Water purchases to save the Murray-Darling Basin

Murray-Darling Basin communities have suffered recurring and prolonged droughts over the past decade. Now that the rains have returned, these communities see the Sustainable Diversion Limits (SDLs) planned by the Commonwealth as a new threat. Modelling with TERM-H2O assumes that since the SDL process is voluntary, Commonwealth purchases will proceed slowly over the next 12 years. This gives farmers time to utilize water saving technologies as they emerge. This is in contrast to the relatively rapid purchase of 920 GL up until September 2010 that has already occurred. These relatively rapid sales reflect hardship associated with drought. If the Commonwealth is to reach the 3500 GL target, it may need to pay over $4 billion more to farmers for water (2010 dollars). The Commonwealth’s budget constraint will limit the volume purchased. Implementing (SDLs) will raise the price of water and the asset value of water held by farmers. At the same time, the value of irrigated land will fall, partly offsetting the increase in the asset value of water. This means that some irrigators may gain more than others. Those who do best will be those whose water entitlements have a high value relative to the value of their land. Under a voluntary scheme that proceeds slowly and gives time for further water savings to occur, there will be modest job losses across the basin. These might fall to 500 jobs below forecast by the year 2026. The extent to which farmers who sell water to the Commonwealth leave the region will have a moderate influence on regional outcomes. TERM-H2O is the only model which has been calibrated by using the drought of 2006-07 to 2008-09 to estimate regional impacts. In the drought scenario, over 6,000 jobs were lost in the short term relative to forecast across the basin. Therefore, SDL impacts are much smaller than drought impacts.Environmental Economics and Policy,

CGE modelling of the resources boom in Indonesia and Australia using TERM

The sharp increase in Australia's terms of trade since 2003-04 has dramatic regional and sectoral implications. Mining-intensive regions have gained from the jump in export prices. Import-competing sectors have faced greater competition both from falling import prices and due to rising demand for domestic factors from the mining sectors. The drought of 2006 will widen the gap between winning and losing regions. In Indonesia, even if we assume that the oil extraction sector is facing resource depletion, a long-run terms-of-trade improvement may result in aggregate consumption increasing should real GDP fall relative to the base case. The TERM framework is highly suitable for modelling Brazil and China, each with around 30 regions.Resource /Energy Economics and Policy,

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

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. 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 temporarily retire capital in response to scarcer farm products, limiting upward price movements in farm outputs and resulting in more realistic modelling of drought. Results are explained using a back-of-the-envelope approach. This framework allows us to estimate the economic impacts of allowing water trade. 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.Research Methods/ Statistical Methods,

The Impacts of Higher Energy Prices on Indonesia’s and West Java’s Economies using INDOTERM, a Multiregional Model of Indonesia

Indonesia’s national and regional/local policy makers are becoming increasingly concerned with disparities between regions. Aggregate incomes and expenditures in one region may change proportionally more than national changes. This paper contains a technical summary of the structure and special features of INDOTERM model, a member of the TERM family (TERM = The Enormous Regional Model). It treats West Java and the rest of Indonesia as separate economies. We discuss the data required to prepare a version of INDOTERM that represents all the provinces of Indonesia. Finally, we present a long-run simulation of the impacts of the recent hike in global energy prices on the Indonesian economy combined with possible depletion of Indonesia’s crude oil supplies. The special features for future development of INDOTERM are multiple household incomes and expenditures and a “top-down” extension representing sub-provincial municipalities. Nationally, Indonesia’s real income losses due to resource depletion are more than compensated by the sharp increase in the terms of trade arising from the increase in global demand for energy. West Java and the rest of Indonesia fare similarly, as a large proportion of the composite region consists of the remaining provinces of Java which have a similar economic structure to West Java. The relatively sparsely populated outer islands that are relatively rich in mineral resources are not represented separately. Using a “top-down” extension of West Java’s 25 municipalities and districts in INDOTERM, the simulation shows that Kabupaten Indramayu fares best. This local region also loses from the decline in crude oil productivity, and indeed the output loss more than outweighs the increase in natural gas production for this effect. But it gains substantially from the energy price hikes: the increase in nominal income has a substantial positive effect on the municipality, with local industries, including trade and motor repairs experiencing output increases in excess of 40%. Overall, the municipality experiences a gain in factor income of 7.3%, whereas most other regions of West Java lose income in the scenario.Computable General Equilibrium, Regional CGE, Indonesia

Regional economic impacts of a plant disease incursion using a general equilibrium approach

The present study uses a dynamic multiregional computable general equilibrium (CGE) model to estimate the micro- andmacroeconomic effects of a hypothetical disease or pest outbreak. Our example is a Karnal bunt incursion in wheat in Western Australia. The extent of the incursion, the impact of the disease or pest on plant yields, the response of buyers, the costs of eradication and the time path of the scenario contribute to outcomes at the industry, regional, state and national levels. We decompose the contribution of these individual direct effects to the overall impact of the incursion. This might provide some guidance regarding areas for priority in attempting to eradicate or minimise the impacts of a disease or pest. The study also introduces a theory of dynamic regional labour adjustment in which economic events may lead to both real wage differentials and worker migration between regions.Crop Production/Industries,

Who Gains from Australian Generic Wine R&D and Promotion?

