modeling the water-food-energy nexus in the arab world: economic and welfare impacts in egypt

Modeling the Water-Food-Energy Nexus in the Arab World : The Case of Egypt

ECONOMIC AND WELFARE I MPACTS: A S I NGLE COUNTRY DYNAMIC COMPUTABL E GENERAL EQUIL IBRIUM (DCGE) MODEL

PERRIHAN AL-RIFFAI

IFPRI APRIL 18, 2016

CONRAD - CAIRO, EGYPT

DCGE Model for the Water-Energy-Food Nexus

Source: Author’s adaptation of Hoff (2011) and von Braun (2015)

DCGE Model for the Water-Energy-Food Nexus

Source: Author’s adaptation of Hoff (2011) and von Braun (2015)

DCGE Model: Circular Flow of Income

Production

Payments

Taxes

Remittances

Foreign markets and

countries

Public sector or

government

Trade

AidRecurrent spending

Public investment

Foreign investment

Savings & private

investment

Industry

Sectoral & national

economic growth

Household incomes

& poverty

Agriculture

Services

Rural

Urban

Incomes

Consumption

Productivity/technology

Human/physical capital

Taxes & social grants

Taxes

Product markets

Factor markets

DCGE Model: Circular Flow of IncomeImpact of a negative climate change shock or reduced water availability on the economy captured through negative long term crop yield changes

Production

Payments

Taxes

Remittances

Foreign markets and

countries

Public sector or

government

Trade

AidRecurrent spending

Public investment

Foreign investment

Savings & private

investment

Industry

Agriculture

Services

Rural

Urban

Incomes

Consumption

Productivity/technology

Human/physical capital

Taxes & social grants

Taxes

Product markets

(water)

Factor markets

(water)

DCGE Model: Circular Flow of IncomeSupply of food is impacted in the economy

Production

Payments

Taxes

Remittances

Foreign markets and

countries

Public sector or

government

Trade

AidRecurrent spending

Public investment

Foreign investment

Savings & private

investment

Industry

Agriculture

Services

Rural

Urban

Incomes

Consumption

Productivity/technology

Human/physical capital

Taxes & social grants

Taxes

Product markets

(water)

Factor markets

(water)

DCGE Model: Circular Flow of IncomeThrough the factor and the product markets, households (especially rural households) are impacted the most

Production

Payments

Taxes

Remittances

Foreign markets and

countries

Public sector or

government

Trade

AidRecurrent spending

Public investment

Foreign investment

Savings & private

investment

Industry

Agriculture

Services

Rural

Urban

Incomes

Consumption

Productivity/technology

Human/physical capital

Taxes & social grants

Taxes

Product markets

(water)

Factor markets

(water)

DCGE Model: Circular Flow of IncomeThrough the factor and the product markets, all households are affected

Production

Payments

Taxes

Remittances

Foreign markets and

countries

Public sector or

government

Trade

AidRecurrent spending

Public investment

Foreign investment

Savings & private

investment

Industry

Agriculture

Services

Rural

Urban

Incomes

Consumption

Productivity/technology

Human/physical capital

Taxes & social grants

Taxes

Product markets

(water)

Factor markets

(water)

DCGE Model: Circular Flow of IncomeAs a result of adverse welfare impacts, the government may decide to introduce welfare enhancing measures, eg, increase social grants and transfers to the vulnerable

Production

Payments

Taxes

Remittances

Foreign markets and

countries

Public sector or

government

Trade

AidRecurrent spending

Public investment

Foreign investment

Savings & private

investment

Industry

Agriculture

Services

Rural

Urban

Incomes

Consumption

Productivity/technology

Human/physical capital

Taxes & social grants

Taxes

Product markets

(water)

Factor markets

(water)

• The CGE model produces results relative to the baselineselected – helpful for comparison• Macro-indicators (or regional): GDP, employment, fiscal

accounts, investment, trade, etc….• Sectoral indicators: GDP/Value added, resources allocation,

crop production, investment decisions• Welfare indicators: poverty, income, household spending,

inequality

DCGE Model Results

Strengths

• Based on a general equilibrium (macro) economic principle that integrates micro economic theory: Producers and households maximize profits and utility (respectively) and produce the necessary behavioral equations (demand and supply) that govern the behavior of the agents in the model.

• Ability to give welfare impacts: Shows the direct as well as the indirect impacts of an exogenous shock on the whole economy and on poverty and inequality

• Ex-ante policy information: Gives the direction of a policy change/scenario before the policy as information to policy makers

• Allows hybrid modeling: CGE models can link with other partial equilibrium models (climate, water, and crop models) in order to optimize the benefits of using the different types of models together in a coherent and comprehensive framework.

Weaknesses

• In most cases elasticities are not computed for the country: Oftentimes and especially for developing countries, elasticities are borrowed from the literature from countries with similar profiles for use with the model if none exist for the country under study

• Black box: Oftentimes CGE models are seen as black boxes by other researchers

• CGE model results emphasize the direction of change rather than the magnitude of the change: CGE models are not forecast models and so the impact of policy changes over a time horizon are best seen as information on the impact of policy changes rather than on the level ( or ) changes.

Policy Application: 3 Country Case Study (Syria, Tunisia and Yemen)

• What are the impacts of climate change on agricultural production,especially crop yields?

• What are the impacts of climate change on agricultural growth, overallGDP growth?

• What is the impact of climate change on (rural) incomes at the nationaland sub national levels (AEZs)?

• What are potential policy and investment options to mitigate growth andpoverty effects of climate change?

Results: Households & Welfare

Syria

Yemen

Global CC Syria

Yemen

Local CC

Combined CCSyria

Yemen

• Climate change: Temperature increases and available rainfall(where relevant) from downscaled GCMs

• Water supply and allocation: Water availability for all sectors inthe economy

• Crop yields: The impact on crop yields of climate risk and wateravailability scenarios

Ways Forward: Data Needs for the DCGE Model

THANK YOU