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An analysis of the strategic role of water in South Africa’s economy: Towards water for economic growth and development Gift Manase a* Silas Mbedzib Ester Ngorimaa and Zamaswazi Nkunaa a* Council for Industrial and Scientific Research (CSIR), No B219- Bld 2, P.O. Box 395, Pretoria 0001, Meiring Naude Road, Brummeria * [email protected], [email protected], [email protected] b Department of Water Affairs and Forestry, Private Bag X313, Pretoria, 0001 [email protected] Abstract South Africa is by far the largest economy in the Southern African Development Community (SADC) and is also the biggest water user. As the country work towards the targeted 6% economic growth rate and poverty alleviation among the very poor sections of society, demand for water is anticipated to increase. This paper analyses the strategic role of water in South Africa’s economy at the macro and sectoral levels. At the macro-economic level, an analysis of the corelation between precipitation and economic growth shows that although the country is relatively water scarce investment in water infrastructure and diversification has played an important role in building the economy and reducing vulnerability. However, the country’s current per capita water storage of 700m3 is very low compared to other middle income countries and may compromise attainment and sustenance of the targeted 6% economic growth rate. At the sectoral level, the paper highlights efficiency and water productivity issues that require urgent attention especially in agriculture. Agriculture uses 67% of the country’s water yet it contributes 8.5% towards employment and a mere 3% towards GDP. On the other hand, industry uses 20% of water and contributes 25% towards employment and constitutes 32% of GDP. The paper concludes that there is a strong correlation between water and the economy highlighting the impact of floods and droughts in other SADC countries and makes the case that investing in water infrastructure, management and services is absolutely essential and a necessary prerequisite for sustainable economic growth, poverty alleviation and social development. Key Words: Economic growth; Human development; Investment; Water economics. 1. Introduction At the 4th World Water Forum, held in Mexico in 2006, the global community emphasised the need to manage and develop water resources in such a way that promote growth and alleviate poverty in a responsible and equitable manner. In April 2007, South Africa launched the theme of Water for Growth and Development as a driving paradigm for the water sector (DWAF, 2008). This, together with the launch of 1 the Accelerated and Shared Growth Initiative of South Africa (ASGISA), shifted focus of the water sector beyond the provision of basic water and sanitation services, and called for a comprehensive national plan that addresses the dynamics of water, growth, poverty, and development This paper is developed as a technical background paper to South Africa’s National Strategy on Water for Sustainable Growth and Development (WFSGD). The objective of this paper is to highlight and strengthen the understanding of the importance of water institutions and investments in enabling and sustaining economic growth, specifically targeting officials in the Ministry of Finance; economic planners; Municipalities; and economic sectors particularly agriculture, industry, energy and tourism. The focus is on the economic role of water and the dynamics of water, growth and poverty alleviation. However, this does not in any way diminish the significance of water in social development and the environment. In terms of scope, the paper looks at water resources as well as water services and their relationship with the economy at the macro, sectoral as well as micro levels. 1.1 What is water for sustainable growth and development? In this paper Water for Sustainable Growth and Development (WFSGD) means ensuring “water security” in order to spur and sustain economic growth and social development without compromising environmental integrity. Water security is defined as “reliable availability of an acceptable quantity and quality of water for production, livelihoods and health, coupled with an acceptable level of risk of high social and economic impacts of unpredictable water events” (Grey and Sadoff, 2005). Water security is achieved when water underpins rather than undermining economic growth. 2 1.2 Why Water for Growth and Development? Water plays a central role in economic growth and social development. Whilst water resources development is not in itself a driver of economic growth and development, it is a necessary and constraining prerequisite. The former Finance Minister in India summarised the correlation been water and the economy by saying “Every one of my budgets was largely a gamble on rain” (Grey and Sadoff, 2005). All industrialised countries invested early and heavily in both water infrastructure and institutions thus reducing the risk of water-related shocks and damage and increasing the reliability of water for productive purposes. These investments were a pre-condition for sustainable and broad-based economic growth and development (ibid.). Therefore, water resources development (WRD) and services should be seen not as an end in itself but rather as a means to catalyse and support economic growth and development. Over the past several years the concept of Integrated Water Resources Management (IWRM) has been developed within the water sector but has primarily focused on integrating all the various aspects of water resources management rather than integrating water issues into national and regional growth and poverty reduction planning and implementation (WB, 2005). 