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

1. 1. ECONOMIC INFRASTRUCTURE, ITS ECONOMIC INFRASTRUCTURE, ITS PERFORMANCE AND ECONOMIC PERFORMANCE AND ECONOMIC GROWTHGROWTH

Infrastructure comprises activities that Infrastructure comprises activities that share technical features (including share technical features (including economies of scale) and economic economies of scale) and economic features (such as externalities). It includes features (such as externalities). It includes activities which are not directly productive activities which are not directly productive but which are necessary for the but which are necessary for the development of productive activities.development of productive activities. Infrastructure comprises both economic Infrastructure comprises both economic and social infrastructureand social infrastructure

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

•Empirical estimates of the impact of Empirical estimates of the impact of infrastructure on economic growth vary infrastructure on economic growth vary widelywidely

What accounts for the performance of What accounts for the performance of infrastructure (a particular issue in infrastructure (a particular issue in Africa)?Africa)?

1. delivery of infrastructure services 1. delivery of infrastructure services usually occurs within a market structure usually occurs within a market structure where competition is absentwhere competition is absent2. the agencies charged with responsibility 2. the agencies charged with responsibility for delivering infrastructure are seldom for delivering infrastructure are seldom given the managerial and financial given the managerial and financial autonomy they need to performautonomy they need to perform3. actual users of the infrastructure are 3. actual users of the infrastructure are not positioned to make their demands feltnot positioned to make their demands felt

Converging forces are opening up new Converging forces are opening up new opportunities for innovation in opportunities for innovation in infrastructure delivery:infrastructure delivery: • Advances have occurred in technology and in Advances have occurred in technology and in

its regulatory environment which have its regulatory environment which have introduced more competitionintroduced more competition

• A growing awareness of the necessity for a A growing awareness of the necessity for a larger private sector role in infrastructure larger private sector role in infrastructure delivery and management.delivery and management.

• Greater concern exists for environmental Greater concern exists for environmental sustainability and poverty reduction and this sustainability and poverty reduction and this is providing impetus for infrastructure reformis providing impetus for infrastructure reform

3. Trends in economic infrastructure 3. Trends in economic infrastructure in SAin SA• Long-term decline infrastructure spending & Long-term decline infrastructure spending & savingssavings• Late 1990s: Telkom, Eskom, SAALate 1990s: Telkom, Eskom, SAAPublic-sector economic infrastructure investment (gross)

per capita and as a percentage of GDP

200

400

600

800

1 000

1 200

1 400

1960 1970 1980 1990 2000

Ran

ds, 1

995

pric

es

2

3

4

5

6

7

8

9

% of G

DP

Infrastructure investment per capita % of GDP

• Rising government consumption Rising government consumption expenditure expenditure financed by investment financed by investment cutbacks and cutbacks and borrowingborrowing

Government consumption and investment componentsof GDP measured as a percentage of GDP

2

6

10

14

18

22

1940 1950 1960 1970 1980 1990 2000

% o

f GD

P

Government consumption Government gross fixed capital formation

• Correlation for 1960-2002: 0.6Correlation for 1960-2002: 0.6• Negative correlation for 1993-2002 (-Negative correlation for 1993-2002 (-0.26)0.26)

Per capita: real GDP and public-sector economicinfrastructure investment (gross)

10 000

12 000

14 000

16 000

18 000

1960 1970 1980 1990 2000

GD

P (r

ands

, 199

5 pr

ices

)

300

600

900

1 200

1 500Investm

ent (rands, 1995 prices)

GDP per capita Infrastructure investment per capita

Existence of long-run relationships Existence of long-run relationships between GDP and infrastructure (INF) between GDP and infrastructure (INF) can be can be tested using Pesaran, Shin and tested using Pesaran, Shin and Smith (PSS) F-testsSmith (PSS) F-tests

1.1. Estimate the following equation:Estimate the following equation:

2.2. Compute F-statistic for joint Compute F-statistic for joint significance of significance of 1 1 = = 22 = 0 and compare = 0 and compare with critical values; F>Fwith critical values; F>FI(1)I(1) indicates INF indicates INF affects GDP (affects GDP (11 = = 22 = 0 is rejected); = 0 is rejected); F<FF<FI(0)I(0) indicates INF does not affect indicates INF does not affect GDP; FGDP; FI(0) I(0) < F < F< F < FI(1)I(1): inconclusive: inconclusive

