THE WORLD BANK GROUP AFRICA REGION POVERTY REDUCTION & ECONOMIC MANAGEMENT NOvEmBER 2011 IssUE 2 South Africa Focus on Green Growth Economic Update 70859 South Africa Economic Update Focus on Green Growth © 2011 The International Bank for Reconstruction and Development/THE WORLD BANK 1818 H Street NW Washington, DC 20433 USA All rights reserved This report was prepared by the staff of the Africa Region Poverty Reduction and Economic Man- agement. The findings, interpretations, and conclusions expressed herein are those of the authors and do not necessarily reflect the views of the World Bank’s Board of Executive Directors or the countries they represent. Photo credits: Warren Rohner, Clive Reid, Trevor Samson/World Bank, Khaz/flickr.com. The report was designed, edited, and typeset by Communications Development Incorporated, Washington, DC. Contents Acknowledgments v Foreword vi Executive summary vii Section 1 Recent economic developments and prospects 1 Global trends: contagion from the European debt crisis6 1 Recent trends in South Africa: economic recovery falters 4 Economic outlook for South Africa 12 Risks to the outlook 14 Section 2 Green growth—opportunities and challenges for South Africa 17 What is green growth? 17 “Greening� energy use in South Africa: possibilities and challenges 21 Economic growth, jobs, and international competitiveness 27 Conclusions 38 Boxes 1.1 Exchange rate pass-through and inflation in South Africa 10 1.2 Does exchange rate volatility really matter? 13 2.1 South African growth in a comprehensive wealth accounting perspective 19 2.2 Key environmental challenges in South Africa 20 2.3 Ecotourism— Conserving the environment and improving welfare 35 Figures 1.1 Contagion has increased sovereign credit default swap rates worldwide 1 1.2 Post-July turmoil leads to equity market declines in both developed and emerging markets 2 1.3 Commodity prices have declined from earlier peaks in 2011 3 1.4 Output and employment, by industry (2008q3 = 100 for GVA and 2008q4 = 100 for labor markets) 5 1.5 Consolidated revenue, expenditure, fiscal balances, and debt burden 7 1.6 Domestic credit provided to the private sector, South Africa and its peers, 2010 8 1.7 Banking assets and credit provision 9 1.8 Trends in headline and core CPI inflation 10 iii South AFRicA Economic UpdatE—FocUs on GrEEn Growth 1.9 Current account, merchandise trade, and terms of trade, 2007q1–11q2 11 1.10 Bond and equity purchases by nonresidents 12 1.11 Exchange rate volatility for South Africa, selected emerging markets, and Australia 13 2.1 CO2 emissions and its drivers 22 2.2 Evolution of energy intensity, 1990–2008 22 2.3 Evolution of carbon intensity, 1990–2007 22 2.4 Energy use by sector, 2009 (percent of total energy use) 24 2.5 Energy use by subsectors, 2009 (percent of industry energy use) 24 iv 2.6 Economic structure across economies, 2009 24 2.7 Energy intensity by sector, select countries, 2009 25 2.8 Labor market indicators, 2001 and 2011 30 2.9 Direct job years per GWh, United States 31 2.10 Highest level of education, July–September 2011 32 2.11 Electricity sector jobs in three scenarios 33 2.12 Carbon emissions embodied in trade 34 2.13 Share of total world trade, 1970–2010 (exports of goods and services) 36 2.14 EGs share in own trade, 2002–10 37 2.15 Export competitiveness for EGs (Combined List), 2002–10 (current prices) 37 2.16 Revealed comparative advantage for EG categories (from WTO list), 2002–10 38 tables 1.1 The global outlook in summary 3 1.2 GDP growth by main sectors (value added), 2007–11q2 (percent) 4 1.3 Gross domestic expenditure growth by component, 2007–11q2 (percent) 5 1.4 Transition matrix for adults (15–64), 2010q4–11q2 6 1.5 Transition matrix for youths (15–24), 2010q4–11q2 6 1.6 Consolidated government fiscal framework, 2008–15 (percent of GDP, unless otherwise indicated) 7 1.7 Public sector expenditure estimates by sector, 2010/11–2013/14 (R billions, unless otherwise indicated) 8 1.8 Cumulative exports and imports with major trading partners, January–July 2011 12 1.9 Macroeconomic outlook, 2007–13 (percent change, unless otherwise indicated) 14 2.1 Fastest growing environmental goods in world trade 36 Notes 41 References 45 Acknowledgments This edition was prepared by a core team com- Economist, SDNCE), Kirk Hamilton (Lead prising Fernando Im and Sandeep Mahajan Environmental Economist, DECEE), Raffaello (Co–task team leaders), Allen Denis (Senior Cervigni (Lead Environmental Economist, Economist, DECPG), Ian Gillson (Senior Trade AFTEN), and Witness Simbanegavi (National Economist, PRMTR), Glenn-Marie Lange Treasury) were peer reviewers. The report was (Senior Environmental Economist, ENV), prepared under the overall guidance and Anthony Leiman (Consultant, University of supervision of Ruth Kagia (Country Director, Cape Town), Thomas Losse-Mueller (Senior AFCS1) and John Panzer (Sector Manager, Financial Sector Specialist, AFTFE), Phindile AFTP1). Ngwenya (Research Analyst, AFTP1), and Sar- The team is thankful to the following indi- wat Hussain (Senior Communications Officer, viduals for their comments and invaluable AFRSC). Milan Brahmbhatt (Senior Advisor, insights that helped shape this report: Claus PRMVP) and Michael Toman (Manager, Envi- Astrup, Patrick Kabuya, Konstantin Makrelov ronment and Energy Team, DECRG), as special (National Treasury), Jamal Saghir, Marco Scu- guest co-authors, led the writing of the focus sec- riatti, Marie Sheppard, David Sislen, and Simi tion on green growth. Marianne Fay (Chief Siwisa. v Foreword The World Bank Office in South Africa is The report discusses two crucial questions: pleased to present the second South Africa How do “green� and “growth� hang together Economic Update, this time focusing on the in practice? How will green environmental challenges and opportunities for securing policies affect GDP growth, employment, and “Green Growth.� The topic is of special signifi- international competitiveness? The update’s cance, particularly as South Africa prepares to overarching finding is that policies to increase host the next Convention of Parties (CoP-17) energy efficiency have substantial potential of the Climate Change meetings in Durban, for green growth. A successful green growth November 28–December 9, 2011. policy will require South Africa to have solid, In keeping with the earlier format, section 1 well-thought, and distinct policy agendas if takes a broad canvas approach and assesses the it is to better pursue its growth and environ- challenges and near-term prospects facing the mental objectives. While green policies can South African economy. The expanding sover- have large synergies and co-benefits with the eign debt crisis in the Eurozone countries, uni- growth and employment agendas, they are no formly sluggish growth globally including the substitute for it. downgrading of the U.S. sovereign debt rating As always, we offer the update to spur discus- by Standard and Poor’s, the continuing eco- sion, generate debate, catalyze solutions, and nomic slump in Japan, and an overall weakened contribute to sound policymaking informed by outlook for the global economy—all are hitting analytical evidence and research findings. South Africa in ways described in the update. Section 2 takes a fresh look at “Green Growth� issues, in the context of South Africa’s Ruth Kagia efforts to attain faster, more inclusive growth Country Director for South Africa while pursuing a low-carbon growth trajectory. The World Bank vi Executive summary The global financial roller coaster, with the government and social partners in November Eurozone as its lead car, has hit economic 2011 lays out an ambitious and far-reaching prospects across the globe. The South Afri- agenda to build and grow the green economy. can economy, with its close links to the world The update’s special focus section aims to economy, has suffered, too, resulting in weak- contribute to the South African discussion ened growth prospects, lower fiscal revenues, on green growth at three levels. Its first part lower and more volatile valuation of the rand, introduces the general idea of green growth, and dampened external financing. This fur- starting with a simple definition that empha- ther compounds the policy challenges facing sizes natural assets in the growth process, the authorities, on top of their preoccupation and then developing more concrete messages with unyielding unemployment, which requires about this type of growth. A comprehen- higher and more inclusive economic growth. sive discussion of all the natural assets and Policymaking is also conditioned by a grow- environmental problems relevant for green ing recognition that future growth needs to be growth in South Africa would be far beyond less carbon-intensive. As elsewhere, opportuni- the scope of this focus. So, the section’s sec- ties in green economies are viewed with keen ond part looks in more depth at one impor- interest, as a way of simultaneously targeting a tant element of the green growth agenda in cleaner environment and stimulating innova- South Africa—the challenges and opportuni- tion, growth, and job creation. ties associated with the country’s transition to a low-carbon growth path. The emphasis is Green growth—opportunities and on its energy use patterns—noting briefly the challenges for South Africa range of other environmental problems that “Green growth� has become a subject of great are also vital for the country. interest for policymakers, private business, A crucial question is how these two terms— and civil society. While the term has no single “green� and “growth�—hang together in prac- definition, policy debates emphasize “win-win� tice. How will green environmental policies outcomes—not only a better environment but affect GDP growth, employment, and inter- also more jobs and faster output growth. This national competitiveness? The focus section’s idea has resonated in South Africa, as it strives third part takes up these questions, surveying to boost economic growth, reduce very high the international cross-country evidence and unemployment, and address air pollution, relating these findings to the South African high CO2 emissions, and water scarcity. The context, noting that well-designed policies are country’s New Growth Path Framework looks to crucial for reaching outcomes that take advan- greening the economy as a jobs driver for the tage of synergies and reduce potential tradeoffs future. The Green Economy Accord signed by the between the environment and the economy. vii South AFRicA Economic UpdatE—FocUs on GrEEn Growth What is green growth? policy instruments to pursue multiple policy objec- “Green growth means fostering economic tives—in this case growth and the environment— growth and development, while ensuring that targeting each objective with the instruments most natural assets continue to provide the resources suited to it. and environmental services on which our well- Increasing growth will require finding the being relies.�1 It spotlights natural assets in eco- right mix of growth instruments that have nomic production and well-being. worked internationally. Environmental poli- Yet the price of scarce environmental cies have important synergies, or co-benefits, resources fails to reflect the true social cost of with the growth agenda, but they are no sub- viii their depletion, due to market failures. Con- stitute for it. Similarly, high growth will not, sider the atmosphere as a sink for greenhouse by itself, be enough to cure environmental ills. gases, the depletion of shared water resources, That requires targeted environmental policies, and the loss of biodiversity. Such overuse is the most important of which is to put a price especially severe when natural systems can sud- on environmental “bads�—a price that reflects denly collapse if pushed beyond critical thresh- the social costs they inflict. South Africa is olds. Fuel subsidies and other policy distortions indeed making progress on some of these also reduce economic efficiency and environ- dimensions, reducing energy consumption mental quality. subsidies, and seriously studying introduction Given this background, we develop four of a carbon tax. more specific points about green growth. Fourth, there can be important synergies or co-bene- First, a basic feature of green growth should be that fits between growth and the environment, and these choices are made and resources allocated in ways that are likely to be mutually enhancing and larger when fully reflect the social costs and benefits of using up policies to accomplish growth and environment objec- scarce natural capital. tives are well coordinated. In practice this means that policies and institu- Consider examples of synergies from environ- tions correct for the overuse of natural capital mental protection to growth. Taxes on pollu- caused by market failures or preexisting policy tion raise fiscal revenues that can be used to distortions. By preventing socially inefficient cut growth- or job-inhibiting taxes on capital overconsumption of natural capital, green or labor, or to make growth-enhancing pub- growth is also a key to sustainability. lic goods investments. Less pollution and greater access to clean water improve health Second, to increase social welfare and well- and labor productivity, which can improve being, faster economic growth should be combined employment if other conditions are conducive. with more—and more effective—environmental Now consider synergies from growth to the protection. environment. South Africa’s trade policies are The relevance of this point for South Africa oriented toward protecting capital- and energy- is apparent. The acceleration in economic intensive sectors, so reforms here would not growth to 6–7 percent proposed by the govern- only boost economic efficiency and jobs, they ment is good for reducing unemployment and would also curb greenhouse gas emissions. poverty, but it could also heighten stresses on Several constraints —notably skill shortages, the environment and natural capital. With nat- current labor market institutions, crime, and ural capital under more stress, the social ben- poor access to electricity and finance—curb efit from better preserving it is also increasing. the formation of small and medium enter- This suggests that, to increase social welfare, prises (SMEs) in South Africa, otherwise a faster growth should be accompanied by more major source of employment in other middle environmental protection, not less. and high income economies. Environmental policies to promote energy efficiency would be Third, there is generally no single “silver bullet� that more effective if new SMEs can form more eas- by itself will deliver both growth and environmental ily in the energy-efficiency sectors (retrofitting protection: it usually makes sense to use multiple residential buildings and so on). “Greening� energy use in South South Africa’s emissions without compromising Africa: possibilities and challenges the overriding priorities to create jobs, address South Africa is the world’s 11th largest emitter poverty, improve public health and grow an of CO2 from energy consumption. It is also in internationally competitive economy, without the upper quartile of countries on CO2 emis- substantial international assistance. However, it sions per capita and per unit of real GDP. The is in the country’s best interest that an absolute level and growth of CO2 emissions has three global emissions constraint is put into effect key drivers: sooner rather than later.�2 • Economic activity, measured by real GDP. ix • Energy intensity of GDP (a measure of the current energy situation: a closer look energy efficiency). Does South Africa’s high economywide energy • Carbon intensity of energy consumption, intensity primarily reflect high energy inten- driven by the proportion of fossil fuels in sity (low energy efficiency) in particular sec- the country’s primary energy mix, measured tors or the overall composition of economic by the ratio of CO2 emissions to energy output? Although the broad sectoral composi- consumption. tion of South Africa’s GDP is similar to that in The 2000s saw an acceleration in the growth a number of middle- and high-income coun- of South Africa’s CO2 emissions, primarily tries, the energy intensity of the broad indus- the result of an acceleration in GDP growth, try, transport, and other sectors is significantly only partly offset by reductions in the energy higher than most comparators. This is good intensity of GDP and the carbon intensity of news in the sense that South Africa may have energy. Compared with other middle-income the opportunity to learn more readily from the countries, South Africa’s energy intensity and policies and technological solutions applied carbon intensity of energy are also higher, in other countries to reduce its own energy while rates of improvement have been relatively intensity. modest. Almost 70 percent of South Africa’s energy Nevertheless, in recent years, South Africa supply comes from coal, either directly or has stated its ambition to act responsibly to mit- through coal-fired electricity. The next section igate climate change. In its Copenhagen Pledge discusses the significant uncertainties, chal- it proposes reducing CO2 emissions 34 percent lenges, and opportunities in managing a tran- below “business as usual� emissions by 2020, sition to a low-carbon energy supply. depending on adequate international support in terms of financing, technology develop- Green energy policies ment, and technology transfer. If the economy The recent Integrated Resource Plan (IRP) continues to grow at around 4  percent, the for energy sector development over 2010–30 4 target would require reductions in the energy and the National Development Plan: Vision for intensity of GDP of around 30 percent, roughly 2030 clearly articulate the multiple energy tripling the pace of South Africa’s energy- challenges that South Africa must address to efficiency improvement. Ambitious, this could achieve its goals for economically, environmen- be feasible, since about a quarter of countries tally, and socially sustainable development. have achieved it. The target would also require Among the country’s key objectives are a cut of around 20 percent in the carbon inten- averting the risk of power shortages in the sity of energy supply through a rapid shift in near term while increasing energy supply and fuel sources from coal to some combination of efficiency to support the needs of a growing renewables, nuclear, and natural gas. Few coun- economy in the longer term; ensuring afford- tries have achieved such a rapid cut. able energy to support inclusive develop- Noting these challenges and the current ment; addressing local environmental threats realities of international climate mitigation related to energy use, notably those related to policy, the National Development Plan: Vision air pollution and human health; and shoul- 2030 3 realistically observes that: “it will be chal- dering an appropriate share of future respon- lenging to honor the commitment to reduce sibility for the long-term global challenge of South AFRicA Economic UpdatE—FocUs on GrEEn Growth restricting emissions of CO2 and other green- measures envisaged in the IRP and the Accord house gases. reflect strong emphasis on capturing early A key element in meeting these objectives “learning by doing� gains that are expected to is to ensure that energy prices reflect the true result in new opportunities for employment, social costs of energy use and that opportuni- skills development, and domestic business ties for energy efficiency are being increas- growth. These actions also can provide a hedge ingly exploited. Here, South Africa is making against fossil-fuel price increases, and they significant progress. Ongoing electricity tariff make it possible to build fewer carbon-inten- increases are unwinding very significant de sive coal-fired plants to meet growing demand, x facto subsidies inherited from history. The thus avoiding increased longer term CO2 emis- country is also conducting an in-depth discus- sions. At the same time, it will be important to sion on a carbon tax, a type of pollution pric- monitor how the unit investment costs of dif- ing policy that both theory and experience ferent renewable energy technologies decline indicate as efficient in providing broad incen- over time to optimize longer term investment tives to mitigate carbon emissions from energy budgeting. Planned investment in nuclear use. Several recent government white papers power post-2020 also provides a useful hedge provide a careful evaluation of the economic, against unexpected increases in the costs of fiscal, environmental, and distributional impli- other sources and an element of flexibility in cations, together with the practical challenges the path by which carbon intensity is reduced. of implementation. While ongoing pricing Another attractive possibility is the prospect of reforms will provide a powerful impetus for plentiful and inexpensive natural gas becom- improved energy efficiency, there are good ing available as a bridge fuel for power genera- arguments for well-targeted energy-efficiency tion and vehicles. standards to overcome institutional and infor- mational barriers that can limit the effective- Economic growth, jobs, and ness of price-based incentives. The country’s international competitiveness National Energy Efficiency Strategy contains standards, aimed especially at industrial energy What does greening imply for growth? efficiency. The traditional view is that a greener envi- In addition, the new IRP plans to add almost ronment has an economic cost, but that well- 30 GW of new generation capacity by 2030 and designed policies can keep the cost relatively to complete roughly 10 GW of new coal-fired small (also taking into account the ambitious- capacity already in the pipeline. Longer term ness of the objective). This is consistent with a options include deploying substantial new considerable body of work analyzing the poten- nuclear capacity (almost 10 GW), more than tial impact of a carbon tax on the South Afri- 20 GW of renewable energy capacity, expanded can economy: emissions mitigation will have regional agreements to import more hydroelec- some economic costs, but these can be limited tric power, and increased substitution of uncon- by using efficient instruments, such as a carbon ventional and imported natural gas for coal. In tax, and by recycling revenues to reduce other November 2011, South Africa and the World distorting taxes. Bank signed an agreement for a $250 million More recently the traditional view of trad- loan to construct large on-grid wind and solar eoffs between environmental protection and thermal power plants, each of 100 MW. growth has been challenged by the Porter Plans as large and ambitious as the Green Hypothesis. 