2 2.1 South Africa’s Macro-economic overview and outlook Macro-economic Overview South Africa is a relatively huge economy worth an estimated R1,2351 billion and has made significant economic progress in the past decade. After a sluggish growth in the early years of the political transformation, the country has started to reap the 1 US$1= R7.20 on 1st of August 2008. 3 benefits of sustained sound national strategies such as Accelerated Shared Growth Initiative for South Africa (ASGISA) and prudent fiscal and monetary policies. The economy is undergoing its longest expansion on record. Annual real gross Domestic product (GDP) growth rate increased from 3.2% in 1994 to a peak of 5% in 2006 before declining marginally to 4.7% in 2007. The whole of Africa has benefited greatly from the buoyant economic growth in South Africa. An additional percentage point increase in South Africa’s economic growth leads to 0.5% to 0.75% GDP growth in the rest of Africa (WB, 2007). The strong economic performance has led to higher employment which grew by 4% between 2003 and 2007 -creating 1.3 million jobs during this period. The proportion of people living below the poverty line also fell by 8% between 1999 and 2006. However, unemployment and poverty levels remain unacceptably high at 24% and 43% respectively. Figure 1 presents economic trends between 2003 and 2007. 2.2 Macro-Economic Outlook The economic outlook for South Africa remains broadly positive with a range of indicators pointing to robust growth. The National Treasury (2007) and the International Monetary Fund (2007) project economic growth to moderate in 2008 but gradually increase to about 5% between 2009-2013 based on optimistic projected increases in fixed capital formation and employment, as well as the continuation of the very strong total factor productivity (TFP) growth experienced in recent years. Figure 2 presents the economic outlook for South Africa. 4 However, it is important to note that this positive projection is based on the assumption that investments will grow rapidly to relieve the current pressing capacity constraints especially in energy and transport networks thereby creating condition for faster sustainable growth. Long term growth trends show a shift in the structure of the economy away from traditional sectors; mining and agriculture towards services as indicated in Figure 3. Expansion in construction, finance services, transportation and communications, and wholesale continued in 2007 and is expected to continue in the next 3years. It is critical for the water sector to understand these shifts in the structure of the economy and plan accordingly. 2.3 Macro-Economic Risks Although South Africa’s economic outlook is generally positive, two main risks coming from the global environment and the strong pace of domestic demand have been identified (IMF, 2007). On the external front the economy is already affected by a global slowdown, rising oil and food prices and the volatile Rand which has fluctuated without a defined trend. An assessment of South Africa’s international competitiveness paints a mixed picture with the country ranking well on business efficiency followed by government efficiency but ranking poorly on infrastructure broadly defined to include physical infrastructure (water facilities, transport networks) and human capital. In 2008, South Africa ranked poorly on the international competitiveness index; 53 out of 55 countries (WCC, 2008). The budget speech (2007) and the Medium Term Budget Policy statement (MTBPS, 2007) recognise the importance of infrastructure in achieving and sustaining the 5 targeted 6% economic growth rate and identify “enhancing infrastructure capacity, especially in relation to telecommunications, rail, roads, ports, electricity and water” as a prerequisite. Whereas South Africa’s macro-economic outlook (2008-2013) is generally positive several reports have identified weak infrastructure, including that for water supply as one of the potential risks that could constrain economic growth (ASGISA, 2006; IMF, 2007; The National Treasury, 2007; WB, 2007) 3 3.1 The role of water in South Africa’s economy At the macro-economic level Water has always played, and continues to play a critical role in sustainable economic growth and development. Most of the earliest civilisations succeeded by harnessing and managing water resources to support economic activities (Grey and Sadoff, 2005). As then so today, water resources development and management remain a crucial part of economic growth, development and poverty alleviation. Globally, countries that have cushioned their economies from weather shocks (droughts and floods) by investing in hydrological infrastructure and in human capacity to manage these investments have more stable economies (ibdi.). The role of agriculture in a country’s economy and the related effects of whether shocks (droughts and floods) depends on the complexity of the economy. Benson and Clay (2001) proposed an “inverted U” shape to characterize the correlation between changing vulnerability to weather shocks and economic development. They argue that “the impact of a drought or flood increases during the early stages of development, due to linkages with the secondary economy, which