Targeted service sector growth could revive South Africa’s economy

South Africa is battling economic stagnation, mass unemployment, and rising inequality, but the country could gain renewed momentum by shifting focus toward targeted service-based structural transformation and workforce upskilling, according to a new study published in Economies.

The study titled "Modelling South Africa’s Economic Transformation and Growth: A Prospective and Retrospective Analysis" evaluates South Africa’s development trajectory using historical review and advanced economic modelling to identify sectors with high potential to boost inclusive growth and employment.

The findings stress the urgency of adopting a dual-pronged strategy grounded in sector-specific productivity and human capital enhancement.

What has South Africa tried so far and why has it fallen short?

Since 1994, South Africa has introduced an array of development blueprints, starting with the Reconstruction and Development Programme (RDP) and including later efforts such as GEAR (Growth, Employment, and Redistribution), ASGISA (Accelerated and Shared Growth Initiative), and the 2030 National Development Plan (NDP). Each attempted to tackle poverty, joblessness, and inequality through economic modernization.

Yet empirical evaluation shows these policies have achieved uneven success. While the economy grew at 3.6% annually between 1994 and 2007, growth plummeted to an average of 1.1% from 2008 to 2023, far below NDP targets. Meanwhile, unemployment surged from 22.9% in 1994 to over 32% by 2023, with youth unemployment exceeding 60%.

These setbacks were compounded by persistent structural issues. The country's economic structure has shifted away from manufacturing and agriculture toward services, yet without achieving the productivity gains necessary to support employment expansion or equitable income distribution. Manufacturing’s contribution to GDP fell from 21% in 1994 to 13% in 2023, while agriculture dropped to a marginal 2.6%. Services, by contrast, increased to dominate 62% of GDP.

Public spending has failed to reverse these trends. South Africa’s debt burden ballooned from 14% of GDP in 1994 to over 52% in 2020, and debt service now consumes 6% of GDP, crowding out productive investment.

Which sectors hold the most promise for inclusive growth?

To identify forward-looking solutions, the authors applied a recursive dynamic Computable General Equilibrium (CGE) model tailored for South Africa. This framework simulated two scenarios: a business-as-usual (BAU) trajectory based on IMF growth forecasts, and an inclusive economic growth stimulation (IEGS) scenario, which increased total factor productivity through strategic public investment.

The IEGS scenario revealed that several service-oriented sectors possess the capacity to both accelerate GDP growth and meaningfully reduce unemployment. Chief among them are:

• Personal and Social Service Activities
• Transport
• Financial and Insurance Services
• Business and Real Estate Activities

According to the study, these sectors not only delivered robust GDP gains but also demonstrated strong labor absorption capabilities, particularly for workers with secondary and tertiary education. For instance, personal and social services contributed 16.8% to GDP and reduced unemployment among high-skilled workers by over 2.3%. Transport showed similarly strong reductions across all education categories, particularly for highly educated labor.

In contrast, traditional sectors such as mining and agriculture, while still important, offered lower productivity gains and limited employment elasticity. Government employment, often a fallback during downturns, was found to be the least effective in reducing joblessness.

Overall, the simulation showed that a 1 percentage point increase in national GDP growth could be sustainably achieved if led by targeted productivity enhancements in these key sectors. This finding underscores the importance of public investment not just in physical infrastructure but also in enabling service sectors that align with South Africa’s labor force profile.

How can South Africa realistically transform its economy?

The research suggests that piecemeal reforms or isolated policy tweaks will be insufficient. Instead, the authors advocate for a cohesive dual strategy:

1. Structural Realignment Toward Services and Modern Manufacturing: The future lies not in reviving low-productivity sectors, but in fostering dynamic service sectors and supporting high-productivity industries that can absorb skilled labor and generate innovation-led growth.

2. Systematic Upskilling of the Workforce: Economic transformation must be accompanied by expanded education, vocational training, and re-skilling programs tailored to the evolving demands of the labor market. Upskilling is especially critical for ensuring that service-led growth remains inclusive and does not entrench existing inequalities.

These priorities must also be underpinned by improved institutional coordination, sound fiscal management, and governance reforms to prevent the policy fatigue and implementation breakdowns that have plagued earlier efforts.

The study clearly warns: Unless South Africa embraces transformative sectoral strategies and invests in human capital with urgency and precision, its development goals, including poverty eradication and sustainable economic inclusion, will remain elusive.