EC 936 ECONOMIC POLICY MODELLING

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EC 936 ECONOMIC POLICY MODELLING

• LECTURE 7
• CGE MODELS
• OF
• STRUCTURAL CHANGE
• AND
• ECONOMIC REFORM

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WASHINGTON CONSENSUS (Williamson, 1989)

• STRUCTURAL ADJUSTMENT POLICIES
• Budget deficit reduction
• Public expenditure reform
• Tax reform
• Financial liberalization
• Foreign exchange liberalization
• Trade liberalization
• Privatization of state-owned enterprises
• Competition policy
• Deregulation of foreign direct investment

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AUGMENTED WASHINGTON CONSENSUS (Rodrik, 2002)

• Land reform
• Poverty reduction
• Social safety nets
• Anti-corruption policy
• Legal reforms
• Governmental/institutional reforms

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WHY CGE MODELS?

• General vs partial equilibrium analysis
• Counterfactual modelling
• Decomposition of complex array of simultaneous
  influences (exogenous as well as policy
  decisions)
• Simulation exercises
• Evaluation of key parameters

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CGE MODELS OF STRUCTURAL ADJUSTMENT AND ECONOMIC
REFORM IN AFRICA

• CAMEROON THE GAMBIA
• MADAGASCAR NIGER
• Key structural similarities
• High share of labour force in agriculture
• Export oriented/primary commodities
• Small industrial sectors
• Similar external shocks pre-reform
• Terms of trade shocks (falling commodity prices)
• Real exchange depreciation (except for Cameroon)
• Structural divergences
• Budget balance
• Nominal exchange rates
• Financial stability

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THE CORNELL CGE MODEL(Dorosh, Sahn et al)

• SAM based model
• Four household sectors (urban non-poor, urban
  poor, rural non-poor, rural poor)
• Cameroon 14 sectors (6 agric, 2 ind)
• The Gambia 17 sectors (6 agric, 1 ind)
• Madagascar 15 sectors (5 agric, 4 ind)
• Niger 14 sectors (5 agric, 3 ind)
• CES value-added production function
• Disaggregated labour (formal/informal by skill
  type)
• Sector-specific fixed capital (formal/informal)
• Disaggregated land by ecological type
• LES or fixed-share consumption functions

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CLOSURE RULES

• Micro
• Market clearing in commodity and labour markets
• Aggregate labour supply fixed
• Armington elasticities for imports
• CET functions for exports
• Government spending exogenous
• Macro
• Savings driven
• Current account deficit held constant

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FOUR SIMULATION EXERCISES

• How might governments respond to external shocks?
• I Impose import quotas to maintain real
  exchange rate
• (de facto adjustment)
• II Real exchange rate deprecation (foreign
  exchange
• liberalization)
• III Real exchange rate depreciation and maintain
  budget
• balance (i.e. cut government expenditures)
• IV Real exchange rate depreciation and impose
  trade taxes to
• maintain level of government expenditure

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CONCLUSIONS

• Terms-of-trade shocks lowered real incomes for
  most households
• Foreign exchange rationing and quotas exacerbate
  the negative effects on poor households, while
  raising incomes for the urban non-poor
• Foreign exchange rationing and quotas lower
  long-run growth potential via lowered
  savings/investment
• Cutting government expenditures raises
  savings/investment relative to raising trade
  taxes
• Cutting government expenditures increases urban
  poverty relative to raising trade taxes
• Political economy implications

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POTENTIAL CRITICISMS

• Sensitivity of results to closure rules, both
  macro and micro (do markets clear? should
  economies be modeled as savings-driven or
  investment-driven? and so on)
• How well is the model calibrated to changes in
  variables as well as static representation of
  resource flows (via the SAM)?
• Is it appropriate to model households as
  homogenous within categories such as
  poor/non-poor urban/rural?
• Is neo-classical modelling appropriate for
  evaluating neo-classical policy agendas?