South Africa's entrepreneurial ecosystem lags behind global counterparts despite high business potential

According to the analysis, South Africa's economy has avoided collapse, but the growth rate has been insufficient to create a sufficient level of well-being. This imbalance represents both a problem and an opportunity for the country.

Distinguishing Between Symptoms and Causes

South Africans often assess the state of the economy by focusing on unemployment, poverty, and inequality. While these factors reflect daily realities, they are consequences of the economic situation, not measures of it. Confusing these symptoms with the root causes can lead to a misunderstanding of both the problem itself and the paths to its solution.

Indicators of Economic Resilience

The Inclusive Society Institute's report presents a more complex picture than extreme optimists or pessimists suggest. South Africa's economy is not experiencing a crash. However, it is also not demonstrating fast enough growth to provide the jobs, incomes, and opportunities that citizens expect. This difference is significant.

Historical data shows that since 1994, real GDP has increased by approximately 85%, reaching over 4.6 trillion rand in constant prices, which refutes the scenario of a collapsing economy. Furthermore, inflation remains under control within a stable monetary system, the financial system functions effectively, and the rand retains its status as one of the most actively traded currencies in emerging markets. These signs indicate high economic resilience in the face of domestic and global shocks.

The Problem of Per Capita Growth

Despite overall stability, many wonder why the economy feels stagnant. The answer lies in the per capita GDP figure, which receives less attention than the overall GDP. While GDP measures the size of the economy, per capita GDP shows what portion of that economy is available to each person.

The period from 1995 to 2014 was characterized by real per capita GDP growth from about 62,000 to nearly 80,000 rand (in constant prices), reflecting a time when economic growth outpaced population growth, improving living standards. However, this momentum was not sustained. During the same period, South Africa's population grew by more than 50%, and moderate economic growth proved insufficient to maintain the rising standard of living for the average citizen.

Over the last decade, real per capita GDP has stagnated and subsequently declined to approximately 75,548 rand in 2023. This means that South Africans are materially better off than three decades ago, but the sustained progress of the first two decades of democracy has largely concluded. This loss of momentum explains why many feel the economy has stopped working for them, even if it hasn't collapsed.

The Concept of 'Per Capita Squeeze'

The central argument of the report is that the economy can grow while people experience stagnation. This happens when economic growth barely keeps pace with population growth. The economy gets bigger, but not enough for every citizen to receive a significantly larger share of its output. Growth is constantly distributed among a growing population, leading economists to call it a 'per capita squeeze.'

An economy growing at about 2% per year cannot absorb new labor market entrants at the required rate. Jobs are created, but not fast enough. New opportunities emerge, but in insufficient numbers. The economy continues to move forward, but unemployment remains painfully high because growth consistently fails to meet labor market needs.

International Context and Conclusions

Modeling by the Institute itself confirms this view: assuming job creation rates remain constant, if South Africa's population grew in line with the average of upper-middle-income countries, the current unemployment rate would be several percentage points lower. Thus, demographics alone would not solve the unemployment crisis, but they do show that the problem is not just a lack of jobs, but that too many people are competing for them because economic growth has failed to outpace population growth.

From this perspective, unemployment is evidence that the economy has not grown fast enough, rather than proof that it has stopped functioning. International data reinforces this conclusion. South Africa does lag behind upper-middle-income economies, but it is not the exceptional case often suggested in public debates. South Africa's economy grew at about 2% per year since 2000, compared to about 3.2% in upper-middle-income countries. This difference, though seemingly modest, represents a significant loss of national income, investment, and employment opportunities over two decades. It is a gap of underperformance, not a systemic economic collapse.

Social Consequences and Outlook

Recognizing this distinction goes beyond an academic exercise. Diagnosing a collapse where there is stagnation leads to incorrect treatments. Conversely, celebrating continued growth risks overlooking the deep social consequences of growth that remains too weak. Preventing a crisis is not the same as achieving prosperity.

This nuance has far-reaching implications beyond economics. Chronic unemployment, stagnant incomes, and limited opportunities not only restrict growth but also erode trust and weaken social cohesion over time, reducing confidence in institutions. No economy, no matter how resilient its macroeconomic foundation, can sustain a high level of exclusion indefinitely without consequences. If South Africa cannot translate economic resilience into broader prosperity, today's social pressures could become tomorrow's economic constraints, hindering investment, weakening confidence, and slowing growth further. Therefore, economic resilience and social cohesion are not competing goals; they mutually reinforce and depend on each other.

One of the report's most important findings is that South Africa's main economic problem is not macroeconomic instability. Inflation is controlled, the financial system is stable, and the external sector continues to adjust. The real constraint lies elsewhere: South Africa has not attracted enough investment, has not grown fast enough, and has not expanded production capacity sufficiently to raise living standards and reduce unemployment to the required extent.

Thus, describing South Africa as a prosperous or failing economy completely misses the point. The country is trapped in a trap of insufficiency. Growth was sufficient to maintain macroeconomic stability, but insufficient to generate the employment, income, and opportunities necessary to sustain growing prosperity. South Africa does not need to save a broken economy; it needs to accelerate a growing one. Only sustainable growth based on investment can create the jobs, incomes, and opportunities needed to transform economic resilience into improved living standards. This is the true economic story of South Africa: not collapse, but insufficient growth.

The Technology Innovation Agency (TIA) of South Africa and the Botswana Digital and Innovation Hub (BDIH) have signed a Memorandum of Understanding (MoU). This strategic initiative aims to strengthen regional cooperation and promote economic growth in South Africa.

