Infrastructure investment-led policy scenarios for South Africa

The South African government has begun to speed up the delivery of infrastructure. This policy shift is in line with its aim to halve poverty and unemployment by 2014, achievable if the economy grows at an average rate of 6 per cent by 2010. The government was able to demonstrate advances across many fronts at the end of the first decade of democracy. Macro economic conditions had stabilised and the economy was growing. In the socioeconomic arena, basic services were more widely accessible and poverty rates were marginally down. However, the Ten Year Reviewi, published by the Presidency, pointed to a series of crucial challenges to the further improvement of sustained economic growth performance and the elimination of poverty and reduction of inequality. These challenges were acknowledged in the 2005 State of the Nation Addressii, in which the President urged the nation to work to achieve the ambitious goals set out for the next decade: that is, to halve poverty and unemployment by 2014 and raise economic growth to an average of 6 per cent by 2010.

In February 2006, the Deputy President launched the Accelerated and Shared Growth Initiative for South Africa (Asgisa)iii to address these challenges and opportunities. This initiative incorporates the imperative of speeding up delivery and economic growth, and making sure that the more rapid and equitable distribution of opportunities and benefits is promoted and supported. This paper, an extract from the DBSA's 2008 Infrastructure Barometer, will explore exactly this relationship , between infrastructure investment and its impact on both economic growth and development.

In the current three-year budget cycleiv, the South African national Treasury has allocated R568 billion to infrastructure development and maintenance, broadly defined. This follows the period between 1976 to 2002, when annual infrastructure investment fell from 8.1 per cent to 2.6 per cent of GDP, and per capita expenditure from R1 268 to R356.v While it is known at a macro- level, in aggregate terms, what the level of infrastructure investment is and should be, there needs also to be an understanding of the likely impacts and implications of disaggregated sectoral infrastructure investment, where and for whom and under what conditions.

At the macro-level, the acceleration envisaged in AsgiSA sets an earlier date for planned future investment, significantly increasing the total amount available for investment in infrastructure. It is generally anticipated that this will also bring forward the benefits to be gained from such investment. However, although accelerated (increased) spending generally will increase the rate of growth, its impact on reducing poverty and unemployment is not as clear. These outcomes require an understanding of the pattern of spending in terms of sectors and value chains as well as location. Thus, although the economic growth and aggregate poverty and inequality situation might be improved at macro level, at the micro level, where benefits are experienced, the picture may be very different.

In order to test the impact of accelerated infrastructure investment on the South African economy, and specifically on the macro-economic, poverty and distribution performance of the economy, a linked macro-micro economic model of South Africa was developed. The findings and implications of this model will form the basis of the paper.