Discussion Document

Limpopo Environmental Outlook Report2016

1st DRAFT

Chapter 8: Economics for the Limpopo Province, South Africa

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This document is an ongoing outcome of a consultative process that underpins the Limpopo Environmental Outlook (LEO) Report 2016. It can be quoted only with the explicit and written permission of LEDET. It has been reviewed by specialists in the field, as well as members of the provincial Steering Committee for the LEO Project. All LEO Reports are distributed as widely as possible, for inputs and comments.

Discussion Document

This document was prepared by EcoAfrica under the aegis of Limpopo Economic Development, Environment and Tourism (LEDET), for stakeholders to engage with the environmental assessment and reporting. Its date of release is the 9th December, 2015.

Table of Contents

Acronyms...............................................................................................................................................3

1. Introduction...................................................................................................................................4

2. Drivers and Pressures....................................................................................................................4

2.1 Structure of the Limpopo Economy.......................................................................................4

2.2 Economic Growth in Limpopo................................................................................................6

2.3 Unemployment......................................................................................................................7

2.4 Poverty and Inequality...........................................................................................................8

3. Impacts and Trends.....................................................................................................................10

4. Global Change Aspects................................................................................................................12

5. Responses....................................................................................................................................13

6. Identifying Scenarios...................................................................................................................14

7. Conclusions and Recommendations............................................................................................15

References...........................................................................................................................................16

List of Figures

Figure 1: Proportionate contributions to Limpopo economy by sector (%)...........................................5Figure 2: Provincial average growth rate in economy from 2002-2012.................................................6Figure 3: Limpopo unemployment trend...............................................................................................7Figure 4: Limpopo GDP-R per Capita (2010 constant prices).................................................................8Figure 5: Gini Co-efficient Trends – Limpopo 1996-2013.......................................................................9Figure 6: International Gini Indices........................................................................................................9Figure 7: Limpopo % of population in poverty.....................................................................................10

List of Tables

Table 1: Limpopo GDP Sector Contribution 2003 to 2012.....................................................................5Table 2: Labour Force Characteristics of Limpopo (‘000 head).............................................................8Table 3: Limpopo Province – Likely Economic Trends.........................................................................11Table 4: Limpopo Province - Summary of indicators considered for state of the economy................11Table 5: Focus Points from the Green Economy Plan..........................................................................13Table 6: Consideration of various response scenarios in Limpopo Province.......................................14

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Acronyms

C Centigrade

EPWP Extended Public Works Programme

GDP Gross Domestic Product

LEO Limpopo Economic Outlook

SA South Africa

SOPA State of the Province Address

Stats SA Statistics South Africa

WEF World Economic Forum

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1. Introduction

Economic growth involves the combination of different factors of production (land, labour, management) with types of capital to produce goods and services. The types of capital that are required include:

• produced capital, such as machinery, buildings and roads;

• human capital, such as skills and knowledge;

• natural capital, for example, raw materials we extract from the earth, carbon sequestration services provided by forests and soils; and

• social capital, including institutions and ties within communities.

Natural capital can be defined as stocks of natural assets which include geology, soil, air, water and all living things. It is from this natural capital that humans derive a wide range of services which make human life possible However, natural capital has critical thresholds beyond which sudden and dramatic changes may occur; some have finite limits; some changes to natural capital are potentially irreversible; and natural capital impacts extend across many generations.

Therefore, while natural capital is important to generate growth, it needs to be used sustainably and efficiently in order to secure growth in the long term future. Historically society and business in particular, have taken these benefits for granted, externalizing them from financial decision making. However, as consumption rises, natural capital declines and so does productivity, and now there is growing international understanding that natural capital comes at a cost and is economically valued.

2. Drivers and Pressures

Population growth, consumption and poverty are often classified internationally as predominant forces that can devour natural capital. In that context it is interesting to note that the main essence of the Limpopo Development Plan is to

reduce poverty, fight unemployment, and reduce unacceptable levels of inequality.

Therefore it is worthwhile to examine these factors which feature strongly in the Limpopo economy and its structural make-up.

2.1 Structure of the Limpopo Economy

Modern economies can be divided into three sectors that reflect the economic development of that society. Generally as economies develop they move from one built on the extraction of raw materials for consumption and sale (the primary sector of the economy) to one that is more

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dependent on revenue from services (the tertiary sector). In between these 2 sectors is the secondary sector which involves the transformation of raw materials into goods and the development in this sector can be attributed to demand for more goods and food, which leads to industrialization.

The primary economic sector of Limpopo’s economy (mainly the important mining industry and agriculture) have always played a key role, tending to increase its share of the economy (in 1996 its share was 17%, but this has now expanded to over 30%).