5 A “weak� version of the Porter Economy Accord and IRP inherently face various Hypothesis says that well-designed environ- uncertainties. The prospect of large, long-lived mental instruments, such as pollution pric- power generation investments means that there ing, are likely to stimulate firms to innovate. is an advantage to plans that provide flexibil- A stronger version is that this induced innova- ity on the timing and size of total investment tion by firms can overcome the added costs of outlays. The ambitious nearer term renew- regulation and thus increase firm productivity able energy investments and energy efficiency and business performance. On a large enough scale, then, this “strong� Porter effect could to the extent that energy demand is increas- boost output and growth as a result of green ingly met from renewable energy sources, there regulation. Empirical research on the Porter will also be a contraction of output and jobs in hypothesis finds a good deal of evidence for traditional fossil-fuel related sectors. So, at a the weak version—in other words, for a positive minimum, the net employment effect must be relationship between environmental regula- considered. There is some evidence that direct tion and firm innovation. By contrast, there is job effects of energy efficiency are higher than little evidence for the strong version of the Por- in fossil-fuel sectors and perhaps, to a modest ter Hypothesis of an increase in overall output extent, in some renewable sectors. xi and growth, though a few recent studies find One also needs to consider broader eco- some support for it. nomic effects outside the energy sector. Renew- Given the mixed empirical evidence, it able energy sources may also have higher would probably be prudent not to count on capital requirements per unit of output, as well environmental regulation by itself having as shorter plant lives and more intermittent major positive effects on economywide busi- energy production—all contributing to the ness performance and growth, at least in the higher cost of renewables today. The impact of near term. But green policies do significantly these features on the broader macroeconomy improve human well-being directly, through also needs to be taken into account, including better environmental protection, and, as noted the impact on jobs—say, through the adverse above, can have significant synergies with impact of increases in electricity costs on out- growth, especially when coordinated with a put and jobs in downstream electricity-consum- well-designed package of policies directly tar- ing sectors. These issues are less important for geted at raising growth. energy efficiency, where capital costs are lower and many options are already commercially What does greening imply for jobs? profitable. We look at three sets of questions to help evalu- Third, what are the broader employment ate the potential for green jobs and the impli- implications of green growth in South Africa, cations for the overall employment picture in and what broader complementary reforms South Africa. would help increase the jobs potential of green First, what are the main factors holding back growth? As noted, there is little evidence so far job creation in South Africa? The Organisa- that green policies could significantly boost tion for Economic Co-operation and Develop- growth. But there is every reason to think ment’s 2010 Economic Survey for South Africa green job creation would be increasingly buoy- estimates that much of the country’s unemploy- ant for policies that directly target fast growth, ment is structural, and that little can be attrib- particularly if greater productivity allows South uted to cyclical factors. The main reasons are African firms to become more internationally that trend growth has been too low to absorb competitive producers of green technologies the growing labor force; growth has become and products. less unskilled labor intensive due to structural For labor intensity, energy efficiency is change and skill-biased technical change; labor the most promising direction for increasing market institutions have created a dualistic unskilled labor demand, while the capital- “insider-outsider� labor market with incomplete intensive renewable sector will make bigger adjustment to fundamental shifts in demand demands on skilled labor. Clearly, green poli- and supply; and deficiencies in education and cies are not designed and cannot be expected training contribute to skill mismatches. to address institutional issues in the labor mar- Second, what does cross-country experience ket. A more promising approach is to ask what tell us about the job potential of green growth? complementary reforms would foster more vig- This is less well researched, but we note some orous SME development, thus increasing the of the emerging issues and findings. Many job impact of green policies. studies look at the direct employment effects Green policies are no substitute for struc- of expanding a given green sector. However, tural reforms. Both are needed. Indeed, the South AFRicA Economic UpdatE—FocUs on GrEEn Growth success of green policies will depend on such generators, furnaces, meters, surveying instru- reforms to improve growth and employment. ments, and similar products with dual uses. The category for photosensitive semiconduc- Green growth and international trade tors (including those for solar panels) has an Carbon emissions. South Africa’s relatively high RCA of 0.97, quite close to 1. carbon emissions are linked in part to its being a net exporter of embodied carbon emis- Trade policy and the environment. South Africa’s sions. Its carbon consumption is estimated to average most-favored-nation applied tariff be around 40 percent lower than its produc- rate on imports of EGs is 3.6 percent, less than xii tion, the balance being net exports, mostly to half the 7.8 percent it levies on merchandise developed countries, which tend to consume imports overall. This should be favorable for more carbon than they produce. This creates green growth because South African firms are, a risk for South Africa. Looking forward, when broadly speaking, able to buy environmental developed countries decide to adopt significant inputs and technologies from the most com- carbon pricing to curb their own emissions, petitive international producers, with low tar- they may consider taxing the carbon content iff costs. Another channel for trade policy to of imports from countries that have not yet hamper green growth is if trade barriers pro- adopted carbon pricing—to level the playing vide particularly strong protection for sectors field. South Africa could face among the larg- that destroy natural capital, as with particularly est tariff hikes as a result of these “border tax energy-intensive sectors. Here, it is notable adjustments.� But the country could reduce that, after a burst of tariff liberalization in the this risk if it introduces some form of carbon 1990s, the tariff structure has become more pricing of its own. complex, and South Africa has emerged as one of the world’s most prolific users of anti- Environmental goods. Many developing countries dumping provisions. Many such provisions are interested in stimulating domestic growth protect heavy upstream industries, which are and employment by becoming net exporters also intensive energy users. So trade policy may of environmental goods and services. Under be protecting and expanding South Africa’s the broadest definition, environmental goods energy-intensive sectors. (EGs) are not an especially fast-growing com- Given South Africa’s well-developed indus- ponent of world trade, their share of world trial base and its existing RCAs in various trade having remained roughly constant in the industrial and electrical machinery categories, 29–30 percent range since 2002, if with fast- the country may have the potential to expand growing segments within the total. its current relatively low share in world EG South Africa’s EG exports have about a 0.5 markets. Such prospects must be linked to percent share in the world market for EGs, a the overall productivity and competitiveness little less than a roughly 0.7 percent share in of the South African economy, depending on total world trade, so its revealed comparative broad macroeconomic factors, such as the real advantage (RCA) index for EGs is much less exchange rate, and on structural factors, such than one. But at a more detailed level, it is as trade policies, infrastructure, logistics, the greater than 1 in several categories. Of these, investment climate, and labor market charac- a significant number have to do with autos and teristics. South Africa clearly has significant auto components, whose exports have been challenges, as indicated by its declining share promoted under the country’s Motor Industry of world trade in the last several decades. Development Program, which has provided various financial supports. Thus strong RCAs conclusions in some of these categories may be misleading For energy consumption and carbon emissions, about underlying competitive strengths. But policies to increase energy efficiency have sig- South Africa also shows RCAs greater than 1 nificant green-growth potential by their abil- in other industrial and electrical machinery— ity to improve economic efficiency and reduce for example, centrifuges, electrical motors, the environmental impacts of energy use. Correcting energy price subsidies and putting a broad array of options, including expansion of a price on carbon emissions is a key element in solar and wind power, nuclear, hydro (through reaping the joint economic and environmen- regional cooperation) and natural gas, as well tal benefits from improved energy efficiency. as new coal-fired capacity. The potential irre- Trade policy reforms that reduce protection versibilities associated with long-lived power for energy- and capital-intensive sectors would generation investments mean that there is an be good for both jobs and energy efficiency. advantage to plans that retain flexibility for the There is some evidence that energy-efficiency timing and size of outlays, based on close moni- improvements have a fairly high employ- toring and constant evaluation of factors such as xiii ment content, the impact of which could be demand trends, the evolving relative costs of dif- increased in South Africa through improve- ferent energy technologies, and the implications ments in the investment climate, stronger edu- for domestic growth and employment. cation and skills training, and labor market While green policies can have large syn- reforms that promote smaller enterprises. ergies and co-benefits with the growth and Long-term decarbonization of South Africa’s employment agenda, they are not a substi- economy will require substantial changes in the tute for it. Indeed, such synergies are likely to composition of energy use, moving from coal to be mutually enhancing and larger when the low-carbon resources. The Integrated Resource growth and environment objectives are being Plan lays out an ambitious agenda to increase pursued by multiple, well-targeted and coordi- power generating capacity by 2030—drawing on nated policies. SEctioN 1 Recent economic developments and prospects Global trends: contagion from Spreading contagion the European debt crisis6 Unlike prior phases of uncertainty in the The global economic recovery, proceeding Eurozone, the current episode features sub- until July 2011, has once again hit a massive stantial contagion, with risks spreading to road bump, this time a debt crisis in Europe.7 hitherto unaffected Eurozone countries and Exacerbated by downbeat news from the farther afield to Japan and emerging market United States, the downgrading of its sovereign economies, including South Africa. An agreed debt by Standard and Poor’s, and the continu- reduction of Greece’s private sector debt seems ing economic slump in Japan, this has rattled imminent, and pressures on debt from Italy, financial markets and considerably weakened Portugal, and Spain remain intense. Since the the outlook for the global economy. Worry- beginning of July, spreads on sovereign credit ingly, a consensus among policymakers (par- default swaps (CDSs) have shot up in France ticularly in Europe and the United States) (130 basis points), Germany (52), and nota- appears difficult to achieve, despite the wors- bly Italy (381; figure  1.1). The contagion has ening financial risks. moved to European commercial banks holding Figure contagion has increased sovereign credit default swap rates worldwide 1.1 swap, basis points (as of November 14, 2011) 400 Change in ve-year sovereign credit-default 3,417 300 200 100 0 Un Ir an Uk ina Cr ine Ro atia Bu nia Ru K ithu ia ian ak ia de an Tu n h A la do a Th esia M and C a lo a ilip ia es ile M zil ico G ru e Sp l Fr in er e d nd es So nez y Po ly y a In fric i Co hin an Ve rke ec G anc tio L r ss az an ut ue ys Ph mb ug Ita a a pin at Pe Jap Ch Fe hst ela lga nt a ra ex Br m o re ala ail n m rt ra St ge Ar ite note: change since the beginning of July 2011. source: Bloomberg data and world Bank dEc prospects Group. 1 South AFRicA Economic UpdatE—FocUs on GrEEn Growth substantial quantities of risky sovereign debt. since August. Depending on how serious the Their CDS spreads having risen by 131 basis confidence effects are, growth for high-income points since the beginning of July, prompting countries in 2012 could range between 1.2 widespread rating downgrades for French and and 2.2  percent (at market exchange rates), Italian commercial banks. and for developing countries, between 4.8 and 6 percent.9 Post-July uncertainty clouds the global outlook Large equity losses (figure 1.2), increasing Developing countries are more 2 doubt about policy, and plummeting consumer vulnerable to slowdown than before and business confidence cloud the near-term Developing countries are more vulnerable to outlook. In August alone, the world’s stock an unfavorable outturn than they were in 2007. capitalization declined about $7.6  trillion Although their fiscal positions are healthier (12.4 percent of global GDP), and $15 billion than those of high-income countries, they have was withdrawn from emerging market equity less fiscal space than before. Following discre- mutual funds, the largest withdrawal since tionary fiscal measures and automatic stabiliz- 2008.8 Even in a benign scenario, investment in ers in 2008 and 2009, more than 40  percent high-income and developing countries is now of developing countries carried fiscal deficits projected to be weaker, and consumer savings above 4  percent of GDP in 2010. In a slower higher. Global GDP growth is projected to slow growth scenario, developing countries will face to 2.7 percent in 2011 from earlier forecasts of declining revenues and may be forced to cut 3.2 percent (World Bank 2011b), with 0.6 per- spending and get squeezed out of capital mar- centage points shaved from the 2012 forecast kets. There may be scope for monetary easing and another 0.3  percentage points from the in countries that have tightened policy sharply 2013 forecast. Most of the current downward (Brazil), but elsewhere low (even negative) real revision to growth is concentrated among high- interest rates and inflationary pressures limit income OECD countries. Developing country the scope for further interest rate cuts. growth has been marked down to 6.1 percent, from 6.3 percent in June (table 1.1). commodity prices have stabilized or are falling These revised baseline projections are sub- Commodity prices, after the runup of 2010 and ject to heightened downside risk. Prospects will early 2011, have either stabilized or are falling depend on how firms and households react to (figure 1.3). This is mixed news for producers financial market volatility, wealth losses, labor of internationally traded commodities, but all markets, and uncertainty. Global purchasing countries will benefit from the step-down in manager surveys suggest weakening prospects inflation already in evidence. Since August, Post-July turmoil leads to equity market declines in Figure both developed and emerging markets 1.2 South Africa Emerging markets Developed markets 130 MSCI equity indices, January 2010 = 100 120 110 100 90 80 Jan. March May July Sept. Nov. Jan. March May July Sept. Nov. 2010 2010 2010 2010 2010 2010 2011 2011 2011 2011 2011 2011 source: Bloomberg data. table the global outlook in summary 1.1 indicator 2008 2009 2010 2011f 2012f 2013f Global conditions world trade volume (GnFs) 3.0 –10.6 12.4 6.9 6.8 7.7 consumer prices G-7 countriesa,b 3.1 –0.2 1.2 2.2 1.8 1.6 commodity prices (Us$ terms) nonoil commodities 18.3 –24.1 27.6 20.7 –12.0 9.4 3 oil price ($ per barrel)c 97.0 61.8 79.0 103.0 94.7 92.5 oil price (percent change) 36.4 –36.3 28.0 30.4 –8.1 –2.4 manufactures unit export valued 7.8 –6.5 5.0 11.2 1.2 0.6 interest rates $, 6-month (percent) 3.2 1.2 0.5 0.4 0.4 0.9 €, 6-month (percent) 4.8 1.5 1.0 1.5 1.4 1.6 real Gdp growthe world 1.4 –2.4 4.0 2.7 2.8 3.3 memo item: world (ppp weights)f 2.6 –1.0 4.9 3.8 4.1 4.3 high income 0.1 –3.8 2.9 1.6 1.8 2.2 oEcd countries 0.0 –3.8 2.8 1.5 1.7 2.1 Euro area 0.3 –4.2 1.7 1.6 0.8 1.6 non-oEcd countries 2.7 –1.5 7.2 4.5 3.3 4.3 developing countries 5.8 1.9 7.3 6.1 5.7 6.2 south africa 3.7 –1.8 2.8 3.2 3.1 3.7 memorandum items developing countries Excluding transition countries 5.9 3.2 7.8 6.3 5.9 6.4 Excluding china and india 4.3 –1.7 5.5 4.4 3.9 4.5 ppp = purchasing power parity; f = forecast a. canada, France, Germany, italy, Japan, the United Kingdom, and the United states. b. in local currency, aggregated using 2005 Gdp weights. c. simple average of dubai, Brent, and west texas intermediate. d. Unit value index of manufactured exports from major economies, expressed in Us$. e. aggregate growth rates calculated using constant 2005 dollars Gdp weights. f. calculated using 2005 ppp weights. source: world Bank dEc prospects Group. Figure commodity prices have declined from earlier peaks in 2011 1.3 Agriculture Energy Metals and minerals 400 Constant prices, 2000 = 100 300 200 100 0 Jan. Sept. May Jan. Sept. May Jan. Sept. 2000 2001 2003 2005 2006 2008 2010 2011 source: datastream and world Bank dEc prospects Group. South AFRicA Economic UpdatE—FocUs on GrEEn Growth the World Bank’s crude oil price index has manufacturing sector, on the other hand, fallen 6.9  percent. Although food prices are slipped further in July but then returned to turning down, risks of higher grain prices positive growth in August and September, fol- persist, evidenced in low maize stocks. Prices lowing the cessation of widespread industrial of metals and minerals, of special interest to action and resumption of more regular supply South Africa, fell a cumulative 9.3 percent in of intermediate goods from Japan. The Kagiso August and September, and 13.1 percent from manufacturing purchasing managers index their 2011 peak in February. Recognize, how- (PMI) rose above the threshold of 50 in Sep- 4 ever, that despite the recent decline, the aver- tember and October, indicating mild