Structural Effects of a Real Exchange Rate Revaluation in China: A CGE Assessment

The misalignment of the Chinese currency exposed by the rapid build-up of China’s foreign exchange reserves over the past few years has been the subject of considerable recent debate. Recent econometric studies suggest a Renminbi undervaluation on the order of 10 to 30%. The modest revaluation of July 2005 is widely perceived as insufficient to correct China’s balance-of-payments disequilibrium and has not silenced charges that China is engaging in persistent one-sided currency manipulation. Within China there are widespread concerns regarding the adverse employment effects of a major revaluation on labour-intensive export sectors, yet the likely magnitude of these effects remains a controversial issue. The paper aims to shed light on this question by simulating the structural effects of a real exchange rate revaluation that lowers the current account surplus-GDP by 4 percentage-points using a 17-sector computable general equilibrium model of the Chinese economy.Renminbi undervaluation; real exchange rate misalignment; applied general equilibrium analysis

From overhang to hangover: consequences of protectionist responses to the global crisis for low-income countries

As the global economic crisis unfolds, policymakers around the world are faced with increasing pressures to resort to protectionist measures in support of domestic producers. While observable recent protectionist trends are certainly a far cry from the spiralling protectionism of the 1930s, and the trade restrictions implemented so far are limited in scope, it is widely expected that pressures on policymakers to adopt protectionist measures will intensify as the crisis deepens. Inspired by the approach proposed in Bouet and Laborde Debucquet (2009), this paper employs a global computable general equilibrium (CGE) trade model to contrast the outcomes of a successful Doha agreement with the consequences of a scenario in which countries raise their import duties to the maximum levels compatible with current WTO obligations. The study complements the earlier CGE analysis of Bouet and Laborde Debucquet by using a more differentiated regional disaggregation with a particular focus on low-income regions in Asia and sub-Saharan Africa, by adopting alternative factor market closures that allow for unemployment and underutilization of capital in the short run, and by incorporating the most recent (December 2008) Doha Round draft modality revisions in the analysis. The illustrative simulation results presented hereconfirm that a widespread resort to WTO-rule-consistent protectionism in response to the crisis would have drastic adverse implications for developing country trade and welfare, especially if factor market imperfections are taken into account. A swift successful completion of a meaningful Doha Round – i.e. a Doha Round that is not hollowed out by a plethora of exemptions - would gradually reduce existing binding overhangs considerably and would thus reduce the threat of a WTO-compliant rise in global protection that is bound to impede a global economic recovery.Doha round; protectionism; global financial crisis; binding overhang; developing countries; least developed countries

Public debt, the terms of trade and welfare in an overlapping generations model with lifetime uncertainty

This article reconsiders the relationship between government debt and welfare in a two-country overlapping-generations model with lifetime uncertainty and international product differentiation. It has recently been proposed that a higher steady-state debt level may be welfare-enhancing in this setting. It is pointed out that this proposition does not adequately account for the effect of debt policy on individual agents' intertemporal consumption profiles. While a higher debt may indeed raise aggregate steady-state consumption, the lifetime utility of all steady-state cohorts will actually , unless the elasticity of substitution between domestic output and imports is extremely low. These particular results illustrate a more general caveat pertaining to any normative policy analysis in settings with overlapping generations of intertemporally optimizing agents: Attempts to draw welfare inferences on the basis of comparisons of aggregate consumption paths can be misleading.

The Price Normalisation Problem in General Equilibriun Models with Oligopoly Power: An Attempt at Perspective

In general equilibrium models with oligopolistic firms, equilibrium outcomes may depend on the choice of numeraire. When firms have the power to influence prices strategically, different price normalisations entail objective profit functions which are generally not monotone transformations of each other. Hence, under the assumption of profit maximization an arbitrary change in the price normalisation rule amounts effectively to a change in the objective pursued by firms. Applied general equilibrium analysts using models with imperfect competition have largely ignored the price normalisation problem. In several recent contributions to the literature, applied modellers are explicitly criticized for their neglect to address the numeraire issue. The purpose of this paper is to assess the validity and practical relevance of these criticisms for applied policy analysis.applied general equilibrium analysis, imperfect competition, price normalization problem, oligopoly, numeraire, CGE analysis

Global energy and environmental scenarios: implications for development policy

"As part of a wider review of existing scenario analyses in areas with direct relevance to the future of global development, this paper focuses on two major recent studies: the scenarios contained in the UN Millennium Ecosystem Assessment (MEA) and the scenarios developed by the International Energy Agency (IEA) in support of the G8 Gleneagles plan of action on climate change, clean energy and sustainable development. The paper offers a critical appraisal of these scenarios, examines the drivers of change that are considered to influence future developments, explores the implications of the scenarios for developing countries, and outlines what types of changes in development policy could be appropriate in light of the lessons learned from these scenario exercises. The adverse consequences of growing pressures on ecosystems due to demographic and economic drivers identified in the MEA scenario projections are most immediately felt by rural poor populations in the least developed regions of the world. The degradation of ecosystem services poses a significant barrier to the achievement of the Millennium Development Goals. Many of the regions facing the greatest challenges in achieving these targets coincide with regions facing the greatest problems of ecosystem degradation. Significant changes in policies, institutions, and practices can mitigate many of the negative consequences of growing pressures on ecosystems. A key implication of the interdependence between environmental and development goals is the need for a meaningful integration of environmental sustainability concerns in national development plans and strategies of individual donors and intergovernmental development agencies, as well as the need for closer coordination between multilateral environmental agreements and other international institutions in the development policy sphere. The IEA baseline scenario clearly shows that without decisive globally coordinated policy action in support of the adoption of low-carbon energy technologies, GHG emissions will continue to rise rapidly over the 21st century and exacerbate current global warming trends. However, in the presence of a supporting policy environment, emerging clean energy technologies can move the global energy system onto a more sustainable path and return world-wide energy-related CO2 emissions back to today's level by 2050. Most of the future growth in energy demand, and hence emissions, arises from developing countries. An effective follow-up agreement to the Kyoto Protocol must therefore include the major large and fast-growing developing countries including China and India. Developed countries have an important role to play in helping developing economies to leapfrog the technology development process and to employ efficient equipment and practices through technology transfer, capacity building and collaborative research, development and demonstration efforts. It will take a huge internationally coordinated effort to achieve the positive outcomes suggested by the IEA-scenarios, and development cooperation on an unprecedented scale will be required as part of this effort. Thus, an important future role of development policy must be the facilitation of the technology and knowledge transfer that is required to meet this challenge. Overall, the scenario studies under review confirm that ecosystem degradation and global warming pose serious threats for poverty reduction and development and deserve high priority on the future development policy agenda." (author's abstract