Figure 1: Proportionate contributions to Limpopo economy by sector (%)

. Source: Statistics SA

The secondary sector (which manufactures finished goods where they are suitable for use by other businesses, for export, or sale to domestic consumers.) has stuttered along at some 7-8% share of the economy each year.

The tertiary sector (the service sector that consists of the "soft" parts of the economy, i.e. activities where people offer their knowledge and time to improve productivity, performance, potential, and sustainability) has consistently contributed over 50% of the economy but has decreased its share in recent years.

Table 1: Limpopo GDP Sector Contribution 2003 to 2012

Source Statistics SA, 2013

Analysis shows that changes in the growth performance of the Limpopo economy correlate closely with the fortunes of the primary industry. Drought conditions obviously have a serious effect on the

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agricultural component of the primary sector, but also have a knock-on effect to the secondary sector. Volatile performances in this sector also stem from external causes such as economic crises and major oil price changes. For example, the Asian economic crisis of the late 90’s led to a 28% depreciation of the Rand which made exports of primary goods more attractive to importers. Thus the Limpopo economic growth pattern tends to be equally volatile.

Within the secondary sector, manufacturing in Limpopo contributed 4.8% to the provincial economy in 1996, but this fell to 2.1% in 2012. Nationally, this sector is seen as an important contributor to future job creation - the SA New Growth Path (2011) sets down an aim to create 350 000 jobs labour intensive manufacturing activities in South Africa. By 2013, this sector employed 1147000 people nationally, but only 79 000 or 6,8% of the national manufacturing jobs were found in Limpopo.

The tertiary sector contributed 50.6% to Provincial GDP in 2012. Government itself falls within this sector, contributing 16.5% in 2012 to the Limpopo economy.

2.2 Economic Growth in Limpopo

Figure 2: Provincial average growth rate in economy from 2002-2012

Source Statistics SA

The growth rate target set in the National Development Plan was a rate of 5.6% while the target for Limpopo growth (SOPA, 2014) is to be 5% per annum by 2019. Table 2 shows that the average Limpopo growth rate between 2002 and 2012 was 2.9% (compared to a national 3.9%). A high growth scenario of reaching 5% economic growth is possible with improved efficiency of capital and labour, far more foreign investment is attracted, and an advantageous environment is created for the private sector.

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2.3 UnemploymentFigure 3: Limpopo unemployment trend

Source: IHS Global Insight Regional eXplorer version

Official unemployment statistics show an improvement in the Provincial situation since 2008. However this hides other aspects of unemployment that affects and impacts Limpopo, and despite this improvement in the unemployment rate there are still employment issues to be addressed.

The first issue is to increase the labour force participation rates in the Limpopo economy. In March 2014 the labour force participation rate was 40% (Statistics SA, 2014) with more than 2m. people deemed not to be economically active. 377 000 job seekers were classified as being discouraged and not actively looking for work.

Secondly, the labour force absorption rate must be increased (currently 30% in Limpopo) and here the problem is worsened by a bulging youth population who will be entering the labour market in a few years’ time. Currently there is a net annual increase to population of working age of some 45000 people (equivalent to 1.3% of current working age population), and the Province already holds the position of having the highest provincial proportion of youth in its working age population (Stats SA) and against a background of South Africa having the third highest unemployment rate in the world for people between the ages of 15 to 24 (World Economic Forum, Global Risk 2014 report).

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Table 2: Labour Force Characteristics of Limpopo (‘000 head)

YearIndicator 2008 2009 2010 2011 2012 2013

Population of Working Age (15-64 years)

3 082 3 140 3 313 3 378 3 442 3 466

Employed Persons 870 910 962 985 1 092 1 168Unemployed persons 353 335 196 249 266 238

Not Economically Active 1 859 1 895 2 155 2 144 2 084 2 060

Discouraged Work Seekers 192 219 393 441 330 324Unemployment Rate (%) 28,9 26,9 16,9 20,2 19,6 16.9

Labour Force Participation Rate (%) 39,7 39,6 35,0 36,5 39,5 40.6

Source: Statistics South Africa; Quarterly Labour Force Surveys

2.4 Poverty and Inequality

Although Provincial population has increased by 12.9% since 1996, Limpopo GDP output (at constant prices) has increased at a faster rate, and theoretically therefore, individuals are better off. This is shown in Table 5 that depicts GDP per capita at 2010 prices.

Figure 4: Limpopo GDP-R per Capita (2010 constant prices)

Source: IHS Global Insight Regional eXplorer version

Poverty and inequality within the population however remain key challenges within the local economy. To indicate this, inequality in income distribution is measured by the Gini coefficient

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method (if the coefficient is 0 the income distribution is perfect, and if the value is equal to 1, then one person would theoretically receive all income).

