The Risks Presented by Poverty, Inequality and Unemployment in South Africa
Executive Summary
London Politica assesses with high confidence that increased poverty, unemployment, and inequality levels will likely continue to drive crime, unrest, and the rise of populist parties in South Africa. This will likely negatively impact the perceived legitimacy and support of the Government of National Unity (GNU) coalition.
To address these challenges effectively and maintain popular support, we assess that the GNU would benefit from investments in infrastructure targeting electricity and water supply, as well as social programs, education and poverty alleviation initiatives at the local level. The implementation of structural macroeconomic reforms to improve living standards and public sector efficiency would also likely continue to improve the country’s business climate and attract foreign investment.
Declining unemployment rates are expected to strengthen demand-driven growth, as evidenced by the 1.3% increase in household consumption following the election. This will likely reinforce business confidence and accelerate the expansion of key national industries, including mining, construction, manufacturing and electricity.
Despite growth in key domestic sectors, economic activity declined across government consumption, imports and exports, contracting GDP by 0.3% in Q3. Persistent trade weakness, driven by declining imports of minerals, precious metals and machinery will likely further constrain trade flows in the near term, limiting the GNU’s external growth prospects.
Introduction
South Africa remains one of Africa’s most advanced and diversified economies offering a relatively stable investment environment. Its appeal to foreign investment lies in its world-class financial services, deep capital markets, transparent legal framework and abundant natural resources. Key sectors attracting foreign direct investment (FDI) include manufacturing, mining and financial services. Despite ample investment opportunities, FDI inflows have consistently declined since 2022, dropping from $1.3 billion in the first quarter of 2024 to $965.87 million in the second quarter.
Throughout 2024, South Africa’s economy faced significant disruptions due to persistent electricity shortages, civil unrest and logistical challenges. These factors - coupled with the outcome of national and provincial elections - substantially impacted business confidence, as the South African Chamber of Commerce’s Business Confidence Index (SACCI) declined by 6.9 points over the two months following the May 2024 general election.
The 2024 general elections marked a historic shift in South Africa’s political landscape, as the African National Congress (ANC) lost its 30-year parliamentary majority, securing a record low of 159 seats. This led to the formation of a coalition government, the Government of National Unity (GNU), composed of 10 parties collectively holding 287 of 400 seats (72%) in the National Assembly. The Democratic Alliance (DA), a pro-business party and the main opposition to the ANC, emerged as a key coalition member, securing 87 seats in the National Assembly.
By prioritizing economic growth and a stable business climate, the GNU has gradually bolstered business confidence through its commitment to implement structural economic reforms and enhance public sector performance. The joint initiative between the presidency and the National Treasury dubbed “Operation Vulindlela” aims to transform electricity, water, transport and digital communication infrastructure to promote economic growth and attract foreign investment.
Within six months of the general election, economic growth and investor confidence are gaining momentum, driven by anticipated structural economic adjustments in energy, logistics and the public sector. The South African Reserve Bank reported the first net inflow of capital since 2022, shifting from an outflow of $1.1 billion in Q2 of 2024 to an inflow of $2.1 billion in Q3. This shift reflects renewed investor confidence in the country’s economic stability, as evidenced by increased inflows of direct investments, portfolio investments and reserve assets.
While the business climate shows signs of improvement, the GNU is likely to face multifaceted risks associated with unemployment, poverty and inequality. South Africa’s high unemployment rates - particularly among young people - create profound negative externalities for the state, as the country’s demographic dividend is disproportionately wasted due to a lack of investment in human capital development. Although 22,000 jobs were created in 2024, 137,000 South Africans entered the workforce the same year. The expanded unemployment rate (including discouraged seekers) was 60.8% amongst 15-24 year olds in Q2 of 2024. As unskilled and unemployed working-age adults are consistently delinked from the labour force, a long-term skill gap is latching itself into the employment market. This risks snowballing into a structural unemployment problem whereby individuals lack the skills necessary to bridge the gap toward average employment requirements.
Unrest
South Africa continues to grapple with worsening civil unrest; data illustrates a visible increase in registered protests and riots since 2021. Civil unrest poses significant risks to both the economic and security environment, leading to financial losses, disruption of business operations, and widespread property damage.
