Trade liberalization and foreign direct investment: an applied general equilibrium model for Costa Rica

This paper quantifies the welfare impact of unilateral trade liberalization and computes the optimal tariff structure for Costa Rica in the presence of trade-policy-induced international capital flows and foreign capital taxation. For this, an applied general equilibrium model integrating trade, capital flows and international capital income taxation is used. The model has been calibrated to a 1990-91 data set for the economies of Costa Rica and a group of OECD countries. In the model, foreign capital income is taxed by host countries and the tax-credit system operates in foreign investors home countries. Results for Costa Rica show that complete trade liberalization ends up being welfare-reducing, as it leads to an outflow of capital and loss of tax revenue which more than offset the efficiency gains from an enhanced resource allocation. The optimal tariff structure for the Costa Rican economy turns out to be a mixture of import tariffs and subsidies, though of a relatively small level

Investment Subsidies and Time-Consistent Environmental Policy

We describe a model of dynamic pollution abatement choices with heterogeneous agents, where, due to the presence of a distributional objective and to the absence of incentive-compatible compensation mechanisms, the choice of a second-best level of emission taxation is time-inconsistent. In this model, we investigate whether investment subsidies can act as a substitute for policy commitment.Pollution Abatement ; Emission Taxes ; Investment Subsidies

The Choice of Structural Model in Trade-Wages Decompositions

This paper explores the use of structural models as an alternative to reduced form methods when decomposing observed joint trade and technology driven wage changes into components attributable to each source. Conventional mobile factors Heckscher-Ohlin models typically reveal problems of specialisation unless price changes accompanying trade shocks are small, and can also produce wide ranges for the decomposition for parameterisations consistent with the joint change. A differentiated goods model which generalises Heckscher-Ohlin removes problems of specialisation and concentrates the range of decompositions more narrowly, but introduces larger demand side responses to trade shocks which greatly reduce the effect of trade. The conclusion offered is that the choice of structural model matters for decomposing observed wage changes into trade and technology components, and that reduced-form methods which do not discriminate between alternative structural models may not be that informative for such decompositions.

Demand Side Considerations and the Trade and Wages Debate

Recent trade and wages literature focuses on whether trade or technology has been the major source of increases in wage inequality in OECD countries since the 1980s. In this literature, no attention has been paid to demand side considerations. Using a simple heterogeneous goods trade model of the Armington type, and UK data, we show how trade shocks affecting the price of unskilled-intensive goods can be absorbed on the demand side, with little or no impact on relative wage rates. No wage impact occurs if the elasticity of substitution in preferences between imports and import substitutes is one. As this elasticity increases, trade plays an ever larger role in explaining wage inequality changes, and as the elasticity goes below one the sign of the effect changes. We suggest that since many import demand elasticity estimates are in the neighbourhood of one, there is a prima facie case that demand side considerations further lower the significance of trade as an explanation of recent trends in OECD wage inequality -beyond that reported in recent literature.

Decomposing Wage Inequality Change Using General Equilibrium Models

This paper presents ex post decomposition analysis of wage inequality change using multi-sector general equilibrium models. The analytical structure used is a specific- factors model of trade, which we calibrate to UK data for the two years 1979 and 1975. We first calibrate our general equilibrium trade model to observations on wage inequality, trade, production and consumption spanning these years, capturing the separate influences of trade, technology and demographics on inequality. Between these years wage inequality changed, but multiple changes in exogenous variables occurred (world prices, technology, endowments). We use calibration techniques to determine parameter values consistent with both the equilibria and the changes in exogenous variables contributing to the wage inequality change being decomposed. We then compute counterfactual equilibria in which only some of the changes in exogenous variables are present to allow us to assess what portion of the observed change is attributable to the various contributing factors. Our findings are that the roles of trade and factor-biased technological change are relatively larger than in earlier literature. We also find that changes in factor endowments to offset increased inequality generated by trade and skilled-biased technological changes, a feature that seems to have gone relatively unnoticed in earlier literature.

Debt Relief under the HIPC Initiative: Context and Outlook for Debt Sustainability and Resource Flows

Debt relief, External debt sustainability, HIPC Initiative, Poverty reduction

Debt Relief under the HIPC Initiative - Context and Outlook for Debt Sustainability and Resource Flows

external debt sustainability, HIPC Initiative, poverty reduction

Applied general equilibrium analysis of trade and environmental issues

This thesis uses general-equilibrium numerical-simulation techniques to analyse trade and environmental issues. It tries to take applied general equilibrium modelling in these areas beyond their traditional confines in a number of ways. These include endogenous incorporation of international capital flows into trade models, decomposition of observed economic outcomes, and computation of bargaining solutions and non-cooperative equilibria. Chapter 1 analyses the welfare, income distribution and macroeconomic implications of trade liberalisation and increased indirect taxation in El Salvador. It is found that these policies have little effect on welfare and income distribution, but a significant impact on macroeconomic aggregates. Chapter 2 examines trade liberalisation when foreign direct investment (FDI) flows and international capital income taxation are present, using data for Costa Rica. The main finding is that, once FDI flows and its taxation are taken into consideration, trade liberalisation can hurt a small open economy, whose optimal policy is no longer free trade but a combination of taxes and subsidies on imports. Chapter 3 deals with the decomposition into trade and technology constituents parts of recent increased wage inequality in the UK. It analyses how decomposition is affected by the way in which labour markets are modelled. It is found that when labour markets are perfectly competitive, the main force behind increased wage inequality is technological change, with trade playing only a small role; but when labour market inflexibilities are taken into account, any of the two factors considered can become dominant, depending on the parameter specification used in the model. Chapter 4 examines the incentives for developing-country participation in possible future negotiation on trade and the environment, assumed to break down on North-South lines. It finds that developing countries will do better if they negotiate jointly on trade and environmental policies than if they negotiate over trade policy only. However, negotiations accompanied with side payments of cash will be even better for them. Finally, Chapter 5 analyses the role of adaptation responses to damage from externalities. Using a hierarchy of models calibrated to UK data, we compare internalisation effects in the presence of these responses with a case where they are absent. We find that taking account of adaptation responses significantly reduces the level of full-internalisation taxes and the associated welfare gains from externality correction

The choice of structural model in trade-wages decompositions

This paper explores the use of structural models as an alternative to reduced form methods when decomposing observed joint trade and technology driven wage changes into components attributable to each source. Conventional mobile factors Heckscher-Ohlin models typically reveal problems of specialisation unless price changes accompanying trade shocks are small, and can also produce wide ranges for the decomposition for parameterisations consistent with the joint change. A differentiated goods model which generalises Heckscher-Ohlin removes problems of specialisation and concentrates the range of decompositions more narrowly, but introduces larger demand side responses to trade shocks which greatly reduce the effect of trade. The conclusion offered is that the choice of structural model matters for decomposing observed wage changes into trade and technology components, and that reduced-form methods which do not discriminate between alternative structural models may not be that informative for such decompositions