will experience a 6 lagged effect of reduced agricultural production, and may take longer to recover”. Ultimately, vulnerability to weather shocks will decline as the economy moves away from reliance on agro-industries, becoming more diversified. This is depicted in Figure 4. South Africa has a fairly complex economy with well developed inter- and intrasectoral linkages as well as international linkages through trade. In addition, the economy is also broad-based and well diversified. These factors together with well developed irrigation infrastructure have cushioned South Africa from weather shocks such as droughts of 1982, 1992, 2003 and 2005 (See Figure 5). Less than 7% of variation in GDP is explained by variability in rainfall showing that the country is ripping the benefits of early investment in water infrastructure. The Vaal River System for example is situated in a semi-arid region with highly variable rainfall but investment in inter-basin transfers with seven other river systems and 16 major dams has ensured economic resilience. Elsewhere droughts and floods have had devastating effects on economies of countries with weak water infrastructure as clearly demonstrated by the cases of Ethiopia, Mozambique and Kenya. Figure 6 shows the striking and shocking correlation between rainfall and GDP in Ethiopia-a typical example of an economy held hostage to hygrology. Figures in Table 2 show that in Kenya, floods and droughts cost the country a stark US$4.8 billion between 1997 and 2000. The sectors worst affected were agriculture, transport, energy and industry. In Mozambique, floods in 2000 cost the economy US$550 million or 12% of GDP (Grey and Sadoff, 2007). 7 However, South Africa should not be complacent. Although the country is successfully addressing catastrophic water risks, it has not yet achieved the infrastructure and institutional capacity to manage its water resources in a manner that optimises economic benefits. For example, growth in the agricultural sector is still hampered by rainfall variability and human capacity is inadequate to manage water resources and infrastructure, emphasizing the imperative of investing in water institutions. The country’s current per capita water storage of 746m3 is very low compared to other middle income countries. Brazil for example, has a per capita water storage capacity of 3,225m3 almost 5 times that of South Africa while Zimbabwe, a low income country, has a per capita storage capacity 10 times that of South Africa (7,500m3 with Kariba dam)(WRI, 2008). Figure 7 presents per capita water storage for South Africa and other middle income countries. Therefore, although an analysis of the correlation between rainfall and South Africa’s economy depicted in Figure 5 suggests that the country may have established the minimum platform of water infrastructure2, meeting increasing water demand associated with high economic growth will require the country to increase its storage capacity through construction of new facilities as well as practicing effective water demand management. Furthermore, South Africa is projected to experience “water scarcity” by 2025 assuming current consumption patterns continue. Water scarcity is a more severe situation that can hamper food production, economic growth and development unless the country develops and apply new technologies for water use, conservation, or reuse (WRI, 2008). Grey et al (2005) postulates that there is a basic level of “water security”- which incorporates the idea of a “minimum platform of water infrastructure”. Below this minimum platform the economy is vulnerable to water shocks. 2 8 3.2 At the sectoral level At the sectoral level, water is an important input in almost all production process particularly in the main water-using sectors such as agriculture, manufacturing, and mining. The Agriculture and Forestry sector in South Africa is by far the largest water user accounting for 67% (8.7 billion cubic meters) of total water withdrawals. Of this, 93% goes to irrigation with the remainder shared between forestry (4%) and livestock and game (3%). Domestic use is the second largest user accounting for 16% of all water withdrawals. Water use by sector is presented in Figure 8. Combined together irrigation and domestic use account for almost 4/5th (9.9 billion cubic meters) of total water supply yet 12% of this is lost during distribution (STATSSA, 2006). Issues of water productivity and efficiency therefore require urgent attention in these two sectors. Long term trends show a gradual shift in water use away from agriculture and towards domestic use. Compared to 1990, water use in agriculture and industry fell by 10 and 6 percentage points respectively while domestic use increased by 15 points. This trend warrants detailed analysis and the results used to inform long-term planning in the Department of Water Affairs and Forestry (DWAF). In terms of economic contribution, the three main water-using economic sectors (agriculture, mining and manufacturing) combined, generated R287 billion and used an estimated 10billion cubic meters of water in 2006. Although water is far from being the only driver of economic growth, it is crucial to understand the link between water use and economic growth measured, in this case, by value added and employment. 