A multi-sectoral partial equilibrium model of the markets for two types of Australian grapes and wine (premium and non-premium) is developed to study the aggregate returns from different types of research and promotion investments by the industry and their distribution across actors in the market (grapegrowers, winemakers, wholesalers/retailers, domestic consumers, the tax office and foreign consumers). The distinction is made between premium and non-premium, since half the market is non-premium and yet virtually all the R&D and marketing efforts are focused on just premium products in an attempt to raise quality as consumers continue to move upmarket. The results show that most of the gains from cost-reducing R&D go to producers, with wineries faring better than grapegrowers; that producers get a far larger share of the benefit from promotion when it is targeted abroad than when it focuses on domestic consumers; and that foreign consumers of Australian wine enjoy a small share of the benefits.Economics of R&D, Promotion, Wine, Equilibrium displacement modelling

Wine export demand shocks and wine tax reform in Australia: Regional consequences using an economy-wide approach

We provide economy-wide modeling results of the national and regional implications of two current challenges facing the Australian wine industry: a decline in export demand for premium wines, and a possible change in the tax on domestic wine sales following the Henry Review of Taxation. The demand shock causes regional GDP to fall in the cool and warm wine regions but not in the hot wine regions unless the shock is large. A change from the current ad valorem tax to a similarly low volumetric tax on domestic wine sales causes regional GDP to rise in the cool and warm wine regions, partly offsetting its fall due to the export demand shock; but GDP in the hot wine regions would fall substantially. The switch to a volumetric tax as high as the standard beer rate would raise tax revenue and lower domestic wine consumption by more than one-third, but would induce a one-third decrease in production of non-premium wine as its consumer price would rise by at least three-quarters (while the average price of super premium wines would change very little), hence exacerbating the difference in effects of a tax reform on hot versus warm and cool wine regionsÂ’ GDP.Wine export demand, wine consumer taxation, regional economy-wide modeling

Book Reviews

Teaching/Communication/Extension/Profession,

U.K. and Global Wine Markets by 2025, and Implications of Brexit

AbstractThe United Kingdom has accounted for a major share of the world's wine imports for centuries, and wine accounts for more than one-third of U.K. alcohol consumption. It is therefore not surprising that suppliers of those imports and U.K. wine consumers, producers, traders, distributors, and retailers are focusing on what the United Kingdom's planned withdrawal from the European Union (Brexit) might mean for them. In this paper, a model of the world's wine markets is used to project those markets to 2025 without, and then with, the occurrence of Brexit. The Brexit scenarios involve adjustment not just to U.K. and EU27 (the countries remaining in the European Union) bilateral tariffs but also to assumed changes to the United Kingdom's income growth and currency. The relative importance of each of these three components of the initial shock are reported, as are impacts on bilateral wine-trade values and volumes for still and sparkling wines. The results suggest that the impact outside the United Kingdom will be minor compared with other developments in the world's wine markets. Inside the United Kingdom, however, the effect of Brexit on incomes and the British pound are likely to have nontrivial initial impacts on the domestic wine market and to be far more consequential than the direct impact of changes in bilateral tariffs. (JEL Classifications: F15, F14, F13)</jats:p

Economic contributions and characteristics of grapes and wine in AustraliaÂ’s wine regions

Over the past two decades, the Australian wine industry has been through a remarkable period of export-oriented growth. Even when vines for drying and table grapes are included, the vineyard area in Australia has trebled over the 20 vintages to 2008, the biggest surge in Australia’s history. In the first half of the 1980s, barely 2 percent of the country’s wine production was exported, which was less than the volume it imported. Today, nearly two-thirds of Australia’s production is exported – and production itself has increased nearly four-fold since the early 1980s. Prepared for the Grape and Wine Research and Development Corporation (GWRDC), Winemakers Federation of Australia (WFA) and the Australian Wine and Brandy Corporation (AWBC). The authors are grateful for funding from GWRDC (Project Number UA08/04) and the University of Adelaide’s Wine2030 project, and for helpful comments from Leanne Webb of CSIRO, Jim Fortune, and members of the project’s Industry Reference Group.