Working Paper 160 - Infrastructure Investment and Economic Growth in South Africa: A Granger Causality Analysis

This paper conducted pairwise Granger causality tests between economic growth, economic infrastructure investment, and employment in South Africa for the period 1960-2009 using bivariate vector autoregression (VAR) model with and without a structural break. The result indicates that there is a strong causality between economic infrastructure investment and GDP growth that runs in both directions implying that economic infrastructure investment drives the long term economic growth in South Africa while improved growth feeds back into more public infrastructure investments. We also found a strong two way causal relationship between economic infrastructure investment and public sector employment reflecting the role of such investments on job creation through construction, maintenance and the actual operational activities, while increased employment could in turn contribute to further infrastructure investments indirectly through higher aggregate demand and economic growth. Further, there is a strong unidirectional causal link between economic growth and public sector employment that runs from the former to the latter; and a strong one way causal link between private sector employment and economic growth that runs from the former to the latter. Economic growth appears to be one of the main drivers of public sector jobs but not the private sector ones and that while the private sector employment remains one of the key drivers of growth, the latter does not seem to have translated into more jobs, reflecting the much criticized scenario of jobless growth in the economy. The pairwise causality test results were assessed further using autoregressive distributed lag (ARDL) or bounds testing approach for cointegration to assess both the short-and long-run relationships among the variables in question. The bounds test results indicate the presence of steady-state long-run equilibrium relationship between economic growth, economic infrastructure investment, formal employment, and exports and imports of goods and services providing a theoretical foundation for the empirical results of the pairwise Granger causality tests.