9 It is important at this point to indicate that the analysis in this section is based on 2006 figures and the scope is limited to water use and direct economic contribution of each sector with the aim of informing water pricing and allocation policies. The multiplier or spill-over effects are not discussed mainly because of a dearth of information on this topic. The agriculture and forestry sector which uses 67% of total water withdrawals, accounts for 8.5% of total employment and contributes less than 3% towards GDP. On the other hand manufacturing which uses 5% of total water withdrawals employ about 14% of the workforce and contribute 18.4% to GDP. The same figures for mining are 3%, 3.1% and 6.6% (see Figure 9). A simple back-of-the-envelope calculation shows that agriculture generates about R3 million per M3 of water compared with R188 million in mining, R262 million in manufacturing and a whooping R10 billion in Trade and Services. This is consistent with findings of a more rigorous economic model run by the WB (2005) which show that: Industry generates about 100 times the value added per unit of water used when compared to irrigated agriculture. Industry generates about 10 times the employment per unit of water used in relation to irrigated agriculture. This implies that industries will almost always be able to afford water, even if costs are relatively high. Further the economic benefits are so great that it is almost always worthwhile developing the water resources to secure the supply for industries. Low value added per drop in agriculture is in part due to inefficiencies in irrigation as well as the nature of the outputs of this industry. As alluded to earlier, 10% of water 10 allocated to irrigation is lost during distribution. Agricultural products by nature require more water to produce compared to industrial products. For example, it is estimated that 120litres are required to produce a glass of wine and it takes 2 000l to 16 000l to “grow” a kilogram of beef (FAO, 2008). Having said this, it is important to emphasise that more can be done in this sector in terms of improving efficiency and job creation. Water productivity gains in agriculture are critical if other growing demands for water are also to be met. 3.3 At the micro-economic level Close to 6 million South Africans do not have access to a reliable source of safe drinking water while 13 million do not have access to adequate sanitation which is seen more as a result, rather than a cause, for economic growth (DWAF, 2008). Figure 10 shows water and sanitation coverage in South Africa. Consequently, water and sanitation related diseases still have a considerable public health significance in the country. For example, diarrhoea is among the top ten causes of death in South Africa claiming 13 600 lives annually (or 2% of all deaths). That is 2 lives every hour! In addition 479 000 Disability Adjusted Life Years or DALYs3 are lost annually due to diarrhoea (WHO, 2002). Time losses due to inconvenient water supply and sanitation are also substantial. Studies estimate that rural women in South Africa may spend over four hours a day gathering fuel and water (Morna, 2000). 3 The Disability Adjusted Life Year or DALY is a health gap measure that extends the concept of potential years of life lost due to premature death (PYLL) to include equivalent years of ‘healthy’ life lost by virtue of being in states of poor health or disability (1). The DALY combines in one measure the time lived with disability and the time lost due to premature mortality. One DALY can be thought of as one lost year of ‘healthy’ life and the burden of disease as a measurement of the gap between current health status and an ideal situation where everyone lives into old age free of disease and disability. 11 Therefore, the explicit and implicit costs of poor water supply and particularly poor sanitation to society in terms of medical costs, low productivity due to ill health, cholera outbreaks, are substantial. In the current environment where a number of priorities dominate the national development agenda, there is need to quantify the economic benefits of improved water supply and sanitation. Based on studies conducted by the Hutton and Haller (2004), SIWI (2007), WSP (2007), this section quantifies the benefits of improved water and sanitation and puts a case for investment in water and sanitation as one of the most effective and sustainable ways of promoting equitable economic growth and social development. A rigorous cost-benefit analysis conducted by the Hutton and Haller (2004) for the WHO quantified the benefits of improved water supply and sanitation in terms of hospital costs saved; productivity and school days gained due to less diarrhoeal illness; convenience time savings; and avoided deaths. The direct and indirect benefits of improved water supply and sanitation are presented in Table 2. The links between investment in water and sanitation and economic growth are presented in Graphic 1. Results of the WHO analysis show benefits for South Africa that range from R200 per person per year for access to simple improved water and sanitation facilities to R900 for access to regular piped water supply and household sewage connection. Total convenience time saving due to improved water supply and sanitation constitute the largest share of total benefits. Given that 6 million South Africans do not have access to safe drinking water while 13 million do not have access to adequate sanitation, then the economic benefits of meeting water and sanitation backlog are at least R1.2 and 12 billion per annum, respectively. 