1. Social and Economic Infrastructure Impacts on Economic Growth in South Africa Infrastructure and Growth Conference 29-31st May C. Kularatne
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2. Outline
Introduction
Economic & Social Infrastructure : A Historical Perspective
Theoretical Background
Empirical Literature
Econometric Methodology
Association between Infrastructure Measures, Output and Private Investment
Results
Non-linear Results
Policy Conclusions
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3. Introduction
Examine relationship between infrastructure (economic and social) and growth in SA
WHY?
DTI: Targeting of infrastructure expenditure is crucial –one of key constraints to growth given the fact that the relative logistics cost of South Africa (15% of GDP) versus those of its trading partners (8,5% of GDP).
No of containers per gross crane hr: Singapore = 25, Nagoya = 32, Hamburg = 24
AsgiSA document outlines 6 salient topics that need immediate address - one is investment in infrastructure.
Cabinet approval for Eskom & Transnet - R121-billion worth of investment over the next five years.
Approximately R107-billion needed for SA energy
AsgiSA: Lower costs & improve SA competitiveness – Planned infrastructure investment will contribute to this
Planned rate of growth of the capital budget of government at between 15% and 20% per year
SA: Durban & Cape Town = 16, Port Elizabeth = 12
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4. A Description of Data Some Notes on SARB Infrastructure Data
SARB gets capital stock data from StatsSA categorized into: Construction, machinery, residential, non-residential,etc.
Non-residential investment => Social infrastructure
Construction and machinery => Economic infrastructure (by public corporations & general govt)
Depreciation is calculated based on these categories provided by StatsSA using a linear rate of depn - Explains negative infrastructure investment
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5. Economic & Social Infrastructure in SA
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6. Historical View of Economic Infrastructure
Demonstrate a long-term deterioration: from mid-1970s for economic and social investment capital stock
Investment in economic infrastructure per capita fell from R1 304 in 1976 to R52 in 2002.
Economic infrastructure investment rate fell from 5 % to 0.27%
Recovery of infrastructural investment in the 1990s & subsequent slump
Expansion programs by Telkom & Eskom to areas which were under-serviced,
(SARB annual economic reports, ).
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7. Historical View of Economic Infrastructure
Decline in infrastructural investment mid-1970s & Part of overall decline in GFCF SA's gross savings (% of GDP) fell during 1980s & 1990s.
After 1980 govt consumption expenditure increased at expense of government investment (Merrifield, 2000: 98) - reflecting the government’s desperate attempts to prop up a political system that was economically unsustainable.
Growing consumption expenditure possible through investment cutbacks & fiscal deficit - budget deficit as prop of GDP rose from 2.9% in 1980–1986 to 4.9% in 1987–1994
In post-apartheid period, consumption & investment constrained to reduce deficit. Averaged 4.5% in 1995–1998 & 1.8% in 1999–2003. See Mariotti (2002).
Phases of Expansion
Railways from 1875–1930 period,
Inter-city roads- reached plateau 1940, after which focus was on paving national & provincial roads.
Port capacity was constrained to 1970s.
Telephones and electricity in 1980s
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8. An Index of Infrastructure
Monetary vs Physical measures
Physical measures: quantity of pertinent structures and facilities and covering a broader definition of this stock
Why?
Government may not always be subject to competitive markets, & public infrastructure endowments are not allocated through a price mechanism
Expansion of infrastructure takes place in stages wrt type of infrastructure
Expansion of infrastructure expenditure may not be matched by proportionate increases in physical infrastructure
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9. Historical View of Economic Infrastructure
Railway lines (km), Rail locomotives (number), Rail goods stock (number),
Rail carrying capacity (tonnes), Rail freight (tonnes), Total roads (km), Ports: cargo handled (harbour tons), South African Airways passengers (number), Total telephone lines (mobile & fixed), & Electricity generated (gigawatt hrs)
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10. Historical View of Economic Infrastructure
Index of capacity utilization of railroad and road infrastructure - incorporates different measures of rail infrastructure
Rail infrastructure measures include railway lines, locomotives and coaching stock per ton of freight & road infrastructure (both paved and unpaved) per vehicle.
Indicates a declining trend.
Imply that infrastructure capacity is declining or that infrastructure is being more efficiently used.
More km of road does not necessarily imply improvements in infrastructure - vehicular transportation may be more efficiently utilized.
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11. Historical View of Social Infrastructure
Social infrastructure investment per capita also decline from R263 in 1976 to R2 in 2002.
Social infrastructure investment rate in 2004 is 0.2%.
Renewed effort from year 2000 to increase social infrastructure investment expenditure - rising to R39 per capita in 2004.
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12. Social Infrastructure: Schools
Declining trend
Trend in infrastructure expenditure on schools portrays a gloomy picture since 1997
Most of education budget spent on recurrent expenditure
Have we caught-up with the backlog of physical infrastructure in schooling system?
