ec 936 economic policy modelling
DESCRIPTION
EC 936 ECONOMIC POLICY MODELLING. LECTURE 7: CGE MODELS OF STRUCTURAL CHANGE AND ECONOMIC REFORM. WASHINGTON CONSENSUS (Williamson, 1989). STRUCTURAL ADJUSTMENT POLICIES Budget deficit reduction Public expenditure reform Tax reform Financial liberalization - PowerPoint PPT PresentationTRANSCRIPT
EC 936 ECONOMIC POLICY MODELLINGEC 936 ECONOMIC POLICY MODELLING
LECTURE 7:LECTURE 7:
CGE MODELS CGE MODELS OF OF
STRUCTURAL CHANGESTRUCTURAL CHANGEANDAND
ECONOMIC REFORMECONOMIC REFORM
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
AUGMENTED WASHINGTON CONSENSUS (Rodrik, 2002)
• Land reform
• Poverty reduction
• Social safety nets
• Anti-corruption policy
• Legal reforms
• Governmental/institutional reforms
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
CGE MODELS OF STRUCTURAL ADJUSTMENT AND ECONOMIC REFORM IN AFRICA
CAMEROON THE GAMBIAMADAGASCAR 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
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
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
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
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
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?