Economic Infrastructure Stocks and Investment in South Africa, 1870 – 2000

1. ECONOMIC INFRASTRUCTURE, ITS PERFORMANCE AND ECONOMIC GROWTH  Infrastructure comprises activities that share technical features (including economies of scale) and economic features (such as externalities). It includes activities which are not directly productive but which are necessary for the development of productive activities.  Infrastructure comprises both economic and social infrastructure

Barro’s (1990) model of endogenous growth demonstrates that an important attribute of infrastructure expenditure by the public sector is that it raises the marginal product of other capital used in the production process, although only up to a point. Barro’s (1990) model of endogenous growth demonstrates that an important attribute of infrastructure expenditure by the public sector is that it raises the marginal product of other capital used in the production process, although only up to a point. Empirical estimates of the impact of infrastructure on economic growth vary widely Empirical estimates of the impact of infrastructure on economic growth vary widely

What accounts for the performance of infrastructure (a particular issue in Africa)? 1. delivery of infrastructure services usually occurs within a market structure where competition is absent 2. the agencies charged with responsibility for delivering infrastructure are seldom given the managerial and financial autonomy they need to perform 3. actual users of the infrastructure are not positioned to make their demands felt

Converging forces are opening up new opportunities for innovation in infrastructure delivery: Advances have occurred in technology and in its regulatory environment which have introduced more competition Advances have occurred in technology and in its regulatory environment which have introduced more competition A growing awareness of the necessity for a larger private sector role in infrastructure delivery and management. A growing awareness of the necessity for a larger private sector role in infrastructure delivery and management. Greater concern exists for environmental sustainability and poverty reduction and this is providing impetus for infrastructure reform Greater concern exists for environmental sustainability and poverty reduction and this is providing impetus for infrastructure reform

3. Trends in economic infrastructure in SA Long-term decline infrastructure spending & savings Long-term decline infrastructure spending & savings Late 1990s: Telkom, Eskom, SAA Late 1990s: Telkom, Eskom, SAA

Rising government consumption expenditure financed by investment cutbacks and borrowing Rising government consumption expenditure financed by investment cutbacks and borrowing

Correlation for : 0.6 Correlation for : 0.6 Negative correlation for (-0.26) Negative correlation for (-0.26)

 Existence of long-run relationships between GDP and infrastructure (INF) can be tested using Pesaran, Shin and Smith (PSS) F-tests 1. Estimate the following equation: 2. Compute F-statistic for joint significance of  1 =  2 = 0 and compare with critical values; F>F I(1) indicates INF affects GDP (  1 =  2 = 0 is rejected); F F I(1) indicates INF affects GDP (  1 =  2 = 0 is rejected); F<F I(0) indicates INF does not affect GDP; F I(0) < F < F I(1) : inconclusive 3. Repeat with  INF t on LHS; RHS unchanged

The PSS F-statistics indicate forcing relationships from infrastructure investment to GDP and from infrastructure fixed capital stock to GDP. Table 1: PSS F-tests for the relationship between real GDP and infrastructure investment and infrastructure fixed capital stock (“INFR”) Measure of infrastructure Relationship between GDP per capita and INFR per capita GDP as outcome variable; * indicates GDP determined by INFR INFR as outcome variable; * indicates INFR determined by GDP Infrastructure investment 6.39 *0.88 Infrastructure fixed capital stock 7.69 *2.78

Early rail development closely related to mining Early rail development closely related to mining Average growth rate : 8.5% p.a. Average growth rate : 8.5% p.a. “Plateau” effect from 1930 “Plateau” effect from 1930

Downturn in actual numbers from early 1980s Downturn in actual numbers from early 1980s F-tests: GDP ↔ locomotives (actual) F-tests: GDP ↔ locomotives (actual) F-tests: GDP → coaching stock (actual) F-tests: GDP → coaching stock (actual)

Strong positive association Strong positive association F-tests: GDP → freight (pc/actual) F-tests: GDP → freight (pc/actual) F-tests: GDP → passengers (actual) F-tests: GDP → passengers (actual)

Strong positive association Strong positive association F-tests: Road → GDP (actual) F-tests: Road → GDP (actual) ARDL results indicate paved roads → GDP ARDL results indicate paved roads → GDP

Slow / negative growth from mid-1980s… Slow / negative growth from mid-1980s… …but not the sharp decline experienced by rail …but not the sharp decline experienced by rail F-tests (actual): passenger vehicles → GDP; goods vehicles ↔ GDP F-tests (actual): passenger vehicles → GDP; goods vehicles ↔ GDP

Strong growth in late 1970s: Richards Bay & Saldanha; growing trade in 1990s Strong growth in late 1970s: Richards Bay & Saldanha; growing trade in 1990s F-tests: GDP → cargo (actual) F-tests: GDP → cargo (actual)

Strong positive association Strong positive association F-tests: indicate GDP → SAA passengers (actual) F-tests: indicate GDP → SAA passengers (actual)

Generally positive relationship except for Generally positive relationship except for F-tests: GDP → passengers (pc & pc/actual, unclear actual) F-tests: GDP → passengers (pc & pc/actual, unclear actual)

F-tests: GDP → fixed lines (actual & pc/actual) F-tests: GDP → fixed lines (actual & pc/actual) Puzzling slowdown in 1960s (when GDP growth was strong) Puzzling slowdown in 1960s (when GDP growth was strong)

Cross-country correlations of 0.94 (fixed lines) and 0.91 (mobile lines) Cross-country correlations of 0.94 (fixed lines) and 0.91 (mobile lines) SA phone lines pc appears low (esp. fixed) SA phone lines pc appears low (esp. fixed)

Power failures affect other infrastructure: lights, rail & air etc. (North America in Aug 2003) Power failures affect other infrastructure: lights, rail & air etc. (North America in Aug 2003) F-tests: GDP → elec. (pc & pc/actual); also ↔ actual F-tests: GDP → elec. (pc & pc/actual); also ↔ actual

Cross-country correlation of 0.86 Cross-country correlation of 0.86 SA in line with other countries SA in line with other countries

Phases of Infrastructure Development

Conclusion 1. The relationship between economic infrastructure and economic growth appears to run in both directions. Economic growth provides both the need for, and the resources to fund. 2. SA’s stock of economic infrastructure has developed in phases. 3. The need for investment in economic infrastructure never goes away.

Conclusion (policy implications) 1. Monitor growing pressures on existing infrastructure-related goods and services when GDP rises – identify congestion and wear & tear 2. Respond to bottlenecks through investment, since aggregate infrastructure investment has a positive impact on long-run GDP 3. In some cases (no bottlenecks), plateau effects may be desirable (but maintenance remains important) 4. Recently: improvement in infrastructure investment and GDP growth. The big question is how this investment drive is going to be sustained when our savings rate is still so low. 4. Recently: improvement in infrastructure investment and GDP growth. The big question is how this investment drive is going to be sustained when our savings rate is still so low.

Appendix – infrastructure developments  New trains (15-year programme); Gautrain  New aeroplanes (Airbus)  New airport (La Mercy)  New port (Coega)  Upgraded facilities at existing ports & airports  Roads – various projects (including expanded public works programme)  Fixed phone lines: SNO (?)  Electricity – remains a concern, but growing level of awareness; a global problem?