Unrest represents an operational hazard for foreign stakeholders and frequent business disruptions continue to damage the GNU’s legitimacy. These trends are likely to persist unless underlying economic issues are effectively addressed.
The July 2021 riots led to $1.5 billion in economic losses and two million jobs being lost or impacted for both local and foreign companies.
Our analysis of historical trends indicates that politicians' failure to appropriately address long-standing unemployment, inequality, and infrastructure deficits have driven grievances and unrest across the country.
Civil unrest remains a key issue obstructing social and economic development in South Africa. South Africa ranked 127 out of 163 on the Institute for Economics and Peace’s (IEP) Global Peace Index 2024, putting it amongst the fifteen most politically unstable countries in Sub-Saharan Africa. Civil unrest increased significantly last year, with 692 protests and riot incidents registered during the first quarter of 2023 compared to 456 over the same period in 2022.
Historically, analysts have associated civil unrest in South Africa with popular resentment towards high and stagnant levels of unemployment and inequality, which are amongst South Africa’s most critical and longstanding socioeconomic challenges. Unemployment increased from 21.8 percent to 28 percent between 2013 and 2023, with the World Bank describing it as “South Africa’s biggest contemporary challenge” in October 2023.
Moreover, South Africa has some of the highest income and wealth inequality levels globally. The population’s richest decile accounts for about 65 percent of national income while the poorest half accounts for 6 percent. Disillusionment towards politicians has historically grown amongst South Africans as governments fail to confront unemployment and inequality, particularly along racial lines.
In July 2021, former South African president Jacob Zuma was arrested in Estcourt, KwaZulu-Natal, after refusing to appear before a judicial commission investigating corruption during his decade in power. Zuma's incarceration led to the violent 'Free Zuma' protests, which escalated and spread to other areas of the country including major cities such as Johannesburg. The riots constituted the largest period of civil unrest since the end of the Apartheid, with an estimated 354 people losing their lives. In our analysis of related data and interviews conducted by local news sources, we assess these protests were largely driven by background economic grievances.
Although the riots in July 2021 were precipitated by Zuma’s arrest, enquiries conducted in the aftermath illustrate that the causes were more deep-rooted. The South African Human Rights Commission (SAHRC) found that high unemployment rates, inequality and poverty were the bedrock from which unrest permeated. Echoing the findings of the SAHRC’s investigation, South Africa’s Minister of Trade, Industry and Competition Ebrahim Patel stated that “while it was true that there were those with a different agenda who lit the match, that match was thrown on dry tinder in communities where there was severe unemployment and poverty”. Further, protests led by the trade union groups Congress of South African Trade Unions (COSATU) and the South African Federation of Trade Unions (SAFTU) over the cost of living and unemployment rates erupted in Pretoria and Cape Town in August 2022, and Johannesburg in July 2023. In late November 2024, residents clashed with police in Johannesburg over a lack of water supply, demonstrating risks of public dissatisfaction with infrastructure deficits.
Previous civil unrest in South Africa has driven security and economic implications that were detrimental enough to shift the risk perceptions of foreign investors and other overseas stakeholders. The ‘Free Zuma’ riots led to $1.5 billion in economic losses and two million jobs being lost or impacted at both local and foreign companies. Unrest primarily disrupts the transportation of goods as major road closures.
Protesters blockaded and damaged key sections of the N2 and N3 highways, significantly disrupting commercial traffic in the KwaZulu-Natal region (KZN) along routes critical to national and regional logistics networks. The closure of these strategic routes constrained commercial cargo traffic and transit freight, disrupting supply chains that link South Africa with landlocked African countries which resulted in significant shortages in food, fuel and medical supplies. In the aftermath, foreign investors cited these riots as a deterrent to new investments and the expansion of existing ones. The economic cost of violence in South Africa as a percentage of GDP amounted to 15.38 percent in 2023.
Assessment:
London Politica assesses that high unemployment and inequality are likely to stagnate or worsen without effective government investments in energy, telecommunication and water supply networks. The absence of effective social investments increases the risk of unrest, particularly in urban areas and neighbourhoods with higher poverty rates. Such unrest is likely to undermine the government’s legitimacy, as constrained economic growth and high unemployment erode support for the GNU’s coalition in favour of populist parties.
