South Africa's long-term economic growth is constrained by corruption and instability in the justice system. Their impact increases the cost of doing business, undermines investor confidence, undermines the state's ability to provide infrastructure and public services, and lowers investor confidence. Combined, they reduce productivity, investment, employment, and fiscal sustainability.

Legal and regulatory frameworks must be stable for both domestic and foreign investors. Investors seek higher returns to offset increased risk in countries where corruption is prevalent and the legal system is viewed as slow, biased (where judges and magistrates sacrilegiously operate as pseudo-gods), unreliable, or politically influenced. The economic penalty is societal suicide, leading investors to boycott or ask for higher returns. It is common for long-term investments to be delayed or cancelled, especially in manufacturing, mining, and infrastructure. The international credit rating agencies perceive an increase in institutional risk. Reliable governments with effective and efficient governance institutions attract capital.

The consequences are disastrous in a country like South Africa, which dismally failed to redress apartheid inequality. Is South Africa different judging by the power FINANCIALIZATION has over the macroeconomic policy framework executed through the SARB? In 2001, George Soros put it rather more bluntly.

“South Africa,” he said, “is now in the hands of international capital.”

The ANC failed to learn from the imperfections of the previous post-colonial states in Africa and instead opted for the “crown of political power” for the “jewel of the South African economy," as Ali Mazrui put it.

Using illusions of a "trickle-down effect" to resolve "inequalities" has proven to transfer political power onto the market. In a country that is financialised (in the captivity of the economy by financial institutions), these self-made errors are unacceptable and lead to reduced foreign direct investment (FDI), lower capital formation, and GDP growth. Ineffectiveness and inefficiency of state institutions create value for corruption proceeds in South Africa. Infrastructure delivery becomes ineffective due to corruption, which functions as an unofficial tax. As is common in project execution, corruption in procurement results in inflated contracts, subpar infrastructure, postponed projects, abandoned projects, and cost overruns. Limited public expenditures are directed at waste and rent-seeking rather than infrastructure that promotes economic growth. Unfortunately, this reduces industrial competitiveness, productivity, and efficient logistics.

When investors lose faith in the country, fewer factories, mines, infrastructure projects, and SMEs are developed because investment creates jobs.

Sadly, these deficiencies are closely tied to poverty, inequality, and unemployment factors which the existing macroeconomic system cannot address. Poor governance is gravely costly, as South Africa already has one of the highest unemployment rates in the world. In addition to tax evasion, illicit financial flows, lax enforcement, and sluggish economic growth, corruption and judicial system instability have severely damaged South African society. These systemic inefficiencies make it difficult to determine the precise amount of tax revenue lost. Nonetheless, reliable studies conducted in South Africa and internationally offer helpful estimates: annual tax revenue lost to tax evasion and the shadow economy is estimated to be between R100- and R300-billion, or 5% to 15% of annual tax revenue; and annual illicit financial flows from South Africa are estimated to be between R100- and R250-billion, or 2% to 4% of GDP.

Government procurement irregularities are estimated to account for 10% to 25% of procurement expenditures that could be lost due to fraud, waste, or corruption; public procurement accounts for about 12% to 15% of GDP, indicating significant fiscal leakage; when corruption, illicit financial flows, procurement fraud, and flaws in the justice system are combined, a reasonable evidence-based estimate of annual fiscal losses is between R200– and R400 billion, or roughly 3% to 6% of South Africa's GDP.

When corruption wastes public resources, governments must borrow to finance infrastructure, service delivery, and operating expenditures. Therefore, debt-service costs consume an increasing proportion of the national budget, money that could have been used to build roads or schools.

Corrupt practices and instabilities in the judicial system produce a vicious cycle:

Corruption → Weak institutions → Reduced investment → Lower economic growth → Higher unemployment → Lower tax revenue → Higher public debt → Reduced public services → Lower trust → More corruption.

Strong governance, reliable law enforcement, and institutional reform are necessary to end this cycle. Infrastructure spending is necessary for industrialisation and employment growth in South Africa. The consequences are especially adverse to infrastructure finance:

• Decreased project bankability: Lenders and investors need assurances that agreements will be upheld and disagreements settled amicably. Weak institutions lower long-term capital availability and raise financing costs.
• Increased sovereign and project risk premiums: Lenders factor in governance and legal issues when assessing public infrastructure projects.
• Diminished involvement of institutional investors: When governance problems jeopardise project sustainability, pension funds and development finance organisations may restrict investment. Litigation, procurement conflicts, and corruption investigations can delay infrastructure delivery, reducing investments' economic and social returns.
• Reduced multiplier effects: Compared to well-governed infrastructure investment, poorly managed infrastructure investment produces less growth, job creation, and industrial development.

The South African electorate should be aware that countries that consistently score highly on governance metrics—such as strong rule of law, effective anti-corruption measures, and robust legal systems—generally attract more investment, have lower borrowing costs, and experience greater long-term economic growth. Therefore, strengthening the legal system and reducing corruption are not just governance objectives for South Africa; they are also essential economic reforms for increasing infrastructure financing, promoting inclusive industrialisation, and winning back investor confidence.

Written by Bongani Mankewu, Director of the InfraFIN