expan- age year-to-date metal and mineral prices are sion. But these incipient signs of rebound are 19.6 percent higher than in 2010. likely to be marred by the ripple effects of the global crisis. The 0.9 point decline in the SACCI Recent trends in South Africa: business confidence index (BCI) in October economic recovery falters and 9.0 point decline in the RMB/BER BCI in Economic recovery, which showed encouraging 2011q3 may be early signs of that. signs of firming until 2011q1, has since been On the expenditure side, the mild recovery faltering. GDP growth slowed down markedly in private investment has been concentrated to 1.3  percent (q/q, seasonally adjusted and in extractive activities (table 1.3), responding annualized) in 2011q2 from 4.5 percent in the to favorable commodity prices in 2010 and the first quarter (table 1.2). The main contributor first half of 2011. Excess capacity in manufac- to that sharp slowdown was manufacturing, turing is likely to constrain investment and whose growth slumped from 14.5 percent (q/q, hiring decisions in the short to medium run.10 s.a.a.) to –7.0 percent from the first quarter to Moderation in consumption expenditure in the second. The sectoral patterns of growth 2011q2 is likely to continue in the short run, were otherwise similar in the first two quarters as reflected in a decline in the FNB/BER con- of the year; mining and agriculture declined sumer confidence index in 2011q3. further while construction remained flat and each of the services subsectors grew. Manufac- Labor markets trends: high persistence turing and agriculture are the only two major in employment status sectors below the precrisis peaks. The most damaging aspect of the post-2008 eco- Momentum in the mining sector contin- nomic slowdown has been its impact on unem- ued to deteriorate in 2011q3, as output fell ployment (figure 1.4). The unemployment on y/y basis in each of the three months. The rate, already extremely high at 21.9  percent table GDP growth by main sectors (value added), 2007–11q2 (percent) 1.2 sector 2007 2008 2009 2010 2010q2 2010q3 2010q4 2011q1 2011q2 primary 0.6 –0.1 –3.9 4.3 –15.0 28.3 15.8 –3.9 –5.2 agriculture 2.7 16.1 –3.0 0.9 13.6 16.3 12.5 –4.0 –4.2 mining 0.0 –5.6 –4.2 5.8 –24.5 33.7 17.1 –4.0 –4.2 secondary 6.2 3.0 –7.1 4.1 4.3 –3.8 3.6 11.1 –5.2 manufacturing 5.2 2.6 –10.4 5.0 5.7 –4.9 4.1 14.5 –7.0 Electricity 3.4 –3.1 –1.6 2.0 –1.7 –2.2 5.6 3.3 0.9 construction 15.0 9.5 7.4 1.5 1.0 0.8 0.2 0.0 0.5 tertiary 6.1 4.5 0.7 2.2 4.6 2.0 3.5 3.7 4.0 wholesale and retail 5.3 0.8 –2.5 2.2 6.0 3.3 3.5 4.4 4.1 transport 6.6 3.4 0.6 2.9 4.5 3.0 4.2 3.6 4.1 Finance 7.9 7.3 0.9 1.9 4.0 1.4 1.7 4.8 2.9 Government services 4.0 4.5 4.1 3.0 4.6 0.5 5.7 1.8 5.7 personal services 5.6 3.9 –0.3 0.6 3.6 3.1 3.3 2.7 2.8 Gdp growth 5.6 3.6 –1.7 2.8 2.8 2.7 4.5 4.5 1.3 source: statistics south africa. table Gross domestic expenditure growth by component, 2007–11q2 (percent) 1.3 component 2007 2008 2009 2010 2010q2 2010q3 2010q4 2011q1 2011q2 total final consumption household 5.5 2.2 –2.0 4.4 4.4 5.7 4.8 5.2 3.8 durables 1.9 –9.4 –9.6 24.0 45.4 13.4 5.0 21.5 12.5 semidurables 11.3 4.2 –1.8 6.5 9.8 –4.8 4.6 8.6 8.8 nondurables 5.0 0.8 –2.7 2.1 –2.3 2.9 0.2 3.4 3.6 Government 4.1 4.7 4.8 4.6 7.1 –0.8 3.9 9.5 –0.1 Gross fixed capital formation 14.0 14.1 –2.2 –3.7 1.2 1.0 1.5 3.1 4.1 5 private 8.9 9.2 –8.9 –4.4 2.2 2.0 1.6 2.7 4.0 Government 22.2 16.1 –4.0 –10.9 –5.3 –3.0 –1.9 –0.5 3.8 public corporations 34.8 36.2 26.1 3.5 2.9 0.7 3.3 6.6 4.4 change in inventories (r billions) 19.8 –12.4 –34.5 –3.8 –7.6 –0.9 1.1 9.3 5.6 Gross domestic expenditure 6.3 3.4 –1.7 4.2 3.2 6.6 2.4 7.9 1.3 source: statistics south africa. output and employment, by industry Figure (2008q3 = 100 for GVA and 2008q4 = 100 for total employment) 1.4 Total employment 2011q3 Gross value added 2011q2 All industries Agriculture Mining Manufacturing Utilities Construction Trade Transport Finance Community and social services 60 70 80 90 100 110 source: statistics south africa, Quarterly Labor Force survey 2011q3, and staff calculations. in 2008q4, has since risen to 25 percent. This formal sector. The number of discouraged translates into a loss of more than half a mil- workers did not increase q/q for the second lion jobs since 2008, even though real GDP has consecutive quarter. Moreover, job creation was exceeded its precrisis peak since 2010q2. And broad-based, with significant additions in agri- more than 1  million people have joined the culture, mining, construction, domestic trade, ranks of discouraged workers since 2008. The and finance. But the manufacturing sector, unemployment rate broadly defined (includ- one of the hardest hit since the crisis, saw no ing discouraged workers) has increased from visible change. In an especially worrying sign, 26.7 percent in 2008q4 to 33.3 percent latest. the employment component of Kagiso’s manu- A confluence of structural factors, supply and facturing PMI remains well below the neutral demand side, has contributed to South Afri- 50 point mark, indicating dim prospects for job ca’s exceptionally high unemployment (see creation in the sector. section 2). The aggregate unemployment figures do Results from the 2011q3 Labor Force Survey not reveal individual transitions in the labor are slightly more encouraging; with the unem- market status. To elicit that, tables 1.4 and ployment rate falling from 25.7 percent (a post- 1.5 present the six-month labor market tran- crisis peak) to 25 percent, on the back of close sition matrices for the working-age popula- to 240,000 jobs added in the nonagricultural tion (15–64) and youths (15–24).11 These are South AFRicA Economic UpdatE—FocUs on GrEEn Growth computed using nationally representative the discouraged workers, 15 percent began panel data from the Quarterly Labor Force actively looking for a job within six months. Surveys for 2011q2 and 2010q4. The diagonal • The category of not economically active was elements in the tables indicate the probability similarly highly persistent, with 87 percent of staying in the same employment status in retaining the status after six months. Fewer 2011q2 as in 2010q4, and the nondiagonal ele- than 3  percent in this category found any ments, that of moving from one employment kind of job. status to another one. • Of the unemployed actively searching for a 6 Highlights include: job, 14  percent found employment within • Young workers (15–24) are less likely to retain six months. This likelihood falls to 12 per- a job than older workers. There was a high cent for discouraged workers. For the young persistence in the status of those employed: unemployed, the likelihood was only 9 per- 91 percent of those employed in the formal cent if they were unemployed and 8 percent sector and 72 percent of those in the infor- if discouraged. mal sector retained that position after six • Two of three actively searching unemployed months. The persistence for youths was lower, continue to so after six months. Of them, however, at 84 and 62 percent, respectively. 21 percent (23 percent in the case of youths) They appear more likely to become unem- give up and become discouraged or take up ployed or not economically active. activities that are not economically active. • Half the discouraged workers remained in The overall picture is largely static, with high that category after six months. They faced persistence in employment status, where youths a 23  percent chance of transitioning into in particular are finding it even harder both to becoming not economically active, a 58 per- transition into employment and to retain their cent higher likelihood of that transition than jobs. This individual-level stasis contrasts with for those unemployed and searching. Of a noticeably more dynamic labor market that table transition matrix for adults (15– 64), 2010q4 –11q2 1.4 Formal informal other Unemployed Unemployed not economically adults employed employed employed searching discouraged active total Formal employed 90.6 4.1 0.4 2.5 0.6 1.8 100 informal employed 10.8 72.0 1.9 6.1 3.0 6.2 100 other employed 3.6 8.4 83.9 1.2 0.3 2.6 100 Unemployed searching 5.3 8.4 0.1 65.2 6.5 14.4 100 Unemployed discouraged 4.1 8.0 0.0 15.1 49.9 22.8 100 not economically active 0.9 1.7 0.1 6.0 4.7 86.6 100 note: the number of observations has been weighted using the sample weights to make it representative. rows add to 100. not economically active excludes discouraged work-seekers. source: QLFs 2010q4 and QLFs 2011q2, statistics south africa and staff calculations. table transition matrix for youths (15–24), 2010q4 –11q2 1.5 Formal informal other Unemployed Unemployed not economically Youths employed employed employed searching discouraged active total Formal employed 84.0 6.4 0.0 6.0 1.0 2.6 100 informal employed 13.7 61.9 0.5 9.9 2.2 11.7 100 other employed 0.0 11.7 21.1 22.1 8.5 36.6 100 Unemployed searching 6.0 3.1 0.0 67.6 6.6 16.6 100 Unemployed discouraged 1.6 6.1 0.0 12.3 54.3 25.7 100 not economically active 0.7 0.7 0.0 5.3 4.4 88.9 100 note: the number of observations has been weighted using the sample weights to make it representative. rows add to 100. not economically active excludes discouraged work-seekers. source: QLFs 2010q4 and QLFs 2011q2, statistics south africa and staff calculations. Banerjee and others (2008) found in a simi- further conditioned the fiscal framework set lar exercise covering September 2003–March forth by the MTBPS. 2004. More uncertain and downbeat economic Understandably, the 2011 MTBPS retained conditions in the current environment may be the countercyclical fiscal stance, to be gradually behind the less fluid current labor market. rolled back over the medium term (table 1.6). But faced with more restrictive fiscal space, Fiscal policy: adjusting to economic slowdown it also sought consolidation and reprioritiza- Turmoil in global financial markets and a slow- tion of expenditures — toward infrastructure ing and increasingly risk-laden world econ- and social investments and away from recur- 7 omy set a complex and volatile backdrop for rent expenditures largely through moderation the Medium-Term Budget Policy Statement of the public sector wage bill. Moderation in (MTBPS) of the government, released on Octo- expenditures relative to the February 2011 bud- ber 25, 2011. With the global effects clearly get does not, however, fully counter the slow- seeping through, policymakers faced bleaker down in revenue collection, leading to a slight and riskier growth prospects for the domestic worsening of the deficit over the MTEF period economy and, as a result, a marked slowdown (less than half a percent of GDP in any given in revenue collection. The social challenges year). The net debt-to-GDP ratio is projected to outlined in the New Growth Path (particularly increase to 38.9 percent by 2013/14 (compared high unemployment), an elevated public sector with 39.3 percent in the 2011 budget) and stabi- wage bill, and remaining infrastructure gaps lize at around 40 percent, with the debt service (especially in the power and transport sectors) costs settling at 3 percent of GDP (figure 1.5). consolidated government fiscal framework, 2008 –15 table (percent of GDP, unless otherwise indicated) 1.6 outcome Budget mtBps Forecast 2008/09 2009/10 2010/11 2011/12 2011/12 2012/13 2013/14 2014/15 revenue 29.5 27.2 27.6 28.3 27.3 27.0 27.3 27.7 Expenditure 30.7 33.8 32.2 33.6 32.9 32.2 31.8 31.0 Budget balance –1.2 –6.6 –4.6 –5.3 –5.5 –5.2 –4.5 –3.3 interest cost 2.4 2.3 2.4 2.6 2.6 2.7 2.9 2.9 public sector borrowing requirement 4.3 8.9 6.5 9.5 8.1 7.8 6.8 5.1 total net government debt 22.7 27.6 29.7 34.3 33.8 36.7 38.9 39.7 southern african customs Union transfers (r millions) 28,921 27,915 14,991 21,763 21,763 38,983 35,997 — — is not available source: national treasury of the republic of south africa. Figure consolidated revenue, expenditure, fiscal balances, and debt burden 1.5 Revenue Expenditure Budget balance Revenue Expenditure Budget balance Primary de cit State debt cost Total net loan debt (right axis) (right axis) Public sector (right axis) borrowing requirement MTBPS 2011 Budget 2011 1.5 4 1.5 4 10.0 45 40 7.5 1.0 0 1.0 0 R trillions R trillions 35 Percent Percent Percent Percent 5.0 30 0.5 –4 0.5 –4 2.5 25 0 –8 0 –8 0 20 20 /08 20 /09 20 /10 20 /11 20 /12 20 /13 20 /14 5 20 /08 20 /09 20 /10 20 /11 20 /12 20 /13 4 1 2 3 4 5 /1 /1 /1 /1 /1 /1 /1 07 08 09 10 11 12 13 14 07 08 09 10 11 12 13 10 11 12 13 14 20 20 20 20 20 20 20 source: national treasury of the republic of south africa and staff calculations. South AFRicA Economic UpdatE—FocUs on GrEEn Growth These positions are fairly manageable, and holding back spending (especially for local debt sustainability does not appear to be an governments and state-owned enterprises). issue, especially given the government’s ready Inability to do so would translate into lower access to the deep and liquid domestic capital potential rates of GDP growth than the current markets, the primary source of funding for the estimates. A promising step is the government’s budget, and to international markets, enabled new cities-support program, designed to lend by investment-grade ratings kept up by various capacity support to cities and introduce incen- rating agencies. tive-based mechanisms to help the cities better 8 A striking feature of the MTBPS is a marked manage their built environment. slowdown in infrastructure spending by both the government and state-owned enterprises. Banking sector developments: dual-economy Shortfalls in spending in the energy and in divide proves hard to bridge water and sanitation are largely responsible. Headline figures of banking sector develop- In the 2010/11 fiscal year, the public sector ment put South Africa significantly ahead of its spent R67 billion (3.1 percent of GDP) less on BRICS and other emerging market peers (fig- infrastructure than envisaged in the February ure 1.6). Banking sector assets have tripled in 2011 Budget (table 1.7). The MTBPS projects the past 10 years (figure 1.7), as the share of infrastructure spending to catch up over the the South Africans with access to formal finan- course of the MTEF period, though this would cial services grew from about 25  percent in be predicated on fixing the capacity and other 1994 to 63 percent in 2010. The financial indus- implementation bottlenecks that are currently try contributes more than 10 percent to GDP, Public sector expenditure estimates by sector, 2010/11–2013/14 table (R billions, unless otherwise indicated) 1.7 2010/11 2011/12 2012/13 2013/14 sector Budget mtBps Budget mtBps Budget mtBps Budget mtBps Economic services 228.7 161.9 216.2 197.3 219.4 217.8 228.5 228.2 Energy 102.8 52.5 96.5 71.7 98.1 90.4 96.8 98.8 water and sanitation 21.0 14.4 26.8 17.8 25.4 20.6 28.2 19.9 transport and logistics 80.5 69.1 67.5 79.5 69.1 76.3 75.6 76.9 other 24.4 25.8 25.4 28.4 26.8 30.4 28.0 32.5 social services 26.2 17.2 29.5 26.6 34.9 26.6 44.3 32.5 total 260.1 185.3 252.8 232.9 269.3 257.6 286.4 269.9 percentage of Gdp 9.8 6.7 8.7 7.8 8.4 7.8 8.1 7.4 source: national treasury of the republic of south africa. Figure Domestic credit provided to the private sector, South Africa and its peers, 2010 1.6 150 Percent of GDP 100 50 0 Turkey Russian India Brazil Korea, Rep. Malaysia Thailand China South Africa Federation source: world Bank, Global development Finance and world Bank, world development indicators. Figure Banking assets and credit provision 1.7 Private credit Mortgage Loans and Other loans advances assets 200 4,000 150 3,000 Percent of GDP R millions 100 2,000 9 50 1,000 0 0 2002 2003 2004 2005 2006 2007 2008 2009 2010 August 2011 source: south african reserve Bank, world Bank, Global development Finance, and world Bank, world development indicators. and South African banks have a significant and less-developed markets, restricting their ability growing footprint in the rest of Africa. to grow in the underserved segments. This impressive growth trajectory has been In a promising sign, the initial success of Capi- thrown off track by the economic downturn. tec and African Bank in targeting the emerging Growth in banking assets has been flat since lower middle mass market has prompted new 2008. As reported in the last economic update, efforts by the large commercial banks in this credit conditions have tightened especially segment. Lower interest rates have aided fairly for small and medium enterprises, apparently quick growth of salary-based lending to salaried more because of cyclical than structural fac- lower income retail customers.14 Mobile phone tors, and banks expect credit flows to resume banking, an innovative instrument put to use once a broader macroeconomic recovery takes in Kenya and other African countries to bring hold. The downturn has, however, highlighted basic banking services to the poor, is beginning the inefficacy of existing development finance in South Africa. A notable example is the “bank instruments in providing countercyclical sup- shops,� a recent initiative of Standard Bank to port to small and medium enterprises.12 team up with small retail outlets in poor com- More concerning are the structural barriers munities to offer low-cost banking services.15 reducing access to credit finance in the under- served areas. South African banks, in most inflation trends: pressures are mostly supply side parts, still lack the business model to bridge Headline CPI inflation accelerated to 5.7 per- the dual-economy divide. Outreach efforts cent y/y in September, 0.3  percentage points remain focused on deposit collection and above the previous month (figure 1.8). Food transaction services, not credit.13 The absence and nonalcoholic beverages, housing and utili- of large microfinance franchises and the dif- ties, and transport contributed close to 70 per- ficulties of African Bank and Capitec in com- cent of the total annual change. Core inflation peting with the big four commercial banks on (which subtracts the effect of volatile food and transaction services and deposit mobilization energy prices) remains under 4 percent, much point to industrial organization challenges for more subdued than headline inflation. The financial inclusion. In particular, new entrants difference naturally is accounted for by the lack the economies of scale to compete with rapid acceleration in food and energy prices the big four banks. This significantly increases over this period. their funding costs and excludes them from Unlike other emerging market economies profitable fee business and other rents that (such as China, Brazil, and India) currently typically accrue to new entrants targeting facing binding capacity constraints, output in South AFRicA Economic UpdatE—FocUs on GrEEn Growth Figure trends in headline and core cPi inflation 1.8 Food and nonalcoholic beverages Excluding energy, petrol, and food and nonalcoholic beverages Headline Petrol 16 40 12 20 Percent Percent 10 8 0 4 –20 0 –40 Jan. 2009 Jan. 2010 Jan. 2011 Sept. 2011 source: statistics south africa. South Africa remains below potential, keep- of the rand, driven by heightened risk aversion ing demand-side pressures in check. The main among global portfolio investors, is another upside risk remains from externally deter- upside risk to the inflation outlook, though it mined food and energy prices and the adminis- is not likely to emerge strongly in the near term tered electricity prices. The recent depreciation (box 1.1). Downside risks are mostly associated Box Exchange rate pass-through and inflation in South Africa 1.1 Exchange rate pass-through (Erpt) refers to the transmission of exchange rate fluctuations into domestic prices. Understanding the transmission mechanism from exchange rates to domestic prices is important for anticipating inflationary developments and formu- lating monetary policy. the extent of the pass-through depends on seven factors: 1) the weight of imported goods and services in domestic production and the aggregate price index; 2) the degree to which import prices are market determined; 3) the nominal anchor, the monetary policy regime, and the credibility of the central bank; 4) the availability of hedging instruments; 5) whether the changes in the exchange rate are temporary or permanent (if the change in exchange rates seems permanent, exporters would be tempted to modify local prices without fear of loss of market share); 6) the presence of menu costs in the price adjustment process, with firms absorbing the fluctua- tions until a threshold is crossed; and 7) the degree and form of competition in a given market and capacity constraints. a number of studies analyze the pass-through effects for south africa, as summarized below. pass-through authors period Findings (for a 10 percent change in the rand exchange rate) Bhundia (2002) 1980–2001 For cpiX inflation (excluding interest on mortgage bonds), the Erpt is 0.83 percent after (quarterly) 4 quarters, 1.23 percent after 8 quarters, and 1.32 percent after 10 quarters, while for short headline