Crowding In And Crowding Out Investments On The Way To A Understanding Of A ‘Sustainable Infrastructure’…
South Africa’s National Development Plan (NDP) mentions that “private investment will be needed to augment public initiatives” and that private investment should also go to sectors, which are traditionally backed up by public investment (i.e. infrastructure-related sectors such as public transport). However, where “private investment is [assumed to be] able to create the connectivity, public investment [should] focus more on enabling the demand by supporting e-literacy and content delivery or reducing investor risk”. Private investment, in some cases, should also benefit state-owned companies (SOEs), which somewhat aligns with the NDP’s aim to “[b]oost private investment in labour-intensive areas”, and underlines its claim that “public-sector investment [crowds] in private investment”. And whereas the latter would certainly be desirable, researchers have not yet found consensus when it comes to the relationship between public and private investments.
As Dumisani Pamba argues in his article ‘Crowing in or crowding out? Public Investment and Private Investment in South Africa: An ECM Approach’, it might actually be the case that public investment has somewhat crowded out private investment in South Africa between 1980-2020. The researcher from the University of KwaZulu-Natal found that in the short-run, there is a negative relationship between public investment and private investment and, in the long-run, there is a negative relationship between government consumption expenditure (GCE) and foreign direct investment (FDI). However, in the long-run, there is a positive relationship between public investment and FDI and between real GDP per capita and FDI. As Adeyemi et al. further remark in their article about GCE and private investments in Africa, in the Southern African bloc, “official development assistance, inflation rate and interest rate exert negative influence on private investment while the impact of debt and tax income tend to be positive”. Conclusively, the researchers suggest that governments should keep spending, however with solid institutional frameworks in place that are directed towards public infrastructure services.
The above, together with the reminders of other researchers, demonstrates that there is still some more research to do in order to truly understand the relationship between public and private investment in South Africa and other regional contexts. What may be important to explore, is the argument of M.F. Oladele and Gabila Fohtung Nubong, two researchers who recently published an article about private investments in South Africa in the International Journal of Economics and Finance Studies (IJEFS). These researchers argue that private investments are only profitable for South Africa in the long-term. As they further specify, “private investment may be boosted by ensuring macroeconomic and fiscal stability” and public-private investment may be encouraged in respect of the large share of the GDP that public investment makes up for. Based on the somewhat contradictory findings of the latter researchers and Adeyemi et al., it could be said that while GDP growth remains somewhat essential to maintain the status quo, it does not tell a story about what private investments can achieve in the long-term in South Africa.
Rather than relying solely on public or public-private investment for development purposes in South Africa, opting for private investment in the short- to-long-term can contribute to economic growth following Joshua, Güngör and Bekun. In their article, which deals with FDI-led growth in South Africa in the midst of urbanization and industrialization, the latter researchers argue that while “urbanization exhibits a non-significant positive influence on economic expansion”, industrialization has the largest and most significant influence on economic growth – by far larger than that of FDI, which is somewhat dependent on a successful industrialization process. Their insights do however prove that private investments matter after industrialization has already taken place and highlight that the ‘public investment-infrastructure’ development pathway was grounded upon a feasible motive in the past.
South Africa’s NDP mentions regional industrialization as an aspect of one of the key drivers of change, namely of “[p]romoting exports and competitiveness”. The latter shows that the establishment of the AfCFTA has contributed to a new understanding of industrialization. Rather than seeing industrialization as a ‘national’ or ‘domestic’ goal, it is now seen as a ‘regional goal’. Rather than interpreting industrialization as a tool to national self-sufficiency, it is understood that industrialization also has to occur in a way that promotes the efficiency, profitability, sustainability and feasibility (i.e. in terms of human rights obligations) of value and supply chains. As specified in the NDP, South Africa’s ability to scale up in terms of trade and investment will depend on both hard and soft infrastructure, whereby the latter includes supply-chain management and trade-facilitation systems etc. and the first majorly refers to what has traditionally been understood as infrastructure (i.e. roads, rail networks etc.).
And whereas this is only indirectly mentioned in the NDP, a commitment to protect human rights and sustainable public procurement (SPP) may also contribute something relevant to South Africa’s future ‘infrastructure of investments’, which may be the willingness of (foreign) private investors to commit towards putting money into the country’s sustainable, responsible and ‘human rights’-aligned development pathway. As Laura Treviño-Lozano pinpoints in her article about SPP and human rights in Mexico,
“SPP demands private suppliers to take actions that otherwise they would not take, it goes beyond market inclusion of certain vulnerable groups. Therefore, in the context of construction, SPP fosters sustainable infrastructure as an outcome”
Laura Treviño-Lozano (2021) ‘Sustainable Public Procurement and Human Rights: Barriers to Deliver on Socially Sustainable Road Infrastructure Projects in Mexico’, Sustainability 13(17): 1-15.
While Treviño-Lozano’s argument demonstrates that SPP is connected with sustainability and the protection of human rights at the small- and medium-sized business level, SPP can also achieve a change in investment and trade cooperation ethics. With SPP having been recognized as one of the objectives of SDG 12 ‘Ensure sustainable consumption and production patterns’, as Treviño-Lozano reminds, SPP is at the nexus between the state and business – and that means, that it is also at the nexus with public and private investments. As the latter researcher writes, the Inter-American Development Bank (IADB) was awarded with Harvard’s ‘Infrastructure 360° Award’ to commemorate “its outstanding sustainability practices in infrastructure investments in Latin America”. Whereas no particular type of research establishes on this link yet, it would be interesting to explore or/and observe how SPP at the domestic and intra-regional level might not only attract responsible and sustainable private investments from abroad in the future, but also lead to operating in networks that are already full of resourceful links and connections to push further on the sustainable development pathway of trade integration.
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