Water: Tough trade-offs and a call for economic management

The management of water resources is an economic problem. The Water Resources Group 2030, consisting of the International Finance Corportion, McKinsey & Co and an extended business consortium has, in a new report, drawn attention to water scarcity and the need for economic management and further investment in this valuable resource.

A key argument is that current supply will be inadequate, but that meeting increasing demands is possible at a reasonable cost:

After careful quantitative analysis of the problem, this report provides some answers on the

path to water resource security. It first quantifies the situation and shows that in many regions, current supply will be inadequate to meet the water requirements. However, as a central thesis, it also shows that meeting all competing demands for water is in fact possible at reasonable cost. This outcome will not emerge naturally from existing market dynamics, but will require a concerted effort by all stakeholders, the willingness to adopt a total resource view where water is seen as a key, cross-sectoral input for development and growth, a mix of technical approaches, and the courage to undertake and fund water sector reforms.

South Africa was one of the case studies . The report indicates that South Africa will have to resolve tough trade-offs between agriculture, key industrial activities such as mining and power generation, and large and growing urban centers.

A winning conclusion

Partha Dasgupta reviewed the interface between ecological economics and economic development in a new working paper "The Place of Nature in Economic Development". His conclusion wins the Sustainable Options Winning Conclusions Award for this week*:

Development policies that ignore our reliance on ecological capital are seriously harmful - they

don't pass the mildest test for equity among contemporaries, nor among people separated by

time and uncertain contingencies.

* A completely random award to all working on interesting issues spanning from Africa's development challenges to the beauty of sea horses in the Knysna lagoon. In the spirit of the Mo Ibrahim prize it may or may not be awarded.

Southern African Regional Climate Change Programme

Africa is expected to bear the brunt of climatic changes (see earlier blogpost The IPCC on Climate Change in Africa). Now there is a new regional Southern African programme to deal with the effects of climate change on the largely poor and malnourished populations in this often forgotten part of the world. With so much anxiety on the success of the Copenhagen talks, this rings at least as a step in the right direction.

From the RCCP website:

"It is in the interests of both the developed and the developing world—North and South—that the impact of climate change on poverty be contained. The Regional Climate Change Programme (RCCP) has been established to help the whole region adapt to climate change. Extending its reach beyond political borders, the RCCP is furthermore committed to helping level the playing field with regard to equitable access to climate funding.

Future life in Southern Africa will depend on the ability of both the environment and the population to adapt to warmer temperatures and greater unpredictability in weather patterns. This variability is already having a negative impact on progress toward the Millennium Development Goals of water, agriculture, health and energy."

Read full story and much more about the programme here.

Africa's Infrastructure Challenge

The IBRD and World Bank released a report entitled "Africa's Infrastructure: A Time for Transformation", estimating that the cost of addressing Africa's infrastructure challenge is $93bn per year, one third of which is for maintenance alone.

Other main findings are that infrastructure has been responsible for more than half of Africa's recent improved growth performance, that infrastructure networks are lagging behind other developing countries, that infrastructure services in Africa are twice as expensive as elsewhere, and that infrastructure in Africa is mainly financed by central governments.

For more findings and well-researched discussions read the full report here.

H/T: Polity

Image: WikiMedia

On access to electricity and higher education in SA

A beautiful graph from GapMinder showing the relationship between access to electricity and higher education for South African municipalities.

A few observations:

- Access to electricity increases markedly over this time period

- The percentage of with higher education increases up to 2000, and started decreasing since then, but with some notable exceptions

- The curve is pulled back towards the left-hand corner as time progresses; improved access to electricity without corresponding gains in higher education.

- A notable rebound effect from 2001 onwards - access to electricity still improved in most cases, but percentage of population with higher education starts to fall behind

This signals pressure on higher education, especially from 2001 onwards, that is not directly related to the lack of access to electricity. This failure is not uniform throughout the country though.

