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BUSINESS & ECONOMY

South Africa can Reduce Emissions and Create Jobs. A Tough Task, but Doable

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By Professor Anthony Black & Professor Harald Winkler

South Africa has the dubious distinction of having one of the highest rates of unemployment and inequality in the world. It is also one of the world’s most emissions-intensive economies, measured in greenhouse gas emissions per unit of economic output. The co-existence of high unemployment and high emissions intensity is not a coincidence. South Africa’s history of segregation and apartheid has had profound implications for its development path. Choices were made that favoured investment in capital rather than labour. Economic growth was based, in part, on cheap (coal-based) energy, overlooking its high emissions.

Coal has been the dominant fuel in South Africa’s energy economy. In addition to coal-fired power, about 30% of liquid fuel supply comes from converting coal to liquid, a technology employed by the energy company Sasol. The political economy of energy supply, then, is dominated by a duopoly – the state power utility Eskom, and Sasol. Significant actors include coal mining firms upstream and electricity-intensive industry downstream.

South Africa’s emission intensity (emissions per unit of output) in 2018 was 2.5 times the global average. That’s about five times higher than in the US. Four-fifths of emissions are attributable to energy supply and use. The large oligopolistic firms engaged in the processing of minerals and basic chemicals production were able to exercise market power and charge import parity prices to downstream producers in South Africa. This limited downstream manufacturing development. In a paper published last year we outlined the key drivers of South Africa’s historical development path. We then considered how South Africa could develop in a way that creates jobs without producing such a high level of emissions. This article focuses on the solutions.

The country’s energy crisis

South Africa has experienced frequent power outages since 2006. Many older coal plants have failing units mainly because of insufficient maintenance. Even the new power stations, Medupi and Kusile, have not operated consistently because of design flaws. This would suggest a compelling case to build generation capacity fast. Wind and solar photovoltaic projects have short lead times.

Yet these proposals have met resistance.

A programme to procure renewable energy from independent power producers is widely considered a success. Renewable energy has grown rapidly but it is still a relatively small share of electricity generated. The country needs a much faster pace of investment to achieve a just energy transition. Due to mismanagement and large-scale corruption, Eskom has drastically underperformed and is severely indebted. The crisis has galvanized action to unbundle the utility. The idea is to divide it into three separate companies – generation, transmission and distribution.

Eskom has a just energy transition plan and has committed in principle to net-zero CO₂ by 2050. There is an opportunity to access international climate finance, which would support the plan, phase coal out and support socio-economic development.

Political support has given momentum to this plan.

Policy options for reduced emissions and job creation

A strategy for employment-intensive and low-emissions development would include:

  • changes to incentives and subsidies provided by the government
  • appropriate regulation.

The proper pricing of energy is a first step. There has been limited public debate on fossil fuel subsidies. Estimates are that these amount to between R6.5 billion and R29 billion per year. They accrue to all consumers of fuel.

Subsidies should be applied, instead to repowering coal-fired power stations, to provide electricity from renewable energy sources. Eskom plans to do this repowering. One feasible option may be to add a levy on power prices to fund localization of renewable energy and provide training for renewable energy and energy service companies.

Renewable energy can create net employment gains, even as jobs decline in coal mining. One study of the employment co-benefits found that 1.2 million job years could be created along the renewable energy value chain. This is more than double the number indicated in the government’s Integrated Resource Plan.

Policy must promote new development in activities and sectors to build on the country’s potential comparative advantage – labour – and prepare for low emissions development. Such policies will have a varied impact depending on employment and emissions intensity of the sector in question. For instance, higher electricity prices or carbon taxes are likely to have the greatest negative impact on high-emissions sectors, many of which are also capital-intensive. Yet South Africa could build comparative advantage in light manufacturing, and create low-emissions employment in agriculture.

Supporting employment and reducing poverty

The incentive structure (accompanied by appropriate regulation) needs to shift in support of greater employment intensity. For example, it is better to subsidise training rather than capital investment. And it’s better to encourage the building of worker housing close to workplaces rather than infrastructure for heavy industry.

