Over the last year or two I feared for an oversupply of infrastructure capacity in China as a result of their construction boom, resulting in a significant drop in construction growth in China. This would potentially lead to a slowdown in demand for construction inputs such as steel and cement, possibly triggering a drop in demand for other resources and manufacturing inputs, thereby affecting the growth in the world economy, including the SA economy. However, many other economists more knowledgeable on China did not share my views. Nonetheless, the oversupply of capacity was recently confirmed when a friend, after visiting China, commented that a high number of buildings stand empty after construction in many of the big cities. But he allayed my fears somewhat by further commenting that many of these buildings are simply torn down a year or three after construction to make way for new buildings. The net effect is thus the build up of extra capacity in China is lower than it could have been. This general picture of wasteful expenditure was confirmed when reading an environmental article on overall efficiency in China, “Each unit of GDP (in China) takes seven times more resources to produce than in Japan, nearly six times more than in the United States and nearly three times more than in India” (Mail & Guardian, 26 February 2007). But what would really happen if China were to double their efficiency in using their resources? And what lessons should South Africa learn from this?
South Africa currently faces significant capacity constraints due to the faster than expected economic growth over the last three years, in particular on our infrastructure. The fast growing economy is placing enormous pressure on our existing, ageing infrastructure. There is thus a rush to develop the necessary infrastructure to meet the demand generated by the economy, replace ageing infrastructure and meet the necessary requirements for hosting the 2010 Soccer World Cup. The private sector is also contributing through private construction developments taking place across the country, significant investments in expansions by many firms to increase output capacity, and many more. This is one of the main reasons why SA was able to achieve a 5% growth rate in 2006. The impact of this injection of expanded capacity through infrastructure investments in the SA economy will be felt in the next few years as it will allow the economy to grow even faster, or at least continue to grow at its current pace.
However, it is important to caution the public that there is the danger of creating too much infrastructure capacity in this current rush/frenzy to develop infrastructure. If an oversupply of infrastructure capacity were to occur, there could be a significant slow down in economic growth as “supply will have to wait for demand to catch up”. This is a key reason for many of the boom and bust cycles of the past in the world, including the current house market slow down in the US. There is also the danger of developing the wrong type of infrastructure to stimulate further economic growth at that particular point in time. This could result in many “white elephant” infrastructure projects dotting the landscape, or that the infrastructure remains un- or underused for a number of years, as was the case with the many mothballed power stations in South Africa. A potential knock-on effect could be a loss of confidence in the economy’s growth prospects, leading to a further slowdown in economic growth.
In essence, we need to balance the supply of extra capacity in the economy through infrastructure development with the growth of demand in the economy (both local demand and international demand for our products and services), as well as our ability to address other capacity constraints such as the skills shortage, general health of the population, technical innovation (research and development), including improving the efficiency of existing infrastructure assets, to name but a few. Up to now, the government has been lauded for their management of the economy since 1994, i.e. returning the economy to good health after the absolute mess given to them by the previous government and managing the economy’s inclusion into the global economy through the turbulences of the late 1990s and early 2000s. However, it is important that this apparently healthy animal that is the South African economy don’t suddenly start to run away from us. We don’t have the resources and possibly not the political authority, like China, to spend precious resources on wasteful infrastructure projects. It is thus important that we continue to carefully monitor the potential of the economy and what the economy is actually producing (i.e. the output gap), as well as to timeously address other capacity constraints that may hinder the future growth of the South African economy.
