The contribution of public capital towards economic growth: A KwaZulu-Natal case study

Abstract

Background: The adequate supply of infrastructure is essential to ensure increasing productivity and economic growth. Research found this relationship to be significantly positive. The external effects that spending on public capital has on the production function of private firms stimulates economic growth overall. This implies that public capital inputs should be incorporated into the production function.

Aim: The way provincial or regional growth depends on infrastructure is investigated in this article and it is applied to data from KwaZulu-Natal province, as an illustration.

Setting: This study investigates the extent to which infrastructure in KwaZulu-Natal province in South Africa leads towards economic growth of the province.

Methods: From a theoretical framework, this article 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 first developed to apply in this study and others to follow. Econometric techniques are then employed, using quarterly data between 2001 and 2015, to assess the set hypothesis that growth in expenditure on public capital leads to national economic growth.

Results: The empirical results support the argument of a positive relationship between provincial capital stock and economic growth in the long-term. The findings also suggests that the long-term causality or effect fades over time, albeit slowly.

Conclusion: 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 was, however, also observed. In conclusion, there also seems to be some causality between provincial capital stock and provincial gross domestic product in the short-run.