More comprehensive wage subsidies could change firm behavior and increase the competitiveness of labor-demanding activities. On the other hand, it makes little sense, in South Africa’s high unemployment environment, to offer incentives for capital investment, as have been applied to sections of heavy industry and other sectors.

Rather, industrial and other policies need to support light manufacturing, both to grow exports and to compete more effectively in the domestic market. Light industries draw on the local, semi-skilled labor force, experience in the region, and established infrastructure. Examples include apparel, metal products, household semi-durables, and electronics assembly. There is also scope to support small and medium energy service companies that provide energy efficiency and small-scale renewable energy services.

Agriculture is a very labor-intensive sector both in terms of employment per unit of output and in terms of its employment multiplier. The destruction of the peasantry through land dispossession has limited the sector’s employment potential but opportunities still exist. With greater and more focused support, the agricultural sector could play an important role in development. Such policies will have a varied impact depending on employment and emissions intensity of the sector in question.

Next steps

South Africa faces huge challenges and pressing socio-economic issues. At the same time, it needs to contribute to climate action. The policy instruments proposed above can be thought of as a policy package – coordinated across industrial, energy, climate and other policy domains.

Historically, the economy has been on a development path that has given rise to the minerals-energy complex. This distorted growth path locked South Africa into low employment and high emissions development, and it has proved difficult to shift direction. The adjustment costs are high and there are also strong political economy interests in support of the current direction.

An integrated employment and mitigation strategy is required to shape (or reshape) the development path of the economy. This means aligning the two objectives, seeking synergies across industrial, energy and climate policy, and managing trade-offs.

Such a strategy is more aligned with South Africa’s real comparative advantage – labor – and will produce more rapid, sustainable and inclusive growth. In the past there was a connection between high emissions and low employment intensity. We argue that employment-intensive growth and a low emissions strategy can complement each other.

Anthony Black and Harald Winkler  are Professors of Climate Change Mitigation and Inequality, at the University of Cape Town

Courtesy: The Conversation


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BUSINESS & ECONOMY

Inquiry on General Babangida’s Involvement in Conventional Banking despite Introduction of Islamic Finance in Nigeria

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Dear Editor,

I hope this letter finds you well. I am writing to express my curiosity and seek clarification on a matter that has caught my attention, specifically pertaining to General Babangida’s involvement in the conventional banking industry despite his role in introducing Islamic finance during the financial reforms of his military government in Nigeria. Vide your special article commemorating his 81st Birthday published in your esteemed news website: https://focus.afrief.org/trending/a-salutary-tribute-to-general-ibrahim-badamasi-babangida-architect-of-islamic-finance-in-nigeria/

It is indeed noteworthy that General Ibrahim Babangida played a pivotal role in shaping the economic landscape of Nigeria by introducing Islamic finance principles. It is fascinating to witness the implementation of Islamic finance in Nigeria, as it promotes principles that align with religious and ethical values. General Babangida’s efforts to introduce this form of finance were undoubtedly commendable, reflecting his commitment to establishing an alternative financial system that adheres to Islamic principles.

However, recent observations suggest his active participation in the conventional banking sector in Nigeria. Certainly, it is intriguing to see General Babangida’s continued involvement in the conventional banking industry, which operates under different principles. While some may argue that his involvement in both sectors is simply a matter of personal choice, it raises questions about the compatibility of his actions with the ideals and principles of Islamic finance. While the former is interest driven, the latter prohibits interest related transactions completely.

I wonder if General Babangida has ever publicly addressed this matter or explained his reasoning behind being active in both sectors. It would be enlightening to hear his perspective on how he reconciles his involvement in conventional banking with his efforts towards promoting Islamic finance. This has raised questions in my mind and perhaps in the minds of others as well.

