CAPITAL

Capital goods are goods that are produced not for their own sake but to produce other goods and services. Capital, as a factor or production, thus comprises all manufactured resources such as machines, tools and buildings which are used in the production of other goods and services. Examples include all types of machinery, plant and equipment used in manufacturing and construction, school buildings, roads, dams and bridges.

Capital can be a confusing concept, particularly because it is often used in an accounting, financial or monetary sense. Business people, bankers and accountants all have their own definition of capital. Even in economics the terms sometimes has a financial connotation. It is important to remember, however, that capital as a factor of production refers to all tangible things that are used to produce other things.

Like all other goods, capital goods do not have an unlimited life. Machinery, plant, equipment, buildings, dams, bridges and roads are all subject to wear and tear. Equipment can also become outdated or obsolete because of technological progress. Provision therefore has to be made for the replacement of existing capital goods. This is called the provision for depreciation or, in modern terms, the consumption of fixed capital.

South Africa is a capital-poor country. Many capital goods, such as heavy or specialised machinery and equipment, cannot be manufactured locally on a profitable basis and therefore have to be imported. More than 40% of South African imports consist of capital goods. To pay for these imports, foreign exchange (eg dollars, pounds, marks and yen) is required and this is often in short supply in South Africa, thus aggravating the situation. In recent years the scarcity of capital in South Africa has often been exacerbated by increases in the capital intensity of production. The latter term refers to the amount of capital required to produce each unit of output. An increase in the capital intensity of production is a worrying phenomenon. In a country in which labour is relatively plentiful and capital is scarce the appropriate trend is towards more labour-intensive production rather than more capital-intensive production.

A positive aspect of South Africa’s capital stock is its impressive infrastructure, particularly in comparison to other developing countries. South Africa has a sound physical infrastructure with wide-reaching road, rail and air links and a sophisticated communications network. In addition it has a highly developed financial infrastructure, including the South African Reserve Bank.