Estimating the Economic Wide Effect of Ethiopian Renaissance Dam on Ethiopian Economy

A Recursive Dynamic Computable General Equilibrium Approach


Academic Paper, 2019

19 Pages, Grade: A


Excerpt

Table of contents

Abstract

Introduction

Methodology
Source of Data
Social accounting matrix
Model formulation

Discussion and analysis
Policy Simulation Results
Recommendation

References

Estimating the Economic Wide Effect of Ethiopian Renaissance Dam on Ethiopian Economy: A Recursive Dynamic Computable General Equilibrium Approach

Ashebir Tsegaye1

Abstract

This paper examines the economy wide effect of Ethiopian renaissance dam on Ethiopian economy. The model is based on an updated Social Accounting Matrix for 2014/15 that takes into account the structural changes in the economy. Given the additional electricity generation capacity of Ethiopia, the model run a policy simulation in which the additional 6000MW that scheduled to come online near the future form renaissance dam. To analysis this policy option this paper outlined a recursive dynamic computable general equilibrium approach and hence uses the change in real GDP, sectors production, investment, external sector, household income and consumption expenditures, and household's welfare relative to the baseline, as an indicators of the economic wide effects of the renaissance dam. In opting for policy shock, the results of exercise showed that with an increment in power supply from renaissance dam the country can optimize the beneficial impacts on its economy. Specifically the simulation results show a spreading out effect in real GDP, sectors production, real investment, household income and household's consumption expenditure. Results also showed improvement in the welfare for all the household categories. However; the shift in relative income across the household categories favors high income households. Overall, this paper suggests that Ethiopian economy will enjoy the largest improvement with additional power supply resulting from Ethiopian renaissance dam, therefore; concerned bodies should exerted maximum efforts to finalize the projects on time and resolve the age--long problems of the people so that the economy maintains its tremendous progress.

Keywords: Dynamic Computable general equilibrium, GAMS, electricity supply, Ethiopian Renaissance Dam

Introduction

Noticeably, now a day, electricity industry becomes a robust industry that enthusiastically contributes to the progress, prosperity and healthy development of a nation. In one hand, electricity has an exceptional ‘energy currency' that underpins the economic development mode of the country (Coupal & Holland, 2002). As a feed backing effect, however; the level and speed of economic development also plays a decisive role in determining the demand for electricity in a given economy (Khandker et al., 2009). Therefore, when the economy has experienced in power failures even an hour, means that a lot of activity is forced to go on a standstill and, hence, directly thwart the fulfillment of the Sustainable Development Goals by fading the society's reaction to economic changes (Vera, 2016).

Like other third world nations, in Ethiopia a severely restricted, inefficient and unreliable supply of electricity has historically recorded as a limiting factor for its economic development (Woldesenbet, 2005). Moreover, with its fast growth electrifying of million households, remote communities and small-scale entrepreneurs remains a challenge in Ethiopia even if pleasingly Ethiopia has endowed with abundant water resources and enormous hydropower potential to put her out of poverty trap.

Consequently, after a wake up, to cover an imminent shortfall in electricity, Ethiopian government launched a plan to exploit the electricity generation potentials in the country. A major step in this regard was the notice in 2011 to construct the largest reservoir in Africa near the border to Sudan, the Grand Ethiopian Renaissance Dam with a storage capacity of 74 billion cubic meters and a power generating capacity of above 6000 Mw. In this milieu, the GERD is central to Ethiopia's development vision of becoming a middle­income country by 2025 and Africa's energy hub (Block and Strzepek, 2010).

Notwithstanding to these increment in public investments in energy sector, the current utilization of hydropower resources of the country are limited to 2,000 MW which is less than 5 percent of the estimated hydropower potentials of the country (Ferrari et al., 2013). Currently, only 27 percent of all households in Ethiopia have access to electricity and the remaining part of the population still relying on traditional biomass. On average, the electricity wastage in Ethiopia is about 20 percent, which is much higher than the international average, 12-13 percent. For instance, as Woldesenbet (2005) have examined power outages caused firms without backup generators to lose approximately 15 percent to 30 percent of their potential production. Even when the power shortages were less severe, losses could reach up to 10 percent. Their preliminary results also indicate that the economy may have lost 10 percent to 15 percent of total yearly gross value of production that could have contributed from the sector and 1 percent to 3 percent of total yearly government revenue because of power outages.

