Natural Capital, Growth and Economic Development

Kookie Habtegaber, October 24th 2016, Paris OECD Global Forum on Economic Growth and Environment

Giving Nature a Seat around the ‘Economics’ Table

Outline

What is happening – development in

the context of resource use

What needs to happen – bringing natural capital into mainstream economic policy making, urbanization, spatial planning

The ‘how’- recommendations

Concluding Remarks

Nature Capital Bedrock of African Economies -Highlights Agriculture

Africa has 65 % of the world’s arable land and 10 % of internal renewable freshwater sources.

Africa is vulnerable to land degradation and desertification and is most severely affected region. Land

degradation affects two thirds of productive land in Africa. Desertification affects 45% of Africa’s land area. Africa is second world’s driest continent and water resources are unevenly distributed. The heart of the Congo basin has some of the highest annual rainfall worldwide There is strong correlation between rate of poverty gap and soil nutrient depletion from cereal croplands.

The economic loss associated with land degradation in sub-Saharan Africa is estimated at $68 billion per year. Land degradation and desertification impacts entire ecosystem good and services such as carbon sequestration, wood production, wildlife habitat, medicinal and food plants, groundwater recharge, hunting opportunities, and tourism activities.

“Africa could generate about 2.83 trillion PPP USD (or about 71.8 billion USD/year) if all countries take action against soil erosion (for next 15 years) which is causing nutrient losses from the arable land areas used for cereals production, through investment in sustainable land management interventions. “ The cost of inaction on the other hand (to all countries) accounts for about 4.6 trillion PPP USD over the next 15 year, equivalent to about 286 billion PPP USD (= 127 billion USD) per year”. Report by UNEP for 42 African Countries.

Tourism

Important sector for many countries – e.g. in 2013 tourism accounted for 2.9 % of total employment, $71.6 billion or 3.6 % of the continent’s GDP. Illegal poaching, wildlife trafficking, land conversion, threatening this industry.

Fisheries Estimated to be worth $24 billion, employing 20 million people and with 90 million people dependent on

fisheries for their livelihoods – e.g. in 2011, it accounted for 1.26 per cent, of Africa’s GDP. Forests

Africa is home to World’s second largest tropical forest with over 70% SSA population depending on forests and woodlands for livelihoods. Forests contribute an average of 6 per cent of GDP in Africa – much more if we take ecosystem services.

Dividend from Natural Resources Driving Economic Growth in Africa

Africa has:30 % of the world’s known mineral reserves, 8 % of the world’s natural gas reserves, 10 % of oil reserves, 40 per % of gold reserves, 80–90 % of chromium and platinum, the largest cobalt, diamond, platinum and uranium reserves in the world.

Minerals account for an average of 70% of total African exports and about 28% of GDP.

Resource rents are the main contributor to tax revenue in Africa. E.g. - In 2008, the rent from natural resources in SSA was as high as 24% of GDP( weighted average). In 2014, it went down to 12.8%.

Dividend from Natural Resources Driving Economic Growth in Africa

Africa’s pop expected to double by 2050.

Both urban and rural pop are growing - delivering a vast growing domestic market.

Urbanization - equaling 560mln by 2020 (2nd highest after Asia) but, has occurred without industrialization and without creating the almost 30 million additional jobs Africa will need every year.

Growing middle class - projected to reach 1.1 billion (42%) by 2060

Source: African Economic Outlook 2015, 2016

Growth was spurred by demand and supply side: commodity price spike, FDI inflow from $34 billion to $246 billion by 2012 , debt relief, good governance, growing middle class , trade increase and diversified export destinations.

African economies have shown strong growth including non-resource rich countries growing at similar rates (Ethiopia, Sierra Leone, Uganda and Rwanda) – i.e. being resource rich does not automatically equate to GDP growth.

Commodity-focused countries in Africa have come under pressure when prices have fallen – lack of diversification and investment in right skills have been multiplied by the depletion of their natural capital and pollution.

Economic Growth 2003-2017

Population Growth 1950 -2050 est.

Growth has taken place without Structural transformation, the same can be said about urbanization.

Jobs creating sectors - manufacturing and agriculture - are behind and losing labor to low value adding services sectors (trade), or to the informal sector.

