Task4.Interac*onwithEconomyandSociety

TaskLeader:StefanoSchiavo

Mar5naSartoriSchoolofInterna*onalStudies

3rdCLIMAWARESEMINARDecember2nd,2015

OutputoftheTask

•  Economiceffectsofchangesinwateravailability–  focusontheagriculturalsector–  landusechangeeffects–  environmentalpoliciesandregula*ons

•  Virtualwatertradeeffects

•  Regionalcoverage:EU(andnotAlpineregiononly)

4

productivity. Eleven individual countries are considered (Albania, Croatia, Cyprus, Egypt, France, Greece, Italy, Morocco, Spain, Tunisia, and Turkey) and one aggregated residual region (XMENA, which stands for "Rest of Middle East and North Africa").

Figure 1. Methodological approach

The starting point is given by a climate scenario, providing estimates of changes in temperature and precipitation for a set of Mediterranean countries. The data has been obtained from the WASSERMed project, where several regional models were tested and selected on the basis of their capability of replicating historical climate records in the Mediterranean. Estimates used here derive from the output of the Hadley Centre model HadCM3Q0 (resolution: 3,75° x 2,5°), based on the SRES Scenario A1B. The climate scenario suggests that precipitation will generally decrease in the Mediter-ranean in the period 2000-2050, particularly in France (-13%), Morocco (-18%) and Tunisia (-10%). The average temperature is expected to increase of about 2°C. Other climate models produce similar results (Giorgi and Lionello, 2008). Figure 2 displays relevant climatic data for the countries under considerations. The vertical bars show annual precipitation around the year 2000 (decadal average) and 2050. The row under the graph indicates the variation in the mean annual temperature, for the same period.

!!!!

Water!Available!

for!Agriculture!

!

System'wide+Economic+Effects+

Future!Water!

Availability!Estimated!Change!in!Runoff!

Climate!Scenario!

Agricultural!Productivity!

Economic!Structure! Trade! Virtual+

Water+Flows+

Water!Stock/Runoff!Relationship!! Other!

Water!Uses!

Crop!Response!

Income!and!

Welfare!!

Themethodologicalapproach

Theeconomicmodel1•  ComputableGeneralEquilibrium-CGEmodels:“classofeconomicmodelsthatuseactualeconomicdatatoes5matehowaneconomymightreacttochangesinpolicy,

technologyorotherexternalfactors”

1.  reproducesthestructureofthewholeeconomyandthenatureofallexis*ngeconomictransac*onsamongdiverseeconomicagents(produc*vesectors,households,andthegovernment,amongothers)

2.  rigorous,cuYng-edgequan*ta*vemethodtoevaluatetheimpactofeconomicandpolicyshocks-par*cularlypolicyreforms-intheeconomyasawhole

Theeconomicmodel2•  ”Computable”:usedatafromrealeconomies,solvedona

computer•  ”General”:severalop*mizingagentsandmarkets•  ”Equilibrium”:supplyanddemandbehaviourdeterminedby

op*mizingagents–  firmsthata[empttomaximizeprofitsandminimizecosts–  householdswhomaximize“welfare”(consump*on)bychoosing

consump*ongoodsaccordingtoprice

–  marketswherepricesadjustun*lsupplyanddemandareequal—>marketequilibria

•  Sta*corDynamic–>heresta*c•  SingleorMul*pleRegion–>heremul*ple

Theeconomicmodel3•  Fromamathema*calpointofview,themodelisavery

largenon-linearsystemofequa*ons

•  Structuralparametersaresettoreplicateobserva*onaldatainabaseyear

•  Simula*onsentailchangingsomeexogenousvariablesorparameters,bringingaboutthedetermina*onofacounterfactualequilibrium

•  Thepar**onbetweenendogenousandexogenousvariables,aswellastheregionalandindustrialdisaggrega*onlevel,isnotfixed

Par*alEquilibrium:EconomicTheory+Data

TheoryOnly Theorywithnumbers

Par*alEquilibrium: EconomicTheoryOnly

EffectofaTax:Theore,cal

ImpactusingNumbers

EffectofaTax:withnumbers

GeneralEquilibrium:Allmarketsinterac*ng

GeneralEquilibrium:• Mul*plemarkets• Mul*plehouseholds• Mul*plefirms

Anexample:themacroeconomicconsequencesofaloweragriculturalproduc*vity

àGofarbeyondadropinproduc=onvolumes(yields)!