Goals of the Partnership and Innovation Fund

The agreement is designed to create a favorable environment for researchers, entrepreneurs, innovators, and technology enterprises. It aligns with the updated agreement between the governments of South Africa and Botswana on scientific and technological cooperation, which is expected to advance joint innovation programs across borders. A central element of this partnership is the creation of a Joint South African-Botswana Innovation Fund.

This fund will serve as a vital investment platform to support collaborative projects between key stakeholders from both countries, including small and medium-sized enterprises (SMEs), startups, and researchers. The fund plans to attract resources from other regional and continental institutions, focusing on the commercialization of high-impact technological projects that solve local problems and enhance the competitiveness of African businesses on the global stage.

Vision of Cooperation Leaders

The CEO of TIA, Dr. Titus Mate, described this collaboration as a crucial strategy for achieving South Africa's industrialization goals. He emphasized that this alliance demonstrates a shared objective to make the region a hub of innovation. According to Mate, integrating expertise, resources, and innovation ecosystems will open new opportunities for technology developers capable of solving social challenges, attracting investment, and succeeding internationally.

Kobo Phetlu, CEO of BDIH, echoed these views, noting that the partnership underscores Botswana's commitment to shaping an interconnected innovation landscape in the region. He stated that pooling resources and enhancing cross-border interaction contributes to creating a more cohesive and conducive environment for Africa's digital and industrial transformation.

Key Areas of Collaboration

The cooperation will cover several important areas. These include joint initiatives in technological innovation, such as launching challenge programs and pilot projects. Emphasis will also be placed on green and clean technologies, such as renewable energy and climate change adaptation solutions. Agricultural technology to improve food security will be a significant focus area.

Furthermore, partners will concentrate on innovations in the mining sector, for instance, regarding safety and smart mining. Digital technologies, including artificial intelligence and cybersecurity, will be developed. The partnership also provides for technology transfer and commercialization, as well as capacity building through training and workshops. Ultimately, this collaboration aims to develop an integrated innovation ecosystem that supports comprehensive economic growth across the African continent.

According to the capital management firm Citadel, entrepreneurs in South Africa feel economic pressure long before these changes are reflected in official statistics. Business owners face issues such as cash flow constraints, rising operating costs, infrastructure challenges, and limited access to financing amid an unpredictable business environment.

Entrepreneurs as an Economic Barometer

Citadel Advisory partner Kirsten Smit emphasized that entrepreneurs serve as one of the clearest indicators of the country's economic health because they experience shifts in market conditions earlier than this data enters macroeconomic reporting. According to her, while economic indicators tell one story, business owners are grappling with cash flow pressure, increased raw material costs, infrastructure limitations, difficulties in attracting capital, payment delays, policy uncertainty, and the need to make decisions in unpredictable circumstances. She compared them to 'canaries in a coal mine.'

Kirsten Smit noted that how businesses adapt to changing conditions provides valuable insight into consumer behavior and business confidence levels. She added that business is the first point where tightening household budgets are felt. Furthermore, entrepreneurship reveals a complex situation where owners spend money on workarounds to combat crime and energy instability, which reduces resources available for growth and innovation.

Depth of Market Understanding

Smit also pointed out that entrepreneurs offer a view beyond general economic figures. They allow one to bypass idealized macroeconomic data, revealing the everyday reality of local trade, community networking, and real-world survival strategies. They also help connect formal GDP with the informal slum economy.

Business and entrepreneurship thought leader Myles Kubheka noted that periods of economic hardship can generate opportunities for innovation. He stated that crises are painful but also highly revealing, as they expose flaws, value leakage areas, and what people desperately need solutions for.

Challenges and Consumer Behavior

Citadel reported that businesses continue to face significant obstacles, including inflation, high interest rates, and weakening consumer spending. Kirsten Smit explained that high inflation and increased rates force entrepreneurs to choose between absorbing rising costs or raising prices at the risk of losing customers. Entrepreneurs are also observing a shift towards basic goods, smaller units, and cheaper local alternatives, indicating a strong defensive posture from consumers.

Despite signs of improving business sentiment, many entrepreneurs remain reluctant to expand staff due to persistent uncertainty. Smit observed that there is often a gap between positive attitude and actual risk-taking: even with growing confidence, many do not plan to create new jobs, preferring to keep teams small due to high labor costs and uncertain growth. They also bear the brunt of structural failures, which force them to spend money on alternative power supply, private security, and logistical workarounds.

Financial Resilience and Advice

The biggest problems for entrepreneurs remain rising utility and fuel prices, reduced customer spending, and limited access to financing. Smit concluded that despite a slight upturn in sentiment, business owners find themselves in a margin squeeze situation: the cost of doing business is rising while customer purchasing power is declining.

Myles Kubheka advised focusing on customer behavior rather than economic forecasts when making investment decisions. He believes that customers will signal the direction of the economy sooner than economists. Citadel also strongly recommended that entrepreneurs separate personal and business finances to build long-term financial resilience. Smit stressed that diversifying assets outside of the business is critical to avoid vulnerability if trade conditions worsen.

Kubheka agreed, stating that the ultimate goal should be financial freedom, not perpetual business ownership. He added that he advises fixed salaries, investment diversification, maintaining reserve savings, and keeping separate business accounts to strengthen management and simplify tax compliance.