Increasing income, increasing waste

The generation of waste does not (yet) seem to follow the richer is greener, or Environmental Kuznets Curve theory. Even in the relatively rich EU25, rising incomes still mean rising amounts of municipal waste in landfills, but there is some good news, according to a new paper "Municipal Waste Kuznets Curves: Evidence of Socio-Economic Drivers and Policy Effectiveness from the EU": "elasticity to income drivers appears lower than in the past".

The full abstract:

Abstract Waste generation and waste disposal are becoming increasingly prominent in the environmental arena, from a policy perspective and in the context of delinking analysis. In general, waste generation is still increasing proportionally with income, and economic and environmental costs associated to landfilling are also increasing. This paper provides a comprehensive analysis of waste generation, incineration and landfill dynamics based on panel data for the EU₂₅, to assess the effects of different drivers (economic, structural, policy) and the eventual differences between Western and Eastern EU countries. We show that for waste generation there is still no Waste Kuznets Curve (WKC) trend, although elasticity to income drivers appears lower than in the past. Landfill and other policy effects do not seem to provide backward incentives for waste prevention, and in terms of landfill and incineration, as expected, they are respectively decreasing and increasing, with policy acting as a strong driver. Eastern countries appear to be performing generally quite well, thus benefiting from EU membership and related policies in terms of environmental performance. We can conclude that although absolute delinking is far from being achieved for waste generation, there are some first positive signs of an increasing relative delinking for waste generation and robust landfill diversion, and varying evidence of a significant role of the EU waste policies implemented in the late 1990s and early 2000s. Our evidence suggests that if while landfill diversion is currently associated to a delinking partly explained by EU policies, waste prevention must be the next objective of waste regulation efforts.

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.

H/T: World Future Society

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.

For more read the latest FAO/WFP report on food insecurity in the world.

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.”

H/T: NY Times

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.

Rising prices and... rising demand!?

Again...

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.

Low

(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.

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

H/T: Business Day

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"

World Bank Policy Research Working Paper No. 5069

JOSE G. MONTALVO, Universitat Pompeu Fabra
Email: jose.garcia-montalvo@upf.edu
MARTIN RAVALLION, World Bank - Development Research Group (DECRG)
Email: mravallion@worldbank.org

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.

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.

(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.

From an earlier blogpost:

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.

Flowers...

The Western Cape's flowers is always a stunning display. This year is no exception. See these beautiful galleries of Wild Coast flowers.

Flowers are not the only attraction. Time to join the steady flow of tourists up there...

So long!

Water Shedding?

It was argued in an earlier post that natural resource constraints, which are generally ignored by macroeconomic planners advising South Africa's government, could have a detrimental impact on South Africa's development path. A new paper by South African economists James Blignaut and Jan van Heerden on water limits to economic development takes a stab in this direction. They do point out that increasing the price of water may help avert such a crises, but remain sceptical on the implementation of such measures:

Is Water Shedding Next?

James Blignaut and Jan van Heerden

July 22, 2009

Abstract

South Africa is in the grip of an electricity crisis marked by a euphemism known as ìload

sheddingî. The demand for electricity has grown to the point that the supply reserve margin is

often under threat, necessitating the electricity supplier to cut supply to some areas for various

periods of time, or to shed load. This is a condition previously unknown to South Africa since

the country has enjoyed electricity security from the mid-1950s. Are we, however, heading in

the same direction when considering water? Is water shedding inevitable?

We ask these questions since South Africa is a country classified has having chronic water

shortages, a condition exacerbated by climate change and the rapidly increasing demand for

water. Can we avert a water shedding crisis by being proactive? In this paper we address

this issue by applying a Computable General Equilibrium (CGE) model using an integrated

database comprising South Africaís Social Accounting Matrix (SAM) and sectoral water use

balances. We refer to AsgiSA, the governmentsíAccelerated and Shared Growth Initiative in

South Africa, and conclude that continuing business as usual will indeed lead to a situation

where water shedding will be inevitable.