3.3. Repeat with Repeat with INFINFtt on LHS; RHS on LHS; RHS unchangedunchanged

.121111

ttt

p

iitiit

p

iit INFGDPINFGDPGDP

• 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 Early rail development closely related to mining mining • Average growth rate 1875-1930: 8.5% p.a.Average growth rate 1875-1930: 8.5% p.a.• “ “Plateau” effect from 1930 Plateau” effect from 1930

Railway lines (route kilometres) and real GDP

0

5 000

10 000

15 000

20 000

25 000

1875 1885 1895 1905 1915 1925 1935 1945 1955 1965 1975 1985 1995 2005

Rai

lway

line

s (ro

ute

km)

0

100

200

300

400

500

600

700R

eal GD

P (Rbn, 1995 prices)

Railway lines Real GDP

Narrow gauge excluded (1945)

* Transvaal included (1902)

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

Per capita: real GDP, railway locomotivesand railway coaching stock

3 000

6 000

9 000

12 000

15 000

18 000

1910 1920 1930 1940 1950 1960 1970 1980 1990 2000

Rea

l GD

P (r

ands

, 199

5 pr

ices

)

0.0

0.1

0.2

0.3

0.4

0.5

Locomotives and coaching stock

(number per thousand)

Real GDP Locomotives Coaching stock

Figures are expressedper capita or per thousand

• Strong positive association 1911 - 1993Strong positive association 1911 - 1993• F-tests: GDP F-tests: GDP → freight (pc/actual)→ freight (pc/actual)• F-tests: GDP F-tests: GDP →→ passengers (actual) passengers (actual)

Per capita: real GDP, railway freightand railway passenger journeys

3 000

6 000

9 000

12 000

15 000

18 000

1910 1920 1930 1940 1950 1960 1970 1980 1990 2000

Rea

l GD

P (r

ands

, 199

5 pr

ices

)

20

60

100

140

180 Freight and passenger journeys(index, 1950 = 100)

Real GDP Freight Passenger journeys

Figures are expressed per capita

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

Per capita: real GDP and national & provincial paved roads

3 000

6 000

9 000

12 000

15 000

18 000

1930 1940 1950 1960 1970 1980 1990 2000

Rea

l GD

P (r

ands

, 199

5 pr

ices

)

0.0

0.5

1.0

1.5

2.0Paved roads

(kilometres per thousand)

Real GDP Paved roads

Figures are expressedper capita or per thousand

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

Per capita: real GDP, passenger vehicles, andcommercial vehicles for transport of goods

3 000

6 000

9 000

12 000

15 000

18 000

1920 1930 1940 1950 1960 1970 1980 1990 2000

Rea

l GD

P (r

ands

, 199

5 pr

ices

)

0

100

200

300

400

500V

ehicles (index, 1950 = 100)

Real GDP Passenger vehicles Goods vehicles

Figures are expressed per capita

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

Per capita: real GDP and cargo handled at ports

3 000

6 000

9 000

12 000

15 000

18 000

1910 1920 1930 1940 1950 1960 1970 1980 1990 2000

Rea

l GD

P (r

ands

, 199

5 pr

ices

)

0

1

2

3

4

5

Cargo (harbour tons per capita)

Real GDP Cargo handled at ports

Figures are expressed per capita

• Strong positive associationStrong positive association• F-tests: indicate F-tests: indicate GDP → SAA passengers GDP → SAA passengers

(actual)(actual)

Per capita: real GDP and SAA passengers(domestic and international)

8 000

10 000

12 000

14 000

16 000

18 000

1950 1960 1970 1980 1990 2000

Rea

l GD

P (r

ands

, 199

5 pr

ices

)

10

40

70

100

130

160

Passengers (number per 1000)

Real GDP SAA passengers

Figures are expressed per capita or per 1000

• Generally positive relationship except for 1989 - Generally positive relationship except for 1989 - 19931993• F-tests: GDP F-tests: GDP → passengers (pc & pc/actual, unclear → passengers (pc & pc/actual, unclear actual)actual)

Per capita: real GDP and passengers on internationalflights at South African airports (all airlines)

10 000

12 000

14 000

16 000

18 000

1960 1970 1980 1990 2000

Rea

l GD

P (r

ands

, 199

5 pr

ices

)

0

30

60

90

120

150

Passengers (number per 1000)