The GNU should enact structural reforms to address unemployment, infrastructure deficits, and public sector performance to prevent consequences associated with a declining investment climate. The government’s pledge to address supply-side challenges by boosting investments in electricity infrastructure will likely gradually improve economic productivity and foreign investment in the long term. Although enhanced electricity supply bolstered manufacturing outputs in 2024, persistent social unrest linked to infrastructure deficits remains deeply entrenched and is unlikely to be resolved in the short term.
We assess that disenfranchised South Africans are likely to turn to disruptive demonstrations to voice their grievances against the government’s lack of effective investment. Social unrest will likely continue over the GNU’s term, resulting in occasional infrastructure damage and substantial financial losses to cities and towns across the country.
Crime
South Africa faces high crime rates linked to socio-economic problems which are exacerbated by the ineffective use of resources. Crime and violence divert resources away from development programs, investments in infrastructure and crucial social services as the government focuses instead on immediate security measures.
This misallocation of resources fails to address the root causes of crime and contributes to social inequality. Important sectors like education and economic development are underfunded due to the focus on short-term security.
The problem is cyclical, with short-term security priorities hindering long-term development and prolonging instability.
Crime in South Africa has a very significant impact on foreign investment and capital inflows. Extortion, theft, and violent crime affect the legitimacy of the government and drastically complicate business operations in the country.
South Africa has one of the highest crime rates in the world and continues to see increases in violent crime, including crime that specifically targets businesses. New data put out by the government demonstrates that crime rates have increased since 2021 - coinciding with a decrease in government popularity throughout the same period. Compared to wealthy communities, crime rates in poorer neighbourhoods like Khayelitsha are nearly five times higher, which is indicative of country-wide trends. The significant economic and social issues that residents experience are linked to this disparity. According to research by the Institute for Security Studies, Khayelitsha's high unemployment rate, poor housing conditions, and restricted access to social services all lead to higher crime rates. These circumstances encourage grievances, which can lead people to commit crimes, as illustrated by strong empirical evidence linking economic hardship to higher crime rates in South Africa.
In addition to community-level crime, South Africa is plagued by transnational organised criminal networks that worsen the business environment, slow the economy, and threaten individuals' physical and financial security. According to the Organised Crime Index, South Africa ranks 3rd as the African country most affected by organized crime, based on the prevalence of criminal activity and the ineffectiveness of state responses to counteract it. Transnational organized crime is defined as illegal activities carried out across borders by structured networks such as gangs, drug trafficking syndicates and international criminal networks. The most prevalent criminal markets in South Africa are human trafficking, financial crimes and arms trafficking. Throughout 2024 the South African Police Service dismantled 30 illegal drug laboratories and seized over $18 million worth of illegal drugs.
The prevalence of organised crime is deeply rooted in corruption within government and police forces and is worsened by a lack of cooperation between institutions. Because a large number of politicians and bureaucrats benefit from corrupt relationships with criminal organizations, they hold a vested interest in impeding efforts to combat it. Government officials are frequently compensated to overlook illicit actions once they are uncovered and to provide details on police operations and strategies to combat criminal activities. Despite government strategies implemented to combat organised crime, a lack of institutional cooperation and corruption among government and police forces have hindered their efforts.
There are substantial geopolitical and economic implications of South Africa's internal instability and high crime rate. The country's failure to uphold internal security harms its standing as a regional and international leader, complicating its efforts to project influence and collaborate on international projects through its G20 presidency.
High crime rates - and high rates of extortion specifically - significantly discourage foreign investment; foreign investors have refrained from entering the South African market due to costs associated with crime, including security measures and insurance premiums. Furthermore, a World Bank study from 2023 on South Africa's investment climate notes that a decline in FDI has been observed in industries such as tourism and manufacturing due to safety concerns and high crime rates.