Lack of spillovers from the commodity sector to non-commodity sectors Industrial policy lacking ( trade-off b/n natural assets not clear)

Public spending and tax base mainly based on natural resource income –

thus impacted commodity prices – ( the tax mix is more balanced in non-resource-rich countries).

Inequality and poverty persists – poverty increased in Africa until about 1993, and fell thereafter. The inequality of opportunities remains in Africa as a serious constraint on development.

Poverty reduction in Africa has mainly been driven by income growth, not by reductions in inequality

resource-poor countries achieved a reduction in poverty of 16 % points between 1995 and 2000, resource-rich countries posted only 7 % reduction for the same time.

Quality of growth – Have African countries been effective in optimizing their natural resource rent to deliver on social and economic returns with minimal negative impact on the environment?

“higher GDP growth over the past decade did not reduce poverty at an adequate pace and failed to create commensurate employment opportunities since the mining and energy sectors are less labor-intense than the manufacturing and agricultural sectors. “ AfDB Development Report 2015

Gap between Africa and other developing countries has been widening during this period

Illicit financial flows (IFF) in SSA US$ 500

billion in last decade - more than half from natural resources revenue. It is greater than ODA and FDI between 2003 and 2012, it was equal to 4% of GDP ( 60.3 billion) Responsible: Large corporates (65%), organized crime (30%), corruption (5%). Tax breaks also cost countries huge loss.

African countries loss 17bln USD due to illegal logging every year while West Africa alone loses 1.3 billion USD per year from illegal fishing.

In both cases, countries are also losing the associated ecosystem services ( carbon sink, water purification, marine ecosystems that protect the coastal areas).

Significant loss of domestic resource that could have been mobilized to invest in public goods including maintaining and replenishing the natural capital as well as mitigating externalities is lost.

Africa Initiative of the Global Forum on Transparency and Exchange of Information for Tax Purposes – efforts to address IFF

Illicit financial flows from Africa compared to official development assistance and foreign direct investment, 2003-12 Source: AEO 2015

Foreign direct investment to Africa: Resource-rich vs. non-resource-rich countries, 2000-15 Source: AEO 2015

Quality of growth – Have African countries been effective in optimizing their natural resource rent to deliver on social and economic returns with minimal negative impact on the environment?

Rapid demographic change increases migration, puts pressure on environment and resources in densely pop areas – e.g. Kinshasa. Urban wood fuel use is causing deforestation and forest degradation around many cities in Africa. 80% of household fuel in Africa and accounts for over 90% of harvested wood.

Concentrating people in cities without proper management leads to land use changes, overexploitation of resources and degradation of ecosystems and ultimately impacts socio-economic development. Cities and towns face environmental risk such as water scarcity if they expand in the wrong places (wetlands & water catchment areas).

Land degradation is responsible for large parts of rural-urban migration. In the Sahel and in the Horn of Africa, 60 million people are likely to migrate between 2016 and 2020 because of degraded areas. Land degradation is exacerbated in regions of both high poverty and high population density.

The poorest households are highly reliant on natural resources and will be most immediately affected by environmental degradation. Many of these people are the urban poor living in slums without basic services such as potable water and sanitation. 72% of urban population of sub-Saharan Africa live in slums.

In 2013, air pollution cost Africa USD 447 billion, a third of its GDP.

Impact of Environmental Degradation on Economic Growth

On the positive side, recent UNEP report underlines the increasing use of renewable energy across the continent and African economies continue to have the lowest footprint globally. There is also improvement in biodiversity conservation and protected areas. However, fresh water use vis-à-vis renewable water sources, increasing, as is the overexploitation of fish stocks above their safe biological limits (UNEP, 2015)

Experts from the continent acknowledge that these important and defining changes have occurred in unsustainable fashion(AEO 2016 Survey)

Impact of Environmental Degradation on Economic Growth

Accounting for Natural Capital in mainstream economic policy making, urbanization, spatial planning ‘Develop at all costs’ narrative is changing…

Countries are Taking Action

Governments in Africa have recognized that long term growth depends managing the natural resources effectively. To that end, some promising developments: Gaborone Declaration for Sustainability in Africa ( 2012) calling for integrating the value of natural

capital into national accounting and corporate planning and reporting processes, policies and programmes ( Gabon, Kenya, Liberia, Botswana, Ghana, Mozambique, South Africa, Rwanda, Namibia, Tanzania)

Meeting of African Ministerial Conference on the Environment on managing Africa’s natural capital for sustainable development and poverty reduction.( March 2015). Eighth African Development Forum and the 2014 joint annual meetings of the Economic Commission for Africa Conference of African Ministers of Finance, Planning and Economic Development (2014).