In view of that, as the completion of the dam construction is getting closer and closer, more and more studies are being published and controversially discuss the likely consequences of the GERD on its environmental, social, economical, and political blueprints. However, the only other preliminary study that we know of is by Ferrari et al., (2012) and Tewodros et al., (2015) which tried to examine the economic wide effect of the dam. The study presented here employs a Computable General Equilibrium (CGE) modeling framework, but contrary to previous studies this study evaluates the direct and indirect economic effect of GERD on Ethiopian economy: First by employing a dynamic recursive multi-sectoral computable general equilibrium model via modeling the issue of hydropower to a single-country approach, and secondly; by substituted the original SAM of Ethiopian with a new one where electricity is produced by two activities: fossil and hydroelectric sources.

In a nutshell, by filling the above knowledge gap, more specifically, this study attempts to answer the following research questions:

- What are the presumable effects of the GERD on factors income, household's income and household's consumption expenditure?
- What are the likely effects of the GERD on Ethiopian export and import volumes?
- What are the presumable effects of GERD on the sectoral productions, real government spending and real investment?
- Will the construction of Ethiopian renaissance dam contribute toward its economic growth?

Methodology

Source of Data

To capture the economic wide effect of Ethiopian renaissance dam to Ethiopian economy, this study employed a dynamic CGE model by utilized 2014/15 SAM of Ethiopia which represents the economy by activities, factors, commodities, and institutions including an aggregate savings-investment account. Therefore, the source of data for this study was 2014/15 SAM of Ethiopia which we have obtained from IFPRI.

Social accounting matrix

In a narrower sense, a social accounting matrix (SAM) represents flows of all economic transactions that take place within an economy. It is at the core, a matrix representation of the national accounts for a given country, which provides a static picture of the economy (Pyatt and Thorbecke, 1976). As a data framework, the SAM is a snapshot, which explicitly incorporates various crucial transaction links among variables, such as the mapping of factorial income distribution from the structure of production and the mapping of the household income distribution from the factorial income distribution, among others. In other saying, it is a comprehensive accounting framework within which the full circular flow of income from production to factor incomes, household income to household consumption, and back to production is captured.

In a broader sense, in addition to providing a consistent classification scheme, it can conceive as a modular analytical framework for a set of interconnected a subsystem, which specifies the major relationships among variables within and among these systems (Luppino et al., 2004). With regard to the structure of the standard SAM, it has a number of accounts such as activities, commodities, institutions, factors of production and saving­investment accounts. In addition to these accounts, SAM may have extra accounts like taxes, total margins (IFPRI, 2010).

In this context 2014/15 SAM of Ethiopia captures: the sources of income and expenditure destination of all accounts, breakdown of sectoral GDP (value addition) by labor and capital factors, income generation and distribution of the institutions in general and household groups in particular, patterns of expenditure by institutions including Household groups, the inter-dependence between activities and institutions with respect to income generation and final demand creation, the inter-dependence among institutions regarding transfer receipts and transfer payments, the role of institutions in capital formation, and the relationship of the domestic economy with the Rest of the World / external sector.

Model formulation

This paper attempts to examine the economy-wide effects of Ethiopian renaissance dam to Ethiopian economy using a recursive dynamic computable general equilibrium (CGE) model. This is because, CGE models have features that make them suitable for such analysis (Janda et al., 2011), as it has sound micro-economic foundations and a complete description of the economy with both direct and indirect effects of a policy changes. More explicitly, in the CGE model the general equilibrium theories are transformed from an abstract form into a realistic and computable one by using a set of equations to characterize supply, demand and equilibrium conditions in the economic system. Therefore, in these equations there are both economic shocks or exogenous variables and endogenous variables or quantities and prices. Consequently, the impacts of exogenous economic shocks on any sector will spread to the whole system of the economy, which in turns lead to the changes in those endogenous variables. Therefore, the state of equilibrium changes from one point to another. Here, by solving the CGE model we can be obtained a new equilibrium quantities and prices whenever the exogenous variables are changed. This becomes the plus points of CGE model over partial equilibrium.