The South African government has attempted to implement several policies to lower crime rates. Crime reduction is a major goal of initiatives such as the National Development Plan (NDP) 2030. Strategies to achieve this goal focus on strengthening law enforcement, improving the justice system, and addressing the socioeconomic drivers of crime. These efforts are complemented by increased funding for the South African Police Service (SAPS) and the adoption of community policing techniques. Unfortunately, corruption, low funding, and the absence of institutional collaboration have frequently impeded these attempts. The overall influence on national crime levels has been minimal, notwithstanding localised successes in certain urban districts. A recent Gallup poll indicated that South Africa ranks among the top three countries in which people feel the least safe walking alone at night. This suggests that more comprehensive strategies are required that address the underlying socio-economic problems that drive crime, in addition to improving law enforcement capabilities.
Assessment:
We assess that insufficient investment in social development, coupled with the failure to address corruption linking the state to transnational criminal networks, is likely to exacerbate existing disparities between communities. This will likely place additional strain on the state’s resources, given the government’s inevitable investment in policing and short-term security expenditures. Rising crime rates driven by unrestrained poverty and inequality will likely fuel growing social unrest and continue to erode public trust in state institutions.
Pessimism concerning South Africa’s investment climate will likely continue to harm the government’s popularity and legitimacy. Limited economic growth worsens already-existing social inequalities, further inhibiting economic progress, and restricting the creation of new jobs. The risk of increasingly frequent and violent civil unrest will likely deter foreign companies from operating in the country, further restricting FDI flows and directly constraining economic growth.
We assess that heightened levels of social unrest are likely to compel the government to divert substantial resources toward security and reconstruction efforts, further constraining funding for investments targeting poverty, inequality, and unemployment. Effective investments targeting structural economic adjustments and socially focused projects will likely benefit the GNU’s expenditures in the long term.
Populism
Right and left-wing populism is on the rise in South Africa. The ANC dropped from a 70% vote share in 2004 to 40.2% in the 2024 general elections. In the same election, populist parties uMkhonto weSizwe (MK) and Economic Freedom Fighters (EFF) respectively gained 14.6% and 9.5% of the vote share.
The rise of populism in South Africa can in part be explained by high voter discontent for the longstanding ruling party, the ANC. Persistent economic challenges that disproportionately impact less educated and economically disadvantaged segments of the population are likely to continue to drive these groups to support populist parties.
Continued failure to address long-standing economic grievances by the government is likely to lead to the further delegitimization of the GNU, threatening its coalition and leading to increased support for populist parties.
Increases in support for populist parties can be particularly observed in rural areas, which have high levels of voter discontent due to regional economic disparities. Rural areas tend to suffer more economically. As of 2017, poverty rates in rural areas (81.3%) were about double those in urban areas (40.7%). Poverty in rural areas has been exacerbated by the effects of the COVID-19 pandemic, the national hunger crisis, as well as continuous load shedding.
For instance, the largely rural province of Kwazulu-Natal had the highest share of votes for populist parties of all provinces in the 2024 election. Zuma’s populist party MK received 45.3% of Kwazulu-Natal’s votes. Kwazulu-Natal also has the second-highest number of people living in poverty. In Gauteng - an urban, comparatively wealthy province that makes up roughly 33% of GDP and has the highest provincial GDP per capita - voters largely backed the ANC.
Simultaneously, lower voter turnout rates can be more broadly observed in provinces that have higher GDP per capita, with the exceptions of Gauteng and the Western Cape. Moreover, voter turnout in the 2024 elections reached a historic low of 58.6% (in comparison to 89.3% in 1999). This could be indicative of a wider trend in which voter fatigue has driven lower turnouts in ANC strongholds and stronger turnouts in regions where populist parties have wider support.
Assessment:
We assess populist parties are likely to continue to mobilise poorer segments of the population to cast protest votes against the perceived status quo. Additionally, growing disillusionment with the ANC-led coalition will likely lead to further increases in voter abstention among former ANC supporters, reflecting a deepening erosion of confidence in the government. This trend is underscored by the historically low voter turnout observed in the 2024 elections.
This trend is likely to be exacerbated by the rhetoric of populist parties, which particularly target poorer and predominantly ethnically black communities. In the long term, there is a reasonable possibility that this will result in a significant shift in vote distribution, further weakening the ANC and posing a threat to the GNU.
This trend is likely to persist in both future regional and national elections unless the GNU’s policies effectively address the needs of disenfranchised communities. Such measures must include structural economic reforms and effective investments in education, infrastructure, social programs, and poverty alleviation initiatives at the local level.