12 At the global level the costs of inadequate water supply and sanitation (WSS) are high: 1.6 million children die every year from diarrhoea, mainly as a result of inadequate sanitation, water supply, and hygiene. And the economic costs of lost time in fetching water and environmental degradation from wastewater pollution are high. Sanitation alone is responsible for at least $9 billion in economic losses per year in Cambodia, Indonesia, the Philippines and Vietnam combined. Economic losses linked to poor water and sanitation amount to 1.4 percent of GDP in Bangladesh, 1 percent in Colombia, and 0.6 percent in Tunisia (WSP, 2007). 4 Conclusions and recommendations South Africa is undergoing its longest economic expansion on record. Water plays a critical role in the country’s economy and has the potential to stall economic growth unless investment in water resources development and institutions increased and at the same time efforts to conserve water are intensified. The economic benefits of meeting the water and sanitation backlog in South Africa are at least R1.2 and 12 billion per annum, respectively. Globally, a number of cost benefits analyses (Hutton and Haller, 2004; SIWI, 2005; and WB, 2007) have shown that investing in water and sanitation makes good business sense; return on a R1 investment is in the range of R11 to R15. However, current water allocation mechanisms in South Africa do not take into consideration the opportunity costs of and rate of return on investment in water. There is a need therefore to allocate water among sectors in such a way that optimizes economic growth and to enhance the integration of water into long-term economic sector plans as well as into the broad economic growth and poverty reduction strategy development process. It is critical that the economic benefits of 13 investment in water infrastructure and institutions are understood, clearly articulated and included in macro-economic, sectoral and local decision making. It is recommended that: Investment in water should increase from the current annual level of 1.2% of national budget to 3% in line with other middle income countries DWAF should identify key “entry points” in development processes and use these to ensure that water is addressed explicitly in all development plans at national, sectoral, provincial and district levels. Issues of water productivity and efficiency in agriculture and domestic water supply are given urgent attention. Water productivity gains in agriculture and efficient domestic water supply are critical if other growing demands for water are also to be met. 14 Figures Figure 1: South Africa Selected Economic Indicators, 2003-2007 Figure 2: South Africa economic outlook 2013 15 Figure 3: Sector Growth Trends 2000-2007 Figure 4: The Relationship Between Agriculture and Complexity of the Economy 16 Figure 5: Impact of Rainfall Variability on South Africa’s Economy Figure 6: Rainfall Variability and GDP growth in Ethiopia 17 Figure 7: South Africa’s Per Capita Water Storage Compared to Other Countries 18 Figure 8: Water Use By Sector 2006 Figure 9: Water Use and Economic Contribution by Sector Access to Improve Water and Sanitation in South Africa 120 100 98 99 100 89 82 80 93 81 75 64 62 65 66 60 57 55 45 47 59 49 40 20 0 1990 2000 2006 1990 2000 2006 1990 2000 2006 1990 2000 2006 1990 2000 2006 1990 2000 2006 Urban Rural Total (%) Urban Access to improved drinking-water sources (%) Rural Total (%) Access to improved sanitation (%) Figure 10: Water and Sanitation Coverage in South Africa 1990-2006 19 Tables Table 1: Impact of Floods and Droughts in Kenya 10/97 – 2/98 Flood Infrastructure $2.39 billion Damage 10/98 -5/00 Crop Loss $0.24 billion Livestock Loss $0.14 billion Reduction in $0.64 billion Drought Hydropower Reduced $1.39 billion Industrial Production TOTAL 10/97 – 05/00 $2.41 billion $2.39 billion $4.8 billion Cost of climate variability Aprox (Annual) $9 billion per year $22 billion GDP Impact as % of 22% GDP per Annum Table 2: Direct and indirect Benefits of Improved Water Supply and Sanitation 20 Graphic 1: Links Between investment in Water and Sanitation and economic Growth 21 improved health water and sanitation investment lower input prices economies of scale increased supply individual and household time savings increased economic productivity and growth existing firms lower prices exiting firms expand production new firms enter industry Source: WASH (1992) 5 Acknowledgements This paper is developed as a technical background paper to South Africa’s National Strategy on Water for Growth and Development. We would like to thank DWAF for financing this work and its officials for their invaluable input and guidance as well as for organising consultative meetings with representatives from agriculture, Eskom and mining. Special thanks go to Pelpola Kalinga, Rosetta Simelane, Nozipo Mbele, Jabu Mtolo, Hameda Deedat and all members of the Economic Pillar Working Committee. 6 References Benson C. and E. Clay. 2001. The Impact of Drought on Sub-Saharan African Economies. Technical paper 401, DWAF, 2008. Water for Growth and Development http://www.dwaf.gov.za/Masibambane/documents/msblll/draft%20brochur e_Glynis_25.1.071.pdf [Accessed 4th of August 2008] 22 FAO. 2008. AQUASTATS: Virtual Water. Food and Agriculture Organisation. Rome, Italy Grey, D. and Sadoff , C. 2005. Sink or Swim? Water Security as a Key to Unlocking Growth. The World Bank, Washington DC, USA.. Grey, D. and Sadoff, C. 2006. “Water for Growth and Development.” David Grey and Claudia W. 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