Several Countries are participating in the Wealth Accounting and Valuation of Ecosystem Services (WAVES) programme ( Botswana, Rwanda, Madagascar)

Example: Botswana Average annual growth rates of over 10% since

mid 90s, now a middle income country Contribution of minerals to the economy at 19%

mainly from mineral rents – highest contribution to GDP, followed by tourism.

Rainfall is low, highly erratic and unevenly distributed. Surface and ground water resources are scarce. Climate change expected to exasperate it.

Developed various natural capital accounts (water, minerals, energy, land/ecosystems & tourism ) to understand future and present economic decisions and design policies that will maintain natural wealth

NCA is focused on the part of total wealth that comes from land, water, mineral, energy, soil, forests and timber, and

ecosystem assets

The ‘how’- recommendations

1. Show the “hidden value” of Nature for economic dynamism

• Ecosystem valuation ( e.g. value of wetlands to economic growth at the city and national level)

2. Better spatial planning and urban strategy linked with national development Planning

• Connecting cities the right way -cities should be considered as an active part of a wider mosaic of land and water use to benefit people and the economy linking with rural communities.

• Link and develop coherence between climate change policies, economic development plans and urbanization strategies

3. Improve the access of spatially explicit ecological information to development planning processes

• Integrate Environmental Indicators as part of the National Economic Development Plans

• Spatial planning can be used to optimize multiple uses of natural resources and is essential to maintain ecosystem services

• Ensure that such analyses are a requirement of relevant policies and financial investment safeguards.

4. Good plans need political will to implement • Political will and long term thinking

5. Economists need to innovate beyond the status quo • what are growth the models for the 21st C green economy? • We need to improve knowledge / research / analysis of the issues

Show the “hidden value” of Nature for Economic Dynamism: the Case of African Cities

“The projected increase in urban population implies that the way our cities are planned and run will not only have huge economic and social implications but will also be of crucial importance for achieving environmental sustainability.” OECD The Metropolitan City Report

As of 2005, 75% of global energy and material consumption

was accounted for by cities—which cover a mere 2% of the world’s land area.

80% of the world’s output, measured in GDP, is generated in cities (UNEP 2013).

Cities are economic hotspots where the growing middle classes will be living.

Increased demand for water – agriculture, urban infrastructure and energy for growing urban population and increased pollution

Urban areas can facilitate the efficient use of environmental resources through sharing land, other natural resources, goods and services.

A low ecological footprint gives African cities a window of opportunity for sustainable development.

African Cities Face Serious Environmental Risks

Cities and towns face environmental risk such as water

scarcity if they expand in the wrong places- conversion of wetlands and watershed into urban areas (wetlands & water catchment areas) Wetlands provide both provisioning services (food, water, raw materials) and regulating services (flood control, climate stabilization). ( Kampala – wetland –settlement)

The International Water Management Institute estimates total value of wetland services in Africa as being US$5.25 billion a year. While significant, this is far less than the $70 billion for Asia, showing potential for greater returns. A conservative estimate of the value of the Zambezi wetlands was US$123 million a year.

Deforestation of critical forests which support watersheds

and building on wetlands can lead to water scarcity and slow growth in African cities.

illegal forest clearance threatens threaten the supply of

water from some economics important cities – E.g. The port city of Mombasa, in Kenya, relies on

water from the Chyulu Hills, over a hundred miles away. Despite Chyulu being a protected area, poor management capacity means illegal logging and settlement continue, threatening the security of urban water.

Innovative finance in valuing ecosystems services benefits

farmers, businesses and urban dwellers that rely on environmental goods and services – e.g. Upper-Tana Nairobi Water Fund provides financing for the watershed that provides Nairobi 95% of its water.

The cities identified here will likely to see their urban expansion taking place on the same watersheds used to supply the cities for fresh water. This may reduce their water provisions. More detailed research is required to further analyse the resulting socio-economic risk. E.g. The Zambian capital, Lusaka, draws 44% of its water supply from the Kafue Flats; demand is growing fast, but currently over half the potential supply is lost through pipe leakage.

Marine ecosystem services are important for many coastal cities

Mangroves protect shorelines and boost fish numbers.