inflation Erpt is 1.07 percent, 1.17 percent, and 1.17 percent, respectively. term aron and others (2010) 1980–2009 the Erpt is about 3.0 percent after six months and 4.4–5.0 percent within a year. (monthly) Exchange rate volatility reduces pass-through over the very short run, and the shift in monetary policy might have reduced the Erpt for import prices. rangasamy and Farrell (2002) 1980–2001 Long-run Erpt for import prices is 7.8 percent. (monthly) Long nell (2004) 1987–98 Long-run Erpt for import prices is 7.7 percent. term (quarterly) Karoro and others (2009) 1980–2005 Long-run Erpt in the range of 7.5–8.2 percent. higher Erpt for depreciations (monthly) (7.2 percent) than for appreciations (6.4 percent). on balance, these results would suggest that the recent depreciation of the rand is unlikely to cause any immediate noticeable changes in headline inflation, with several mitigating factors at play. First, not enough time has elapsed for the more significant longer term effects to show. Furthermore, nontradable goods and services still carry a significant weight in the overall price index. Excess capacity in production would also have contained second-round effects. Finally, heightened volatility in the exchange rate would also have reduced the pass-through. with weaker-than-projected global and domes- equipment. By contrast, the EU and the United tic growth performances. States take almost half of South Africa’s total machinery and equipment exports. The EU, External sector: Europe poses risks to the United States, and Japan together also take exports, as portfolio flows dry up more than two-thirds of vehicles, aircraft, and The trade surplus moderated in the first half of transport equipment exports. A slowdown in 2011 and slipped into deficit in the third quar- the world’s advanced economies thus has com- ter, as South Africa’s terms of trade receded pletely different first-round effects at the indus- from the record highs in 2010q4. This, in com- try level than a deceleration of the Chinese 11 bination with higher services, income, and economy. current transfers, led to worsening of the cur- Portfolio flows have weakened consider- rent account deficit from 1 percent of GDP in ably in recent months. Figure 1.10 plots the 2008q4 and 2.8 percent for 2010 as a whole to end-of-period 22-day moving average of bond 3.1 percent and 3.3 percent of GDP in 2011q1 and equity purchases by nonresidents vis-à-vis and 2011q2, respectively (figure 1.9). the rand/U.S. dollar exchange rate. Since the South Africa’s export destinations have second half of July, nonresidents have been net shifted, with China making inroads and sellers of equities. Bonds purchases also began becoming the biggest single-country destina- to decline following the credit downgrade of tion (table  1.8). This has come mostly at the the United States by S&P. As uncertainty over expense of the EU and, to less extent, Japan the sovereign debt crisis in Europe started and the United States. The EU nonetheless to mount, net selloffs of bonds became more remains the largest single-market destination pronounced, increasing the rand/U.S. dollar for South Africa, and its deteriorating situation exchange rate to levels not seen since 2009. poses considerable risks. While the weakening of the rand has been Exports to the EU and the United States, seen as providing welcome relief to South Afri- and, to less extent, Japan, are more balanced can exporters, business leaders and policy- with more intra-industry trade rather than makers alike have expressed concern about the endowment-based trade, as with China. More high volatility in the exchange rate markets. than 90  percent of South Africa’s exports to Indeed, the rand emerges as among the most China are mineral products and base met- volatile currencies relative to a number of other als. China accounts for almost 40  percent of global currencies (figures 1.10 and 1.11).16 The South Africa’s total mineral exports and less bars indicate the two months following the than 0.5 percent of exports of machinery and collapse of Lehman Brothers and the U.S. equipment or vehicles, aircraft and transport credit downgrade by S&P. Clearly, currency Figure current account, merchandise trade, and terms of trade, 2007q1–11q2 1.9 Trade balance to GDP Foreign trade: Current account to GDP terms of trade, including gold 5 130 0 90 Percent Percent –5 50 –10 10 January January January January January 2007 2008 2009 2010 2011 source: south african reserve Bank. South AFRicA Economic UpdatE—FocUs on GrEEn Growth table cumulative exports and imports with major trading partners, January–July 2011 1.8 Exports by section EU china Usa Japan total total exports (r millions) 89,025 46,731 32,131 31,329 382,016 as a percentage of total south africa exports 23.3 12.2 8.4 8.2 100.0 memorandum 2006 exports as percent of total south africa exports 30.1 3.6 10.4 10.7 395,173 2007 exports as percent of total south africa exports 30.1 6.0 10.8 10.1 491,391 2008 exports as percent of total south africa exports 29.2 5.4 10.0 10.1 656,125 12 2009 exports as percent of total south africa exports 23.7 9.3 7.4 6.7 513,874 2010 exports as percent of total south africa exports 23.4 10.1 8.8 7.9 590,054 top five south african exports by value share with respect to the total exports to a given country mineral products 19.2 77.1 5.7 14.5 24.4 natural/cultured pearls, precious/semiprecious stones, precious metals 18.6 1.9 29.5 57.7 25.6 Base metals and articles of base metal 13.1 14.5 16.3 14.7 14.6 machinery and mechanical appliances, electrical equipment 14.3 0.4 6.7 0.6 8.0 Vehicles, aircraft, vessels, and associated transport equipment 12.0 0.3 25.6 4.3 7.9 share with respect to total exports of each section mineral products 18.3 38.6 2.0 4.9 100.0 natural/cultured pearls, precious/semiprecious stones, precious metals 16.9 0.9 9.7 18.5 100.0 Base metals and articles of base metal 20.9 12.2 9.4 8.3 100.0 machinery and mechanical appliances, electrical equipment 41.5 0.6 7.1 0.6 100.0 Vehicles, aircraft, vessels, and associated transport equipment 35.3 0.5 27.1 4.4 100.0 source: south african revenue service and staff calculations. Figure Bond and equity purchases by nonresidents 1.10 Bonds Equities Rand/US$ Bonds and equities exchange rate 200 8.5 100 8.0 Rand/US$ exchange rate US$ millions 0 7.5 –100 7.0 –200 6.5 July 19, August Sept. Oct. Nov. 2011 2011 2011 2011 2011 note: Figure depicts the 22-day moving average for bonds and equities. source: citibank, south african reserve Bank, and staff calculations. fluctuations for resource-based exporters have Economic outlook for South Africa recorded a pronounced increase during recent Against the backdrop of a significantly weaker episodes of risk aversion and flight to safety. global economy than at the time of the previ- The concern around heightened volatility ous forecasts (June 2011), the short-to-medium- appears to be justified by a review of the litera- term growth outlook for South Africa remains ture (box 1.2), which, on balance, finds damag- less optimistic than earlier projected. A marked ing effects for developing countries. slowdown in infrastructure spending by public Figure Exchange rate volatility for South Africa, selected emerging markets, and Australia 1.11 South Africa Australia Chile 0.06 0.05 0.04 Percent 0.03 13 0.02 0.01 0.00 2007 2008 2009 2010 2011 South Africa Brazil India Malaysia Mexico Thailand 0.06 0.05 0.04 Percent 0.03 0.02 0.01 0.00 2007 2008 2009 2010 2011 note: Graph depicts the daily volatility of the growth rate of the nominal exchange rate over a 22-day rolling window (end-period). source: Federal reserve of st. Louis and central Bank of chile and staff calculations. Box Does exchange rate volatility really matter? 1.2 Exchange rate volatility can hit the real economy through two main channels: foreign direct investment (Fdi) and international trade. Fdi inflows bring not only additional resources for investment but also associated benefits of transfers of technology and managerial know-how.1 But they can be deterred by the heightened risk that more volatile exchange rates would generate, espe- cially when currency hedging is not a viable option. Exchange rate volatility may also affect trade flows. From a theoretical standpoint, the impact on the level of international trade is ambiguous. Greater volatility creates uncertainty around the profits derived from international trade, and thus leading to lower volume of trade. But if a firm can alter factor inputs to take account of exchange rates movements, it can in fact benefit from the increased volatility, leading to higher trade. other factors might also mitigate the effect of exchange rate fluctuations in firms’ profits, such as the use of imported inputs in the production process.2 results from empirical studies are similarly mixed,3 though there is more compelling evidence that developing countries are adversely affected.4 one explanation behind these results could be the incomplete nature of the capital markets in developing economies, which limit the ability of firms to reduce their exposure to exchange rate risk. these options, even if present, might not be accessible to all of them, and they may entail high costs. wei (1999) finds little empirical support showing that the availability of hedging tools would reduce the impact on trade. more recent studies have emphasized the heterogeneous impact of exchange rate risk across industries.5 Notes 1. see, for example, Larraín and Vergara (1993) and Kiyota and Urata (2004). 2. clark and others 2004. 3. clark and others 2004. 4. calvo and reinhart 1999; Grier and smallwood 2007. 5. raddatz 2011. South AFRicA Economic UpdatE—FocUs on GrEEn Growth table Macroeconomic outlook, 2007–13 (percent change, unless otherwise indicated) 1.9 2007 2008 2009 2010 2011 2012 2013 real Gdp 5.5 3.6 –1.7 2.8 3.2 3.1 3.7 household consumption 5.5 2.2 –2.0 4.4 4.5 3.9 4.2 Government consumption 4.1 4.7 4.8 4.6 4.4 4.1 4.1 Gross fixed investment 14.0 14.1 –2.2 –3.7 2.9 3.3 4.6 Exports, GnFs 5.9 2.4 –19.5 4.5 4.0 5.0 6.2 imports, GnFs 9.0 1.4 –17.4 9.6 7.7 6.8 7.2 14 headline consumer price index 6.1 9.9 7.1 4.3 5.0 5.4 5.6 current account balance (percent of Gdp) –7.0 –7.1 –4.1 –2.8 –3.4 –3.8 –4.0 source: national treasury of the republic of south africa and staff calculations and projections. entities also contributes to diminished pros- 9 points to 39 in the third quarter as business pects for growth in the short run. Hence, we confidence was shaken not only by external have lowered our GDP growth forecast for 2011 developments but also by domestic ones includ- to 3.2 percent from the 3.5 percent in the last ing industrial action and weaker-than-expected economic update, and for 2012 and 2013 to domestic sales, as households moderated their 3.1 percent and 3.7 percent, respectively, down spending. from 4.1 and 4.4 percent (table 1.9). On the export front, deterioration in global Supported by historically low interest rates growth is likely to dampen export growth, and above-inf lation wage increases, South through lower metal and mineral prices and African consumers will continue to remain a weaker demand from high-income countries. dominant force for supporting GDP growth. Although a moderation in domestic con- The contribution of consumer spending to sumption and lower oil prices could lower the GDP growth could, however, wane over the expansion of imports, overall net exports will forecast period as the recent pick-up in infla- continue to serve as a drag on growth. tion reduces purchasing power and increases the possibility of a rate hike. Furthermore, the Risks to the outlook heightened economic uncertainty is likely to The key risks emanate mostly from global constrain job creation and accelerate the pace uncertainty. First is the possibility of a much of the ongoing debt deleveraging by house- more pronounced slowdown of the global holds. Indeed, the RMB/BER consumer con- economy than is anticipated under the baseline fidence index dropped sharply in the third forecasts. Two potential sources of slowdown quarter to +4 from +11 in the previous quar- are pertinent for South Africa. A disorderly ter, suggesting less buoyant consumers, which resolution to the ongoing Eurozone sovereign could translate to lower spending. debt crisis could lead to a sharper slowdown With government fiscal policy remain- in growth in Europe than envisaged. By our ing countercyclical, the boost to growth from estimations, a 1  percent GDP contraction in increased government spending will remain the Eurozone could cut 0.77 percentage points strong in 2011 and 2012 but is likely to wane from GDP growth in South Africa. Second, thereafter, as projected under the MTBPS. with much of the recent increase in commod- Throughout the recovery, private investment— ity prices driven by strong demand from Asia blighted by an uncertain global recovery, low (particularly China), a cooling of the Chinese business confidence, long-running labor dis- economy relative to baseline projections, cou- putes, and a strong rand— has lagged behind pled with weak demand from Europe, could other aggregate demand components in its dampen commodity prices and reduce South contribution to GDP growth. It is likely to take African export receipts as well as investments a further hit from the heightened uncertainty in minerals. Indeed, were base metals and min- in the global economy. Indeed, the FNB/BER eral prices to fall by an average of 10 percent, business confidence index dropped by a sharp South Africa’s exports could see a 4.6 percent decline, placing a significant drag on GDP depreciation of the rand and a large correction growth. in the current account deficit, which, in turn, South Africa’s chronically low national sav- would constrain domestic investment and lower ings rate (around 16 percent of GDP) yields a GDP growth. Heightened risk aversion among high current account deficit, which gets funded commercial banks in a scenario of global mostly through volatile and short-term portfo- financial turmoil would lead to curtailment of lio (equity and bond) flows. The reliance on domestic credit extension, which, together with portfolio flows makes the economy susceptible a subdued consumer confidence, could under- to sudden capital stops. Manifestation of this mine the recovery in consumption of durable 15 particular risk could result in a large abrupt goods. SEctioN 2 Green growth— opportunities and challenges for South Africa Green growth has become a subject of great briefly the range of other environmental prob- interest for policymakers, private business, lems that are also vital for the country, and and civil society. While the term has no single the need for other, more extensive follow-up definition, the emphasis in policy debates is on studies. the possibility of win-win outcomes —not only A crucial question is how these two terms — a better environment but also more jobs and “green� and “growth�—hang together in prac- a faster rate of output growth. This idea has tice. How will green environmental policies resonated in South Africa, as it strives to boost affect GDP growth, employment, and inter- economic growth, reduce very high unemploy- national competitiveness? The section’s third ment, and address air pollution, high CO2 part takes up these questions, surveying the emissions, water scarcity, and other serious international cross-country evidence and relat- environmental concerns. South Africa’s New ing these findings where possible to the South Growth Path Framework sees greening the econ- African context, noting that well-designed poli- omy as an important jobs driver for the future. cies are crucial for reaching outcomes that take The Green Economy Accord signed by the govern- advantage of synergies and reduce potential ment and social partners in November 2011 tradeoffs between the environment and the lays out an ambitious and far-reaching agenda economy. to build and grow the green economy. The update’s special focus section aims to What is green growth? contribute to the South African discussion on A useful entry-point is provided by the Green green growth at three levels. Its first part intro- Growth Knowledge Platform: “Green growth duces the general idea of green growth, start- means fostering economic growth and devel- ing with a simple definition that emphasizes opment, while ensuring that natural assets natural assets in the growth process, and then continue to provide the resources and environ- developing more concrete messages about this mental services on which our well-being relies.�17 type of growth. A comprehensive discussion of This approach puts the spotlight on natural all the natural assets and environmental prob- assets in economic production and in human lems relevant for green growth in South Africa well-being. To carry on production, firms draw would be far beyond the scope of this focus. So, on the services of a variety of capital inputs, the section’s second part looks in more depth including physical and human capital, techno- at one important element of the green growth logical knowledge, and other intangible assets agenda in South Africa — the challenges and such as trust social capital, and the quality of opportunities associated with the country’s institutions. The perspective of green growth transition to a low carbon growth path. The places particular emphasis on natural capital, emphasis is on its energy use patterns —noting which refers to natural systems that provide 17 South AFRicA Economic UpdatE—FocUs on GrEEn Growth services useful in economic production. These fully reflect the social costs and benefits of using up environmental services come from various scarce natural capital. spheres — the atmosphere, water resources In practice this means that policies and institu- (hydrosphere), the earth’s soil and crust (pedo- tions correct for the overuse of natural capital sphere and lithosphere), and living things (the caused by market failures or preexisting policy biosphere). Such environmental services are distortions. The measurement of environmen- also themselves often a direct source of enjoy- tal costs and benefits may be far from simple in ment or utility to people — such as clean air, practice, though environmental economics has natural beauty, and so on. made a good deal of progress on such methods 18 For the most part, people would like more of over the years.18 both economic and environmental goods, but By preventing socially inefficient overcon- often have to tradeoff one against the other. sumption of natural capital, green growth is Some amount of increased air pollution from also a key to achieving sustainability, defined as factories may need to be tolerated in return a development path that provides future gener- for more abundant consumer goods. Differ- ations with the opportunity to enjoy at least the ent societies and individuals will have differ- same level of well-being as today’s generation, ent preferences for precisely where they make typically by providing future generations with that tradeoff. Innovation and technological at least the same amount of wealth as today’s progress become important here, softening generation. Comprehensive wealth accounting the tradeoffs between economic and environ- (including natural capital) is then an impor- mental objectives. Then the relevant concern tant informational tool to help measure and becomes how many resources ought to be develop policies for green growth and sustain- invested in developing less polluting technolo- ability. Box 2.1 discusses preliminary results gies versus other uses. from comprehensive wealth accounting for Yet scarce environmental resources often South Africa. fail to receive a price that sufficiently reflects the true social cost of their depletion, due to Second, to increase social welfare and well-being, a variety of market failures. Without a price faster economic growth should be combined with more that reflects social cost, such resources are — and more effective — environmental protection. almost certain to be overused. Social welfare The relevance of this point for the issues con- is then less than it could be. Examples include fronting South Africa is apparent. The acceler- the overuse of the atmosphere as a sink for ation in the country’s rate of economic growth greenhouse gases, leading to climate change, to 6–7  percent proposed by the government depletion of shared water resources, and loss is highly desirable for reducing unemploy- of biodiversity. Such problems could be espe- ment and poverty, yet, on its own, would also cially severe when natural systems are liable heighten stresses on the environment and nat- to sudden collapse if pushed beyond critical ural capital. As we document later, the modest thresholds. Problems of “market failure� can acceleration in South Africa’s growth in the be worsened by “policy failures.