Trade liberalisation and regional integration: the search for large numbers

We surveyed the empirical literature using multi-country computable general equilibrium (CGE) models to analyse potential and actual regional trade agreements (RTAs). The studies indicate that these RTAs improve welfare, that trade creation greatly exceeds trade diversion, and that they are consistent with further global liberalisation. The welfare gains are bigger when models incorporate aspects of ‘‘new trade theory’’ such as increasing returns, imperfect competition, and links between trade liberalisation, total factor productivity growth, and capital accumulation. We also conjectured that an RTA expands market size and stability, allowing firms to pursue economies of fine specialisation, generating additional ‘‘Smithian’’ efficiency gains.International Relations/Trade,

Empirical models, rules, and optimization

This paper considers supply decisions by firms in a dynamic setting with adjustment costs and compares the behavior of an optimal control model to that of a rule-based system which relaxes the assumption that agents are explicit optimizers. In our approach, the economic agent uses believably simple rules in coping with complex situations. We estimate rules using an artificially generated sample obtained by running repeated simulations of a dynamic optimal control model of a firm's hiring/firing decisions. We show that (i) agents using heuristics can behave as if they were seeking rationally to maximize their dynamic returns; (ii) the approach requires fewer behavioral assumptions relative to dynamic optimization and the assumptions made are based on economically intuitive theoretical results linking rule adoption to uncertainty; (iii) the approach delineates the domain of applicability of maximization hypotheses and describes the behavior of agents in situations of economic disequilibrium. The approach adopted uses concepts from fuzzy control theory. An agent, instead of optimizing, follows Fuzzy Associative Memory (FAM) rules which, given input and output data, can be estimated and used to approximate any non-linear dynamic process. Empirical results indicate that the fuzzy rule-based system performs extremely well in approximating optimal dynamic behavior in situations with limited noise.Decision-making. ,econometric models ,TMD ,

Spatial networks in multi-region computable general equilibrium models:

The spatial dimension of economic policy is often important. However, as opposed to partial-equilibrium multi-region programming models, existing multi-region Computable General Equilibrium (CGE) models have rarely explicitly treated geographical space. This paper develops a spatial-network, mixed-complementarity CGE model that combines the strengths of CGE and partial-equilibrium programming models. We implement the model with a prototype data set for a stylized, poor, developing country with rural regions linked to an urban region that provides the gateway to international markets. We demonstrate that the model provides a good framework for analyzing the impact of higher world prices and reduced domestic transportation costs.Equilibrium (Economics), Economic policy., Spatial analysis (Statistics), Computable general equilibrium (CGE).,

A note on taxes, prices, wages, and welfare in general equilibirium models:

Changes in real wages are often used to measure welfare changes. There is a problem, however, in interpreting measures of changes in factor returns when analyzing the impact of changes in taxes — such as tariffs and indirect taxes — that operate as wedges in product and factor markets versus direct taxes that do not work through the price system. One must account for both how the tax is collected and where the tax revenue goes. We sort out how a shift in tax structure will affect the real wage in a model which isolates the price, wage, revenue, and welfare effects. We start from a simple general equilibrium model which accounts for all income and expenditure flows in the economy and includes both traded and domestic goods. We analyze the impact of changes in indirect taxes and tariffs on prices and factor income and demonstrate the pitfalls of using real factor returns as a welfare indicator. There is a transfer effect on factor returns arising from any shift between indirect and direct taxes, regardless of any efficiency effects. Next, we add explicit factor markets to the model and describe the implications for income distribution in an extension of the Jones trade model. We find that the transfer effect dampens the magnification effect of a price change on factor returns, but does not reverse the Stolper-Samuelson results.Trade policy., Welfare economics., Equilibrium (Economics).,

Trade and tradability

We extend the Salter-Swan model to include both factor markets and semi-traded goods. In our model, changes in relative factor prices depend on changes in world commodity prices, factor endowments, and the trade balance. In contrast, only changes in world commodity prices can affect factor prices in the neoclassical trade model. The inclusion of semi-traded goods weakens the magnification effect of both the Stolper-Samuelson and Rybczynski theorems. When imports and domestic goods are poor substitutes, a characteristic of some commodities in developing countries, the sign of the Stolper-Samuelson effect is reversed. Authors' Abstract.Exports. ,Imports. ,Trade. ,Commerce Mathematical models. ,

Trade and the skilled-unskilled wage gap in a model with differentiated goods

"There is a continuing debate about the role of changes in trade on the evolution of relative wages particularly the skilled-unskilled wage gap. In the 1980's, the wage gap widened considerably in the United States, and there was an active literature on the roles of trade, technology, and changes in labor supplies, particularly due to migration and education, in explaining these changes. The empirical models used to analyze the links fall into two broad groups: (1) partial-equilibrium models of the labor market, focusing on changes in the supply and demand of labor by skill category, and (2) general equilibrium trade models linking domestic factor returns to changes in world prices and the composition of trade....In this paper, we present a theoretical model that can capture many of the differences between the approaches of trade and labor economists." from Authors' Introduction.Equilibrium (Economics) Models ,

