Applying Inclusive Development Finance Strategies Within The World Order Messy Middle By Zeph Nhleko

Implications of the messy middle for development finance institutions

The world order messy middle has traditionally been understood to be the transitional period between global empires or large-scale systemic changes, such as decolonisation. It is characterised by the breakdown of old structures, while new systems have not taken off yet. The messy middle is intense, volatile and often pushes established international laws and relations to the limit. The specific shifts we are currently witnessing are the economic and military rise of non-West global powers; increasing multipolarity where no single nation dominates; elevated use of economic or military powers in negotiations, while adopting protectionist and populist national stances; the global South accounting for more than half of the global economic output, and an evolution in alliances with nations diversifying allies across the globe.

What this means is that development finance institutions (DFIs), like all other entities, need to adapt their strategies to this operating environment. A fundamental question to be asked is: what should DFIs be solving for during this period?  The answer is always the same – DFIs should be solving for long-term, sustainable economic growth and development, catalysing private capital in the process. Beyond development finance, increasing South Africa’s productive capacity and balancing economic progress with environmental protection and social equity, will require inclusivity, responsible resource management and strong institutions. Inclusivity is the basis for economic transformation.

Continued desirability of economic transformation

One of the key themes announced for the “people's dialogue” that kickstarted in August 2025, is economic transformation and job creation. This is an important theme – and economic transformation should mean facilitating economic access for the majority of citizens through shifting onto a higher economic growth path. A large part of the explanation for the socio-economic challenges we are facing in South Africa, such as poverty and unemployment, is the slow and incomplete economic transformation on the one hand and an economy that has failed to grow sufficiently fast to keep up with the growth in the labour force and economic aspirations of people. The African Centre for Economic Transformation produces the African Transformation Index annually to rank progress on African economies. The Index covers 14 indicators across the categories of diversification, export competitiveness, productivity increases, technology upgrading, and human well-being. It shows that the South African economy remains about 60% transformed. And as we have observed, the most visible result thereof has been an increase in unemployment estimates – as defined by the International Labour Organisation (ILO) and measured by StatsSA – from around 20% in 1994 to more than 30% in 2025.

Relevance of macroeconomic policy coherence

However, before deploying development finance strategies, there has to be general satisfaction that macroeconomic policy is enabling. It might be useful therefore to ask some questions in this regard, such as – has the implementation of macroeconomic policy enabled economic transformation and job creation, and if not, what should be done differently going forward? This question should be anchored on the understanding that proper macroeconomic policy always creates the necessary foundation for successful microeconomic (sector) policies to function effectively – and more importantly, for development finance to be deployed effectively.

The implementation of macroeconomic policy entails pursuing a sound fiscal policy of government spending and taxation as well as a prudent monetary policy of managing interest rates and money supply to counter inflation. And frankly, because of its origins and management thereof, inflation has never been the main economic challenge over the past 20 years – so there is no need to exert more economic effort here. As has been seen from StatsSA’s household and labour surveys over the past three decades, the implementation of macroeconomic and sector policies since 1994 has had a major impact on economic transformation and job creation. Some argue that we have had a mixed societal impact – that’s probably more accurate.

Positive developments, such as improved access to basic social services (even though this has not reached satisfactory levels because infrastructure installed does not always translate to adequate services) and a robust financial system have been negated by challenges such as slow economic growth, high unemployment, and persisting poverty, that create a vicious cycle of mutually reinforcing negative events that put us on a wrong economic trajectory. The key gap reinforcing these challenges seems to be the low investment to gross domestic product (GDP) ratio – sub 15% compared with an average of over 30% for peer countries in the upper middle-income level of development. There is a positive relationship between investment and GDP – Development Bank of Southern Africa research shows that a 1% increase in gross fixed capital formation delivers a 0.01% improvement in GDP.  