� For example, 2000s has already increased the pace of carbon energy subsidies reduce both economic effi- emissions growth, for example. However, with ciency and environmental quality by inducing natural capital under more stress, the social excessive energy consumption and oversupply benefit from better preserving it is also increas- of greenhouse gases in the atmosphere. And ing. This suggests that, to increase social wel- poorly defined or enforced property rights fare, faster growth should be accompanied by over land use can induce excessive soil erosion more environmental protection, not less. or deforestation. Given this background, we develop four Third, there is generally no single “silver bullet� more specific points about green growth. that by itself will deliver both growth and envi- ronmental protection: it usually makes sense to First, a basic feature of green growth should be that use multiple policy instruments to pursue mul- choices are made and resources allocated in ways that tiple policy objectives— in this case growth and the Box South African growth in a comprehensive wealth accounting perspective 2.1 at the heart of determining whether growth in a country is green and sustainable, is the accumulation of wealth. it is wealth— broadly defined to include manufactured capital, natural capital, and intangible capital (human and social)—that underlies the generation of national income.1 while Gdp has conventionally been used to assess economic growth from one year to the next, it does not take into account depreciation and depletion of wealth, and therefore does not show whether growth is sustainable. an economy could appear to be growing in the near term but only by running down its assets.2 assessments of economic performance should therefore be based on both measures of annual growth (such as Gdp growth) as well as measures of the country’s compre- hensive wealth, which indicate whether that growth is sustainable in the long term. the table presents estimates of wealth for south africa for 2008. the country’s overall capital stock was estimated at $84,829 per 19 capita in 2008, lower than the average for upper middle-income countries ($105,000 per capita). as in most upper middle-income coun- tries, intangible capital (human and social) is by far the largest component of south africa’s total capital stock, while a partial estimate of natural capital represents about 10 percent of the total. natural capital is dominated by agricultural land, with smaller shares for minerals (gold and platinum), energy (coal), and protected areas (see figure). (the wealth accounting methodology does not fully account for all forms of natural capital, such as water resources, fisheries, and the use of the atmosphere as a sink for greenhouse gases.) Where is South Africa’s wealth? Natural capital composition (2008 uS$) Protected areas 2% Energy 8% total per annual growth, (billion) capita 1995–2008 total wealth 4,139 84,829 1.4 Minerals produced capital 603 12,348 –0.3 21% Crop, natural capital 420 8,617 5.9 pastureland, and forest intangible capital 3,183 65,233 1.5 69% net foreign assets –67 –1,369 6.3 source: world Bank data and staff estimates. statistics south africa data for coal, gold, and platinum group metals. in real terms, estimated wealth per capita increased by 1.4 percent a year between 1995 and 2008, in line with the average for upper middle-income countries. this estimate could provide some evidence that south africa’s growth is broadly sustainable, in the sense that overall wealth per capita is rising over time, though at a modest pace.3 however, south africa’s adjusted net savings rate—a concept appropriate for comprehensive wealth accounting since it includes not only gross savings and depreciation of produced capital but also estimates of savings and depreciation in the form of changes in human and natural capital—has been declining since 1996, from around 8 percent of gross national income to 2 percent in 2008. this is cause for concern about the future sustainability of growth. comprehensive wealth accounting is a crucial analytical tool to support green growth policies, which will be expanded and developed over coming years in terms of both country and conceptual coverage and depth. it will ultimately be a key element in an expanded set of national accounts that can support comprehensive monitoring, analysis, and policy formulation for both the economy and the environment. Notes 1. world Bank 2011d. see also arrow and others (2010). 2. net domestic product and net national income account for depreciation of manufactured capital, but not depletion or degrada- tion of natural capital. 3. this compares favorably with many other sub-saharan economies, where an upturn in Gdp growth over the last decade could be unsustainable because it is accompanied by an accelerated depletion of minerals and other natural capital, resulting in a decline in the total capital stock per capita. environment — targeting each objective with the to strengthen trade, competition, labor mar- instruments best suited to it. kets, and the investment climate; solid pub- Increasing growth, no simple matter, will lic investments in infrastructure, education, require the sustained attention of policy- health, and other public goods; and so on. makers on finding the mix that is right for Green or environmental policies can have South Africa among the set of growth policy important synergies with the growth agenda, instruments that have worked internationally as we show. But it is unlikely that green poli- — macroeconomic policies; structural reforms cies can largely substitute for the hard work South AFRicA Economic UpdatE—FocUs on GrEEn Growth of finding and implementing a good growth access to clean water improve health and labor policy package. productivity, which can improve employment Similarly, it would be idle to think that high if other conditions are conducive. Now con- growth, once achieved, will be enough by itself sider examples of synergies from growth to to cure environmental ills. As noted, environ- the environment. South Africa’s trade poli- mental goods are subject to market failures cies are oriented toward protecting capital- and typically need public action to protect. and energy-intensive sectors, so reforms here Here, international experience offers lessons would not only boost economic efficiency 20 on the most economically efficient and growth- and jobs, they would also curb greenhouse friendly environmental policy instruments to gas emissions. Several constraints — notably use. In the first instance, this entails removing skill shortages, current labor market institu- distortions that actually subsidize environmen- tions, crime, and poor access to electricity tal “bads,� and then putting a price on environ- and finance — curb the formation of small and mental “bads,� which reflects the social costs medium enterprises (SMEs) in South Africa, they inflict. South Africa is indeed making otherwise a major source of employment in progress on some of these dimensions, reduc- other middle- and high-income economies.19 ing energy consumption subsidies and seriously Environmental policies to promote energy studying introduction of a carbon tax. efficiency would be more effective if new SMEs can form more easily in the energy-efficiency Fourth, there can be important synergies or co-bene- sectors (retrofitting residential buildings and fits between growth and the environment, and these so on). are likely to be mutually enhancing and larger when A comprehensive discussion of all the natu- policies to accomplish growth and environment objec- ral assets and environmental problems relevant tives are well coordinated. for green growth in South Africa is beyond the Consider examples of synergies from environ- scope of this special focus. Instead, we look in mental protection to growth. Taxes on pollu- more depth at one important element of the tion raise fiscal revenues that can be used to green growth agenda in South Africa— energy cut growth- or job-inhibiting taxes on capital use and the challenges and opportunities of or labor, or to make growth-enhancing public transition to a low-carbon growth path. This goods investments. Less pollution and greater attention is warranted by the generally close Box Key environmental challenges in South Africa 2.2 Limited water supply is “a matter of central importance in national planning.�1 while less than 20 percent of south african land is seen as arable, irrigation currently is responsible for 62 percent of water uptake, while large industry, mining, and power genera- tion account for only 8 percent.2 improved energy efficiency will reduce demand for water use in power generation and refining; conversely, changes in the country’s water infrastructure and allocation system will be needed to accommodate anticipated growth in water demand from industry and power generation. water degradation is a particularly serious concern for human health and river/estuary ecosystems. inadequate and poorly maintained sewage systems, together with growth in the number and size of informal settlements along stream banks, contribute to high bacterial levels in some of south africa’s rivers,3 posing a significant threat of illness and, especially for young children, death. ameliorating this problem is important for improved employment, growth, and quality of life. Loss of natural habitat, in particular due to urban sprawl and past agricultural expansion, is a concern for protecting south africa’s valuable nature tourism and safeguarding biodiversity. since the agricultural sector was deregulated in the 1980s and agricul- tural subsidies have been largely abandoned, one could anticipate some decline in the area under cultivation. more importantly for our purposes, policies to limit urban sprawl would promote energy efficiency as well as supporting continued efforts to establish and maintain conservation areas, including on privately held land. Notes this box draws on a background paper for this report prepared by anthony Leiman. 1. npc 2011a. 2. dwaF 2004. 3. oberholster 2010. links in all economies between energy use and overview of economywide trends both economic growth and the environment South Africa is the world’s 11th largest emitter — and by unusually high energy and carbon of CO2 from consumption of energy. It is also intensity of the South African economy. The in the upper quartile of countries on CO2 emis- salience of these issues is reflected in the atten- sions per capita and per unit of real GDP.21 In tion given to them in recent years by South the wake of international climate change nego- African policymakers, embodied in studies, tiations at Copenhagen in December 2009, policy papers, and planning documents, culmi- South Africa proposed an ambitious Nationally nating in the recent National Development Plan: Appropriate Mitigation Action plan, aiming to 21 Vision for 2030.20 This by no means underesti- reduce CO2 emissions 34 percent below an esti- mates other environmental issues for the green mate of business-as-usual emissions by 2020, growth agenda in South Africa — for example, and a 42 percent reduction by 2025.22 water scarcity and air and water quality. These Arithmetically, one can calculate a coun- issues are briefly outlined in box 2.2 and need try’s CO2 emissions from energy consumption to be addressed in more extensive follow-up according to the following simple identity: studies. CO2 Emissions = GDP × (Energy Consumption/GDP) × “Greening� energy use in South (CO2 Emissions/Energy Consumption). Africa: possibilities and challenges Among the issues South Africa will need to So, the level and growth of CO2 emissions address for green growth, energy efficiency can be decomposed into three key drivers: and the environmental impacts of the types of • Economic activity, measured by real GDP. energy it uses are a key part of the story. South • Energy intensity of GDP (a measure of Africa’s historical patterns of industrial and energy efficiency). energy resource development have resulted in • Carbon intensity of energy consumption, high reliance on coal reserves, reflecting the driven by the proportion of fossil fuels in impact of energy and industrial development the country’s primary energy mix, measured policies as well as the availability and cost of by the ratio of CO2 emissions to energy energy resources. Direct coal combustion by consumption. industry and others — and an overwhelming We use this framework to analyze recent proportion of electricity produced from coal trends in South Africa’s CO2 emissions. Fig- —have provided relatively inexpensive energy. ure 2.1 indicates that, although the country’s But these patterns of energy production and CO2 emissions from energy use grew only mod- use also give rise to concerns about local air estly in the 1990s, the pace accelerated in the pollution and relatively high CO2. Moreover, 2000s. Trend CO2 emission growth doubled the efficiency of energy use in South Africa from the 1990s to around 2.5 percent a year in appears to be notably lower than in other the 2000s.23 This was primarily the result of an comparison countries. Current patterns have acceleration in trend GDP growth in the 2000s, been motivated by a history of pricing energy only partly offset by reductions in energy inten- below its cost of supply, though the government sity (improvements in energy efficiency) of a has made significant strides in recent years to little over 1 percent a year. This pace of energy address that situation. efficiency improvement in South Africa is a This part begins with a quantitative over- significant improvement over the 1990s, which view and analysis of economywide trends in saw little increase in energy efficiency but was South Africa’s carbon emissions and the broad still below the average of 1.7 percent a year in features of energy use that drive those trends. high-income economies and over 2  percent a The discussion provides a useful framework year in developing economies. For the third for the later parts of this section, which take variable of the identity, there was a modest a more detailed look at patterns of energy use decline in the carbon intensity of the energy and at the policies needed to put the economy mix in South Africa during the 2000s, at about on a low-carbon path. 0.5 percent a year. South AFRicA Economic UpdatE—FocUs on GrEEn Growth Figure co 2 emissions and its drivers 2.1 CO2 emissions Real GDP Energy/GDP (kg CO2/energy (kg per (kt) (2000 US$) per $1,000 GDP) kg of oil equivalent) 1.8 1.6 Index (1990 = 1) 1.4 22 1.2 1.0 0.8 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 source: world Bank, world development indicators and U.s. Energy information administration. Figure Evolution of energy intensity, 1990 –2008 2.2 2,000 1,500 Energy intensity Turkmenistan 1,000 China Russian Federation 500 South Africa India Brazil Korea, Rep. Switzerland 0 5 6 7 8 9 10 11 12 Real GDP per capita (purchasing power parity, 2005 US$; log scale) note: Energy to Gdp ratio: kilogram of oil equivalent per $1,000 Gdp (power purchasing parity, 2005 Us$). source: world Bank, world development indicators. Figure Evolution of carbon intensity, 1990 –2007 2.3 6 5 Carbon intensity 4 South Africa China Australia 3 Korea, Rep. India 2 Russian Federation Brazil France 1 0 5 6 7 8 9 10 11 12 Real GDP per capita (PPP, 2005 US$; log scale) note: carbon emissions to energy ratio: kilogram of carbon to kilogram of oil equivalent energy use. source: world Bank, world development indicators. Figures 2.2 and 2.3 take a closer look at 2020 by one-third relative to a business-as-usual the evolution of energy efficiency and carbon scenario, depending on adequate international intensity in an international context. Figure support in financing, technology development, 2.2 shows the energy consumption to GDP and technology transfer. Assuming a 4 percent ratios for 125 countries over 1990–2008, plot- GDP growth rate for illustration, we estimate ted against the logarithm of real GDP per that the target reduction in emissions could be capita (in purchasing power parity terms). The accomplished by a reduction by 2020 of around evolution of energy intensity of several com- 25–30 percent from current levels in both the parator countries is picked out with individual energy intensity of GDP and in the CO2 inten- 23 trend lines. Broadly speaking, energy intensity sity of the energy mix. Greater reduction in the appears to fall with per capita GDP, but there energy intensity of GDP would allow the goal to is considerable variation in intensity among be met with a smaller reduction in CO2 inten- countries at any given level of income. The fig- sity, and vice versa. Both intensities would have ure indicates that South Africa’s energy inten- to decline by a greater amount to meet a given sity, while declining over the last two decades, emissions reduction target if there is a higher remains higher than in other middle-income GDP growth rate. countries. True, some middle-income coun- As noted, the energy to GDP ratio in South tries have even higher energy intensity, but they Africa has been trending lower at a little over are largely transition economies of the Former 1  percent a year in the 2000s. To achieve Soviet Union, with a special history of wasteful a 30  percent decline by 2020 would imply energy use under the planned economy. Most accelerating the pace of energy efficiency other large emerging economies have lower improvement to about 3 percent a year. While energy intensity than South Africa, including ambitious, such a goal is feasible since about a China and India, which have both seen marked quarter of the world’s countries achieved this declines in energy intensity over the last two or faster energy rates in 2000–07. The prospect decades. for a rapid reduction in the carbon intensity Figure 2.3 provides a similar interna- of energy consumption is more challenging, tional comparison for the evolution of car- however. To reduce carbon intensity by 20 per- bon intensity — the ratio of carbon emissions cent by 2020 would require the pace of decline to energy consumption. Again, there is a to increase from around 0.5 percent a year to wide range of outcomes at every income level, around 2.5 percent. Given South Africa’s cur- depending in part on the type of domestic rent pattern of energy consumption, this would energy resources available to countries, with necessitate a rapid shift from coal to renew- coal or other fossil-fuel-abundant countries able sources or nuclear, as well as a significant like South Africa, Australia, and China typi- shift to natural gas. 24 However, the number cally at the upper end of the range for their of countries that achieved decarbonization at per capita incomes. Countries that started an annual pace of 2  percent or more during the period (1990–2007) at higher per capita 2000–07 is quite small. incomes (Republic of Korea, Russian Federa- Noting these challenges and the current tion, and Australia as well as South Africa) realities of international climate mitigation tend to show a decline in carbon intensity over policy, the National Development Plan: Vision time. Countries that started at lower per capita 2030 realistically observes that: “it will be chal- incomes (China and India) tend to show rising lenging to honor the commitment to reduce intensities over time. South Africa’s emissions without compromising The decomposition framework used here the overriding priorities to create jobs, address also facilitates the discussion of scenarios for poverty, improve public health and grow an a transition to low-carbon growth. In recent internationally competitive economy, without years, South Africa has increasingly stated substantial international assistance. However, it its ambition to act responsibly to mitigate cli- is in the country’s best interest that an absolute mate change. In its Copenhagen Pledge, South global emissions constraint is put into effect Africa proposed to reduce carbon emissions in sooner rather than later.