Trade liberalization and regional integration: the search for large numbers

The debate over the impact of regional trade agreements (RTAs) on world welfare hinges upon (1) whether they are net trade creating or trade diverting and (2) whether they impede multilateral trade liberalization. Theoretical models are ambiguous on these issues. We summarize the insights from the vast body of empirical literature on multi-country CGE models which analyze RTAs. The empirical models overwhelmingly show that aggregate trade creation dominates trade diversion. Indeed, in many cases, there is no absolute aggregate trade diversion from an RTA. The models also indicate that welfare for all members — both current and potential — increases when RTAs expand. There are even bigger welfare gains when models incorporate aspects of “new trade theory” such as increasing returns, imperfect competition, technology transfers, trade externalities, and dynamic effects such as links between trade liberalization, total factor productivity growth, and capital stock accumulation. We broaden the search for large numbers by suggesting an additional gain from RTAs. We conjecture that increases in intra-sectoral trade arise from the fact that an RTA provides an expanded secure market, and permits firms to pursue economies of fine specialization. This Smithian specialization in production is another source of efficiency gains.Trade liberalization Econometric models., Trade policy Econometric models., Regional economics., Welfare economics.,

Economy-wide effects of El Niño / Southern Oscillation (ENSO) in Mexico and the role of improved forecasting and technological change

Weather fluctuations, such as those caused by the El Niño Southern Oscillation (ENSO), add to the riskiness associated with agricultural production. Improved predictive capacity may help ameliorate negative impacts of climate and weather shocks on agriculture, but it is possible that the benefits of an improved forecast will be distributed unevenly. In particular, poor farmers may not have access to improved forecasts, or they may not have the means to adapt to new weather information. This paper uses a stochastic computable general equilibrium (CGE) model to examine the distributive effects of improved forecasting of ENSO in Mexico. The particular focus is on agriculture, one of the most vulnerable sectors in the face of ENSO, as well as a sector which provides income to many of the country's poorest households. The model is used to investigate the responsiveness of various sectors of the economy under different degrees of improved predictive capacity and improvements in agricultural technology....The results show that while agricultural losses are small as a share of the overall economy, improved forecasting techniques can eliminate these lossesStochastic analysis ,Agriculture Environmental aspects Mexico ,Climatic changes Models ,Agricultural productivity ,Forecasting ,TMD ,

Productivity and externalities : models of export led growth

In developing countries, industrialization for successful export-led growth has been associated with rapid structural change and growth in productivity. Standard neoclassical growth models have difficulty explaining this change in performance. This paper has developed a simple analytical model incorporating export externalities that capture the large increases in the share of trade and total factor productivity that are associated with export-led growth. It also has developed a second model that breaks growth into its various components, which includes the effects of: (a) factor accumulation; (b) moving factors from areas of low productivity to area of high productivity; (c) exporting heavy and light manufactures; and (d) importing capital goods. The paper implements the second model with data from an archetypal semi-industrial country. The model accounts for the higher total factor productivity growth observed in countries pursuing export-led growth strategies. It also captures the pattern of structural change that such countries experience.Banks&Banking Reform,Achieving Shared Growth,Economic Theory&Research,Environmental Economics&Policies,Economic Growth

The social impact of a WTO agreement in Indonesia

Indonesia experienced rapid growth and the expansion of the formal financial sector during the last quarter of the 20th century. Although this tendency was reversed by the shock of the financial crisis that spread throughout Asia in 1997 and 1998, macroeconomic stability has since then been restored, and poverty has been reduced to pre-crisis levels. Poverty reduction remains nevertheless a critical challenge for Indonesia with over 110 million people (53 percent of the population) living on less than $2 a day. The objective of this study is to help identify ways in which the Doha Development Agenda might contribute to further poverty reduction in Indonesia. To provide a good technical basis for answering this question, the authors use an approach that combines a computable general equilibrium (CGE) model with a microsimulation model. This framework is designed to capture important channels through which macroeconomic shocks affect household incomes. It allows making recommendations on specific trade reform options as well as on complementary development policy reforms. The framework presented in this study generates detailed poverty outcomes of trade shocks. Given the magnitude of the shocks examined here and the structural features of the Indonesian economy, only the full liberalization scenario generates significant poverty changes. The authors examine their impact under alternative specifications of the functioning of labor markets. These alternative assumptions generate different results, all of which confirm that the impact of full liberalization on poverty would be beneficial, with wage and employment gains dominating the adverse food price changes that could hurt the poorest households. Two alternative tax replacement schemes are examined. While direct tax replacement appears to be more desirable in terms of efficiency gains and translates into higher poverty reduction, political and practical considerations could lead the Government of Indonesia to choose a replacement scheme through the adjustment of value-added tax rates across nonexempt sectors.Rural Poverty Reduction,Economic Theory&Research,Poverty Assessment,Achieving Shared Growth,Inequality