Thursday, October 29, 2009

Online Materialism

The somewhat bizarre phenomenon that people spent real money on virtual goods is attracting attention. It may not be that bizarre after all..

People buy virtual goods for the same reasons as they buy material goods. In online spaces, virtual goods can function as markers of status, elements of identity and means towards ends in the same way as material consumer goods do in similarly contrived physical spaces, says Lehdonvirta, the author of a new Phd on the topic.

The good news?

From a macroeconomic perspective, it does not matter what consumers buy, as long as they keep on spending. Virtual consumption might offer an ecological way out of this consumer society's dilemma, says Lehdonvirta.

Increased consumption and less ecological impact? Enough to get me interested and to add the thesis on my pile of reading.

Read a summary on the website of the Helsinki University of Technology which also contains links to the full thesis.

Wednesday, October 21, 2009

A day of number crunching on hunger in SADC

The Southern African Development Community suffers from a food crises. The impact is certainly not uniform. On a country level both impact and direction of change is very different. Here are some facts:

- Hunger is a problem on an enormous scale: 95 million people or almost half the SADC population are undernourished. That is twice the number of people living in South Africa.

- Hunger tends to be more acute in certain regions. Almost half of undernourished people in SADC are in the Democratic Republic of Congo alone. Almost 84% of undernourished people in SADC are found in only five countries: DRC, Tanzania, Mozambique, Angola and Madagascar, 15% are in Zambia, Zimbabwe and Malawi and 1.5% in the rest of SADC.

- In absolute terms hunger is increasing, but the rate at which this increase is happening is slowing down. For the whole of SADC the rate of growth in undernourished people slowed down from 46% between the time periods 1990-1992 and 1995-97 (roughly 9% pa), to 10% between the time periods 2000-02 to 2004-6 (roughly 2.5% pa).

- There are mixed successes across the region in responding to the problem. Countries with large undernourished populations are either making good progress (Angola, Mozambique, Zimbabwe) or are making very poor or poor progress (DRC, Tanzania, Madagascar, Zambia).

- Early prognosis?: In the cases of countries with large undernourished populations, the scale of the problem is such that a normal business as usual approach will not eradicate hunger in the forseeable future.

Thursday, October 15, 2009

Comeback of the Commons

The 2009 Nobel Prize in economics went to Elinor Ostrom & Oliver Williamson. They pointed out that internal social control mechanisms regulate the use of the commons and that one does not have to resort to private property rights.

Here the award announcement:

“Rules that are imposed from the outside or unilaterally dictated by powerful insiders have less legitimacy and are more likely to be violated. Likewise, monitoring and enforcement work better when conducted by insiders than by outsiders. These principles are in stark contrast to the common view that monitoring and sanctions are the responsibility of the state and should be conducted by public employees.”

Hunger in sub-Saharan Africa

The 2009 Global Hunger Index reveals the disturbing reality that hunger is on the rise again in the region. Although GHI declined overall in sub Saharan Africa, nearly all the countries in which the GHI rose since 1990 are in the region. Both in the DRC and in Burundi the GHI has reached alarmingly high levels.

The report states as reasons for this growing food insecurity: government ineffectiveness, conflict, political instability and high rates of HIV and AIDS, noting that the financial crises adds to the vulnerability of the hungry. The report further argues that reducing gender inequality is an important part of the solution to global hunger.

Wednesday, October 14, 2009

Rising prices and... rising demand!?


Will electricity demand keep on increasing while prices are rising? (A few days ago I posted on a study done by the University of Pretoria showing a substantial reduction in electricity demanded when prices double)

Eskom seems to think that they can have both raising prices and raising demand as evident from their Proposed Revenue Application. Quoted from the document (p 30, for simplicity I am only showing the low sales scenario here):

The sales forecast for the next 10 years has some downside risk (i.e., lower sales) based on the

depth and length of the economic slowdown especially for the first 2 years.


(GWh) % Growth

2010/11 220,260 1.0%

2011/12 224,737 2.0%

2012/13 232,388 3.4%

2013/14 239,536 3.1%

2014/15 248,621 3.8%

2015/16 258,921 4.1%

2016/17 265,399 2.5%

2017/18 271,946 2.5%

2018/19 279,163 2.7%

2019/20 286,388 2.6%

Economic theory says that as electricity prices rise the quantity of electricity demanded will fall, holding other factors constant. The percentage change in quantity demanded in relation to the the percentage change in price is called the price elasticity of demand.

Electricity demand traditionally was relatively inelastic to price which basically means that the rate at which demand slowed down was much less then the rate at what prices increased. There are many different price elasticities for different regions and sectors, but it seems that most tend to converge around a range of -0.2 to -0.7. That means that a 1% increase in price would lead to between 0.2 to 0.7% reduction in demand. There are also signs, at least in the US economy, that price elasticity of electricity is increasing.

This raises questions on the assumptions used in the utility's modelling as well as more serious implications of this modelling and the practical need to entrench market power from the utility's perspective. Will customers be freely allowed to respond to raising electricity prices even if it reduces the demand and thus the sales of the utility? Looking at Eskom's modelling assumptions I am not convinced.