�25 South AFRicA Economic UpdatE—FocUs on GrEEn Growth Energy use by sector, 2009 Energy use by subsectors, 2009 Figure (percent of total energy use) Figure (percent of industry energy use) 2.4 Commercial and Losses 3% Agriculture, 2.5 public services 9% forestry, and shing 2% Nonferrous metals 14% Industry Other 33% 31% Iron and Transport steel 26% 13% Residential 24 27% Chemical and Mining and quarrying 5% petrochemical 6% source: international Energy agency. source: international Energy agency. the current energy situation: a closer look We now look more closely at the broad driv- Like many countries with a relatively estab- ers of carbon emissions noted earlier. Does lished industrial sector, most of South Afri- South Africa’s high economywide energy inten- ca’s energy use is distributed across industry sity primarily reflect high energy intensity (33  percent), residential (27 percent), and within particular sectors, or the overall compo- transport (26 percent)— see figure 2.4. Within sition of economic output? Figures 2.6 and 2.7 industry, the top four energy-using subsectors provide a crude but useful initial cut at answer- are nonferrous metals (mainly electricity-inten- ing that question. Figure 2.6 shows that shares sive aluminum production), iron and steel, of GDP from industry, transport, and “other� chemicals, and mining/quarrying (figure 2.5). for South Africa are broadly comparable to However, roughly 30 percent of total industrial those in several other relatively industrialized energy use is outside these subsectors, scattered middle- and high-income countries — notably across a substantial number of other subsectors Brazil, Germany, India, and Poland. Among each with relatively small energy use. Close to the other comparator countries in the figure, 85 percent of the country’s total carbon emis- Mexico and Republic of Korea have higher sions come from industry, transport, and resi- industry shares and smaller transport shares, dential, with industry alone roughly half that while there is a bigger difference between (over 40  percent of total national emissions). these shares for China. Looking forward, it will Within industry, however, emissions outside be important to carry out this kind of analysis the top four subsectors are closer to 40 percent of sectoral structure at the level of individual of the industry total, indicating the high car- industries, transport modes, residential and bon intensity of some smaller sectors. commercial buildings, agriculture, and so on. Figure Economic structure across economies, 2009 2.6 Industry Transport Others 75 Percent of GDP 50 25 0 South Africa Mexico China Poland Germany Brazil Korea, Rep. India source: United nations industrial development organization. Figure Energy intensity by sector, select countries, 2009 2.7 Industry Transport Others Total 10 8 kWh per 2009 US$ GDP 6 4 25 2 0 South Africa Mexico China Poland Germany Brazil Korea, Rep. India source: international Energy agency and United nations industrial development organization. Figure 2.7 shows that the energy intensity of have led to a dualized economy with high industry in South Africa is substantially larger unemployment and poor quality public services than in most of the other countries shown, for the historically disenfranchised. As a con- including China. Only India has a higher sequence, South Africa faces interconnected industrial energy intensity. South Africa’s challenges of environmental sustainability and energy intensity for transport is also substan- poverty alleviation that in some ways are simi- tially above the intensity in other countries. lar to other countries at a similar stage of devel- While those differences could reflect a variety opment, and unique in others.27 of influences — including age of vehicle stock, The recent Integrated Resource Plan (IRP) population density, and availability of mass for energy sector development over 2010–30,28 transit— they likely also reflect continued use and the National Development Plan: Vision for 2030 of highly carbon-intensive synthetic oil from clearly articulate the multiple and complicated coal liquefaction. These observations suggest energy-related challenges that South Africa that there are likely to be significant opportu- must address to achieve its goals for economi- nities for South Africa to improve energy effi- cally, environmentally, and socially sustainable ciency, many of which can be undertaken at development. The needs for change echo those relatively low cost. first articulated in the important 1998 White On South Africa’s high intensity of carbon Paper on Energy Policy. They include:29 emissions per unit of energy used, almost • Responding to the risk of near-term electric- 70 percent of South Africa’s total energy sup- ity capacity shortages, while also increasing ply comes from coal, either directly or through energy supply and improving energy effi- coal-fired electricity, compared with almost ciency over the longer term to respond to trivial amounts of hydro, solar, and wind. About the needs of a growing economy and help 10 percent of total energy supply comes from keep South Africa competitive in the global biomass, in contrast to many other relatively economy. industrialized economies and likely reflect- • Making energy affordable to meet the basic ing continued small-scale and traditional uses needs of all South African households and of biomass in rural and lower income areas. realize the fundamental goals of inclusive These patterns of energy use have also given development. rise to serious air quality concerns.26 • Addressing local environmental threats from energy use, notably those to air pol- Green energy policies lution and human health. This in turn Context and objectives. South Africa’s challenges requires addressing primary fuel quality for in achieving green growth cannot be separated lower income households and rural areas, from its economic and political history, which and ambient air pollution from energy South AFRicA Economic UpdatE—FocUs on GrEEn Growth combustion in power production, industry, practice to reduce carbon intensity in power and transport. generation. Substantially increased competi- • Shouldering an appropriate share of future tiveness in the wholesale power market could responsibility for the long-term global chal- have the desired effect, but this would take lenge of sharply restricting emissions of CO2 some time to accomplish. Until that time, and other greenhouse gases. authorities may need to consider either a modi- The current state of the electricity sector fied form of carbon tax that changes relative derives in part from circumstances dating fuel-cost recovery for different energy sources to the 1970s, when Eskom, finding itself with based on carbon content without compromis- 26 excess generating capacity, embarked on a ing Eskom’s financial sustainability — or some strategy to stimulate electricity demand with systemwide performance standards on the car- low rates, while lining up long-term coal sup- bon intensity of electricity supply as a second- ply contracts at favorable prices. As economic best alternative. growth restarted after 1994, demand for elec- Enhancing energy efficiency is an impor- tricity rose, but tariffs (and contract coal tant element of green growth in South Africa. prices) were slow to adjust. These de facto sub- Better energy efficiency can lower energy sidies, plus delays in expanding capacity and costs, reduce environmental impact from lower insufficient investment in maintenance, led to energy use per unit of output, offer flexibility a crisis including blackouts and other curtail- in how it is developed and delivered (limited ments starting in 2008. sunk costs), and contribute to employment growth because of its relatively high labor Getting the prices right and improving energy effi- intensity. Along with the ongoing reforms of ciency. South Africa is now unwinding the energy pricing that provide a powerful impetus distortions in its electricity pricing, with sub- for improved energy efficiency, there are good stantial tariff increases beginning in 2008 arguments for well-targeted energy-efficiency and planned to continue every year through standards to overcome institutional and infor- 2012/13. Eskom has also negotiated new inter- mational barriers that can limit the effective- ruptible service agreements with large custom- ness of price-based incentives. The National ers to increase short-term flexibility in load Energy Efficiency Strategy, first promulgated management. The higher prices provide a pow- in 2005 and reviewed in 2008, contains stan- erful incentive for improving energy efficiency dards and implementation measures toward over the medium and longer term, as well as that end, particularly for energy efficiency curbing nearer term demand in the face of improvements in industry.30 capacity shortages. South Africa has also undertaken an in- Integrated Resource Plan options. South Africa’s depth and well advanced discussion on a challenges in balancing multiple objectives are carbon tax, a way of putting a price on this laid out in the Department of Energy’s discus- environmental “bad.� Both theory and experi- sion of revisions to the IRP. 31 The long-term ence indicate that pricing emissions is the most goal is to add almost 30 GW of new generation efficient way to provide broad incentives to mit- capacity by 2030 and to complete roughly 10 igate carbon emissions from energy use. The GW of new coal-fired capacity already in the National Treasury (2010) lays out clearly how a pipeline. That would replace retiring capac- carbon tax would work in South Africa, and the ity and satisfy anticipated growth in electricity potential impacts on economic efficiency, fis- demand; ameliorate risks of supply insecurity; cal balance, and distributional considerations. create new domestic business and employment Implementing a carbon tax will have chal- opportunities; stabilize national emissions lenges, however, particularly for coal-based of CO2 at 275MT per year from 2025 onward emissions. NPC (2011b) points out that Eskom (significantly below business as usual projec- is a regulated monopoly, and since its costs tions); while also holding down electricity price (including fuel expenses) are covered by regu- increases. The means to accomplish these lated electricity rates, the tax may do little in objectives include additional (high-efficiency, lower emissions) coal fired generation capac- reflect strong emphasis on capturing early ity; deployment of substantial new nuclear “learning by doing� gains that are expected to capacity (almost 10 GW); investment in more result in new opportunities for employment, than 20 GW of renewable energy capacity, skills development, and domestic business including early-start investment that can help growth. These actions also can provide a hedge build up domestic capacities and employment against fossil-fuel price increases, and they opportunities; improved energy efficiency make it possible to build fewer carbon-intensive through demand side management programs; coal-fired plants to meet growing demand, thus expanded regional agreements and corre- avoiding increased longer term CO2 emissions. 27 sponding transmission investment to import At the same time, it will be important to moni- more hydroelectric power; and increased sub- tor how the unit investment costs of different stitution of unconventional and imported natu- renewable energy technologies are declining ral gas for coal.32 The IRP target for renewable over time so as to optimize longer term invest- energy investment through 2016 (already ment budgeting. The larger are these declines, committed and new build) is in line with the the greater are the prospective gains from lon- 3,725 MW announced as part of the November ger term renewable investment and the lower 2011 Green Economy Accord. will be the start-up costs.34 In response to comments on an initial con- The planned investment in nuclear post- sultation draft, the IRP has subsequently been 2020 can also provide a useful hedge against adjusted in several ways, notably far faster con- uncertainties in fuel prices and renewable struction of coal plants to increase nearer term energy investment costs, in addition to displac- supply security combined with a larger and ing new coal-fired generation capacity that faster investment in renewables capacity. The otherwise would have been built.35 The other new investment in renewable by 2020 is antici- side of the choice is uncertainty about the pated to include 2.4 GW each of solar photo- capital costs of new-generation nuclear plants. voltaic (PV) and wind capacity, and 400 MW of Another uncertainty involves the prospects for solar thermal capacity.33 South Africa and the more plentiful and low-cost natural gas becom- World Bank signed an agreement in November ing available, acting as a bridge fuel for power 2011 for a $250 million loan for constructing generation and vehicles. large on-grid wind and solar thermal power plants, each of 100 MW. Economic growth, jobs, and international competitiveness Uncertainties, challenges, opportunities. As noted, A crucial question in developing countries is the Green Economy Accord lays out an ambitious how green environmental policies will affect and far-reaching agenda for new initiatives in the growth in output of economic goods and energy efficiency and renewable energy, involv- services (measured approximately by real GDP) ing both major investments as well as commit- and employment. ments to skills development for thousands of Green policies could have such effects in workers. Any plan on this scale faces various two ways. The first is the impact on growth and uncertainties. In particular, economic and employment of structural changes in the coun- technological uncertainties arise in the con- try’s economy as a result of green policies —for text of large, long-lived investments in power example, as a result of changes in demand pat- generation capacity that once built are costly terns, the emergence of new sectors and the to change. This point, in turn, underscores the decline of others, and the adoption of new importance accorded in the IRP to undertak- technologies. The first two parts of this sec- ing a range of initiatives that provide greater tion look at these kinds of effects on growth overall flexibility in the nation’s portfolio of and jobs, respectively. The second channel is power sector investments. through a country’s participation in the inter- The ambitious nearer term renewable national market for environmental goods and energy investments and energy efficiency mea- services, likely to grow as more countries adopt sures envisaged in the IRP and the Accord green policies. Many countries hope to boost South AFRicA Economic UpdatE—FocUs on GrEEn Growth growth and employment by becoming globally distorting taxes. Devarajan and others (2011) competitive net exporters in the world market find that a carbon tax designed to reduce emis- for green goods and services, though not all sions by 15 percent reduces household welfare can succeed. The last part of this section looks by 0.33  percent. This cost is slightly reduced at the global trends in world trade of environ- with revenue recycling to reduce other indirect mental goods and services and South Africa’s taxes. The study also finds that the welfare cost potential participation in this market. is significantly lower when distortions in the labor market are reduced. 28 What does greening imply for growth? South Africa is also in the midst of gain- Developing countries are usually extremely ing valuable experience on these matters as concerned about the impact of green policies a result of the major increases in electricity on short-term economic growth, a major driver tariffs implemented in the wake of the local of employment. In some cases, the choice energy crisis in 2007/08. Prices began to be should be rather straightforward, as when increased in 2008, with significant annual green policies eliminate economic distortions increases planned through 2012/13. It is per- like energy subsidies, thus increasing economic haps still too soon for rigorous analysis of the efficiency and the prospects for growth. In impact on the economy. But a survey of large other cases like climate change, the choice may firms commissioned by the National Treasury be more difficult, since green policies could finds that companies are making significant require some economic costs today in return changes in their operations in response to the for environmental and economic benefits in tariff increases.39 Most firms are implementing the longer term. options to increase energy efficiency. Energy savings are expected to rise to around 3.5 mil- The traditional viewpoint. The traditional view lion MWh a year in 2011–15, compared with is that a greener environment usually does less than 2 million a year in 2008–10. Firms are have some economic cost, but that with well- also anticipating an increase in the number of designed policies the cost can be kept fairly renewable energy projects that they undertake. small if implemented using market-based pol- While the survey does not look at the impact icy instruments, like a pollution emission tax, on firm output, it is a hopeful sign that firms that create incentives for people to seek out the are making these adjustments in response to least-cost ways of protecting the environment.36 higher prices, a precondition for minimizing There is also evidence for the so-called “double adverse impacts on business performance. dividend� hypothesis: economic costs can be further minimized when pollution tax reve- The Porter Hypothesis— Do green policies accelerate nues are used to reduce other distorting taxes, growth? More recently the traditional view that for example on capital or labor, or to reduce there some tradeoffs between environmental fiscal large deficits.37 But much will depend on protection and growth has been challenged by the ambitiousness of environmental targets, the Porter Hypothesis.40 What has often been the availability of substitute technologies, the called the “weak� version of the Porter Hypoth- level of distortions in the existing tax system, esis says that the use of well-designed environ- and the particular country circumstances. mental instruments like pollution pricing is In South Africa, a significant amount of likely to stimulate innovation by firms. A stron- work has been undertaken in recent years to ger version is that this induced innovation by evaluate the economic impacts of environmen- firms can overcome the added costs of regula- tal regulation to limit greenhouse gas emis- tion and, in that case, will lead to an increase in sions. 38 The results of these studies broadly firms’ productivity and business performance. confirm the results found internationally — On a sufficient scale, then, a strong Porter emission mitigation will have some economic effect could boost output and growth as a result costs, but they can be limited by the use of of green regulation. While this is an attractive efficient instruments, such as a carbon tax, idea, there is, however, relatively little overall and by recycling revenues to reduce other evidence for the strong version as yet. A recent survey paper by Ambec and others (2011) And green growth to generate green jobs surveys the empirical research on the Porter is now a part of the country’s plans to tackle Hypothesis. It notes a good deal of evidence for unemployment. the weak version: that is, for a positive relation- The New Growth Path targets greening to ship between environmental regulation and generate 300,000 direct jobs by 2020 — 6 per- firm innovation, as measured by R&D spend- cent of the 5  million additional jobs needed ing or patents. to cut the unemployment rate from its current But the evidence for the strong Porter effect 25  percent to 15  percent by 2020. These jobs is much more mixed, with an earlier genera- are expected to arise from “expanding the 29 tion of studies generally finding that environ- existing public employment schemes to pro- mental regulation had a negative impact on tect the environment,� biofuels production, firm productivity, while some more recent and “major new opportunities for investment, studies have found a positive impact. A recent and employment in manufacturing new energy study by Lanoie and others (2011) studies the technologies as well as construction� related Porter causality chain in more than 4,000 firms to expanded renewable energy targets. These in seven industrial countries. They again con- plans were further fleshed out in the Novem- firm the existence of a significant positive link ber 2011 Green Economy Accord. between regulation and firm innovation. They The Industrial Policy Action Plan (IPAP) for further find that such innovation does have a 2010/11–2012/13 also highlights green and significant positive effect on business perfor- energy-saving industries as one of 13 key sec- mance. But they also note that the environ- tors to promote. It emphasizes solar water heat- mental regulation itself has a direct negative ing, concentrated solar thermal, industrial effect on business performance. On balance, energy and water efficiency, wind, biomass, they find the net effect of regulation on busi- waste management, and energy-efficient vehi- ness performance is negative. An earlier study cles, using subsidies, subsidized finance, stan- by Lanoie and others (2008) accounts for the dards, regulations, and public demonstration point that it would probably take some time for investments. The IPAP does not discuss the Porter-type effects to become apparent. For a employment implications of these initiatives, sample of firms in Quebec, they find that the however. impact of regulation on business performance To be sure, there is no entirely agreed defi- is initially negative but then becomes modestly nition of the term “green jobs.