Policy analysis in South Africa with regional applied general equilibrium models

Abstract

The research question addressed in this study is first to illustrate the appropriateness and feasibility of a Regional Applied General Equilibrium (RAGE) model in the South African context for policy makers. Secondly the study provides proposals for the construction of a RAGE model to assist policy-makers to investigate spatial or regional (sub-national) impacts and policy-choices with a more sophisticated approach (other than a simplified top-down approach or partial equilibrium models) which would provide for more consistent results or implications as related to the spatial or regional implications of such impacts. This study is an attempt to address this shortcoming by investigating and illustrating the need for such modelling ability. This is done by illustrating the value and potential of RAGE models by making use of a simplified "top-down" regional application. In particular, the shortcomings of such a 'top-down' approach are highlighted and the case made for a more sophisticated 'bottoms up' approach. A literature review was conducted regarding the types of RAGE models that can be found, as well as on the various methodological approaches to regional or spatial Applied General Equilibrium (AGE) modelling. A simplified top-down model based on the AGE model used by South Africa's Industrial Development Corporation (IDC) was constructed in order to conduct some illustrative applications. These illustrative applications highlighted some of the shortcomings of a top-down approach to regional AGE models based on an application of an electricity price and volume shock scenario. Finally, this study presents proposals for future research regarding the development of RAGE models for the South African economy. These take account of the current work on Provincial Social Accounting Matrices (SAMs) lead by the Development Bank of Southern Africa. The feasibility of a hybrid regional AGE was illustrated and some future potential developments in this regard were stated.