Foreign Credit, Local Collapse

What the AfDB Loan Could Mean for South Africa

Photo by Vardan Papikyan on Unsplash

Ludwig von Mises, one of the clearest thinkers on money and markets, espoused a simple warning: when governments or banks hand out money that isn’t backed by real savings, people start building things that won’t work in the long run. At first, everything looks good; there’s a lot of activity, people get jobs, cement is poured, and machines are bought, but this rush is based on false signals. Individuals in the economy are tricked into thinking there are more real resources (i.e. land, labour and capital goods) than there actually are. So, businessmen start too many big projects that they can't finish or maintain.

Mises called this problem malinvestment. It means the wrong things are built in the wrong places, at the wrong time. These are not bad ideas because people are foolish—but because they were misled by money that made it seem like more was possible than actually was. And when the truth comes out, the country is left with unfinished buildings, empty rail lines, unpaid loans, and wasted time that can never be recovered.

Let’s now look at the $475 million loan the African Development Bank (AfDB) is preparing to give to South Africa. The goal is to support budget spending and infrastructure, including energy, water, and logistics. On paper, this sounds helpful, as South Africa is facing serious challenges such as load shedding, water shortages, and a collapsing rail network. However, Mises would ask: where is the money coming from, and how do we know these projects are truly needed by the market?

This loan does not come from the savings of South African citizens. It does not reflect the real priorities of local investors or communities. Instead, it is being handed out by a foreign development bank based on policy goals. It is not driven by what consumers want or what local businesses are willing to risk their own money on. It is driven by what SA government officials think the country needs.

This sounds harmless, but it leads to real problems.

What Mises’ theory predicts

Mises would predict several likely outcomes from this loan:

1. Misleading signals
   The loan sends a signal to project planners that there is enough real capital—enough bricks, tools, labour, and fuel—to start big, long-term projects. But that may not be true. The money is financial, not physical. It can hire people and place orders, but it cannot create the actual materials or skills needed. If the economy is already stretched thin, this loan just pushes it closer to the edge.

2. Projects that don’t match real demand
   Because the money comes from outside and is tied to political targets, it may fund projects that the market would not choose. For example, a new rail line may be built to support a mining sector whose global prices are already falling. Private investors might say, “This isn’t worth the risk,” but the loan bypasses that caution. So, the project goes ahead and later sits mostly unused.

3. Wasted resources
   Every rand spent on a misdirected project is a rand that could have gone elsewhere—to small-scale farming, road repair, school upgrades, or water maintenance in towns that need it now. Instead, the loan pushes the economy toward flashy, centralised projects with weak long-term returns.

4. Short-term boost, long-term cost
   There will be a short period where things seem better. Jobs will be created, and GDP might rise a little. But once the money runs out, the country will be left with new debt, ongoing maintenance costs, and assets that may not generate enough value to cover their costs. The loan must still be repaid, but the economic benefits may vanish.

5. Lower capital stock in the end
   Perhaps most important of all, Mises would warn that when the correction comes, when the projects stop delivering returns, the country will have fewer real assets than before. The labour, materials, and time spent on dead-end work are gone forever. That lowers South Africa’s productive capacity.

What could be done instead?

Mises believed in patient, real growth. That means only building what the economy can truly support, based on what people save, produce, and need. Interest rates and market signals – when left alone – can guide this process. Governments should not suppress those signals by flooding the economy with outside money or cheap credit. It only creates a cycle of booms and busts, where the economy appears to be doing well, then suddenly isn’t.

Big foreign loans may look impressive on a paper, but SA would likely gain more by letting local people decide how their own resources are used. Cut taxes, reduce regulation and guarantee every citizen’s right to own property and invest. These steps cost nothing, create no new debt, and let normal buying and selling show where effort brings the most good.

In short, the AfDB loan may give the appearance of progress, but Mises would argue that it’s a trap. It encourages the country to build on shaky ground, using money that hides the real limits of the economy. Eventually, the “money high” (the boom) will wear off, and South Africans will be left with broken promises, idle equipment, and even more debt to carry.

Econ Bro (@EconBreau and @EconBreau2 on Twitter/X) is a Nigerian Austrolibertarian economist and an apprentice at the Mises Institute. Under the organisation name “The Freedom Institute” he teaches individual liberty, personal responsibility, private property rights, free markets, and sound money to mostly young people across Nigeria. Econ Bro is an Associate of the Free Market Foundation.