Figure 5: Gini Co-efficient Trends – Limpopo 1996-2013

Although the downward trend since 2003 is encouraging, the index shows that that there is still skewed distribution of income in the Province.

By comparison, South Africa as a whole has the international reputation of having the highest Gini co-efficient in the world (0.63) while the Ukraine the lowest at 0.25.

Figure 6: International Gini Indices

Source: World Bank

The Province still has high levels of poverty, despite improvements since 1996 (since when access to basic services has also improved).

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Figure 7: Limpopo % of population in poverty

Source: IHS Global Insight Regional eXplorer version

3. Impacts and Trends

All governments face the challenge of simultaneously meeting two imperatives:

developing their economies to meet the needs of their people

and ensuring that the productivity and viability of the underlying ecosystems and ecosystem services are maintained at healthy levels over time.

From an economics theme perspective, sustainable development requires that social welfare (well-being) is at least maintained over time. One way of interpreting this would be in terms of maintaining the stock of productive capital upon which social welfare depends. That would include human capital (intangible skills and knowledge), natural capital (ecological systems and natural resource deposits), as well as manufactured capital (tangibly produced assets).

The Limpopo Province is under some pressure to be able to protect its natural capital, because due to its economic structure (a strong primary economic sector and an obligation to reduce poverty, unemployment reduce economic inequality) there will be a temptation, if not a need, to rely on all forms of capital to meet its growth objectives. Indeed, in the short to medium term, a number of economic challenges (drought effect, climate change, downturn in world trade of mineral commodities, local real unemployment, reduction in grazing capacity, etc.) could lead to trends as summarised in Table 3 below:

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Table 3: Limpopo Province – Likely Economic Trends

Economics aspect Trends Discussion

Economics growth rate Short term Medium turn

Drought; Mineral Commodity outlook.Hard pressed to achieve the SOPA 5% by 2019?

Primary economic sector contribution to GDP

Mainly due to mining.There will be pressure on the agricultural sector and its environmental resources.

Labour force Net increase of at least 45000 per year. - shaped age profile of population

EmploymentUnlikely to grow substantially (mining is capital rather than labour intensive).Could result in heavy pressure on the subsistence sector (food security) and its resources.

Wealth disparity (Gini coefficient)

(negative) Poverty increase

The socio-economic imperatives (although they have improved) are still such that a compromise may be to allow some substitution between different forms of capital, so long as some minimum, core stock of critical natural capital is maintained.

The review of state of the economy and associated socio-economic factors in the Province would include the following indicators (as agreed by the LEO Steering Committee) described in Table 4 below. These indicators have been reviewed and prioritised as shown.

Table 4: Limpopo Province - Summary of indicators considered for state of the economy No. Indicator Recommended

priorityDiscussion

1 Economic growth – GDP and GGP (Total & by sector)

High To measure economic growth and composition of the economy

2 Employment per sector

High Important to track employment

3 Contribution to economy from “working for/on” initiatives

High The EPWP ends in 2019, therefore effectiveness of the programme should be checked

4 Periodic calculation of economic value of local subsistence economies

High Could be increasingly important due to current economic outlook & food security

5 Contribution of natural resources (renewable and non-renewable) to the provincial economy

High Estimation of use values (direct, indirect and option values) + estimation of non-use values. This would be useful to prioritise programmes and increase awareness of the value of natural capital.

6 Food production index

High Contributes to food security monitoring (important). Should include subsistence sector.

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7 Food price index Medium Contributes to food security monitoring

8 Agricultural production index

Low The performance of the sector has a large knock-on effect to the economy as a whole)

9 Mainstreaming of the Green Economy in provincial plans and processes

High To monitor the degree and prominence of “Greening the Economy” consideration in planning processes

4. Global Change Aspects

As an environmental and economics menace, climate change would have by far the biggest global change threat to the Province. While all industries in the various primary, secondary and tertiary sectors of the economy occupy land space, utilise energy and other resources, generate waste and impact generally on the environment, by definition the primary sector will be worst affected by such change. Undoubtedly, within that sector, agriculture’s use of natural capital will particularly come under increased stress.

RSA climate change science indicates that Limpopo stands to possibly face temperature changes by up to 2°C by 2035. At the same time, there is less certainty over rainfall as some models predict increases but others decreases (whatever happens to rainfall, effective rainfall will be reduced due to higher evaporation rates). One can therefore expect the patterns of land use in the Limpopo Province to be affected and alter accordingly over time. The high proportion and economic importance of the Province’s 300000-strong smallholder farmer sector would be at particular risk, and therefore is deserving of greater and more effective support (including access to more productive land). Indeed, 89% of the population of Limpopo Province is classified as rural, and the rural population would have to bear the brunt of climate change effect. Moreover, this rural household base supplies commercial agriculture with its labour requirements (17% of Limpopo formal sector employment). Therefore if commercial agriculture is also affected (particularly the labour-intensive horticultural sector) the structure of the Limpopo economy could be seriously affected and employment opportunities would have to be generated in other sectors to meet the challenges and compensate for change.

