Presentation to Economic Concepts for Researching Education, Masters, Wits School of Education��Drawing on Chapter from “A Just Transition to a Low Carbon Future in South Africa” published by Mistra (2022)

Shaping a new economic growth model for South Africa via a well-managed energy transition

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Dr Kenneth Creamer

9 May 2024

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Current context

• Although the situation seem to be improving, loadshedding costs the economy billions of Rands per year, as well as indirect costs in the form of investments that are not being made and jobs that are not created
• Loadshedding has been one of the reasons that South Africa has been trapped on a low growth path for the past decade and more.
• Eskom performance is improving during recent months mainly due to impact of government’s Energy Action Plan which has seen large-scale investment in roof top solar and company own-generation, which has given Eskom space to do more maintenance.
• Also, Eskom’s debt relief is helping and mechanisms to ensure that it has funds available to bring in new spare parts, etc. There will still be ups and downs but hopefully we are turning the corner in SA’s electricity crisis.

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An economy-wide perspective

• The programme to restore electricity security in South Africa together with the ongoing energy transition has the potential to stimulate growth and employment over the next 10 to 20 years – or it can lead to economic disaster
• A key objective of the energy transition should be to restore economic growth and employment creation through
• the restoration of reliable and widespread access to competitively priced, low-carbon electricity (SA’s competitiveness)
• taking advantage of all potential backward and forward linkages that such an investment programme will entail (requiring SA’s skills development)
• A failed energy transition will result in ongoing electricity shortages and deepening poverty and inequality as scare electricity is accessible mainly to the well-off and the economy continue to shrink and decay.

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Historical Growth Rates in SA Economy

Apartheid Period

• Apartheid growth model (1950’s and 1960’s)
• SA characterised as Colonialism of a Special Time (CST) settler and colonised living together in one country, period of very unequal growth characterised by super-exploitation, ongoing land dispossession and racial exclusions, as well as inward industrialisation and the Minerals Energy Complex (MEC) (settler colonialism pattern of industrialization is unlike pure extractive colonialism in most parts of Africa and other parts of the colonised world)
• Crisis of apartheid (1970’s and 1980’s)
• Capitalism had benefited from apartheid, then Marxists writers like Wolpe characterised the relations as historically contingent – initially apartheid was functional to capitalism but then it became dysfunctional – not producing the internal market, the skills or the stability needed - “Apartheid Form became a fetter to capitalist development” (as well as the impact of intensified struggle and international isolation)

Post 1994 Period

• Initial Post-apartheid period (Transition to democracy 1994 to 2008)
• Growth dividend of peaceful settlement with some growth and employment creation, increasingly open to trade and part of globalising world economy, as China entered the world economy South Africa benefited from high commodity prices of our exports like iron-ore, coal, gold and platinum, but not enough investment in infrastructure, or fairer access to assets and opportunities for the black majority, to overcome the historical CST structure of race, class and gender inequality
• Recent Post-apartheid period (Persistent low growth 2009 to 2023)
• Hostile global conditions (global financial crisis and mineral prices falling as China adjusted its growth model) combined with and state capture and corruption resulting in low growth and social and economic indicators in wrong direction (See falling GDP per capita since 2015, rising unemployment, falling investment levels, falling electricity production and SA’s rising national debt)
• Current challenge: Need new growth and transformation model – based on industrialisation, infrastructure investment, capable developmental state, racial and social cohesion to move SA beyond CST structure (economic growth based on changing structure of the economy, changing the structures of opportunity in the economy)

Accelerate Employment and Reduce unemployment

Lift Investment Levels

Restore Electricity Production

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How should South Africa reindustrialize?

• The role of the Developmental State
• What could be winning sectors for South Africa?
• The role of supply chain linkages in industrial policy – backward, forward and sideways linkages
• Localisation – the benefits and the costs
• Three questions that must be answered if we are to rebuilding SA industry

The role of the developmental state

• China and other East Asian states led a process of industrial development
• As result these countries grew much more rapidly than countries in Africa, Europe and the Americas for 20 or 30 years
• The lifted billions of people out of poverty
• The focus of these developmental states was to pick winning industries and sell them into the world market – computers, cars, phones, steel, etc.
• Many manufacturing jobs shifted from the US and Europe to East Asia – resulting in political problems like Brexit, MAGA, etc.

Fig 1: China GDP per capita growth rate vs OECD Average (1978-2022)

Source: World Development Indicators

Deng Xiaopeng, 1979

Which could be winning sectors for South Africa?

• Automotive – integrated into global supply chains so Mercedes, BNW, Ford, Toyota all manufacture in South Africa for export and the local market, but there is major challenge ahead as global supply chains change with the advent of electric vehicles
• Mining – South Africa has world class deposits of platinum, iron-ore, manganese, creating many jobs and earning the country foreign revenue, but the electricity shortage has meant that beneficiation (value addition) to minerals has gone into reverse, failure to explore for new minerals has meant that the future of mining in SA is now in question

Which could be winning sectors for South Africa?

