Bad economics

In Homer’s Odyssey, the Greek hero Odysseus encounters the Sirens – mythical creatures whose enchanting songs lure sailors to their doom on the rocks. Forewarned, he plugs his crew’s ears with wax and binds himself to the mast, resisting their temptation. Today, South Africa faces its own kind of siren song: the seductive idea that a financial reconfiguration – what some call monetary architecture (MA) – can unlock economic transformation without consequence. 

Mark Swilling is the latest proponent of MA-style macroeconomics. On Thursday March 27, he presented a “masterclass” at Stellenbosch University titled: “After the Budget Debacle: Is it Time to Rethink South Africa’s Financial Ecosystem?”

The fact that Swilling, distinguished professor of sustainable development in the centre for sustainability transitions, is venturing into macroeconomics, matters. He sits on the national planning commission, tasked with implementing South Africa’s long-term development goals, and is highly regarded in ministries close to the president. 

At first glance, his argument is compelling. By reorganising balance sheets across the financial system – the central bank, commercial banks, development finance institutions, state-owned enterprises, institutional investors – he suggests existing capital can be mobilised to fund infrastructure, green transitions and broader economic development.

Crucially, Swilling explicitly rejects populist approaches, such as increased government borrowing or central bank money printing. Instead, he proposes a Keynesian-style strategy: in the absence of adequate private investment, targeted public investment should serve as a catalyst, creating confidence and momentum that ultimately attracts private capital. 

Crowding in investment

This aligns with the “public sustainable finance” approach advocated by Philipp Golka, Steffen Murau and Jan-Erik Thie. They argue that direct government investments, if carefully structured, can reduce market uncertainty. By clearly signalling long-term commitments, such investments would then attract or “crowd in” private investment. In this view, the state moves away from passively relying on uncertain private sector responses. Instead, it becomes an active player, directly steering projects crucial for economic growth.

Yet, despite its appeal, this approach lacks strong empirical backing. The 2024 Golka et al paper offers little evidence from developing economies that this “crowding in” consistently happens in reality. The authors rely mostly on idealised scenarios and theoretical reasoning. They pay limited attention to historical cases where state-led investment failed to attract private capital or, even worse, pushed it out entirely.

Indeed, the approach overlooks the core issue facing the South African economy: persistently low levels of private investment. As the figure below clearly illustrates, South Africa’s private investment as a share of GDP has steadily declined since the global financial crisis, now reaching levels comparable to those of the politically and economically turbulent mid-1980s. While the need for infrastructure investment is undeniable, the fundamental question remains why the private sector is so hesitant to invest. 

The case for policy certainty

There are clear explanations for this. Economist Dani Rodrik, a member of Ramaphosa’s presidential economic advisory board, has long emphasised that policy uncertainty acts as a significant deterrent to private investment in developing countries. Even moderate policy uncertainty, Rodrik argues, effectively imposes a heavy implicit tax on investment decisions. Investors, wary of future policy reversals, tend to delay or withdraw entirely from committing resources. Rodrik’s model shows that rational entrepreneurs, recognising that physical investments are partly irreversible, withhold capital until uncertainties regarding policy permanence are resolved. 

This theoretical insight is especially relevant for South Africa, which has experienced frequent policy reversals, uncertainty around property rights, labour market reforms, and shifting economic strategies.

Empirical studies confirm Rodrik’s hypothesis, too. Sangyup Choi, Davide Furceri and Chansik Yoon find strong evidence that domestic policy uncertainty severely reduces foreign direct investment (FDI), a crucial driver of technology transfer and economic growth. A one-standard-deviation increase in policy uncertainty reduces bilateral FDI inflows (in rich countries) by nearly 17%. Given South Africa’s need for both domestic and foreign private investment, this finding underscores the critical need for stable and predictable policy frameworks. 

Swilling argues that existing capital in South Africa remains unproductively allocated due to bottlenecks within the financial system. For instance, he highlights how regulatory constraints limit the Development Bank’s lending capacity. Simply changing regulatory oversight, he suggests, could potentially unlock hundreds of billions of rands for investment. But while this may address short-term financial constraints, it does little to tackle the deeper, structural uncertainty that discourages sustained private sector involvement. 

Indeed, history provides a stark lesson. South Africa’s experience with directed investment strategies during the 1970s and 1980s offers a cautionary tale about government intervention in capital allocation.

To foster rapid industrialisation and self-sufficiency, the apartheid government channelled capital towards politically favoured sectors such as heavy industry, defence and synthetic fuels. While initially spurring industrial expansion, this led ultimately to significant economic distortions. Government-directed credit and subsidies masked genuine market signals, resulting in chronic inefficiencies, excess capacity and the emergence of uncompetitive industries dependent on continuous state support.

This approach proved unsustainable, burdening the economy with costly, politically entrenched industries unable to compete globally once subsidies were withdrawn. 

Rodrik’s theoretical framework underscores why such policies fail: sustainable investment growth hinges not merely on the availability of funds or short-term financial engineering, but on credible, stable policy signals that allow entrepreneurs to make informed decisions. Without clear signals about future economic policies, investors rationally hold back, aware that any irreversible investment made under uncertain conditions becomes an expensive gamble. 

The public sustainable finance approach advocated by Golka et al, and echoed by Swilling, risks creating precisely the type of uncertainty Rodrik warns about. If private investors perceive state-driven financial reconfigurations or regulatory changes as transient, politically motivated, or potentially reversible, the intended crowding-in effect is likely to evaporate. Far from unlocking private investment, such initiatives could reinforce investors’ fears about future policy unpredictability, deepening their existing reluctance to commit resources. 

The critical lesson from both Rodrik’s theoretical insights and Choi et al’s empirical findings is clear: credible, stable and predictable policies are indispensable prerequisites for sustained private sector investment. Government-led initiatives might offer short-term stimuli, but unless accompanied by genuine, credible policy reform, private investment will not follow. 

The MA approach thus remains an alluring but dangerous proposal. Like the Sirens in Homer’s Odyssey, it promises prosperity without pain – a financial reconfiguration that avoids confronting the real economic dilemma: policy uncertainty. 

Odysseus survived by tying himself to the mast. South Africa would do well to exercise similar restraint. 

Johan Fourie is professor of economics at Stellenbosch University, where he teaches economic history at the graduate and undergraduate levels. He is the author of ‘Our Long Walk to Economic Freedom’ (Tafelberg, 2025) and is a blogger at ourlongwalk.com.