Poverty effects of Russia’s WTO accession: Modeling real households with endogenous productivity effects

Abstract

Abstract: We employ a computable general equilibrium comparative static model of the Russian economy to assess the impact of accession to the World Trade Organization (WTO) on income distribution and the poor. Our model is innovative in that we incorporate all 55,000 households from the Russian Household Budget Survey as “real ” households in the model. This was accomplished due to our development of a new algorithm for solving general equilibrium models with a large number of agents. In addition, this is the first paper to include foreign direct investment and Dixit-Stiglitz endogenous productivity effects in trade and poverty analysis. In the medium term, we find that virtually all households gain from Russian WTO accession, with 99.9 percent of the estimated gains falling within a range between 2 and 25 percent increases in household income. We show that our estimates are decisively affected by liberalization of barriers against foreign direct investment in business services sectors and endogenous productivity effects in business services and goods. We use our integrated model to assess the error associated with a “top down ” approach to micro-simulation. We find that approximation errors introduced by failing to account for income effects in the conventional sequential approach are very small. However, data reconciliation between the national accounts and the household budget survey is important to the results. Despite the estimated gains for virtually all households in the medium term, many households may lose in the short term due to the costs of transition. Thus, safety nets are crucial for the poorest members of society during the transition