South Africa and China were on the same development path until the early 1980s after which South Africa’s lack of investment in gross fixed capital formation (GFCF) delayed the country’s economic growth.
Specialist asset manager Futuregrowth said South Africa’s rate of investment in GFCF has declined for decades, while China’s has skyrocketed.
South Africa’s lack of investment in GFCF over the past four decades has delayed its economic growth and affected its ability to address poverty and inequality, said Futuregrowth.
“South Africa’s share of GFCF to gross domestic product (GDP) in 2021 was a modest 13%, relative to the exceptional 42% contribution of GFCF to China’s GDP over the same period,” said Jason Lightfoot, the senior portfolio manager at Futuregrowth Asset Management.
GFCF is the net increase in fixed assets used in the production of goods and services, like public infrastructure, roads, bridges and power plants.
These assets increase a country’s productivity, living standards and employment and are an important aspect of economic growth.
“Since the early 1980s, GFCF growth has resulted in an average GDP rate of 9.23% for China and 2.10% for South Africa, demonstrating the importance of infrastructure investment.”
Political and economic instability, low business confidence and a lack of foreign direct investment have contributed to South Africa’s lack of GFCF investment.
However, Futuregrowth identified a lack of private investment as one of the key reasons for the country’s absence of GFCF growth.
While initiatives like the Renewable Independent Power Producer Programme (REIPPP) provide some relief, private investment in South Africa has been on the decline.
This decline has caused the country’s GFCF to be overtaken by the depreciation of its existing assets.
The depreciation of South Africa’s public infrastructure is another key reason for the lack GFCF in South Africa.
The country’s state-owned enterprises, tasked with running and maintaining public infrastructure like ports, railways and power stations, are in disrepair – with little sign of recourse.
South Africa is losing billions of rands each year due to failures at Transnet alone, as it prevents multiple sectors from transporting and exporting goods.
China, on the other hand, owes its strong GFCF growth to its government’s commitment to investing in infrastructure.
“The Chinese government has made substantial investments in public infrastructure, such as roads, bridges, power plants, and water and sewage systems, which have improved the quality of the country’s infrastructure and have attracted private investment,” said Futuregrowth.
In 2022, Bloomberg calculated that Beijing would be making 6.8 trillion yuan (R17.88 trillion) of government funds available for construction projects.
In addition, the Chinese government has implemented policies to encourage private investment in the country, including tax incentives and subsidies, which add to GFCF growth.