Scandinavian Working Papers in Economics

Working Paper Series,
Uppsala University, Department of Economics

No 2014:11: Growth, Water Resilience, and Sustainability: A DSGE Model Applied to South Africa

Chuan-Zhong Li () and Ranjula Bali Swain ()
Additional contact information
Chuan-Zhong Li: Department of Economics, Postal: Department of Economics, Uppsala University, P.O. Box 513, SE-751 20 Uppsala, Sweden
Ranjula Bali Swain: Department of Economics, Postal: Department of Economics, Uppsala University, P.O. Box 513, SE-751 20 Uppsala, Sweden

Abstract: In this paper, we analyze a dynamic stochastic general equilibrium model on how water resilience a¤acts 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 in the future. Using the model, we conduct numerical simulation for di¤erent parameter configurations with varying discount rate, climate change assumption, and the degree of uncertainty in future precipitation. We find that with sufficient capital accumulation, development can still be made sustainable despite of increased future water scarcity and decreased long-run sustianable welfare; While sto- chastic variation in precipitation has a negatively e¤ect 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

JEL-codes: D60; O40; O55; Q25

21 pages, December 19, 2014

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