� One approach positive after a number of years. equates it with employment in the specific What lessons should policymakers draw set of industries that produce goods and ser- from the evidence on connections between vices deemed of environmental benefit — green policies and growth? Given the mixed currently about 1 percent of total employment cross-country evidence, it would probably be in advanced economies. A broader approach prudent not to count on environmental regu- focuses on the overall employment conse- lation by itself having major positive effects quences of introducing green policies, taking on economywide business performance and into account direct and indirect channels, and growth, at least in the near term. However, jobs created and jobs destroyed.41 green policies do significantly improve human We look at three sets of questions to help well-being directly, through better environ- evaluate the potential for green jobs and the mental protection, and, as noted earlier, can implications for the overall employment pic- have significant synergies with growth, espe- ture in South Africa. cially when coordinated with a well-designed • First, what are the main factors holding package of policies directly targeted at raising back job creation in South Africa? There growth. is a considerable research literature on this question, and we can just touch on the What does greening imply for jobs? highlights.42 Reducing unemployment is one of the over- • Second, what does cross-country expe- riding policy concerns in South Africa today. rience tell us about the job potential of South AFRicA Economic UpdatE—FocUs on GrEEn Growth green growth processes? This is less well population. Employment growth was particu- researched, but we note some of the emerg- larly weak in the informal sector, agriculture ing issues and findings. and personal households.44 Informal and • Third, given results for the first two ques- self-employment is much lower than in other tions, what are the broader employment middle-income countries, as is employment in implications of green growth in South small firms.45 Africa and what are the kinds of broader The OECD’s 2010 Economic Survey for complementary reforms would help increase South Africa estimates that much unemploy- 30 the jobs potential of green growth? ment is structural, and that very little can be attributed to cyclical factors.46 Reasons for the Features and causes of high unemployment in South high structural unemployment? Africa. Some 25 percent of South Africa’s labor • Trend economic growth of around 3.5 per- force was unemployed in September 2011, down cent in the 2000s has been too weak to only slightly from a decade earlier (figure 2.8). absorb the growing labor force. Such sustained high unemployment is unusual. • Such growth also appears to have become One can get a better idea of what is driving the less labor-intensive, particularly in unskilled unemployment rate by decomposing it into two labor, due to structural changes (contrac- further ratios. The unemployment rate will be tions of mining, agriculture, and manufac- higher, the lower is the labor absorption rate (the turing employment and shifts to services, ratio of employment to the working-age popu- some of them are less labor-intensive, like lation). Other things equal, the unemployment financial services), as well as skill-biased rate will also be higher, the higher is the labor technical change. force participation rate (the ratio of the labor • Downward rigidity in real wages in the for- force to the working-age population).43 mal sector has prevented market-clearing Between the absorption rate and the partici- in the face of shifts in labor supply and pation rate, the former explains South Africa’s demand. Kingdon and Knight (2007) docu- high unemployment relative to other countries. ment the dualistic “insider-outsider� labor Only slightly more than 40 percent of the work- market. Insider formal sector workers have ing-age population was employed in Septem- strong collective bargaining and regulatory ber 2011, compared with 60–75 percent in the protections. Outsider informal sector work- OECD and many middle-income economies. ers and the unemployed have few protec- The labor absorption rate was lower than 10 tions and suffer from weak development of years before. Employment grew only at 1.3 per- SME employment in South Africa.47 cent a year over the decade, compared with • On the supply side of the labor market, 1.7 percent annual growth in the working-age deficiencies in education and training Figure Labor market indicators, 2001 and 2011 2.8 September 2001 September 2011 60 40 Percent 20 0 Unemployment rate Labor absorption rate Participation rate source: south africa Labor Force survey, various. contribute to skill mismatches. Many work- has to look at the job impact not just in that ers, particularly Africans, live far from sector but in the economy as a whole. Thus, to where jobs are located, raising reservation the extent that energy demand is increasingly wages and the costs of job search. met from renewable energy sources, there will also be a contraction of output and jobs in tra- Green growth and green jobs: what do we know? We ditional fossil-fuel related sectors (with its own still know relatively little about the employment direct, indirect, and induced effects). In this effects of green growth. The reason is that few case, it is the net change in overall energy sec- countries, if any, have implemented extensive tor jobs that needs to be considered. 31 green policies, particularly for reducing carbon A recent study by Wei, Patadia, and Kammen emissions. Thus there has been little scope for (2010) provides some information that can help careful empirical evaluations of economywide assess such net effects. Figure 2.9 shows their job impacts. Instead, many studies are more in estimates of direct job-years per GWh of elec- the nature of model-based scenarios of what tricity produced in the United States by differ- the job effects could be, based on partial infor- ent technologies, including both fossil-fuel and mation, and are quite sensitive to the modeling clean technologies. The study generally finds assumptions. This suggests the need for cau- that clean energy technologies do have higher tion in interpreting and using these results. direct employment coefficients than, say, coal The simplest approach to measuring the or natural gas. Energy efficiency improvement, employment effects of green growth is to mea- in particular, appears to be a relatively labor sure direct employment effects —the extra employ- intensive sector, especially when it draws on ment created by the expansion of a given green unskilled labor in the construction sector.48 sector, with the focus of most studies being on Wind, carbon capture and storage, and solar renewable energy technologies such as solar, thermal are also estimated to have direct job wind, and energy-efficiency improvements. coefficients that are on the order of 0.07–0.1 Sometimes these direct effects are bulked out job years per GWh greater than coal.49 (There by looking at indirect effects —the additional jobs is also some evidence for the relative high labor created in the industries that supply inputs intensity of biofuels and low-carbon land use in to the expanding green sector— and induced a developing country.) effects, when workers in the jobs created by One also needs to consider broader eco- direct and indirect effects spend their wages on nomic effects outside the energy sector. goods and services, thereby creating additional Renewable energy sources may have higher jobs. capital requirements per unit of output as However, to get a complete picture of the well as shorter plant lives and more intermit- employment impact of expanding a given tent energy production, each contributing green sector such as renewable energy, one to the current higher cost of renewables over Figure Direct job years per GWh, united States 2.9 Energy ef ciency Natural gas Coal Nuclear Carbon capture and storage Wind Solar thermal Small hydro 0.0 0.1 0.2 0.3 0.4 source: wei, patadia, and Kammen 2010. South AFRicA Economic UpdatE—FocUs on GrEEn Growth conventional energy sources. These features substantial direct benefits for the environ- also need to be taken into account, including ment and for human well-being, green poli- the impact on jobs. To the extent that a switch cies alone would significantly boost overall to renewables increases electricity costs, there GDP growth. However, there is every rea- would also be an adverse impact on output and son to think green job creation would be jobs in downstream electricity-consuming sec- increasingly buoyant in the context of a pol- tors. If the government subsidizes electricity icy package directly targeted at fast growth, prices to mitigate this effect, there would be a particularly if greater productivity allows question about the opportunity cost of the fis- South African firms to become more inter- 32 cal resources used for the subsidy — resources nationally competitive producers of green that could have been devoted to alternative technologies and products. purposes, including job creation. • Less labor-intensive growth, particularly for By contrast, capital requirements in the unskilled labor. Here, the most promis- energy-efficiency sector are likely to be much ing direction for jobs growth is energy lower than in renewable energy. There is efficiency, which tends to be more labor- considerable evidence on the relatively low intensive then either fossil-fuel or renew- cost of energy savings through efficiency able-based power generation, and which improvements, which are thus likely to be the also has a larger demand for less skilled most promising way to promote employment labor — for example, in construction, cost-effectively. weatherization, and retrofitting. 50 Other segments, like solar PV or smart-grid tech- Strengthening the employment implications of green nology, will make bigger demands on tech- growth. The foregoing discussion has stressed nically skilled labor. Keep in mind the sheer the need to take an economywide approach scale of unskilled unemployment in South in assessing the job implications of green poli- Africa (figure 2.10). About 60 percent of the cies. This section adds a few comments on the unemployed— almost 2.7  million people — potential for green jobs in light of the reasons have not completed secondary school, and for high structural unemployment on South among the economically inactive, almost Africa, noting in particular the need for com- 80 percent. plementary reforms that would increase the job • Labor market institutions and a dual insider- impact of green policies. outsider labor market. Clearly, green policies • A low trend rate of economic growth. As noted are not designed and cannot be expected in the earlier discussion of growth, we have to address institutional issues in the labor little evidence as yet that, while generating market. A more promising line of approach Figure highest level of education, July–September 2011 2.10 Unemployed Not economically active 60 Percent of total 40 20 0 No Less than Primary Secondary Secondary Tertiary Other schooling primary completed not completed completed source: south africa Quarterly Labor Force survey (2011q3). is to ask what complementary reforms The government’s National Climate Change would foster more vigorous SME develop- Response White Paper gives the following ment in the country, thus increasing the job realistic appraisal: “In terms of job creation, impact of green policies. In many countries, the short- to medium-term objective of the energy efficiency, in particular, provides National Climate Change Response Policy considerable scope for SMEs and for SME is to limit employment contraction to those employment. areas of the economy where excessive carbon A recent study helps illustrate these issues intensity is considered unsustainable, whilst and throws valuable light on some of the chal- promoting and expanding the green economy 33 lenges ahead. 51 It looks at the job impact in sectors. Growth in new sectors alone will be no the South African power sector of an energy guarantee of net job creation and the govern- revolution that would entail a major increase ment will promote conditions that will increase in renewable (non-nuclear) energy supply and the mobility of labor and capital out of car- energy efficiency. Strikingly, such a revolution bon intensive sectors to greener productive would have little impact on employment, com- sectors.�52 pared with a reference or baseline scenario Green policies are no substitute for struc- (figure 2.11). The reason is that job gains in tural reforms. Both are needed. Indeed, the energy efficiency and renewables are offset by success of green policies will depend on such job losses in coal and nuclear, a possibility dis- reforms to improve growth and employment cussed earlier. prospects. An advanced energy revolution scenario yields larger job gains, based on the assump- Green growth and international trade tion that a much larger proportion of the International trade and South Africa’s “carbon foot- equipment and technologies used in renew- print.� Worldwide, nearly a quarter of all car- able energy start to be manufactured in South bon from fossil fuel burning is emitted in the Africa, efficiently substituting for imports and course of producing goods destined to be con- also allowing rising exports. However, such a sumed elsewhere. 53 And there is a strong pat- strong improvement in South Africa’s manufac- tern for many developed countries to be large turing competitiveness would presumably need net importers of embodied carbon and for their to be based on structural reforms to improve carbon consumption footprint to be larger the private investment climate, education and than their production emissions. Conversely, labor force skills, labor market institutions, and many developing countries are significant so on, since it would not automatically follow net carbon exporters, with carbon consump- from the shift to renewables itself. tion footprints significantly smaller than their Figure Electricity sector jobs in three scenarios 2.11 Reference scenario Energy revolution Advanced energy revolution 200 150 Jobs (thousands) 100 50 0 2010 2015 2020 2030 source: Greenpeace international and ErEc 2011. South AFRicA Economic UpdatE—FocUs on GrEEn Growth production emissions. The carbon consump- Opportunities for South Africa in the world market tion footprint in the four biggest EU countries for environmental goods. Many developing coun- exceeded production emissions in 2001 by an tries are interested in the potential to stimulate estimated 15–17 percent, for example. 54 Con- domestic growth and employment by becom- versely, China’s carbon consumption footprint ing competitive net exporters of environmen- was about 18 percent smaller than its produc- tal goods and services. Here, we focus on the tion emissions. And South Africa was the larg- potential for trade in environmental goods est relative net exporter of embodied carbon, (EGs) rather than services, mainly because of 34 with carbon consumption nearly 40  percent greater data availability. 56 Box 2.3 comments lower than production emissions and the vast on one type of environmental service trade, majority of embodied carbon net exports going ecotourism, drawing on experience from Afri- to developed economies (figure 2.12). can countries and from Costa Rica. When countries decide to adopt signifi- There is no common agreed definition of cant carbon pricing to curb their own emis- EGs, though bodies such as APEC, the OECD, sions, they may consider taxing the carbon and UNCTAD have developed detailed if dif- content of imports from countries that have fering definitions and lists of EGs in world not yet adopted carbon pricing (most develop- trade. ing countries), to level the playing field. Such Broadly speaking, EGs are classified in two border tax adjustments could result in a sig- groups. A narrower conventional view of EGs— nificant effective tariff rate on the exports of referred to as established environmental technolo- developing countries, including South Africa. gies (EETs)—focuses on goods used directly in A $50 a ton carbon price in importing coun- the treatment of environmental problems — tries could result in an estimated 11.5 percent for example, goods used in wastewater treat- average tariff on South African exports, the ment or equipment used to produce renewable highest of all the estimates made. 55 Ferrous energy. These goods generally have multiple metals, mineral products, and other mining end-uses, only one of which is to provide envi- could face effective tariffs ranging from 19 to ronmental benefits, the dual use problem. 28  percent. Any attempt to guess whether or A second broader view of EGs — referred to when a border tax adjustment regime might as environmentally preferable products (EPPs)— come about can only be speculative. But it focuses on goods that are not mainly used to seems likely that South Africa could reduce remedy an environmental problem but whose the risk of being subject to such adjustments if production or end-use generates environmen- it introduces some carbon pricing, an impor- tal benefits relative to substitutes. Examples tant point as South Africa debates introducing cover a wide range of products including its own carbon tax. CFC-free refrigerants, chlorine-free paper, Figure carbon emissions embodied in trade 2.12 Sweden United Kingdom France Germany Japan Italy Korea, Rep. United States Brazil Turkey India Australia China Indonesia Russian Federation South Africa –40 –20 0 20 40 Net exports as percent of emissions produced source: peters and hertwich 2008. Box Ecotourism — conserving the environment and improving welfare 2.3 Ecotourism is commonly defined as “responsible travel to natural areas which conserves the environment and improves the welfare of local people.� it is a niche tourism product, estimated by the Un world tourism organization to capture about 7 percent of world tourism receipts in 2007, but growing at 20–34 percent a year, about three times faster than tourism overall. compared with resort-based or tour ship-based tourism, ecotourism is a premium product which attracts a significantly higher expenditure per tourist, a larger proportion of which is also retained in the local economy.1 costa rica is widely acknowledged as an early developer and market-leader in ecotourism. tourism has long since become its largest export sector, with nearly half of tourist visits engaged in activities related to ecotourism. Underlying this success is costa rica’s wealth of biodiversity and its well-established system of 29 national parks and protected areas covering more than a quarter 35 of the country, one of the highest protection rates in the world. costa rica also provides useful lessons on establishing good quality legal, policy, regulatory, monitoring, and impact-evaluation frameworks for a successful ecotourism strategy. the certification for sustainable tourism program provided by the costa rican tourism Board, for example, evaluates and rates tourism companies. the innovative Forest Law of 1996 provides for the government to contract with private landowners for the provision of a range of environmental services, including provision of scenic beauty for recreation and ecotourism, the financing for the program coming from a tax on fossil fuel use. with exceptionally rich natural attractions and biodiversity, sub-saharan africa—and south africa specifically—is well positioned to take advantage of the boom in ecotourism. the subtropical thicket restoration program in the Eastern cape of south africa would contribute to healthier functioning of the local ecosystem and support ecosystem-based job creation. a healthy thicket is expected to increase carrying capacities for species such as black rhino, elephant, and kudu, which have significant tourism potential, while adding to carbon storage within the region’s semi-arid system. namibia’s wildlife conservancy program strengths on land tenure rights and responsibility for wildlife as a means of improving local livelihoods, developing tourism enterprises within conservancies. the Great Limpopo transfrontier park, established in 2002, provides for joint management of adjoining national parks in mozambique, south africa, and Zimbabwe. the current 2006 to 2013 transfrontier conservation area and tourism development program focuses on policy, legal, and institutional reforms to rehabilitate the various parks and is expected to achieve substantial outcomes for biodiversity conservation, management system capacity, and community welfare. Note 1. tiEs 2006; honey 2008. biodegradable natural fibers such as jute and They are included in the EG definition either sisal, and energy-efficient light bulbs. There because they are considered an EPP (as in the is often overlap between the two categories of case of natural gas), or because of the dual use EGs. For example, solar panels are classified as problem, or because the six-digit classification EETs when used in a renewable energy power level is not disaggregated enough to pick out plant but EPPs when incorporated in a solar fuel-efficient vehicles (as in the case of motor powered consumer good. cars). The next 15 largest categories of EGs do, The value of total world exports of EGs however, contain some more conventionally was $3.03 trillion in 2010, a little over 29 per- recognized EGs, such as photosensitive semi- cent of total world trade. 