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5. Responses

With South Africa beginning to experience the impacts of climate change, increasing awareness of its future likely impacts has led to individual provincial response. And here the Limpopo Province has been no exception.

An important first step was the 2013 preparation of the Limpopo Green Economy Plan.

Table 5: Focus Points from the Green Economy Plan

Short Term Medium Term Long-Term*Generate Jobs

*Improve Environmental Quality

*Create Enabling Conditions for Green Growth

*Change Behavioural and Production Patterns

*Build a New Economic/Environmental

Paradigm for Limpopo

The above would be implemented through specified initiatives and interventions in key focus areas

Thereafter major sectors and their comparative vulnerability were identified in the Province, which led to general planning of strategies as a coping mechanism. Such a project approach has been validated by relevant stakeholders this year.

Five major sectors were established as being particularly prone to climate change effect, and sector strategies were developed for each of them. The sectors are:

Agriculture

Livelihoods and Settlements – Rural and Urban

Ecosystems – Terrestrial and Aquatic

Water Supply

Human Health

The responses for implementation plans now lie within each sector involved, and with both Provincial and National Government to strengthen mechanisms to make Limpopo more climate-resilient.

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6. Identifying Scenarios

Table 6: Consideration of various response scenarios in Limpopo Province

Scenario Description Actions requiredRelevant

implementer

1 No Government support(no budget change)

“Business as usual”(no climate change intervention)Increased reliance on (diminishing) Primary Sector.Unemployment climbs.Insufficient water resources.Inadequate decision-making tools.Environmental degradation (e.g. grazing capacity).Food security is compromised.Little monitoring/planning.No legislation change.No rehabilitation. Environmental degradation and reducing grazing landFood security is compromised.

No specific actions taken

2 Partial Government Support (partial budget change)

Intervention on a ‘when needed’ and ad hoc basis

Changes depending on when and where necessary

for relief or supply

Provincial (with National support)

3 Strong & effective governance support

(full budget change)

Fully integrated climate change planning and effective

implementation through implemented strategy and

legislation

Definitive Provincial plan and implementation.

Conclusive and authoritative Climate

Change Policy, Strategy & Legislation in operation

within 2 years?

Provincial Govt. to take the lead.

Clear roles & responsibilities

for Govt. at Prov. & Local

level.

Private sector.

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7. Conclusions and Recommendations

A transition to a green economy is increasingly receiving support as a means to drive and implement economic and social sustainability, nevertheless the concept is still relatively new and there are probably some significant capacity and knowledge gaps within the country if not the Province.

Limpopo and its economic structure are heavily dependent on natural resources for economic development. And historically this has worked to allow for some progress with the Province’s social and economic priorities. However, faced now with a change to the natural environment, many aspects of the Province will come under strain as its ‘natural capital’ dwindles further. Therefore a bold new direction is required – one of developing a number of explicit and aligned green economic strategies, policies, and programmes. Such will be more than providing a fresh canvas for a new picture of the Province, for it requires a new economic orientation altogether. One that recognises the imperatives of developing the economy to improve the needs of Limpopo’s people, and ensuring that the productivity and viability of the underlying ecosystem and ecosystem services are maintained at healthy levels over time.

Such a goal calls for a complex task to be performed. One that would have to include:

A system of awareness creation at all levels;

A definitive and authoritative re-planning process;

Emergence of an operating suite of new policies, strategies, legislation and budgets to fund new functional direction and fiscal incentives;

Development of new indicators for monitoring and reporting; and

Accompanied by a whole government, multi-sectoral and integrated commitment and imperative.

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References

Africon & Environomics Joint Venture. 2004. Report for Limpopo Department of Finance and Economic Development. Limpopo State of the Environment.

Dept. Economic Development, Environment and Tourism. 2013. Limpopo Conservation Plan v2.

Everett, T. et al. 2010. Economic Growth and the Environment. Paper 2, DEFRA Series.

IHS Global Insight Regional eXplorer. Various statistics.

Johannson, T.O.2001. The interactions between Economic Growth and Environmental Quality. Paper 2, TVA Rural Studies.

Limpopo Economic Development Agency. 2015. Annual Performance Plan 2015-2016.

Limpopo Provincial Treasury. Socio-economic Review 2012.

Statistics SA. 2014. National and provincial labour market.

Statistics SA. Various press releases and surveys.

Statistics South Africa. Quarterly Labour Force Surveys.

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