ECO1011S: ESSAY

The South African government’s recognition of the critical need for infrastructure investment is exemplified by the creation of the Presidential Infrastructure Coordinating Commission (PICC) in April 2012. However, 76% (R58.5 billion) of new infrastructure developments in 2011 came from the private sector (Munshi, 2012). An analysis of the importance of investment and investment rates for economic growth and employment, the relevance of South Africa’s capacity utilisation level and its relationship to businesses’ cash stockpiles, and the government’s New Growth Plan will give an overview of South Africa’s current and future investment level, and its implications for economic prosperity.

Public and private investment and increased investment rates are vital for current and future economic growth. An increase in government spending on goods and services and/or a fall in the interest rate causes the aggregate demand curve to shift to the right, which leads to an increase in Real Gross Domestic Product (GDP) (Parkin et al, 2010):

Figure 1 (Parkin et al, 2010: pg 615) 615)

Workers are hired by firms to enable expanded production, and the unemployment levels decrease. However, there is no guarantee as to the extent of this causal effect, as the relationship between economic growth and job creation has weakened over the past few decades, due to labour regulations and growth in high-skilled areas (Neethling, 2012):

Figure 2 (Neethling, 2012)

Investment in human capital and physical capital stock can lead to economic growth, with the latter also able to increase the marginal productivity of capital – and often, labour – in the future and prevent diminishing returns to scale (Fedderke et al, 2006). However, infrastructure investment creates the most jobs in the shortterm and also leads to economic growth, as well as raising “productivity and