Unlike electricity, however, water security is much more serious from livelihood, health and

socio-economic development perspectives since there are no substitutes for it, although its influ-

ence is not directly and immediately visible. This delayed effect can create a degree of comfort

and ill-founded complacency leading to non-action, whereas there is an urgent need for proactive measures.

See here for more on water pricing is an important policy instrument to manage water scarcity and risks.

Trade and Development Report on Africa and Environment

The UN Trade and Development Report 2009 was released. A few snippets highlights the worsening state of Africa and possible growth and development opportunities in addressing environmental concerns:

On Africa:

Falling GDP...

In Africa output growth is expected to slow down sharply in 2009, particularly in sub-Saharan Africa, where per capita GDP will actually fall.

Increasing food insecurity...

In 2009, food emergencies persist in 31 countries, and it is estimated that between 109 million and 126 million people, most of them in sub-Saharan Africa and South Asia, may have fallen below the poverty line since 2006 due to higher food prices

On the natural environment:

Climate change and development...

Increased efforts aimed at climate change mitigation can be combined with forward-looking development strategies and rapid growth in developing countries.

Market for ’environmental goods’...

At present, the global market for what is sometimes called “environmental goods” is clearly dominated by developed countries, but several developing economies already account for an increasing share of this market. For some countries, climate change mitigation offers new possibilities to exploit natural comparative advantages, particularly in the production of low-carbon energy, which so far have been of minor economic importance; for others it may offer opportunities to build new dynamic comparative advantages.

A proactive industrial policy with a special focus on using existing comparative advantages and creating new ones in the production of environmental goods is of particular relevance in the context of forward-looking development strategies, because the policy space for support measures in this area is less narrowly circumscribed by multilateral agreements than in other areas.

Adaptation!?

Adapting to the impacts of climate change needs much more attention, especially for a developing continent such as Africa, an idea that was supported in earlier posts on this blog (See: In Africa climate change = adaptation, Africa and Adaptation, Let's not forget adaptation)

This time another article From Project Syndicate:

COPENHAGEN – Striking the right balance between preventing global warming and adapting to its effects is one of the most important – and most vexing – policy questions of our age. It is also often ignored.

According to the conventional wisdom of many environmental campaigners, we should first do everything we can to mitigate global warming, and only then focus on adaptation strategies. This seems wrong – even immoral – if we could do more for people and the planet through adaptation.

Read here for full article.

Read here for the background economic analysis supporting the article.

Fragile Growth

Every now and then we post something on the topic of African growth. This time starting with a a new study published in the Journal of African Economies.

How Fragile Is Africa's Recent Growth?

Jorge Saba Arbache^* and John Page¹

Office of the Chief Economist, Africa Region, The World Bank, The Brookings Institution, Washington, D.C. 20433, USA

^* Corresponding author: Jorge Saba Arbache. E-mail: jarbache@worldbank.org.

Has Africa finally reached the path to sustained growth? We find that much of the improvement in economic performance in Africa after 1995 is attributable to a substantial reduction in the frequency and severity of growth declines in all economies and an increase in growth accelerations in mineral-rich economies. We find, however, that growth accelerations have not been generally accompanied by improvements in variables often correlated withlong run growth, such as investment. We also fail to find evidence that substantial policy and governance improvements were associated with the post-1995 accelerations. We conclude that Africa's growth recovery remains fragile.

In an earlier post it was argued that sub-Saharan growth is largely achieved by a depletion of capital. It does not seem that the badly needed investments to maintain or expand the regions' productive base is realising. It was also pointed out earlier that economic growth does not lead to meaningful gains in social development.

The conclusion becomes stronger that the gains of growth in sub-Saharan Africa is dissipating. One of the reasons could be the high volatility of growth in Africa.

The obvious response is to question growth in itself, but to lift millions of people out of poverty growth is needed. Not less growth, but more (inclusive, transparent and environmentally friendly) growth is what Africa needs.