Abstract
M.Com. (Local Economic Development)
In 2008 South Africa experienced a period of constrained electricity supply, which led
to wide-spread blackouts. In order to deal with these electricity capacity constraints,
there has since been a shift in focus in the country with significant investment in this
sector. Most studies in the energy-economic growth nexus have focused on the
economic effects of energy use. There is a body of literature that has looked at
infrastructure investment and economic growth, but does not treat energy investment
as a particular kind. We argue that it is not only energy consumption that matters for
economic growth, but the investment it its production as well. Investors might
carefully watch energy capacity development in order to make their investment
decisions in other economic sectors, which make investment in energy a possible
trigger of capital formation in other sectors and subsequent economic growth.
With this hypothesis, our paper investigates the causal relationship between
investments in energy and capital formation in other sectors of the economy on one
hand, and the causal relations to economic growth on the other. We use annual data
for 228 South African municipalities from 1993 to 2015. The paper uses the newly
developed heterogeneous panel Granger causality methodology, which improves the
traditional causality approaches in accounting for heterogeneity and cross-sectional
dependence in the panel data. Traditional approaches were developed under the
assumption of homogeneity in slope, intercept or both, and the independence of
panel units. Our findings are therefore more robust to heterogeneity issues and
account for individual differences between municipalities. Another difference
between this paper and the majority of academic work is our shift in focus from a
national level to a local/municipal level.
Our findings suggest that there is an overall bidirectional causal relationship between
investments in energy, capital formation in other sectors of the economy, and
economic growth. This finding highlights the potential that investments in energy
have to trigger capital formation in other sectors and promote economic growth.
Such findings will have significant local economic development implications in terms
of the role of energy capital in attracting capital in other sectors, with broader
implications for economic growth in view of job creation and poverty reduction.