Energy consumption, human capital investment and economic growth in South Africa: a vector error correction model analysis

• Date: 01 March 2017
• Published date: 01 March 2017
• Author: Kehinde Damilola Ilesanmi,Devi Datt Tewari
• DOI: http://doi.org/10.1111/opec.12094

Energy consumption, human capital

investment and economic growth in South

Africa: a vector error correction model

analysis

Kehinde Damilola Ilesanmi* and Devi Datt Tewari**

*Postgraduate Student, Department of Economics, University of Zululand, Private Bag X1001,

KwaDlangezwa3886, South Africa. Email: ilesanmi.kd@gmail.com

**Professor, Dean, Faculty of Commerce, Administration and law, University of Zululand, Private Bag

X1001, KwaDlangezwa3886, South Africa. Email: tewarid@unizulu.ac.za

Abstract

This paper investigates the dynamic causal relationship between energy consumption, human

capital investment and economic growth in South Africa for the period 1960–2015 within the

vector error correction model (VECM) framework. It was revealed that there is cointegration

among the variables. The causality test result reveals that there exists a long-run bi-directional

relationship between economic growth and energy consumption. While on the other hand, a long-

run unidirectional causal relationship was discovered running from economic growth and energy

consumption to social and economic infrastructure investment. This justifies the government’s

massive investment in the energy sector which is aimed at meeting the increasing energy demand.

However, the lack of feedback from social infrastructural investment may imply that the focus

social infrastructure investment is not adequate to granger cause growth or due to high inequality

and unemployment in the country which will require more investment attention for it to

significantly affect growth. The government, therefore, should give priority to the provision of both

social and economic infrastructure investment and implementation of policies that are aimed at

human capital development through public empowerment so that they can support the economy

instead of depending on the government.

1 Introduction

The quests for increased economic growth among countries (especially energy-

dependent countries) place them in a dilemma as to whether to pursue economic

growth at the expense of environmental sustainability or vice versa. Energy is considered

as an indispensable resource that supports human survival, economic growth, social

progress and sustainable development (International Energy Agency (IEA), 2014;

©2017 Organization of the Petroleum Exporting Countries. Published by John Wiley & Sons Ltd, 9600 Garsington

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55

Kaygusuz, 2012). It is an essential factor in the production process and strategic

resources of an industrial society (Yi-Ming et al., 2010).

Uri (1995) stated that inadequacy of energy resources to meet demand affects

economic growth as in the case the USA (Uri, 1995). A limited supply of energy

resources and the need for environmental conservation have propelled countries to find a

middle ground between energy consumption and economic growth (Lee, 2006). On the

other hand, Ouedraogo (2013) suggested that the availability of modern energy is not by

itself a panacea for the economic and social problems facing a country, as it is now

widely recognized that lack of access to reliable and affordable energy resources is a

fundamental obstacle to socio-economic development (Ouedraogo, 2013). Therefore,

provision of clean energy is a major factor that enhances the living standard, improve the

quality and quantity of human capital, as well as enhance the business and natural

environment (Kaygusuz, 2012).

Adequate access to clean energy has been constrained by low income, increasing

population, inadequate capital investment. For example, the total population in South

Africa increased from 17.4 million in 1960 to 54.0 million in 2014, changing 210 per

cent during the last 50 years. Increase in economic activities and the population has

resulted in an increase in energy demand and an overworked electricity infrastructure

which culminated in series of power outages across the country. As a matter of fact,

going by the projection of the National Treasury, South Africa’s energy demand is

expected to be twice the current levels by 2030 (Republic of South Africa (RSA), 2014).

To facilitate improved energy supply, the government pledged 40 per cent of the $26.66

billion set aside for infrastructural development to improve energy generation,

transmission and distribution (RSA, 2014). In 2012/13 budget, the Department of

Energy (DoE) was allocated the sum of $469 million for improving energy supply out of

which 95 per cent ($448 million) was transferred as follows: integrated national energy

programme was allocated $213.8 million to connect 150,000 and 10,000 households to

the grid and non-grid systems, respectively; $69.0 million to accelerate solar water

heating programme; $ 103.4 million for the final installation of new multiproduct

pipeline; $ 38.21 million for nuclear energy research among others (RSA, 2014).

Human capital investment is essential for economic growth as well as to meet the

growing energy infrastructure demand due to increasing economic activities and

growing population. It is, therefore, important to examine the interrelationship that exists

among human capital investment (economic and social infrastructure), energy

consumption and economic growth in order to formulate informed policies that will

ensure sustainable growth and development.

Energy is a key input to economic activities and the economy must have a secure,

reliable and efficient source of energy in order to ensure sustainable growth and

enhanced standard of living for the populace. Increased energy demand due to increased

OPEC Energy Review March 2017 ©2017 Organization of the Petroleum Exporting Countries

56 Kehinde Damilola Ilesanmi and Devi Datt Tewari