• Agriculture food and beverage – South Africa produces more food than we consume, SA one of the world’s largest exporters of citrus goods and other agriculture products, but lack of investment in rural roads, and poor performance of rail and ports have put pressure on exports, also land redistribution and use of communal lands is not supported by access to farming equipment, technologies and markets access
• Energy sector – South Africa is undergoing massive investment in new electricity technologies – solar, wind, batteries and transmission and distribution infrastructure, the potential to produce these new technologies locally, but the stop-start policies on energy investment has meant that local producers of wind towers and solar panels have closed

The role of supply chain linkages in industrial policy

• Backward linkages – if you know you will be investing massively in wind and solar then you can promote investment in the manufacturing of wind and solar panel components (this creates more jobs)
• Forward linkages – if you have a reliable supply of raw materials like grapes then you should in place policies like bottle manufacture, and skills training of wine makers (this creates more jobs)
• Sideways linkages – once you have industrial know how it can be used in different sectors eg SA’s automotive sector had the know how to assist in building ventilators in response to the Covid pandemic

Localisation – the benefits and the costs

• The objective of localization is to try to produce items locally in your own economy rather than importing the goods
• The main instrument of localization is to put taxes (or tariffs) on imports so as to protect locally produced goods
• The benefits of localisation – is increased employment, economic activity, taxes, etc.
• The costs of localisation - if the local industry does not produce high quality products, or if its products are more expensive than imported products, then consumers receive substandard or costly goods
• Generally, trade is good for consumers, and tariff protection of local industry should not be permanent, it should be temporary while a new industry get established (but thereafter it should be globally competitive and seek to export)

Three questions that must be answered if we are to rebuild SA industry

• Are the skills that we are producing appropriate to allowing our young people to participate in the Fourth Industrial Revolution – where many things are being digitized and decarbonized
• Are we choosing the right technologies to be internationally competitive – the Minerals Energy Complex model was based on industrialization through low cost electricity – how doe we restore this?
• Are we producing for export – through trading with the rest of the world and Africa we are able to produce a lot more food, manufactured goods, cars than if we only produced for the local market (this brings economies of scale)

Much of SA’s Just Energy Transition centers around Mpumalanga

• Account must be taken of the fact that Mpumalanga is SA’s most important province for the just energy transition
• Mpumalanga’s main advantage is that is at the heart of SA’s electricity grid - this will make it cheaper to connect new solar and wind electricity generation plants to the national grid
• Eskom already has announced plans to:
• Release land in Mpumalanga for wind and solar plants
• To repurpose old coal power stations to include gas, wind and solar
• To build industrial hubs for the manufacture of smart grids (inside movable containers) for electrification of villages
• The coal mining companies will continue to supply coal to Eskom and for export for decades ahead and are intimately linked into the Mpumalanga economy e.g. supplying water to Emalahleni
• All of this new potential and legacy issues will have to be carefully managed by Mpumalanga – perhaps in a Social Compact for growth, jobs and a just energy transition
• Financing is potentially available for Eskom and Mpumalanga through the various mechanisms including the R131bn offer made to SA for its just energy transition at the COP26 meeting late last year

Does technological change lead to job gain or job losses?

• Theoretically – it can be shown that technological changes can result in more employment and higher wages, just as it can be shown that technological change can result in job losses and lower wages. (Move from A to D)
• In practice - the actual outcome is conditional and depends the policy environment and how the supply-side of the economy actually responds to the technological change.

The outcome is contingent

• It is South Africa’s legal and public policy frameworks and the practices of trade union and employer organisations that will all determine outcomes
• Risks to incumbent workers and affected communities will be reduced:
• if public resources are mobilised to re-skill workers,
• if public utilities are able to repurpose ageing plants and provide new employment opportunities, and
• if policy frameworks operate efficiently and new firms are able to rapidly begin deploying the new technologies.
• If such contingencies do not occur, then there is a real risk that losers will outnumber winners and that the net effect of the technology shift will be negative.  

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Example of skills and community linkages the North West

• The project created more than 800 local jobs, including subcontractor opportunities for small businesses
• There was a ringfenced budget for community initiatives including vegetable gardens, repair of streetlights, and provision of school bags, stationary, sanitary packages and sports equipment.
• The companies also supplied generators for pumps and assisted in distributing water in the community.
• There was training to small and medium-sized enterprises in the community to impart skills on management, marketing, logistics and other technical construction-related courses.
• The training was subsequently extended into a mentorship programme, which now includes on-site work training.

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Skills Programmes linked to Just Energy Transition

Progress requires that we be forward looking, not backward looking

• Many workers and firms in the coal sector will continue to have employment as coal production will continue for decades to come, but over time it will be phasing down and some workers and firms will need find new employment pathways as there will certainly be some closures
• To manage this process will require political leadership and a clear forward-looking vision
• The process which will be made easier if new jobs and new firms are opening-up linked to the energy transition and upstream and downstream of the energy transition

Thank-you