Abstract/Summary

Construction is considered a major sector of the economy throughout the world. It accounts for about 10% of most countries’ gross domestic product (GDP). Its sheer size and role in economic growth is used to justify its importance. The importance of the construction sector in both national and world economies is unclear. Three growth theories are mobilized to explain the relationship of the construction sector to economic growth: Harrod–Domar, Solow and endogenous growth models. The theory of market and government failure is also used in order to explain public sector intervention in construction activity. The fundamental dynamics of the construction sector are studied in relation to economic growth, with a view to ascertaining if there is a basis for national governments to stimulate economic growth through investment in construction. This will enable policy makers to make better use of the construction sector. Time series statistical analysis of total construction output (TCO) and GDP data for South Africa and the UK reveal that a positive short run relationship between the construction sector and economic growth does exist, subject to other factors being equal. However, empirical evidence suggests that there is no obvious link between construction investment and economic growth. While the growth theories show that construction influences investment, which is a major factor in determining economic growth, the growth process per se is a complex phenomenon. Public sector investment in construction activity is necessary to fill the gaps of market failure left by the private sector, but the existence of government failure undermines such intervention.