The difference between gross and net investment is depreciation – that portion of investment spent to replace worn out capital. The chart below shows that the gap between gross and net investment has been rising in South Africa. Net investment averaged about 7% of GDP between 1946 and 2009, whereas gross investment averaged 21%. A back-of-the-envelope calculation therefore suggests new investment historically represented about two-thirds of total investment, with the balance going to replacing old capital.
Since the global financial crisis, there has been a steady decline in investment in South Africa. Gross investment average below 17% of GDP since 2010, compared to below 4% for net investment. This suggests that capital depreciation has accelerated. The big acceleration has been since 2020, with hardly any net addition to the capital stock. Data from the Reserve Bank of South Africa (SARB) line up with this picture, and suggest that the capital stock in the manufacturing industry has actually shrunk since 2010, while Statistics South Africa data suggest that the capital stock has decreased in other industries as well.
Since investment is a key driver of productivity and per capita income growth, a bigger gap augurs ill for South Africa’s outlook.
There are many possible explanations for the decline in the life expectancy of capital investments. One possibility is that investment in software and computers have become more important over time and these tend to have much shorter average service lives than other forms of capital such as machinery. Other possibilities are that South Africa’s fixed investment in water and electricity production have become less efficient and the infrastructure has been degraded by loadshedding and a lack of maintenance, which has been worsened by crime. Lastly, it is possible that investments in industrial and commercial property have had to be written down because of the deterioration of South Africa’s central business districts over recent decades.
