Growth, Water Resilience, and Sustainability: A DSGE Model Applied to South Africa

Chuan-Zhong Li and Ranjula Bali Swain
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Chuan-Zhong Li: Department of Economics, Uppsala University, Sweden‡The Beijer Institute, Royal Swedish Academy of Sciences, Sweden§School of Business, Ningbo University, China

Water Economics and Policy (WEP), 2016, vol. 02, issue 04, 1-23

Abstract: In this paper, we develop a dynamic stochastic general equilibrium (DSGE) model to study how water resilience affects economic growth and dynamic welfare with special reference to South Africa. While water may become a limiting factor for future development in general, as a drought prone and water poor country with rapid population growth, South Africa may face more serious challenges for sustainable development. Analyzing the DSGE model, we conduct numerical simulations for different parameter configurations with varying discount rate, climate change scenario, and the degree of uncertainty in future precipitation. We find that with sufficient capital accumulation, development may still be sustainable despite increased future water scarcity and decreased long-run sustainable welfare. While stochastic variation in precipitation has a negative effect on water resilience and the expected dynamic welfare, the effect is mitigated by persistence in the precipitation pattern. With heavier time discounting and lower capital formation, however, the current welfare may not be sustained.

Keywords: Water resilience; growth; dynamic welfare; sustainability (search for similar items in EconPapers)
Date: 2016
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Working Paper: Growth, Water Resilience, and Sustainability: A DSGE Model Applied to South Africa (2014)
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DOI: 10.1142/S2382624X16500223

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