57 At this broad level, conductor devices (including PV cells and light it appears that EGs are not an especially fast- emitting diodes that are used as components of growing component of world trade, their share solar panels) and gas turbines. of world trade having remained roughly con- Table 2.1 shows the five fastest growing six- stant in the 29–30 percent range since 2002. digit categories with an export value greater The five largest categories of EGs in world than $5  billion in 2010. Interestingly, these trade at the six-digit level are lubricating oils, include categories like photosensitive semi- motor vehicles with cylinder capacity greater conductors (including those used for solar than 1,500  cc but less than 3,000  cc, natural panels) and wind-powered electric generators, gas, light oils, and motor vehicles with cylin- both of which have been growing 3–4 times der capacity exceeding 3,000  cc. These five faster than the value of world trade as a whole. make up almost 25 percent of total world trade The largest exporter of EGs is the EU in EGs, but clearly they are not commonly (accounting for 38  percent of world exports) thought of as green or environmental goods. followed by China (12  percent), the United South AFRicA Economic UpdatE—FocUs on GrEEn Growth States (9 percent), and Japan (8 percent). South significant proportion of commodities in South Africa ranks thirtieth. These rankings are Africa’s exports. Thus the 2000s, a period of broadly similar to those of a decade ago, except generally rising primary commodity prices, China, which has increased its ranking from also saw a mild increase in South Africa’s world fourth at the start of the decade. The United trade share measured in current prices, even as States is the largest market (accounting for the constant price share continued to fall. 27  percent of world imports) followed by the South Africa exported $14.9 billion of EGs EU (24 percent) and Japan (8 percent). South (Combined List definition) in 2010, about 36 Africa is the fifteenth largest importer of EGs. 21  percent of its total goods exports, while In terms of dynamics, the 15 fastest growing importing $22.3  billion, about 28  percent of import markets for EGs are nearly all emerging its total goods imports. EGs have, if anything, market and developing economies. trended somewhat lower as a share of South Africa’s own export basket since 2002, while South Africa’s performance in the world market imports of EGs have trended modestly higher for EGs. Over the last 25 years, South Africa (figure 2.14). has generally been losing market share in South Africa’s share in world exports of world trade, dipping from around 1  percent EGs is consistently lower than its share in total in 1975 to 0.5 percent in 2010. South Africa’s world exports, though also trending modestly world trade share in constant price terms has higher (figure 2.15). Its revealed comparative declined fairly steadily (figure 2.13). The share advantage (RCA) in EGs, defined as its share measured in current prices has been more vola- in world EG exports divided by its share in total tile, however, tending to rise when world pri- world exports, for all EGs has been consistently mary commodity prices are high, reflecting the less than 1, suggesting a lack of comparative table Fastest growing environmental goods in world trade 2.1 six-digit code product description Export value (Us$ billions), 2010 average percentage growth, 2002–10 854140 photosensitive semiconductors (including for solar panels) 54.8 34.7 740400 scrap copper 22.2 29.1 850231 wind-powered electric generators 5.6 29.0 400122 natural rubber 11.9 27.1 870331 motor cars, cylinder capacity < 1,500 cc 15.2 25.4 note: with a 2010 value greater than $5 billion. source: Balineau and Gillson 2011. Figure Share of total world trade, 1970 –2010 (exports of goods and services) 2.13 Current price Constant price 1.5 1.0 Percent 0.5 0.0 1975 1980 1985 1990 1995 2000 2005 2010 source: world Bank data and staff estimates. Figure EGs share in own trade, 2002–10 2.14 EGs share in own total exports EGs share in own total imports 30 28 26 Percent 24 37 22 20 2002 2003 2004 2005 2006 2007 2008 2009 2010 source: world Bank data and staff estimates. Figure Export competitiveness for EGs (combined List), 2002–10 (current prices) 2.15 South Africa share in South Africa share in Revealed comparative world total exports world EGs exports advantage for total EGs 1.0 0.8 0.6 Percent 0.4 0.2 0.0 2002 2003 2004 2005 2006 2007 2008 2009 2010 source: world Bank data and staff estimates. advantage in EGs as whole (see figure 2.15). the country’s Motor Industry Development But there is a considerable diversity in South Program, which has provided the sector with Africa’s subcategories of EGs. It has RCAs various financial support. Thus strong RCAs greater than 1 in at least a couple of the broad in some of these categories may be misleading categories on the WTO list, notably air pollu- about underlying competitive strengths. These tion control and renewable energy, but much products are also important elements of the air less than 1 in waste management and environ- pollution control and renewable energy catego- mental technologies (figure 2.16). ries, even though they do not fit most conven- These are very broad and heterogeneous tional notions of EGs. categories, though, and it is necessary to dig South Africa also shows RCAs greater deeper to find the specific areas where South than  1 in a fairly broad array of other indus- Africa has a comparative advantage. Of the trial and electrical machinery — for example, 911 six-digit codes on the Combined List, centrifuges, various kinds of electrical motors, South Africa has an RCA greater than 1 in generators and furnaces, meters, surveying 97 of them. 58 Of these, a significant number instruments, and similar products with dual have to do with autos and auto components, uses. Photosensitive semiconductors (includ- whose exports have been promoted under ing those for solar panels) have an RCA of 0.97, South AFRicA Economic UpdatE—FocUs on GrEEn Growth Figure Revealed comparative advantage for EG categories (from Wto list), 2002–10 2.16 Air pollution Renewable Environmental Waste control energy technologies management 2.5 2.0 1.5 38 Percent 1.0 0.5 0.0 2002 2003 2004 2005 2006 2007 2008 2009 2010 source: world Bank data and staff estimates. and so are quite close to 1. EPPs based on bio- ‘strategic’ industries, and the interests of down- degradable natural fibers are another group stream users and final consumers play an insig- where South Africa shows revealed compara- nificant role in antidumping decisions.� As of tive advantage, as are various recyclable metals. May 2011, 28 out of 68 antidumping provisions were for the energy-intensive iron and steel, South Africa’s trade policies and environmental aluminum, and chemicals. This is a provocative goods. South Africa’s average most-favored- finding, suggesting that trade policy may pro- nation applied tariff rate on imports of EGs is tect and expand the energy-intensive sectors of 3.6 percent, less than half the 7.8 percent rate the South African economy— clearly a topic for on merchandise imports overall. This should be further study. favorable for green growth because South Afri- This brief survey suggests that, given South can firms can, broadly speaking, buy environ- Africa’s well-developed industrial base and its mental inputs and technologies from the most existing RCAs in various industrial and elec- competitive international producers, with rela- trical machinery categories, the country may tively low tariff costs. But some sectors are more have the potential to expand its current rela- protected than others: EGs related to iron and tively low share in world EGs markets. Such steel and vehicles and motor cars have average prospects must be linked to the overall produc- tariff rates of 7.7 and 10.3 percent, respectively. tivity and competitiveness of the South African Another channel through which trade economy, depending on broad macroeconomic policy could hamper green growth is if trade factors, such as the real exchange rate, and on barriers provide particularly strong protection structural factors, such as trade policies, infra- for sectors that destroy natural capital, such as structure, logistics, the investment climate, heavily energy-intensive sectors. South Africa and labor market characteristics. South Africa undertook a strong burst of trade liberalization clearly has significant challenges, as indicated, in the 1990s, but there has been little progress by its declining share of overall world trade in on the trade front since then. Instead, the tar- the last several decades. iff structure has become more complex, and South Africa has emerged as one of the world’s conclusions most prolific users of antidumping provisions. The idea of green growth stresses the need to Flatters and Stern (2007) comment that the ensure that natural assets continue to provide primary beneficiaries of antidumping investi- the resources and environmental services on gations have been “upstream heavy industries which our well-being relies. such as steel, chemicals and plastics — that is, In this discussion we have focused on one they are a form of disguised protection for key element of the green growth agenda in South Africa, the challenges associated with Long-term decarbonization of South Afri- energy use and country’s transition to a low- ca’s economy will require substantial changes carbon growth path. Here, policies to increase in the composition of energy use, moving energy efficiency have a particularly signifi- from a dominant reliance on coal toward low- cant green growth potential, by their ability to carbon renewable resources. The recent Inte- both improve economic efficiency and reduce grated Resource Plan and the Green Economy the environmental impacts of energy use. This Accord lay out an ambitious agenda to substan- is especially the case in economies like South tially increase power generating capacity by Africa’s with a history of economic distortions 2030 — drawing on a broad array of options, 39 due to underpricing energy and overinvesting including expansion of solar and wind power, in energy-intensive sectors. Correcting energy nuclear, hydro (through regional cooperation), price subsidies is a key element in reaping and natural gas, as well as new coal-fired capac- joint economic and environmental benefits ity. The potential irreversibilities associated from improved energy efficiency. A good case with long-lived power generation investments also can be made for complementing energy- mean that there is an advantage to plans that pricing reforms with well-targeted energy- retain flexibility for the timing and size of out- efficiency standards, and reducing regulatory lays, based on close monitoring and constant barriers to adoption of more energy-efficient evaluation of factors such as demand trends, technologies and practices. Trade policy the evolving relative costs of different energy reforms that reduce protection for energy and technologies, and the implications for domes- capital intensive sectors would be favorable tic growth and employment. for both jobs and energy efficiency. There is While green policies can have large syn- some evidence that energy- efficiency improve- ergies and co-benefits with the growth and ments have a relatively high employment con- employment agenda, they are not a substi- tent, the impact of which in the South African tute for it. Indeed such synergies are likely to context could be increased through improve- be mutually enhancing and larger when the ments in the investment climate, stronger edu- growth and environment objectives are being cation and skills training, and reforms that pursued by multiple, well-targeted and coordi- promote SMEs. nated policies. Notes 1. GGKP 2011. The Green Growth Knowl- but below its previous reading of 81.1 in edge Platform is a partnership between the May 2011. Global Green Growth Institute, the Organ- 11. The transition matrices were constructed isation for Economic Co-operation and matching the observations from 2010q4 Development, the United Nations Environ- and 2011q2. One quarter of the sampled ment Programme, and the World Bank. dwellings rotate out of the sample each 2. NPC 2011b: 183. quarter and are replaced by new dwell- 3. NPC 2011b. ings in the new dwellings. This means that 4. DOE 2011. about half the observations of each QLFS 5. Porter and Van der Linde 1995. are available to construct the transition 6. This section draws on parts of the Sep- matrices. tember 2011 brief prepared by the World 12. World Bank 2011a. Bank’s Short-Term Risk Monitoring Group. 13. The 2010 Finscope Small Business Survey 7. After turning negative in the wake of the found that only 9 percent of small busi- Tohoku earthquake, world industrial pro- nesses had access to credit, while the 2008 duction was growing strongly, expanding Investment Climate Assessment showed at an 8.8  percent annualized rate in the the “access gap� between large and small two months ending June 2011; commod- enterprises to be larger in South Africa ity prices were stabilizing, and as a result, than in most of its emerging market peers. inflationary pressures were easing and real Furthermore, while 65 percent of house- disposable income growth picking up — holds had access to savings and transaction setting the scene for an acceleration of out- services in 2010, only 34 percent accessed put into the second half of the year. bank credits. 8. Since the end of July, global stock market 14. Debt distress appears to be on the rise capitalization has lost $5.5  trillion (as of in South Africa. In the case of a more November 14), or 9 percent of global GDP. protracted economic downturn, a more 9. The lower bound estimates assume a 1 adverse scenario for this segment of the percentage point increase in precaution- financial services industry can clearly not ary saving worldwide and a 2.5 percent- be ruled out. age point reduction in investment growth 15. England 2011. rates. 16. Volatility is measured here as the stan- 10. Capacity utilization in manufacturing dard deviation of the nominal bilateral stood at 79.8 percent in August, slightly exchange rate against the dollar over a higher than the levels recorded a year ago, 22-day moving window. 41 South AFRicA Economic UpdatE—FocUs on GrEEn Growth 17. GGKP 2011. The GGKP is a partnership self-financing of many efficiency measures between the Global Green Growth Insti- given the reduction in future energy costs. tute, the Organisation for Economic Co- 31. DOE 2011. operation and Development, the United 32. See Mukheibir (2007) for information on Nations Environment Program, and the regional hydro potential. NPC (2011b: World Bank. 143) provides information on potential 18. See for example OECD (2006). natural gas sources including coal bed 19. World Bank 2010; NPC 2011a. According methane, imports of liquefied natural gas, to World Bank (2011a), SMEs’ access to and natural gas trapped in shale rock for- 42 finance has become more restricted since mations (the latter appears to be extremely the onset of the global financial crisis. abundant in South Africa). 20. NPC 2011b. 33. The previous version of the plan had called 21. U.S. Energy Information Administration. for 3.6 GW of wind before 2020, but only Comparisons are for 2009 from a set of 217 400 MW of solar PV and thermal capacity countries and territories. over that period. Over the period to 2030, 22. Department of Environmental Affairs 2010. the revised plan includes more new coal 23. Trend growth is estimated by linear regres- capacity than the previous version (6.3 ver- sion against a time trend. sus 5.0 GW), less imported hydro (2.6 GW 24. Another alternative would entail massive versus 3.3 GW), and somewhat more new expansion in geological carbon sequestra- gas combined-cycle capacity (2.4 GW versus tion, still a pioneer technology that remains 1.9 GW). unproven at large scale. 34. Lower start-up costs also allow for a lower 25. NPC 2011b: 183. “feed-in tariff� to cover the costs of new 26. Witi’s (2005) analysis of particulate data renewable supplies. This kind of tariff from monitoring stations in several urban allows a supplier of higher cost energy to areas, while now dated, shows how a variety recover the full costs of supply, while the of sources contribute to excess concentra- cost premium is spread across the rates paid tions of this pollutant, which is very harm- for all other electricity use. South Africa’s ful to health and longevity. “REFIT,� promulgated in 2009, has subse- 27. NPC 2011a. quently been undergoing reconfiguration. 28. DOE 2011. 35. The IRP’s technology cost-investment expe- 29. Reforms after 1998 addressed governance rience curves are drawn from analysis car- in the electricity sector, including corpo- ried out by the International Agency (IEA ratizing the national utility Eskom, estab- 2008) on how these technologies might lishing a stronger independent electricity develop on a global scale. The report sector regulator, formulating policies with by Greenpeace International and EREC quantitative targets for renewable electric- (2011) appears to have more ambitious ity supply and energy efficiency, and taking technology learning rates. further measures in 2010 to cope with the 36. Aldy and others 2010. electricity supply crisis. The country’s posi- 37. Huberty and others 2011. tion on climate change policies was laid out 38. Department of Environmental Affairs 2007; in a “Long-Term Mitigation Scenarios� doc- National Treasury 2010; Devarajan and oth- ument in 2008. See Greenpeace Interna- ers 2011; Van Heerden and others 2006; tional and EREC (2011) and OECD (2010). Winkler and Marquard 2009. 30. Department of Minerals and Energy 2008. 39. DNA Economics 2011. Subsidies for improving energy efficiency 40. Porter and Van der Linde 1995. are harder to target and may end up ben- 41. See Bowen (2011) and World Bank (2011c) efiting those who would have chosen the for a fuller discussion of green jobs con- more energy-efficient option anyway. The cepts, methods of estimating green jobs Strategy emphasizes potential for the effects, and surveys of the existing empiri- cal literature in this area. 42. For example OECD (2010), Kingdon and employment by 6–11 percent, with especially Knight (2007), and Banerjee and others large shortfalls in SME employment. (2008). 48. Huberty and others (2011) summarize 43. The formula is UR = 1 – (AR/PR), where studies that generally find significant UR is the unemployment rate, AR is the employment effects from energy efficiency labor absorption rate, and PR is the partici- programs in the United States. pation rate. 49. The study finds a significantly higher esti- 44. South Africa’s labor force participation mate for solar photo voltaic (PV) but the rate—a little below 55  percent—is also authors note that it is likely to be unreli- 43 lower than in the OECD and other middle- able and requires further study, because income countries. In other words, a little of various difficulties with underlying data more than 45  percent of the working-age sources. population is not economically active. 50. Pollin and others 2009. This tends to hold down the measured 51. Greenpeace International and EREC 2011. unemployment rate. Yet the economi- 52. Department of Environmental Affairs 2011: cally inactive population contains a large 33. component—well more than 2  million 53. Davis and Caldeira 2010. people — of discouraged work seekers. 54. Peters and Hertwich 2008. Adding these discouraged workers back 55. Atkinson and others 2011. in, a broad measure of unemployment was 56. This section draws on Balineau and Gillson 33.3 percent in September 2011. (2011), a World Bank background paper 45. Magruder 2009. prepared for this report. 46. OECD 2010. 57. This number refers to the Combined List 47. Magruder (2009) argues that the weak devel- of EGs, which is a comprehensive concor- opment of SMEs is related to the system dance of various overlapping lists devel- of Bargaining Councils and Wage Boards, oped by bodies like APEC, the OECD, which set sectoral minimum wages and UNCTAD, and the WTO. Balineau and extend these to all firms in the sector regard- Gillson (2011) provide details. less of size. He finds the presence of Bar- 58. 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