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

Chuan-Zhong Li and Ranjula Bali Swain. 2015.

Abstract:

In this paper, we analyze a dynamic stochastic general equilibrium model on how water resilience a¤ects economic growth and dynamic welfare with special reference to South Africa. While water may become a limiting fac- tor 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. Using the model, we conduct nu- merical simulations for di¤erent parameter con…gurations with varying dis- count rate, climate change scenario, and the degree of uncertainty in future precipitation. We …nd that with su¢ cient capital accumulation, develop- ment may still be sustainable despite increased future water scarcity and decreased long-run sustainable welfare; While stochastic variation in precipitation has a negative e¤ect on water resilience and the expected dynamic welfare, the e¤ect is mitigated by persistence in the precipitation pattern. With heavier time discounting and lower capital formation, however, the current welfare may not be sustained. JEL: D6, O4, Q25, Q55

Keywords: Water resilience, growth, dynamic welfare, sustainability

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