Working Paper 1-2004: A Dynamic Computable General Equilibrium (CGE) Model for South Africa: Extending the Static IFPRI Model

Computable general equilibrium (CGE) models are widely used for policy-analysis in many countries. In the past a number of CGE models have been developed for South Africa, and used to assess a broad range of policy issues. However, the perceived complexity of this analytical approach, and the concentration of capacity within a small number of academic or related institutions, have generally led policy-makers, analysts and other researchers to avoid directly using CGE models in their analysis or decision-making. Since CGE modelling provides both an economy-wide assessment of policies and a framework in which the workings of policies can be more easily understood, it is the objective of this paper to present a core South African model that reduces the initial cost of undertaking CGE analysis. The core model can then be adapted according to the interests of individual researchers or policy-makers. Furthermore, since the strength of the model is dependent on its ability to reflect the specific structure and workings of the South African economy, it is hoped that the core model will be developed further as more supporting evidence and research becomes available.

The model presented in this paper has at its core the static model used by the International Food Policy Research Institute (IFPRI) as described in Lofgren et al. (2002). The model is recursive dynamic and is therefore an extension of the IFPRI model and the earlier static South African model presented in Thurlow and van Seventer (2002).

The construction of the South African model takes place in two stages. At the first stage the structure and interactions of the economy within and across time periods is specified in a set of mathematical equations. Section 2 describes the specification and limitations of the South African model without the aid of mathematics. Since the underlying static South African model is essentially that of the IFPRI standard model, Appendix A first presents the differences in the mathematical equations between these two models, before describing the mathematics of the model's dynamic specification.

The second stage of constructing the model involves the compilation of a database that describes the South African economy and is used to assign values to the parameters of the mathematical equations. This process is called the 'calibration' of the model. The most important database for CGE model calibration is a social accounting matrix (SAM). Two SAMs are compiled for South Africa for the years 1993 and 2000, thus allowing the model to assess the impact of both past and future policies. Section 3 describes the South African economy as it is represented in the SAMs and other relevant data sources. Appendix B describes the SAM construction process, and Appendix C presents a series of disaggregated SAM tables that inform the discussion in Section 3.

Finally, Section 4 concludes the paper by describing existing applications of the models and identifying areas where further research is needed to address the limitations of the model.