Inclusive economic growth — growth that supports sustainable economic participation for all citizens — is fundamental in the quest to respond to unemployment, poverty and inequality in SA.

The unemployment rate of more than 30%, a Gini ratio that is close to perfect inequality and a poverty rate of more than 56%, are reflective of the fact that SA’s annual economic growth over the past 60 years has been both waning and far from inclusive. Apart from the build-up to the 2010 Soccer World Cup, annual economic growth has been unsatisfactory to say the least, averaging just 1.7% between 2010 and 2019.

Since 1994 the government has introduced at least five economic strategies in a quest to achieve the elusive inclusive economic growth. While acknowledging that economic growth is not necessarily the best indicator for social progress, it is certainly an important prerequisite to improve society’s standard of living.

After recent broad consensus across the government, business and labour, the economic growth conversation has settled on an infrastructure-led argument. The key consensus from independent reports of these social partners is that infrastructure development should be central to the post-lockdown economic recovery. The consideration now is whether we should emphasise capital formation or institutional functionality to drive this consensus.

A capital-formation view to economic growth advances the argument that economic growth is a function of a long-term supply-side stimulation of the economy. Growth models in this realm emphasise capital formation, labour and total factor productivity — effectiveness or capacity of applying production factors — as integral parts of economic growth. However, to be effective in the post-lockdown environment these types of models would need to be supplemented by careful interventions to stimulate near-term demand given the destruction of demand from the Covid-19 fallout. Furthermore, the weak state of the fiscus makes for a stronger case for catalysing private-sector capital into the economic recovery.

An institutional development argument to economic growth posits that economic growth is predominantly a function of well-functioning institutions such as legal foundation, property rights, governance, implementation platforms/structures, cultural factors and human development. Institutional economics is still evolving and will probably continue to use mainstream economics as a yardstick for its growth. The role of institutions in economic growth is invariably affected by the historical economic set-up of a nation. For example, the legacy of colonisation and the high proportion of tribal systems have, among other historical economic set-ups, distorted the allocation of property rights in Sub-Saharan African countries.

Research from Sub-Saharan Africa undertaken by various researchers from  2012 to 2019 shows that both capital formation and functional institutions contribute positively to economic growth. There are a few mixed findings where the causal relationship and extent of influence between capital formation and economic growth are unclear or weak. However, the overwhelming outcome is that gross fixed-capital formation has a positive relationship with economic growth in the short as well as the long run. Similarly, evidence from pooled Sub-Saharan data from 2000 to 2018 shows that efficient institutions such as rule of law, financial structure, political stability and economic freedom are key to accelerating economic growth.

Institutional development can assist in forging a new path of economic growth and development. However, it should be noted that in our case there is still a lot of work to do as before 1994 the apartheid government specified institutions and enforced policies to maximise wealth for the white minority. Despite the democratic government reversing these practices after 1994, many of these institutions, such as property rights and financial structures, remain severely distorted. It is therefore crucial to ensure that economic policy structures at both macro and sector levels deliberately facilitate institutional development to foster cohesion between the public and the private sectors.

Ultimately there has to be a symbiotic pursuance of capital formation and institutional development. The infrastructure-led economic recovery in SA should be viewed in line with the National Development Plan, which lists “capable institutions” as one of the critical success factors for the vision. We should therefore ensure that our institutions work to facilitate capital formation.

Over time the Development Bank of Southern Africa (DBSA) has gained invaluable experience to create credible institutions to support the development of infrastructure. These include the independent power producers’ office, infrastructure delivery division outside the DBSA, the project preparation division, the development laboratories and recently the infrastructure fund — all within the bank. These institutions support the strategic approach of the DBSA to operate across the entire infrastructure development value chain to support the planning, preparation, financing and implementation of projects.

But beyond pursuing capital formation alongside institutional development, the infrastructure-led economic recovery drive should also emphasise smart collaborations, blended finance, implementation of the district One Plans, internal efficiencies to ensure financial sustainability, the security of energy supply to produce capital formation inputs such as cement, steel, aluminium, bitumen, bricks and concrete, and the pursuance of development impact. This means the infrastructure created should assist in addressing existing access inequalities in society.

• Nhleko DBSA chief economist.

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