The contribution of public capital towards economic growth

South Africa - 21 November 2017

Research has shown that adequate infrastructure is essential for an increase in productivity and sustained economic growth. The growth-enhancing effect that public spending has on production in private firms implies that public capital inputs should be incorporated into the production function. This paper investigates the way in which provincial or regional growth depends on infrastructure, using data from KwaZulu-Natal province as an illustration. Specifically, it investigates the extent to which infrastructure in KwaZulu-Natal contributes to economic growth in the province. From a theoretical framework the paper develops an endogenous growth model which investigates the association between provincial public capital stock expenditure and economic growth. Data series for public capital formation are developed and applied, and econometric techniques are then employed (using quarterly data between 2001 and 2015) to assess the hypothesis that growth in public capital expenditure stimulates national economic growth.

The empirical results support the argument of a positive relationship between provincial capital stock and economic growth in the long term. The findings also suggest that the long-term causality or effect fades over time, albeit slowly. The nature and statistical significance of the long-term equilibrium relationship seems to be ambiguous at best. Some evidence of an equilibrium relationship in the short term is also observed. In conclusion, there seems to be some causality between provincial capital stock and provincial gross domestic product in the short run.

Available from: https://sajems.org/index.php/sajems/article/view/1591

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