I am keen to understand the rationale behind General Babangida’s dual engagement in both Islamic finance and conventional banking. Does this reflect a strategic approach to diversify Nigeria’s financial sector, or are there specific reasons behind his involvement in conventional banking despite advocating for Islamic finance principles?

Additionally, it would be interesting to explore the potential impact of his dual involvement on the perception and growth of Islamic finance in Nigeria. Does his presence in the conventional banking industry hinder the progress of Islamic finance, or does it have the potential to bridge the gap between the two sectors?

I believe that delving into these questions could provide valuable insights and generate constructive discussions within the Islamic finance community in Nigeria. By shedding light on General Babangida’s dual involvement and the potential implications, we can further enhance our understanding of the challenges and opportunities faced by the Islamic economy in our country.

Thank you for considering my questions, and I look forward to reading more about this topic in your esteemed Focus on Islamic Economy.

Sincerely,

 

Abba Musa Mamman Lagos

Kaduna


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BUSINESS & ECONOMY

10 Megatrends Shaping the World in 2024

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The report, “Navigating Megatrends Shaping Our Future in 2024”, was launched during the first day of the World Governments Summit (WGS) 2024, being held under the theme “Shaping Future Governments” from 12th-14th February in Dubai. The report examines the indicators that shape these megatrends, supported by evidence from today as well as future expectations. These trends inform decision-makers and foresight experts about various sectors and the potential opportunities in each.

Khalfan Belhoul, CEO of Dubai Future Foundation, said, “This report has been launched in line with DFF’s efforts to identify and communicate those trends with the most potential to shape opportunities and strengthen local and international partnerships to overcome current and future challenges.”

“The challenges that face us on our journey to the future require that we are agile enough to be able to adapt to rapid change. It is vital we pay attention to the signals we detect – only then can we be prepared to overcome challenges and seize opportunities. The World Governments Summit provides a platform for discussing these challenges and exploring the opportunities.”

Materials revolution

New types of materials will create a shift in the industry, with solutions based on artificial intelligence (AI) such as biopolymers, biorefineries, and chemical recycling paving the way. These solutions will facilitate the development of new biological and novel materials that could rival plastics.

Boundless Multidimensional Data

Enabled by developments such as 5G and 6G in addition to advanced connectivity, the availability of raw data will vastly increase. The Internet of Things (IoT) will continue being deployed in healthcare, agriculture, and smart cities, especially in the Middle East.

Technological Vulnerabilities

The cybersecurity sector will boom amid a sharp rise in smart home devices and wearable tech. According to a report by Allianz, the annual cost of ransomware is projected to reach around $265 billion by 2031. Meanwhile, the debate on the future of decentralised finance will continue.

Energy Boundaries

Advances in tech and the growing demand for energy will drive the pursuit of alternative sources of energy. Novel materials and machine intelligence will enhance current sources of energy, including their distribution around the world – and in space.

Saving Ecosystems

Approaches to conservation will be more interdisciplinary and future-focused, taking into account both societal and environmental factors. Driven by resource scarcity, climate change, and shifts in social values, environmental impact management will become increasingly holistic.

Borderless World – Fluid Economies

The world is witnessing a rise in unmediated transactions in finance, health, education, trade, services, and even space, which are blurring boundaries and creating more cross-border communities. Advances in communications, computing, and advanced machine intelligence will accelerate the creation of a borderless world that will change the way we work, live, and connect.

Digital Realities

The spread of 5G and 6G networks will enhance the applications of autonomous technologies and IoT. As quantum technologies become scalable and reliable, immersive experiences will become even more realistic.

Living with Autonomous Robots and Automation

Robotics and automation will increasingly be deployed across industries beyond automotive, manufacturing and supply chain logistics. This will provide opportunities for efficiency and innovation, although there will also be ethical challenges to address.

Future Humanity

New workplace norms will emerge, with people needing to adapt to non-traditional skill sets in areas such as digital literacy, communications, culture and sustainability.

