Developing a baseline forecast for a South African dynamic CGE model (SAGE-H) with HIV/AIDS detail

Policy analysis with a detailed CGE model requires two simulations. The first simulation is the baseline forecast or business-as-usual simulation. This simulation models the growth of the South African economy and the HIV epidemic over time in the absence of the policy change under consideration. The second simulation is the policy simulation. This simulation generates a second forecast that incorporates all the exogenous features of the baseline forecast, and now includes policy-related shocks reflecting the details of the policy under consideration. The impacts of a policy are typically reported as a percentage deviation away from the baseline forecast. This paper describes the baseline forecast developed for a South African dynamic computable general equilibrium (CGE) model (SAGE-H). SAGE-H is a large-scale dynamic CGE model of the South African economy which consists of two inter-dependent modules. The first module contains core economic theory and the second module contains the detailed modelling of labour supply including HIV detail. To gain a better understanding of the main features of SAGE-H, I follow the approach of Dixon and Rimmer (2002) by first developing a stylised back-of-the-envelope (BOTE) model. The BOTE model captures the underlying features and macroeconomic relationships in SAGE-H. In this paper I use the BOTE model to (1) explain the closures developed for the baseline simulation and (2) aid with the interpretation of the main macro results produced in the baseline simulation. Use of miniature models such as BOTE to describe the results from a full-scale applied economic model has a long-tradition in CGE modelling (Dixon et al., 1984). I use the BOTE model to describe the closure settings and results of the baseline forecast. The simulation period is from 2003 to 2045. The baseline forecast includes three different closures. The first closure is developed to accommodate observed macroeconomic data for the period 2003-2009. I also introduce data to show the change in the number of new HIV cases over this period. The second closure is developed to accommodate independent forecast data for selected macroeconomic variables. This closure is used for 2010 to 2014. The third closureis developed for the years 2015 to 2045. For this period no independent forecast data are available. This paper is set out as follows: Section 1 gives a broad overview of SAGE-H. Section 2 describes the equations in the BOTE model that underlines the main macro mechanisms in SAGE-H. This is followed by a description of a short-run closure for the BOTE model. In developing an appropriate closure for the BOTE model, I distinguish between equations describing economic relationships within any given year, equations describing the underlying theory of how adults change their HIV status at the start of any given year, equations describing the start-of-the-year stock variables, and an equation describing the wage adjustment mechanism. The short-run closure serves as the starting point in developing the appropriate baseline forecast closure, which is described in Section 3. The paper ends with concluding remarks in Section 4.