J. Appl. Environ. Biol. Sci., 7(9)59-69, 2017 | ISSN: 2090-4274 |
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Using CGE Modeling as an Alternative Approach to measure the Performance
1Assistant Professor, School of Management Studies, The University of Faisalabad, Faisalabad. Pakistan1 Corresponding Author, 2Chairperson, Department of Economics, Government College University Faisalabad, Faisalabad. Pakistan 3Assistant Professor, COMSATS Institute of Information Technology, Islamabad, Pakistan
Received: March 18, 2017 Accepted: June 18, 2017
Computable General equilibrium (CGE) models take into account inter-linkages between different sectors of the economy and emphasize on factor and product markets and on prices and output through detailed input-output analysis and equations. Like any other modelling technique, CGE models also have strengthens and weaknesses. The current study attempts to investigate the maximum available studies that employed the CGE models whether static or dynamic in nature. CGE models are believed to be one the most reliable ones to investigate the policy options for an economy. The main purpose of this study was to combine the portfolio of studies that employed CGE modeling to assess the performance of any economy on the fronts of trade and development approach and to facilitate the researchers and policy makers. KEY WORDS: Trade, Price, Policy, CGE, Economic Growth, Static.
It has passed more than two decades that International Monetary Fund (IMF) and World Bank has engaged the international economic community with the worldwide campaign of economic reforms through the economic stabilization and structural adjustment programs. However, the debate shifted its focus to international economic integration through fare international competition and trade liberalization from structural adjustment and stabilization [25]. International economics is considered to be the oldest branch of the economics discipline. Economic activities within an economy and between two economies have been accepted as distinctively separate domains. Both types of the economies have differences not only in customs, population and consumptions patterns but also the trading economies have tax and currency system for the traded products. The ancient problems not only exist today but also many other problems joined them [29]. International trade theories are concerned with the gains accruing to trading partners on their mutual trade if tradable goods are produced according to the principle of comparative advantage based on their factor endowments. Economies at national or international level pay special attention towards the production structures while considering the trade policy instruments [30]. Tariffs and quotas are the instruments of trade policy that affect the relative prices of the goods in any given economy. The demand for inputs changes when the economy changes the mix of produced goods and services. Hence, it is difficult to predict that any given change in trade policy will affect only one sector of the economy [42]. The backward and forward linkages in the economy bring a change in the sectoral output mix according to the strength of the linkages [32]. In the pursuit of economic growth, many developing economies have espoused economic liberalization policies. It is based on a common fabrication that countries with fewer trade restrictions have fast-paced economies and vice-versa. Trade liberalization has an inherent tendency to raise employment elasticity of economic growth thereby creating a better impact. However, critics of globalization find a chance to underline that growth benefits might possibly be unevenly spread; as a result, the consequences of distribution could also affect the poor adversely [35]. In order to check the authenticity of theories models are worked out and to make researchers to know about implications of the theories and address different policy issues. Once the general equilibrium is developed it then becomes quite easy to check for all the possible policy changes [53]. Therefore when the concept of liberalization policies got attention; at the same time CGE got its importance in front of developing economies. CGE incorporates all the interactions that are market-based and results generated suggest that which kind of policy would be more appropriate for a certain economy. The factor behind the more appropriateness of CGE than all its linear predecessors is that it eliminates the linearity constraint found in all the previous models. But every model has certain implications.
*Corresponding Author: Dr. Sofia Anwar, Chairperson, Department of Economics, Government College University Faisalabad, Faisalabad. Pakistan. sofia_eco@gcuf.edu.pk
CGE unlike other models no doubt solves the complexity of micro-macro analysis to a greater extent but still this issue is not solved completely as none of model can address all the issues in adjustment programs. CGE models have been classified from most simple to complex depending according to the study that which model to incorporate. Trade policies adopted by any country have far reaching affects in many allied sectors of the economy therefore Computable General equilibrium (CGE) usually help better analyse the policies; affecting the economy in positive or negative terms and its extent can also be checked [39]. This paper is hence an effort to present the studies related to CGE modelling used to analyse the various trade policy related effects on economy. This study has the three main objectives; one, to conduct a detailed literature review on CGE models and international trade. Two, facilitate the new researchers to find the latest available literature on CGE technique and three, to highlight the importance of CGE model and especially the GTAP model.