(But then, we need to be sure that all substitutes for Eskom electricity are factored in (what substitutes?), and that the powering forces of raising incomes in South Africa will dwarf the increases in price (really?)).

See, I am still not convinced.

Tuesday, October 13, 2009

Quote of the day

“I am done with great things and big plans, great institutions, and big success. I am for those tiny, invisible, loving forces that work from individual to individual, creeping through the crannies of the world like so many rootlets, or like the capillary oozing of water, which given time will rend the hardest monuments of pride.”

William James, American philosopher

Types of growth and poverty reduction

Only economic growth in certain sectors reduced poverty (at least in China):

"The Pattern of Growth and Poverty Reduction in China" Free Download

World Bank Policy Research Working Paper No. 5069

JOSE G. MONTALVO, Universitat Pompeu Fabra
MARTIN RAVALLION, World Bank - Development Research Group (DECRG)

China has seen a huge reduction in the incidence of extreme poverty since the economic reforms that started in the late 1970s. Yet, the growth process has been highly uneven across sectors and regions. The paper tests whether the pattern of China´s growth mattered to poverty reduction using a new provincial panel data set constructed for this purpose. The econometric tests support the view that the primary sector (mainly agriculture) has been the main driving force in poverty reduction over the period since 1980. It was the sectoral unevenness in the growth process, rather than its geographic unevenness, that handicapped poverty reduction. Yes, China has had great success in reducing poverty through economic growth, but this happened despite the unevenness in its sectoral pattern of growth. The idea of a trade-off between these sectors in terms of overall progress against poverty in China turns out to be a moot point, given how little evidence there is of any poverty impact of non-primary sector growth, controlling for primary-sector growth. While the non-primary sectors were key drivers of aggregate growth, it was the primary sector that did the heavy lifting against poverty.

Thursday, October 8, 2009

Will rising electricity prices reduce demand?

Analyse both price and quantity effects! Therefore it is quite a relief to see a new research paper attempting to quantify the effects of rising electricity prices on demand.

In the new paper " Aggregate electricity demand in South Africa: Conditional forecasts to 2030", Roula Inglesi at the University of Pretoria argues that electricity demand will drop substantially due to the price policies agreed – until now – by Eskom and the National Energy Regulator South Africa.

This is the full abstract of the paper:

In 2008, South Africa experienced a severe electricity crisis. Domestic and industrial electricity users had to suffer from black outs all over the country. It is argued that partially the reason was the lack of research on energy, locally. However, Eskom argues that the lack of capacity can only be solved by building new power plants.The objective of this study is to specify the variables that explain the electricity demand in South Africa and to forecast electricity demand by creating a model using the Engle–Granger methodology for co-integration and Error Correction models. By producing reliable results, this study will make a significant contribution that will improve the status quo of energy research in South Africa.

The findings indicate that there is a long run relationship between electricity consumption and price as well as economic growth/income. The last few years in South Africa, price elasticity was rarely taken into account because of the low and decreasing prices in the past. The short-run dynamics of the system are affected by population growth, too. After the energy crisis, Eskom, the national electricity supplier, is in search for substantial funding in order to build new power plants that will help with the envisaged lack of capacity that the company experienced. By using two scenarios for the future of growth, this study shows that the electricity demand will drop substantially due to the price policies agreed – until now – by Eskom and the National Energy Regulator South Africa (NERSA) that will affect the demand for some years.

In a summarised discussion in the monthly AfriNem Newsletter the following telling graph on projected electricity demand (assuming a doubling of the price of electricity from 2008-2011) is presented:

Even at relatively high economic growth rates of 4% and 6%, electricity demand is expected to fall around a massive 27% (when 2007 and 2030 values are compared). Good news is that this is expected to reduce CO2 emissions with 24Mt, but at a cost to several economic sectors such as utilities, construction and mining.

If you are relying on income from electricity sales and have not yet taken into account some basic economics yet: take note. There may be less funds than expected.

Monday, October 5, 2009

(partial) Development Indicators

The South African government has released a third edition of the Development Indicators publication. The report does not contain a specific section on the trends in natural and environmental capital, but a few indicators did make it into the report:

- 470 000 'environmental' jobs were created in the expanded public works programme, compared to 980 000 in infrastructure and 200 000 in the social and economic spheres.
- membership of voluntary environmental organisations declined steeply from 7.9% of citizens in 1995 to 3.9% in 2006.
- International tourist arrivals increased sharply from 6.4m in 2002 to 9.6m in 2008.
- Greenhouse gas emissions per GDP is declining from 450MtCO2 eq in 1990 to 400MtCO2eq in 2007.
- Greenhouse gas emissions per capita is increasing from 9.87 tCO2eq per person in 1990 to 10.29 in 2007.

The mainstream economic growth model assumes that natural capital and the environment is in abundant supply, or that a combination of technological developments and the price mechanism will take care of natural resource and environmental shocks on the economy. These are very strong assumptions to make and one that needs to evaluated in much more detail in the further discussion of these recommendations.

Clearly the dominant thinking in economic development is still that natural resources are in abundant supply and scarcity (in quality and/or quantity) will have no discernible feedback effects that may threaten the country's development path.