Real GDP Passengers (arrivals and departures)

Figures are expressed per capita or per 1000

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

growth was strong)growth was strong)

Per capita: real GDP and fixed phone lines

3 000

6 000

9 000

12 000

15 000

18 000

1910 1920 1930 1940 1950 1960 1970 1980 1990 2000

Rea

l GD

P (r

ands

, 199

5 pr

ices

)

0

30

60

90

120

150Fixed lines (num

ber per 1000)

Real GDP Fixed phone lines

Figures are expressed per capita or per 1000

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

Cross-country comparison: phone lines per 1000 people, 2001

0

100

200

300

400

500

600

700

800

900

0 5 000 10 000 15 000 20 000 25 000 30 000 35 000

Gross national income per capita ($, purchasing power parity)

Phon

e lin

es p

er 1

000

peop

le

fixed mobile

South Africa

Sources: World Telecommunication Development Report , 2002; World Development Indicators , 2003.

UnitedStates

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

Per capita: real GDP and electricity generated

3 000

6 000

9 000

12 000

15 000

18 000

1910 1920 1930 1940 1950 1960 1970 1980 1990 2000

Rea

l GD

P (r

ands

, 199

5 pr

ices

)

0

1 000

2 000

3 000

4 000

5 000

6 000

Electricity

(kilowatt hours per capita)

Real GDP Electricity generated

Figures are expressed per capita

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

Cross-country comparison: electricity consumption per cap., 2000

0

3 000

6 000

9 000

12 000

15 000

18 000

0 5 000 10 000 15 000 20 000 25 000 30 000 35 000 40 000

Gross national income per capita ($, purchasing power parity)

Ele

ctri

city

con

sum

ptio

n pe

r ca

pita

in

kilo

wat

t hou

rs

South Africa

Source: World Development Indicators , 2002 and 2003.

United States

Canada

Kuwait

Sweden and Finland

Phases of Infrastructure Phases of Infrastructure DevelopmentDevelopment

South Africa: indices of infrastructure

0

50

100

150

200

1870 1880 1890 1900 1910 1920 1930 1940 1950 1960 1970 1980 1990 2000

Inde

x (1

990

= 10

0)

Railway lines Goods stock (rail) Paved roads

Electricity Phone lines, incl. mobile

ConclusionConclusion1.1.The relationship between economic The relationship between economic

infrastructure and economic growth infrastructure and economic growth appears to run in both directions. appears to run in both directions. Economic growth provides both the Economic growth provides both the need for, and the resources to fund.need for, and the resources to fund.

2.2.SA’s stock of economic infrastructure SA’s stock of economic infrastructure has developed in phases.has developed in phases.

3.3.The need for investment in economic The need for investment in economic infrastructure never goes away. infrastructure never goes away.

Conclusion (policy implications)Conclusion (policy implications)

1.1. Monitor growing pressures on existing Monitor growing pressures on existing infrastructure-related goods and services infrastructure-related goods and services when GDP rises – identify congestion and when GDP rises – identify congestion and wear & tearwear & tear

2.2. Respond to bottlenecks through investment, Respond to bottlenecks through investment, since aggregate infrastructure investment since aggregate infrastructure investment has a positive impact on long-run GDP has a positive impact on long-run GDP

3.3. In some cases (no bottlenecks), plateau In some cases (no bottlenecks), plateau effects may be desirable (but maintenance effects may be desirable (but maintenance remains important)remains important)

4.4. Recently: improvement in infrastructure Recently: improvement in infrastructure investment and GDP growth. The big investment and GDP growth. The big question is how this investment drive is going question is how this investment drive is going to be sustained when our savings rate is still to be sustained when our savings rate is still so low. so low. 

Appendix – infrastructure Appendix – infrastructure developmentsdevelopments

New trains (15-year programme); New trains (15-year programme);

GautrainGautrain New New aeroplanesaeroplanes (Airbus) (Airbus) New airport (La Mercy)New airport (La Mercy) New port (Coega)New port (Coega) Upgraded facilities at existing ports & Upgraded facilities at existing ports &

airportsairports Roads – various projects (including Roads – various projects (including

expanded public works programme)expanded public works programme) Fixed phone lines: SNO (?)Fixed phone lines: SNO (?) Electricity – remains a concern, but Electricity – remains a concern, but

growing level of awareness; a global growing level of awareness; a global problem?problem?