Red tape and capital flight: Bureaucracy undermines SA’s economic future

South Africa’s economy remains stagnant, inequality remains high and unemployment continues to devastate communities. 

While many factors contribute to this crisis, one of the most overlooked is the suffocating weight of bureaucracy. Excessive red tape is not only holding back entrepreneurs but also driving away capital, often capital that belongs to ordinary South Africans, and exacerbating inequality.

For aspiring entrepreneurs, particularly those from historically disadvantaged communities, compliance costs are not merely technical but existential. 

Starting a formal business in South Africa is arduous, time-consuming, and expensive. According to the World Bank’s Doing Business 2020 report, South Africa ranked 84th globally for ease of starting a business. From registering with multiple government agencies to navigating tax and municipal systems, the average entrepreneur faces weeks, if not months, of paperwork before opening their doors.

These burdens disproportionately affect small businesses and informal traders, many of whom operate without legal assistance or start-up capital. With every additional form, approval and compliance certificate required, the cost of participation in the formal economy increases and the incentive to remain informal or to give up entirely grows.

The result of this bureaucratic environment is not just the suppression of domestic business but the systematic erosion of national capital. Faced with regulatory uncertainty and administrative inefficiencies, investors increasingly move their funds offshore, seeking better returns in more business-friendly environments.

Between 2018 and 2023, the portion of South African government bonds held by non-resident investors declined from 42.8% to 25.4%, according to the South African Reserve Bank. During the same period, foreign investors sold off nearly R100 billion worth of South African equities and bonds (Daily Investor, 2023).

This capital exodus is not merely a response to global economic shifts but reflects deep-seated concerns about South Africa’s regulatory and policy environment. The resultant reduction in investment undermines economic growth and limits the resources available for addressing social and infrastructural challenges. 

A significant proportion of the capital leaving South Africa belongs to ordinary South Africans — teachers, nurses, police officers and millions of working-class people who contribute to large asset managers’ pension funds. These funds, tasked with securing stable, long-term returns, often look abroad for profitability and predictability.

Instead of building clinics, funding infrastructure or supporting new enterprises at home, South Africans’ own money is enriching stock markets in developed economies, lining the pockets of foreign investors and flowing into already-wealthy white-owned firms that are better equipped to navigate South Africa’s regulatory maze.

This flight of capital deepens the very inequalities that post-apartheid South Africa sought to dismantle. Established businesses, often those with the infrastructure, networks and administrative capacity to comply with complex regulations, continue to attract investment and scale their operations. Emerging black-owned businesses, meanwhile, are shut out by a wall of red tape.

The interplay between bureaucratic hurdles and capital flight creates a self-reinforcing cycle of economic inequality where established firms, often with the historical advantages and resources to navigate complex regulations, continue to attract investment and dominate markets. In contrast, emerging entrepreneurs, particularly from marginalised communities, struggle to comply with regulatory demands, limiting their growth and access to capital.​

This dynamic perpetuates a concentration of economic power and wealth, undermining efforts to foster inclusive growth and broad-based economic participation. Without targeted interventions to streamline regulatory processes and support emerging businesses, these disparities are likely to persist.

Though designed to ensure order and compliance, the regulatory regime ends up being an exclusion engine, where opportunity is a luxury, not a right. This is not a call for deregulation. It is a call for smarter regulation. The current system does not merely regulate; it obstructs. South Africa must make business easier, faster and cheaper, especially for small and medium-sized enterprises that generate employment and innovation.

Reform efforts should focus on digitising and consolidating compliance systems to avoid duplication and delays and incentivising domestic investment by making it more attractive for pension funds and asset managers to invest in local ventures with social returns. These are not radical interventions; they are common-sense economic strategies many middle-income countries use to unlock growth and build inclusive economies.

South Africa is not a poor country; it is a misallocated one. Talent, capital and creativity exist in abundance, but they are trapped behind gatekeeping systems built on compliance-heavy models that favour the few. 

If we are to build an economy that truly reflects the spirit and potential of its people, we must cut through the red tape. Growth cannot thrive in an economy where bureaucracy costs more than risk and where inequality is reproduced by the very systems meant to end it. South Africa cannot afford to continue exporting its future. 

When bureaucratic inefficiency drives capital away, it is not just lost investment, it is jobs, innovation and dignity. The tragedy is not just that foreign investors are leaving but that ordinary South Africans are being forced to enrich others while their own communities languish.

Reclaiming our economic destiny requires a hard look at the structures that block growth. Red tape is not a sign of order but a symptom of inertia. And unless we dismantle it with purpose, the promises of post-apartheid economic justice will remain unfulfilled.

Yonela Faba is a University of Cape Town PhD student and writer with blockchain, finance and policy analysis expertise. He has a background in academia and banking. Linkedin: Yonela Faba.