To test transformation

My submission on South Africa's Draft Transformation Fund Concept Document

When Samuel Krupp, a Lithuanian Jewish grain merchant, partnered with Hendrik van Niekerk, an Afrikaans miller from Eendekuil, in 1933, few would have predicted that this was the start of something beautiful. Amidst the devastation of the Great Depression and an extended drought that crushed wheat prices, and with no safety net and little government support, the chances of success were slim.¹ Yet, nearly a century later, Van Niekerk & Krupp still survives, producing specialised agricultural machinery for farmers across southern Africa.

This story of resilience has something to teach South Africa’s policymakers, now embarking on yet another ambitious attempt to ‘transform the economy’ – the Transformation Fund. The plan is simple: allocate R100 billion over five years to black industrialists. Funding will come from state resources and – it is hoped – from partnerships with banks and other private financial institutions. (Unsurprisingly, there is little in the draft document about exactly how this will be funded, but to give perspective: the total amount is roughly equivalent to a 4 percentage point VAT increase.) Even the operational aspects are pretty vague: A committee set up under the fund will select beneficiaries, with the main target being black entrepreneurs in manufacturing.

Given our country’s stark racial inequalities, the goal seems morally compelling: indeed, I don’t know anyone who would not want to see more (black) entrepreneurs building thriving businesses. But intentions alone are not enough. History reminds us that state-led initiatives often disappoint. As economist Thomas Sowell bluntly notes: ‘It is hard to imagine a more … dangerous way of making decisions than by putting those decisions in the hands of people who pay no price for being wrong.’

We’ve been here before. Without market accountability, public-choice theory warns, bureaucrats are likely to funnel resources to political allies, not the best entrepreneurs. It is not cynicism; it is human nature. Even with the best of intentions, political actors face incentives that distort decision-making. But even if corruption could be held at bay, another problem remains – a quieter, more fundamental one: We simply do not know enough about what black-owned businesses actually need. Is it really a lack of capital that holds them back? Or are the constraints elsewhere – in poor infrastructure, burdensome regulations or gaps in skills and market access?

We simply do not know because we rarely bother to collect or analyse that data. The answer, surprisingly neglected in South Africa, is firm-level data. Unlike macroeconomic indicators, firm-level data offers insights into the everyday realities of running a business: the constraints firms face, the markets they serve, the technology they use, and the workers they employ.

Consider the international evidence: Trinity College Dublin economist Carol Newman’s recent work on manufacturing in Africa highlights that productivity and firm capabilities, not just cash injections, drive sustained growth. Without accurate data, governments stumble blindly, pouring funds into sectors without knowing their real needs.² Closer to home, research by my colleagues at Stellenbosch University – Rulof Burger, Rachel Jafta and Dieter von Fintel – clearly shows affirmative action policies in South Africa became more effective only after clear benchmarks and stringent monitoring were established.³ Policies with vague goals and weak oversight inevitably fail. Yet, worryingly, the draft document currently has no clear commitment to meaningful evaluation.

So here’s a straightforward proposal: commit just 1% of the Transformation Fund to rigorous firm-level surveys, analysis and experimentation. Hire some of the leading international firm-level experts to investigate firm success rigorously. Host them at local universities to build long-term analytical capacity. Use randomised control trials (RCTs) to allocate capital experimentally among groups of firms, carefully measuring outcomes over several years. This approach would offer a transparent, scientific method of policy evaluation. If the government genuinely wants a thriving black entrepreneurial class, they would embrace this experimental approach. But if the Fund is about rewarding political allies, expect fierce resistance to any rigorous accountability.

Imagine the rich insights economists could glean from detailed firm-level data collected over several years. For example: Does easier credit actually lead to growth in black-owned firms, or merely debt accumulation? Are township-based enterprises failing due to lack of capital, or are logistics, crime, and weak infrastructure greater hurdles? How do firms that receive government contracts perform compared to those that do not? What role does managerial experience play in firm survival and growth? Does formalising a business improve access to markets and finance, or simply increase red tape? And how does innovation – introducing a new product or process – affect profitability and job creation over time?

With the right data, we do not have to guess. We can know.

We’ve made some progress already. ​Recent analyses utilising South African Revenue Service (SARS) administrative tax data have shown the potential of such sources. One study examining firm-level data from 2010 to 2014 revealed a private sector dominated by large, aging firms that, despite their size, exhibit lower productivity and offer lower wages compared to smaller enterprises.⁴ Job creation remains largely confined to these incumbent firms, with minimal contributions from new market entrants or exits. Another investigation highlighted that firms engaged in both importing and exporting activities demonstrate superior productivity, employment rates, wages, and capital intensity relative to non-trading firms or those involved solely in importing or exporting.⁵ Additionally, research focusing on manufacturing exporters found that these entities tend to be larger, more productive, and provide higher wages than their non-exporting counterparts. This diversity among exporting firms suggests the necessity for tailored policies to effectively support various exporter categories.

Why are these insights so crucial? Because firms are the fundamental building blocks of economic growth. Productive, innovative firms create sustainable jobs, raise incomes and reduce poverty and crime. Eric Verhoogen, in his comprehensive review of firm-level upgrading in developing countries that he presented at Stellenbosch last year, argues convincingly that understanding the constraints firms face, the technologies they adopt, and the products they innovate is crucial for sustained economic development.⁶ A Rand invested in this knowledge today can deliver substantial dividends in the future.

Van Niekerk & Krupp did not grow because the then South African government handed them cheques. What mattered more was that the state understood the broader constraints rural businesses faced – and made smart investments to ease them. Infrastructure upgrades, like better rail links and rural roads, did not fund the company directly, but they made it possible to transport heavy agricultural machinery to far-flung farms. Today, South Africa’s policymakers need that same pragmatism. We need robust data, careful analysis and bold experimentation, not billions spent blindly.

If we are serious about transformation, let’s not waste another decade. Let’s invest in understanding exactly what enables entrepreneurial success. Real empowerment does not come from the top. It responds to real needs, backed by real insight. Entrepreneurs test their ideas in the market – some succeed, many fail, and that is how progress happens. The government’s role is not to pick winners but to create the conditions for more ideas to be tested and for the best ones to grow. With the right data and analysis, we can sharpen that process. But, as Sowell reminds us, trying to replace the market’s role in deciding what works – or who is allowed to compete – is a fool’s errand.

An edited version of this article was published on News24. Support more such writing by signing up for a paid subscription. The images were created with Midjourney v6.

1. Van der Colff, S., 2022. Van Niekerk & Krupp: from general agricultural machinery dealer to specialist manufacturers of agricultural planting machinery, c. 1928-2022 (Master’s dissertation, Stellenbosch: Stellenbosch University).

2. Newman, C., 2024. Manufacturing in Africa. In Handbook of African Economic Development (pp. 218-232). Edward Elgar Publishing.

3. Burger, R., Jafta, R. and von Fintel, D., 2022. The effectiveness of affirmative action policies in South Africa. In Handbook on Economics of Discrimination and Affirmative Action (pp. 1-22). Singapore: Springer Nature Singapore.

4. Aterido, R., Hlatshwayo, A., Pieterse, D. and Steenkamp, A., 2019. Firm Dynamics, Job Outcomes, and Productivity: South African Formal Businesses, 2010-14. World Bank Policy Research Working Paper, (8788).

5. Edwards, L., Sanfilippo, M. and Sundaram, A., 2018. Importing and firm export performance: New evidence from South Africa. South African Journal of Economics, 86, pp.79-95.

6. Verhoogen, E., 2023. Firm-level upgrading in developing countries. Journal of Economic Literature, 61(4), pp.1410-1464.