Global energy and environmental scenarios: Implications for development policy

As part of a wider review of existing scenario analyses in areas with direct relevance to the future of global development, this paper focuses on two major recent studies: the scenarios contained in the UN Millennium Ecosystem Assessment (MEA) and the scenarios developed by the International Energy Agency (IEA) in support of the G8 Gleneagles plan of action on climate change, clean energy and sustainable development. The paper offers a critical appraisal of these scenarios, examines the drivers of change that are considered to influence future developments, explores the implications of the scenarios for developing countries, and outlines what types of changes in development policy could be appropriate in light of the lessons learned from these scenario exercises.Economic development; Low-carbon growth; Sustainable growth; Millennium development goals

Exchange rate volatility and exports: new empirical evidence from the emerging East Asian economies.

This paper examines the impact of bilateral real exchange rate volatility on real exports of five emerging East Asian countries among themselves as well as to 13 industrialised countries. We recognise the specificity of the exports between the emerging East Asian and industrialised countries and employ a generalised gravity model. In the empirical analysis we use a panel comprising 25 years of quarterly data and perform unit-root and cointegration tests to verify the long-run relationship among the variables. The results provide strong evidence that exchange rate volatility has a negative impact on the exports of emerging East Asian countries. In addition, the results suggest that the pattern of bilateral exports is influenced by third-country variables. An increase in the price competitiveness of other emerging East Asian countries has a negative impact on a country’s exports to a destination market, but the magnitude of the impact is relatively small. These results are robust across different estimation techniques and do not depend on the variable chosen to proxy exchange rate uncertainty. The results of the GMM-IV estimation also confirm the negative impact of exchange rate volatility on exports and suggest that this negative relationship is not driven by simultaneous causality bias

Exploring the Macroeconomic Impacts of Low-Carbon Energy Transitions: A Simulation Analysis for Kenya and Ghana

The study applies purpose-built dynamic computable general equilibrium models for Kenya and Ghana with a disaggregated country‑specific representation of the power sector, to simulate the prospective medium-run growth and distributional implications associated with a shift towards a higher share of renewables in the power mix, up to 2025. In both countries, the share of fossil fuel-based thermal electricity generation in the power mix will increase sharply over the next decade and beyond according to current national energy sector development plans. The overarching general message suggested by the simulation results is that in both countries it appears feasible to reduce the carbon content of electricity generation significantly without adverse consequences for economic growth and without noteworthy distributional effects

Computable General Equilibrium Simulations of the COMESA-EAC-SADC Tripartite Free Trade Agreement

Building upon earlier work by Willenbockel (2013; MPRA Paper No.51501), this study provides an extended ex-ante computable general equilibrium (CGE) assessment of the Tripartite Free Trade Agreement between the member states of the Common Market for Eastern and Southern Africa, the East African Community and the Southern African Development Community. The CGE approach enables a consistent integrated predictive evaluation of sectoral production and employment impacts, aggregate income and welfare effects of changes in trade barriers while taking full account of the macroeconomic repercussion arising e.g. from terms-of-trade effects, tariff revenue changes and intersectoral input-output linkages. The simulation analysis considers four distinct trade integration scenarios, which are based upon the agreed tariff reduction modalities and differ in their assumptions about export taxes, trade facilitation efforts and labour supply elasticities

From overhang to hangover: consequences of protectionist responses to the global crisis for low-income countries

As the global economic crisis unfolds, policymakers around the world are faced with increasing pressures to resort to protectionist measures in support of domestic producers. While observable recent protectionist trends are certainly a far cry from the spiralling protectionism of the 1930s, and the trade restrictions implemented so far are limited in scope, it is widely expected that pressures on policymakers to adopt protectionist measures will intensify as the crisis deepens. Inspired by the approach proposed in Bouet and Laborde Debucquet (2009), this paper employs a global computable general equilibrium (CGE) trade model to contrast the outcomes of a successful Doha agreement with the consequences of a scenario in which countries raise their import duties to the maximum levels compatible with current WTO obligations. The study complements the earlier CGE analysis of Bouet and Laborde Debucquet by using a more differentiated regional disaggregation with a particular focus on low-income regions in Asia and sub-Saharan Africa, by adopting alternative factor market closures that allow for unemployment and underutilization of capital in the short run, and by incorporating the most recent (December 2008) Doha Round draft modality revisions in the analysis. The illustrative simulation results presented hereconfirm that a widespread resort to WTO-rule-consistent protectionism in response to the crisis would have drastic adverse implications for developing country trade and welfare, especially if factor market imperfections are taken into account. A swift successful completion of a meaningful Doha Round – i.e. a Doha Round that is not hollowed out by a plethora of exemptions - would gradually reduce existing binding overhangs considerably and would thus reduce the threat of a WTO-compliant rise in global protection that is bound to impede a global economic recovery