Loweroutputinagriculture:1.  bringsaboutanincreaseinthepricesofdomes*cproducts,which

becomerela*velymoreexpensivethanforeignproducts2.  thislossofcompe**venesscausessubs*tu*onofdomes*cgoods

withimportsintheproduc*onandconsump*onprocesses–  realdevalua*onofthena*onalcurrency

3.  withintheagriculturalsector,cropsaresubs*tuted–  theproduc*onmixshidstowardcropsrela*velymoreproduc*ve(in

thiscontext,cropswhicharelessaffectedbywatershortage)àChangesinthewholestructurefortheeconomicsystem!

Mainapplica*onsandusesofCGEs

•  FieldswhereCGEmodelsaretradi*onallyapplied:–  PublicEconomics–>typicalsimula*on:fiscalreform–  Interna*onal Trade –> typical simula*on: interna*onal

tradeagreement

•  Applica*ons inthefieldofEnvironmentalEconomicsaremuchmorerecent:–  introduc*onofgreentaxes–  assessmentof climate change impacts, affec*ng factors

produc*vity,orproduc*onandconsump*onpa[erns–  tool forquan*fyingcostsandbenefitsofenvironmental

policies

WhyusingaCGEmodelinthiscontex?•  Solidmicro-economicfounda*on:

–  combina*onofstandardtheorywithdetaileddata

•  Generalvspar*alequilibriumanalysis–  second-ordereffects–  structuralchangeanalysis–  mul*-marketcomplexinterac*ons–  abletocopewithcomplexproblems

•  Quan*fymagnitudesoftheore*calresults(importantforpolicy)–  provides“evidence”tosupportclaims–  counterfactualmodeling,simula*onexercises–  iden*fynetresultsofcounterac*ngeffects–  providearealis*cquan*fica*onofthepolicyeffectsbyusingrealdata–  trade-offsbetweenpoliciescanbequan*fied–  abletoanalyzewelfareeffects–  benefitsandcostscanbecalculated,andusedasevidencetosupport

par*cularpolicies

Some”drawbacks”ofCGEmodels

•  Specifica*onoffunc*onalforms•  Calibra*on:theyaredatademanding•  Maybecomerathercomplex•  Noforecas*ng:only“what-if”scenarios•  Nofinancialandmonetaryissues•  Nonorma*veop*miza*on•  Inappropriatescaleanalysis

WhyCGE&Co.areinteres*ng

•  Flexibility:modularmodelswiththeore*callysoundhypotheses

•  Flexibility:easytointerfacewithothermodelsformul*disciplinaryresearch–  IAMandClimateChange– Land-usemodels– Virtualwatertradeandfootprint

IntegratedAssessmentModel

Thedatabase

•  Tablesoftransac=onvalues:input-outputtableorsocialaccoun*ngmatrix(seenextslide)–  itcoversthewholeeconomy(ofacountry,oreventhewholeworld),anddis*nguishesanumberofsectors,commodi*es,primaryfactorsand(perhaps)typesofhousehold

–  show,forexample,thevalueofcoalusedbytheironindustry

•  Elas=ci=es:dimensionlessparametersthatcapturebehaviouralresponse–  Forexample,exportdemandelas*ci*esspecifybyhowmuchexportvolumesmightfallifexportpriceswentup

Thedatabase:IOtables•  Input-outputtable:matrixthatdepictsinter-industryrela*onshipswithinaneconomy,showinghowoutputfromoneindustrialsectormaybecomeaninputtoanotherindustrialsector–  columnentriesrepresentthemonetaryvalueofinputstoanindustrialsector