The ultimate objective of macroeconomic policy implementation is to achieve and maintain a stable and sustainable economy that is characterized by economic aggregates such as strong economic growth, high employment and low inflation. The performance of these economic aggregates is necessary for addressing other societal challenges such as poverty and inequality. The main idea for macroeconomic policy should be to navigate the economy through its developmental path by accommodating periods of economic downturns in the policy stance and generally keeping up with the understanding that monetary policy is more effective in the short-term, while fiscal policy is more effective for instituting long-term structural reforms. To be effective and to create smooth economic progress, these policies should be coherent – much like the movement of the two-man crosscut saw we grew up using to cut firewood or fencing poles. If one party was off rhythm, progress became slow and the blade could even snap.

Achieving, let alone maintaining a coherent macroeconomic policy, is a very complex exercise, not least because policymakers often have conflicting objectives, they face economic uncertainties, policy impacts take long to be realised and, on top of that, the economy faces external shocks from time to time. So, for macroeconomic policy to cohere, a very specific “economic fight” that represent the 20% input that is likely to move the needle by as much as 80% must therefore be selected to anchor economic policy implementation – the 80/20 rule. There should be no more than two or three economic goals of focus – with all other economic interventions aiming to advance the main goals.

However, the effectiveness of macroeconomic policy is not always a reflection of the complexity of interventions. Simplicity is often effective as most stakeholders tend to understand the policy objectives and processes, as well as their roles. Consider China's targeted poverty alleviation program which demonstrated how carefully defined objectives can serve as a north star for economic development. The programme was implemented over a decade and focused on lifting millions out of poverty by providing direct assistance, facilitating local development, and improving access to essential services such as healthcare and education. Granted, these interventions required effective implementation and coordination, but they were not complex – instead they suggest that institutions that work are a critical part of macroeconomic implementation.

How should we take advantage of the positive sentiment in early 2026

In our case, we should move away from the tradition of throwing everything in the pot as a solution – it does not work. We end up with many interventions and targets that nobody remembers or even tracks. From a development finance strategy lens, there are three critical matters that become important. And this is not to say, abandon everything else and do three things in the economy – it simply means let us locate the 80/20 balance.

And the environment to pursue these three matters is conducive – there have been some positive developments recently that seem to be working in favour of the macroeconomy. There has been a sovereign ratings upgrade to BB; the 2025 MTBPS reflects improved fiscal trajectory; South Africa has been removed from the FATF grey list; the GNU remains intact and functional, South Africa has also been removed from European Union’s list of “high-risk third country jurisdictions”; structural reform plans implementation have taken off; and the first G20 Summit held on African soil was a success. These provide solid anchors to possible economic green shoots in the months ahead – and we should take advantage. The Rand exchange rate has shown the most visible benefit from the positive sentiment.

First, let us be clear that the most urgent economic matter is increasing investment to deal with unemployment. The most pressing challenge is the low level of fixed capital formation investment – which is among the main reasons we cannot grow the economy, to employ the 11.5 million unemployed people and begin to turn the poverty levels around. Development finance should be channeled towards fixed capital formation, particularly build and construction activities, through DFIs and other capable state-owned entities. The backward linkages to economic participation for individuals and businesses here are massive.

Second, macroeconomic policy should integrate DFIs more meaningfully in the process of its implementation, both from a financing and task allocation angles. If DFIs are so effective, as they often show that despite not having annual public budget allocations, they continue to realise meaningful sustainable income and development impact, why are they not utilised more? Imagine what will happen if targeted budget allocations are made? While the government continues to improve public efficiencies through the targeted and responsible spending programme, those functional public entities created to specialise in certain sectors, such as DFIs, should be used more innovatively and strategically because they have both the capacity and capability.

Third, let’s work to create a single channel national infrastructure development system. Chile’s public investment management system is an excellent example of how to set up a single national infrastructure development system across all spheres of government and across all project stages, such as ideation, selection, planning, preparation, financing, building and maintenance. In our case it means when setting up such a system in South Africa, existing institutions could be arranged to fit neatly within the infrastructure development value chain according to their expertise. Coordination, budgeting, goal setting and role clarification should be centralised. DFIs, like the DBSA, already possess platforms to anchor the creation of such an infrastructure development system.

[1] Zeph is the Chief Economist and Group Executive for Strategy & Sustainability at the Development Bank of Southern Africa

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