With poverty and inequality worsening, fixing microeconomic inefficiencies is key to unlocking growth and opportunity for all
South Africa has now endured 15 years of weak economic growth. The 2010s were the worst decade since WWII, with the economy growing by only 16% – in stark contrast to the preceding decade, when output grew by 39%, nearly two and a half times as fast. The near-term outlook for growth remains weak: this year’s forecasted growth is just 1.1%, far below the longer-term average of around 3%. By comparison, other emerging markets are expected to grow at an average of 4.1% over the next three years.
This prolonged period of low growth has had serious implications for the well-being of South Africans. Between 2013 and 2019, per capita income fell by an average of 0.4% per year, while 55% of the population now lives below the poverty line. Unemployment has risen from 22.5% in 2008 to 32.1% in 2024. This failure to generate growth and create jobs is deepening poverty and driving inequality.
So, what should we do? Should we borrow and spend more to reach that elusive growth? Or should we be lowering interest rates? Unfortunately, without improved microeconomic policy and outcomes, these approaches are unlikely to have much effect.
Macroeconomics and microeconomics—and their associated policies—are often treated separately, and interdependence is often overlooked. Microeconomic factors and outcomes can both constrain and create opportunities for macroeconomic policy. In reality, when we separate micro from macro, we limit how we approach and understand the overall macroeconomic policy landscape.
We can understand this problem using basic aggregate supply and demand curves. Currently, our supply curve is inelastic, meaning the economy has limited capacity to increase production in response to rising demand. As a result, positive demand shocks—like those from expansionary macroeconomic policy—lead to higher prices rather than meaningful growth. In contrast, when supply is more elastic (a flatter supply curve), production can increase as demand rises, leading to real growth with minimal impact on prices.
South Africa needs positive productivity shocks, like fixing the energy problem, which shifts the supply curve to the right. But to allow macroeconomic policy to have a real impact, microeconomic policy needs to also flatten the aggregate supply curve. Better-functioning markets and better public services would flatten its slope, delivering more real GDP growth and less inflation.
So why is our supply curve so inelastic? I see three main microeconomic factors, summarised by one overarching issue: we do not get enough economic value, defined here as productivity growth, for money spent in the economy, either in the public or private sectors.
First, the lack of integration into global value chains. Instead of reaping the benefits of knowledge creation and spillovers associated with global markets, we try to compete with imports and fail to encourage the exports we can specialise in. In turn, this is reflected in the composition of our trade and capital flows, with the latter primarily short-term, portfolio financing rather than direct investment.
Second, our inward focus has led to excessive microeconomic management, where regulatory controls distort market signals. Prices should guide economic decisions, such as production and job creation, but regulations often obscure these signals by creating incentives that hinder growth. Regulatory price controls limit flexibility and the signals markets can send about where demand is and where to invest.
This challenge spans critical markets like labour and energy. In the labour market, weak demand results from rigid prices that cannot adjust to different levels of productivity. In energy, excess demand and fixed supply create inefficiencies, and high economic and social costs.
Finally, we must question whether our public services and network industries are fit for purpose. Public services are essential for growth and inclusion, but there needs to be more focus on measurable outcomes. Poor outcomes disproportionately affect economic inclusion. More marginal households inevitably bear the brunt of inefficient public services or private markets where service depends on the ability to pay. The public sector must modernise to reduce these costs and, where applicable, compete with the private sector in network industries. Public services should aim to facilitate economic activity and inclusion as efficiently as possible.
To sum up, the key lies in pursuing structural, primarily investment-driven reforms to move the supply curve and reduce its slope. Spending can contribute to this goal, but it must be effective and targeted, and benchmarked against global best practices.
These ideas are hardly new. They are similar to those presented in Michael Spence’s 2008 Growth Report,1 Dani Rodrik’s 2008 Growth Puzzle,2 and Ricardo Hausmann’s Growth through Inclusion report,3 etc. The list goes on.
But far too often, we ignore microeconomics and settle on demands for more spending or cutting interest rates as quickly as possible despite the abundant evidence that these don’t work.4 At the end of the day, bad microeconomics makes good macroeconomic policy harder. Our microeconomic environment will not be improved by making macroeconomic policy less sustainable.
1 See Commission on Growth and Development (2008). “The Growth Report: Strategies for Sustained Growth and Inclusive Development”. Available at: https://www.treasury.gov.za/comm_media/press/2008/growth/Full%20Growth%20Report.pdf
2 See D Rodrik (2008). “Understanding South Africa’s economic puzzles”, Economics of Transition Volume 16(4) 2008, 769–797. Available at: https://scholar.harvard.edu/files/dani-rodrik/files/understanding-south-africa.pdf
3 See R Hausmann (2023). “Growth Through Inclusion in South Africa”. CID Faculty Working Paper no. 434. Available at: https://growthlab.hks.harvard.edu/sites/projects.iq.harvard.edu/files/growthlab/files/2023-11-cid-wp-434-south-africa-growth-through-inclusion.pdf
4 See E Pirozhkova (2023). “Enhancing the Quarterly Projection Model.” SARB Working Paper, WP/23/05. Available at: https://www.resbank.co.za/en/home/publications/publication-detail-pages/working-papers/2023/enhancing-the-quarterly-projection-model and T Janse van Rensburg, S de Jager and K Makrelov (2021). “Fiscal multipliers after the global financial crisis.” SARB Working paper, WP/21/07. Available at: https://www.resbank.co.za/en/home/publications/publication-detail-pages/working-papers/2021/fiscal-multipliers-in-south-africa-after-the-global-financial-cr