Advanced Health and Nutrition

Accelerated progress in advanced machine intelligence, nano- and biotechnology, additive manufacturing, and IoT will transform health and nutrition, improving health and wellbeing for people of all ages. Technology will reduce, if not eradicate, some communicable and non-communicable diseases and enhance the sustainable use of and access to water and food.


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BUSINESS & ECONOMY

Africa’s New Online Foreign Exchange System will Enable Cross-border Payments in Local Currencies – what you need to know

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The high cost of making cross border payments on the African continent has driven governments on the continent to seek options of settling trade and other transactions in local currencies. This has given birth to the Pan-African Payment and Settlement System which was formally launched in Accra, Ghana, in January 2022.  Development economist Christopher Adam, who has studied the exchange rate policies of African countries, answers some key questions.

Why are African countries exposed in the international currency market?

Three main reasons. First, African economies are small and as such are highly dependent on trade with the rest of the world. Their exports are dominated by primary commodities including oil and gas, minerals and cash crop agriculture. On the import side, they purchase a whole range of goods – from essential commodities not produced at home such as fooddrugs and medicines, to capital goods and energy. A large proportion of these are sourced from China and other major economies of the global north. But because African countries are small relative to their trading partners they rarely have the power to determine the prices of imports and exports. They are “price takers” in world markets. And with world prices being set in the major reserve currencies of the world (the US dollar, euro, yen and renminbi), African countries are exposed to movements in these world prices. Second, “intra-African” trade is still a relatively small proportion of the total trade of African countries.

Finally, since African countries’ currencies mostly can’t be directly exchanged in international transactions, the dollar remains the most widely used currency in trade, even between African countries.

What’s required for the system to get off the ground?

The basic idea of the system is to be able to settle trade between African countries without having to use the US dollar.  There are two major challenges with that. First, intra-African trade accounts for less than 15% of Africa’s exports at present (although supporters of the African Continental Free Trade Area expect this to grow significantly over the coming decades). The African payment system therefore does not eliminate the role of the dollar (or other foreign currencies) in trade settlement entirely.

The second issue is that trade is not balanced between African countries. For example, Kenya exports goods of higher total value to Ethiopia than it imports from Ethiopia. If Ethiopia paid in its own currency, Kenya would end up with Ethiopian currency that it didn’t need. Some form of settlement currency that is acceptable to all is required – most likely the US dollar.

What are the challenges and potential risks?

Since trade rarely occurs instantaneously, some institution in the trade financing chain carries the exchange rate risk. Because of the gap between placing an order for imports and receiving them to sell in the local economy, there is a risk that the value of local currency will change relative to the currency in which the import is denominated.

In the “old” system, this risk is borne by the trader because everything is priced in dollars. The local currency value of the income from exports or the local currency cost of imports will change with movements between the local currency and the dollar, but the banks and those counterparts pricing in the dollar are protected.

Under the new system the same allocation of risk will remain in “external trade”. This currency risk is also present for intra-African trade.

An important question for the new African payment system is: who bears the exchange risk if one African currency depreciates relative to another? Should the importer carry the risk, or the exporter? Can and should the African payment system bear this risk of exchange rate movements itself? Where both currencies are volatile, traders might still prefer the relative stability of settlement through the US dollar.

The success of this system also depends on scale. The more trade settlement is routed through it, the easier it will be to settle in local currencies. Large currency imbalances will be less common. But until the system achieves this scale, the African payment system will need a strong balance sheet so that traders and participants can have confidence that settlement will be swift and risk free. It is unclear at the moment how this is to be achieved.

What is the best case scenario?

If the system can address the trade imbalance problem, provide clarity on risk management and reach scale, it could be very successful. But this is all going to be driven by underlying economic performance. Improved settlement will help but what is really driving this is the structure of trade. The more the economies of Africa can develop intra-African trade and the less dependent they are on extra-African trade, the less will be dollar dependence in trade. This growth in trade depends to some degree on trade settlement and trade financing but much more on production, consumption, trade policy and fiscal policy.

Christopher Adam is a Professor of Development Economics, University of Oxford


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