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13. Theoretical Background
Investment in economic infrastructure increase growth potential, raising productive capacity via TFP directly or indirectly by increasing the return to private capital
Direct effect: as a factor of production
Indirect effect: productive infrastructure and private capital are "complements" in production, i.e, partial derivative of marginal product of private capital services with respect to the flow of infrastructure capital services is positive.
Effect of Social infrastructure???
Barro (1990) theoretical model to underpin the interaction of government expenditure on growth
Nuance to Barro (1990) model is inclusion of public investment in social infrastructure and economic infrastructure.
Infrastructure (economic and social) used in production of final output - financed by a tax on output.
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14. Theoretical Background
as augmenting technological progress.
Social infrastructure represents schools and hospitals - argue productivity of individuals in the economy will improve with improvements with increasing access to health care and educational facilities.
iff
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15. Theoretical Background
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16. Literature Review
Academic debate on public infrastructure was stimulated by Aschauer ( )
Various papers using a variety of methodologies in analysing the impact of infrastructure
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17. Literature Review
Perkins (2003) finds significant long-run relationships between infrastructure and GDP in South Africa – SA’s GDP growth tends to drive growth in individual measures of infrastructure-related goods and services.
Fedderke et al. (2005) find investment in infrastructure (using various measures of physical infrastructure) does appear to lead economic growth in SA both directly and indirectly (raising the marginal productivity of capital); weak evidence of feedback from output to infrastructure; while the finding of an infrastructure growth impact is robust.
Bogeti´c et al. (2005) using panel data for the SA manufacturing sector find empirical links between infrastructure and productivity. Specifically, infrastructure affects output directly, while it exerts more limited impact on factor productivity.
Summary
Public capital probably enhances economic growth,
Direction of association???
We are less certain about the magnitude of the effect and this is a disappointing outcome, given the enormous amount of research in this field.
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18. Econometric Methodology
PSS F-Test
Explore the directions of association between the variables
Where the estimated test statistic exceeds the upper bound value, we infer presence of a long-run equilibrium relationship and vice versa.
Test is indeterminate:
Where test statistic lies between the upper & lower bound values (in which case it is not clear whether a long-run relationship between the variables is present),
Where more than one variable is confirmed as outcome variable of long-run equilibrium relationship (in which case the long-run relationships between variables not unique).
In current application - relationship tested is between GDP and/or private investment & individual measures of economic infrastructure, and/or private investment & social infrastructure
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19. Econometric Methodology
3. Johansen Vector Error Correction Methodology
Estimate a structural model for the linkages between economic and social infrastructure and other macroeconomic variables the paper employs Johansen estimation technique
Estimating a Vector Error-Correction Mechanism (VECM)
Threshold autoregressive estimation - Potter (1995), Pesaran and Potter (1996)
How do we determine threshold?
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20. Discussion of Results
Existence of feedback effects between physical infrastructure and per capita output;
Existence of feedback effects between physical infrastructure and per capita private investment expenditure;
Physical infrastructure (possibly) affects per capita output indirectly via per capita private investment expenditure; and
Social capital affects per capita output, per capita private investment expenditure and physical economic infrastructure directly.
The PSS F-test was conducted to determine the relationship between per capita infrastructure investment expenditure, per capita private investment expenditure and per capita output.
We discover that infrastructure manifests (in one dimension) the possible absence of per capita output and per capita private investment affecting per capita investment expenditure.
Does output affect infrastructure development?
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21. Estimation
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22. Threshold effects
Social infrastructure-to-GVA – No critical threshold reached at 1.3%
Economic infrastructure-to-GVA- No critical threshold reached at 6%
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23. Conclusion and Policy Analysis
Neither Economic nor Social infrastructure expenditure thresholds could be reached as a percentage of GVA when taking into account the highest it has been since 1960 (as a percentage of GVA)
Both economic and social infrastructure expenditure still on a linear path
Social infrastructure has a positive direct effect on GVA
Appears that economic infrastructure investment does not lead output but rather lags GDP growth from 1965 onwards
Economic infrastructure investment appears to respond to economic growth rather than driving economic growth since 1960
Investments undertaken were a response to capacity constraints being reached
Feed back effects of economic infrastructure wrt to private investment
Other investments like petrol refineries which occurred in 1960s may have had a negligible effect on GDP growth – inefficient investments
Economic Infrastructure still on linear path – further investigation
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24. Quality of Schooling & Infrastructure
New Schools, Total of classrooms, Total of workshops, Total of toilets, Administrative areas: offices and storerooms, Media centres, Halls, Number of schools provided with fences, Number of schools provided with water, & Number of schools provided with electricity
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25. Savings
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