Simulation designs

Assessing the economic wide effect of Ethiopian renaissance dam to Ethiopian economy requires economic scenarios that can be simulated with the dynamic CGE model for Ethiopia economy to be defined. Unfortunately, the macro closure of the model imposes restrictions on the type of scenarios that will simulate. Additionally, the simulation exercise by itself requires the definition of a baseline scenario that can be used as a benchmark to measure the impact of a given policy scenario's. Hence, this scenario is run and provides “what if” or counterfactual projections, rather than a forecast.

In a consequence, since the main objective of this paper is to assess the potential economic impacts of Ethiopian renaissance dam to Ethiopian economy and currently she has announced a national energy policy, it makes sense to assess the impact of policy prescriptions on Ethiopian's economy. For this sake, we have considered the economic scenario that will be compared with the result of the baseline run.

- Given the additional electricity generation capacity of Ethiopia, we run a policy simulation in which the additional 6000MW that scheduled to come online near the future form renaissance dam.

- Specifically, given that there is no additional power generation capacity expected from Ethiopian renaissance dam between the years 2015 to 2020, the electricity supply growth is set to be zero. However; in 2021 there is additional power generation capacities which expected to come online from Ethiopian renaissance dam. Hence in this year, electricity supply growth is set to 17.5 percent.2 This simulates the new generating capacity of GERD which come online over this period (i.e. two turbines of GERD each with capacity 375 MW have already been installed and are waiting test electricity generation). From 2022 onward, electricity supply growth rate is set to 94.4 percent in our policy run.

Discussion and analysis

Policy Simulation Results

The main rationale of this paper is to provide an economy-wide examination of the contribution that additional power generation from Ethiopian renaissance dam will make to Ethiopian economy over the coming years. Intentionally in this section the policy simulation results are expressed as percentage deviations relative to the baseline, unless otherwise we stated. In this part, although we present results for all years of simulation, we pay particular attention to analyzing results for the years 2020 and 2027, which respectively corresponds to the implementation period of Ethiopian renaissance dam and end of the simulation period. Now let us scrutinize our simulation results more plainly.

Macroeconomic effects

As a basic industry of the national economy, the electricity industry plays an irreplaceable role to support economic development. Thus, the impacts of Ethiopian renaissance dam on GDP should be put in the first place in order to know the power effect better. To do so, the simulation results in this study are presented in a series of real GDP growth, consumption, real investment, export and import deviation from baseline scenarios.

As shown in Figure 1 below, the positive impacts of Ethiopian renaissance dam on GDP are very significant. This change in the GDP is attributed to the change in the GDP distribution due to the reallocation of the factors of production, intermediate inputs among all domestic production sectors, change in the level of consumption and net trade. In opting of our policy shock, GDP gain accelerates with an additional power supplies resulted from Ethiopian renaissance dam, i.e. on average Ethiopian GDP grows by 2.29 from the year 2020 to 2027 compared to the baseline scenario.

[...]


1 Lecturer at Debre Markos University, College Of Business and Economics, Department Of Economics

2 This growth rate electricity supply is computed by the following formula that interpreted as the smoothed annualized growth rate achieved during the considered time horizon where n = number of periods

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Details

Title
Estimating the Economic Wide Effect of Ethiopian Renaissance Dam on Ethiopian Economy
Subtitle
A Recursive Dynamic Computable General Equilibrium Approach
College
Addis Ababa University
Grade
A
Author
Year
2019
Pages
19
Catalog Number
V537097
ISBN (eBook)
9783346135445
ISBN (Book)
9783346135452
Language
English
Tags
estimating, equilibrium, general, computable, dynamic, recursive, economy, renaissance, ethiopian, effect, wide, economic, approach
Quote paper
Ashiber Tsegaye (Author), 2019, Estimating the Economic Wide Effect of Ethiopian Renaissance Dam on Ethiopian Economy, Munich, GRIN Verlag, https://www.grin.com/document/537097

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