–  rowentriesrepresentthemonetaryvalueofoutputsfromagivensector

–  thisformatshowshowdependenteachsectorisoneveryothersector,bothasacustomerofoutputsfromothersectorsandasasupplierofinputs

–  factorsofproduc*on(labor,capital,land)andotherinputs

IOtables:extension

•  EnvironmentallyExtendedInput-Outputtables

•  ASocialAccoun*ngMatrix(SAM)representsflowsofalleconomictransac*onsthattakeplacewithinaneconomy(regionalorna*onal)amongagentsandsectors– wagesfirmspaytohouseholds–  household’sconsump*onofgoods–  taxesandtransfersadministratedbytheGovernment– …

and the rest is saved for the future. The total supply in the economy has to be matched by the demand made by the institutions and capital formation, i.e., purchase of investment goods. In the SAM, an extra breakdown of the household sector is done to reflect the role of people in the economy.

Appendix Table 1: The Structure of the SAM

EXPENDITURES

ENDOGENOUS EXOGENOUS TOTALS

FAC

TO

RS

HO

USE

HO

LD

S

PRO

DU

CT

IVE

A

CT

IVIT

IES

GO

VE

RN

ME

NT

RE

ST O

F T

HE

W

OR

LD

CA

PIT

AL

A

CC

OU

NT

FACTORS 0 0 T13 X14 X15 X16 Y1

HOUSEHOLDS T21 T22 0 X24 X25 X26 Y2

EN

DO

-G

EN

OU

S

PRODUCT ACTIVITY 0 T32 T33 X34 X35 X36 Y3

GOVERNMENT L41 L42 L43 t44 t45 t46 Y4

REST OF WORLD L51 L52 L53 t54 t55 t56 Y5

EX

O-

GE

NO

US

CAPITAL ACCOUNTS L61 L62 L63 t44 t45 t46 Y6

REC

EIPT

S O

R IN

CO

MES

TOTALS Y1 Y2 Y3 Y4 Y5 Y6

The village SAM for Nana Kotda consists of the following components: Production activities: The production sectors included in the SAM are: (1) crop husbandry—wheat, jowar, bajra, maize, tur, other pulses, oilseeds, cotton, fruits and vegetables, and other crops (cultivation of these crops is divided for irrigated and rainfed areas, but in SAM we have only one column for each crop); (2) animal husbandry—milk and milk products, wool and meat, cow dung manure, and bullocks; (3) construction; (4) service providers and the self-employed—fruit and vegetable vendor, bangle vendor, cloth shop, pan shop, PDS shop, transport, carpenter, and other services; (5) manufacturing—cotton ginning factory; and (6) services—government services (education, welfare) and private services (petty services). Factors of production: The factors of production included in the SAM are: (1) Labour—males and females (by sex); and (2) capital—capital includes mixed income of the self-employed. Institutions: The institutions covered in the SAM are: (1) households by occupation—small farmers, medium farmers, large farmers, labour, self-employed in non-agriculture, service, and other households (the farmers are divided into three categories based on the cultivatable land owned by them—marginal farmers own up to 2.5 acres, small farmers own from 2.5 to 5.0 acres, and large farmers own land above 5.0 acres); and (2) government—only the village Panchayat (local body) is taken as the government. The village Panchayat receives land and house taxes from households as income and government grants from other sources outside the village. It gives grants for the

TypicalOutputsGeneralOutputs:

• Produc*onLevels

• NewPriceLevels&Infla*on• Interna*onalTradeVolume(importsandexports)

• Welfare(EquivalentVaria*on)

• FactorReturns(Wages,ReturntoCapital)

SpecializedOutputs:(ifintegratedintothebasicmodel)

• EnvironmentalIndicators(CO2,Pollutants)

TheCGEweuse:theGTAPmodel

•  TheGTAPconsor*um•  GTAP-AEZ,GTAP-W,GTAP-L,etc–>extensionsoftheoriginalGTAP-CGEmodelframework–  landcanbetransformedintocroplandandpastureland,orintodifferentcrop-types,agro-ecologicalzones

•  RunGTAP•  Regional/sectoraldisaggrega*on

Grazie

…eadessotuYacena!