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Closing the factory doors until better times: CGE modelling of drought using a theory of excess capacity

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  • Wittwer, Glyn
  • Griffith, Marnie

Abstract

The aim of this paper is to analyse the regional economic impacts of a prolonged period of recurrent droughts. The model used for analysis is TERM-H2O, a dynamic successor to the bottom-up, comparative static TERM (The Enormous Regional Model). We concentrate on the regions of the southern Murray-Darling basin (SMDB). Large change simulations are a challenge for modellers. Drought brings substantial inward supply shifts for farm sectors. This paper outlines various theoretical modifications undertaken to improve the modelling of drought in a computable general equilibrium (CGE) framework and then applies them to the period from 2005–06 on. In particular, we apply a theory of sticky capital adjustment to downstream processing sectors, whereby processors retire capital temporarily in response to scarcer farm products. This limits upward price movements in farm outputs and results in more realistic modelling of drought. Results are explained using a back-of-the-envelope approach. In addition, the approach provides some estimate as to the impact of prolonged drought on structural change in predominantly rural regions of south-eastern Australia.

Suggested Citation

  • Wittwer, Glyn & Griffith, Marnie, 2010. "Closing the factory doors until better times: CGE modelling of drought using a theory of excess capacity," Conference papers 331997, Purdue University, Center for Global Trade Analysis, Global Trade Analysis Project.
    • Handle: RePEc:ags:pugtwp:331997
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    References listed on IDEAS

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    1. Carbone, Jared C. & Helm, Carsten & Rutherford, Thomas F., 2009. "The case for international emission trade in the absence of cooperative climate policy," Journal of Environmental Economics and Management, Elsevier, vol. 58(3), pages 266-280, November.
    2. repec:dar:wpaper:35491 is not listed on IDEAS
    3. Garnaut,Ross, 2008. "The Garnaut Climate Change Review," Cambridge Books, Cambridge University Press, number 9780521744447, September.
    4. Mark Horridge & John Madden & Glyn Wittwer, 2003. "Using a highly disaggregated multi-regional single-country model to analyse the impacts of the 2002-03 drought on Australia," Centre of Policy Studies/IMPACT Centre Working Papers g-141, Victoria University, Centre of Policy Studies/IMPACT Centre.
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    Cited by:

    1. Masato Yamazaki & Atsushi Koike & Yoshinori Sone, 2018. "A Heuristic Approach to the Estimation of Key Parameters for a Monthly, Recursive, Dynamic CGE Model," Economics of Disasters and Climate Change, Springer, vol. 2(3), pages 283-301, October.
    2. K. Jenkins, 2013. "Indirect economic losses of drought under future projections of climate change: a case study for Spain," Natural Hazards: Journal of the International Society for the Prevention and Mitigation of Natural Hazards, Springer;International Society for the Prevention and Mitigation of Natural Hazards, vol. 69(3), pages 1967-1986, December.
    3. Pourzand, Farnaz & Noy, Ilan & Sağlam, Yiğit, 2020. "Droughts and farms’ financial performance: a farm‐level study in New Zealand," Australian Journal of Agricultural and Resource Economics, Australian Agricultural and Resource Economics Society, vol. 64(3), July.
    4. Ivana Logar & Jeroen Bergh, 2013. "Methods to Assess Costs of Drought Damages and Policies for Drought Mitigation and Adaptation: Review and Recommendations," Water Resources Management: An International Journal, Published for the European Water Resources Association (EWRA), Springer;European Water Resources Association (EWRA), vol. 27(6), pages 1707-1720, April.
    5. Farnaz Pourzand & Ilan Noy & Yigit Saglam, 2019. "Droughts and farms' financial performance in New Zealand: a micro farm-level study," CESifo Working Paper Series 7633, CESifo.
    6. Mohamed A. Chemingui & Chokri Thabet, 2016. "Economy-Wide Analysis of Alternative Water Management Policies: A Comparative Analysis for Morocco and Tunisia," Water Economics and Policy (WEP), World Scientific Publishing Co. Pte. Ltd., vol. 2(04), pages 1-27, December.
    7. Pourzand, Farnaz & Noy, Ilan & Sağlam, Yiğit, 2019. "Droughts and farms’ financial performance in New Zealand: A micro farm level study," Working Paper Series 8159, Victoria University of Wellington, School of Economics and Finance.
    8. Freire-González, Jaume & Decker, Christopher & Hall, Jim W., 2017. "The Economic Impacts of Droughts: A Framework for Analysis," Ecological Economics, Elsevier, vol. 132(C), pages 196-204.

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