Mangrove forests buffer coastlines against storms, ocean surge and sea-level rise; they also create spawning grounds and nurseries for fish.

E.g. in Vietnam a US$1.1 million investment for community restoration of mangroves saved an estimated US$7.3 million/ year in sea dyke maintenance. The mangroves have effectively buffered coastal villages against typhoons, when other villages suffered serious damage.

There have been few economic analyses of mangroves in Africa. Yet in many places, they are threatened by infrastructure (e.g. Ports) as well as urban expansion taking place without taking their services /value into account..

Climate Change makes coastal cities more vulnerable. Africa is more vulnerable to climate change than other world regions. Climate related breakdown in ecosystem services and extreme weather events hit cities hard due to high population densities and often poor infrastructure.

Half of the ten fastest growing economies in Africa have major centers of economic activity on the coast (Côte d’Ivoire, Mozambique, Tanzania, Sierra Leone and Kenya). Many of them without effective and implementable urban strategy that embeds climate adaptation and resilience. Some progressive examples include cities such as Cape Town.

Better Spatial Planning, Need to Link Urban Strategy with National /Regional

Development Plan

Link and develop coherence between climate change policies, economic development plans and urbanization strategies

multi-level governance and transparency including reinvesting resource rents locally

Understand how biodiversity and ecosystem service assets fair against development pressures such as agriculture, mining, infrastructure plans, and demographic trends

Development strategies should be more than a collection of sectoral policies - have a framework that balances socio-economic and environmental policies to bring the optimal combination

Spatial planning can be used to optimize multiple uses of natural resources and is essential to maintain ecosystem services

Ensure that such analyses are a requirement of relevant policies and financial investment safeguards in economic corridors and other SEZ developments.

LAPPSET Corridor - Planned road infrastructure in Kenya in relation to protected areas

Improve the Access of Spatially Explicit ecological Information to Development Planning Processes

1. Integrate environmental

indicators as part of the National Economic Development Plans as well as investing and collecting local level data ( cities –urban / regional data)

2. To do so improve needs to improve data collection and capacity because SSA lacks significant statistical and data infrastructure

Statistical Capacity indicator: Source: AEO 2015

Systems Approach Looking at Opportunities and Risks

Africa Sensitive Ecological Zones

Average Annual Growth Rate in Real Per Capita GDP 1996-2013

Foreign Transactions on Agricultural Land in Africa

Irrigation Potential in Africa

Africa Population Density

Potential flashpoints - Spatial overlap of multiple sectors and drivers of growth

Good Plans Need Political Will to Implement

Is circular economy relevant for African countries? Can they find strategies to leapfrog towards efficient systems – What policies are needed and how can those

with the knowledge and expertise i.e. developed economies enable that?

Given the resource exploitation model is still

viable and attractive, what is required to think long and medium term? How should we incentivize governments? What role can economic thinking play?

What can OECD and others do to addresses to help make choices that optimize human wellbeing and ecological resilience?

Sustainable use of natural assets and ecological thresholds Qualitative dimensions of natural assets Economic values of stocks and flows of natural assets Combining economic and environmental data at the macro-level Resilience of socioeconomic systems to ecological shocks Distributional effects of environmental changes or policies Aggregate impacts of environmental policies Support the expansion / integration of SEEA – EEA

(Research Results from Green Growth Knowledge Platform Indicators and Measurement Committee)

We need more Economic Innovation

Key Messages Pollute now, clean up later is no longer an option and African countries

cannot growth their way out of environmental degradation - Ecological factors can be fundamentally altered by economic and development decisions made today.

Ecosystem services such as water, hydrologic regulation, soil fertility, biodiversity and climate change adaptation will be critical factors for Africa’s economic sectors and future growth – Increasingly we are getting better at improving links between economics and environments: Institutions like OECD can help accelerate and advance this knowledge – we need to go beyond GDP.

By managing and maintaining natural capital, African countries can use the advantage of having abundance in renewable and non renewable natural resources to enable key sectors to be competitive and attractive in the globalized world where most Africans do not yet have the skills required for high skilled jobs.

How urbanization takes place and cities are planned matters - cities should be considered as an active part of a wider mosaic of land and water use to benefit people and the economy linking with rural communities

Thank You

The Future is here and the choices we make today will lock us into development trajectories far into the future.