Policy makers usually check the indirect and direct affects through CGE about certain policies, like for instance they check that if specific policy is formed then which sectors are benefited and how much percent of the benefit we can gain or losses we can bear. Advantage of using CGE is that it uses General equilibrium, helps in adjustment of policy issues and after a micro and macro analysis none of the field is left untouched. Models effectively portray the view of an economy as whole, they are being used for prediction and these predictions are according to the results obtained. The basic objective of policy makers is to see the real picture of the economy through theories and form models according to that for future prediction [52]. There were many surveys conducted regarding CGE and every author according to his field of interest studied different portion of it. For example, [9] studied the national taxation portion of dynamic CGE, [10] focused on trade and taxation portion and [19] focusing on developing countries studied the trade scenario quantification and CGE’s contribution in it. A survey on CGE model was made with especially focus on its application side [50] and policies in LDC’s through CGE were surveyed by [8]. Comparison analysis through the input-output and regional issues was done by [34]. Through CGE many issues of taxes and public finance, environmental and energy policies, tariff and other trade policies and developmental policies have been addressed. A CGE model was applied to study the policies for Ecuador through incorporation of financial portfolio [31] and inflation and interest rates as endogenous variables. Through simulation results it was observed that if the current expenditures are reduced then it would benefit the economy in the long run. But contractionary monetary policy would discourage the private investors due to a rise in interest rates. Different effects of the above mentioned policies were seen on sectoral poverty. If we check out the rural sector it is benefited from this policy of reduced expenditure but the urban sector is affected badly as it has to face the exchange rate devaluation, demand contraction and the losses in public goods benefit. Here comes the benefit of CGE during such contradiction. He concluded in the end that reduced fiscal expenditure benefited the poor sector of Ecuador. While conducting a survey on impacts of trade reforms on the poverty [33] the need of certain properties in a model were observed; while calculating the distributional impacts of macroeconomic policy reforms. The study stressed that these properties should be used in all four types of models namely CGE, econometric, micro simulation and fixed ratio that are commonly used for assessing the impact of such policy options. The five recommended properties namely; (i) representing specific policy controls employed by policy packages, (ii) providing pliability in modelling production and employment nest, (iii) representing connections among macroeconomic variables and production nest, (iv) representing short term and medium term dynamics instead of long term and (v) producing procedures of confidence for the model’s output. The study concluded that despite lacking short term analysis and weakness of non-verifiability, the CGE models still provides the best results among others when considering the said criteria. Rules of macro closure were studied [4] through CGE model and insensitivity was found regarding the size of distribution while sensitivity was observed in functional distribution regarding the rule. The balance of payment was found equally important as of saving-investment closure rule. Simulation results might vary for every country. If some policies are going good for one country; it is not necessary that same results would be observed for another country even if the same policies are adopted. This is because each country has a different adjustment pattern of market mechanism and institutional structure. Likewise; the two economies i.e. middle income Latin America and low income African country were analysed [17] by developing a macro model. The results clearly explained that the devaluation of exchange benefits the low income people as they are located in export markets. But affects the people of middle income because when the Government reduces its expenditures uniformly it has less effects on low income people but greater effects on middle income as through this inequality accruing of premium occurs on capital. A financial CGE model was developed by [12] and then further extended by [22] as they represented all the advancement in the field of structural adjustment policies regarding modelling on income distribution and performance of economy. Further extension was made in such a way that market for loanable funds was incorporated. Countries start adopting the
J. Appl. Environ. Biol. Sci., 7(9)59-69, 2017
policies of structural adjustment in order to have a sustained growth rate. But some studies reveal that adoption of these programs affects the poor people a lot so can’t be fully applied. CGE model was also utilized to investigate the impact of research and development (R&D) activities and trade protections on the economic growth of Japanese economy [20]. The model used the real data for calibration and estimated the transitional equilibrium and steady state results. The results of steady state equilibrium were found odd showing a week effect of tariff imposition on the production of domestic final products. The study justified the strange results with two reasons: first, it is due to limitations of the model and second, final good producers did not compete with R&D activities for resources allocation. The model designed for the study was unable to detect the impacts of technology improvements accrued from trade. On the other hand, the transitional equilibrium showed a substantial impact of protection trade policies on the output growth of the economy. To investigate the impacts of trade and aid in developing African economies, CGE model was found quite suitable [3]. CGE model was employed in the backdrop that econometric models were unable to detect the “Dutch disease” effects on these economies. The results of the simulation showed that gains from trade were more than the gains from aid. The study encouraged the those tranfers (whether throgh aid or trade) that helped to accumulate the capital in the economy. This accumulated capital will help to shift the exports from raw to manufactured goods that ultimatly result into increased household welfare. It was interesting to note that tranfers thorugh aid adversly affcted the exports and domestic productivity while the trade helped to increase not only the domestic out put but also the consumption level. Similarly, the distortions attached with aid were found more important than the trade. It was due to the fact that subsidities given for export promotion will increase the fiscal burden ultimatly. In a study that calculated the impact of agriculture trade liberalization both at domestic and abroad on the economic growth of Pakistan, both static and dynamic CGE were employed [56]. For this purpose, the study used SAM for the year of 2002 for Pakistan. The findings of the simulation revealed a positive impact of agriculture trade liberalization both at domestic and international level on economic growth of Pakistan. Further it was explored that the impact of liberalization at international level was stronger than domestic level liberalization. The agriculture trade liberalization was found to be more beneficial for rural households in long run than for urban household while in case of income distribution, it revealed positive impact in short run but adverse negative impact in long run. In another study CGE model was employed [5] to check the effects of external balance variations on different sectors of Pakistan economy. The economy was aggregated into 33 sectors that measured the impact of changes in external savings and import prices on these sectors. The results showed that if foreign saving is increased (50%), it causes an increase in imports and reduction in exports of the economy. The most affected sectors were livestock, cement, textile and leather in export reduction area while the income of unskilled labour (non-agriculture) and agriculture labour was increased. The reduction in export was the result of an increased prices of imported inputs especially petroleum prices. The results further explored that it will also excavate the poverty and income inequality. Using SAM of 2003-04 of India CGE model by was applied [45] to investigate the impacts of trade liberalization on GDP growth. The study showed a negative impact on the GDP growth of India due to liberalization. It was further explored that it was only agriculture sector that benefitted from the unilateral and multilateral agreements while in case of non-agricultural products, the growth was only possible if the agreement was unilateral. In both cases, wages and prices increased and interestingly, increase in wage rate was more than increase in price level resulting in an increase in real income of household. The study concluded that lower income group of people were adversely affected in terms of food intake (calories) either rural or urban; while other group improved benefits. In regional economics the trade agreements have long lasting effects on the partner countries. Therefore to assess the impact of various trade agreements CGE modelling was extensively used in literature, see [24 and 11]. The impact t of SAFTA on South Asian economies in terms of poverty, household welfare and inequality was studied [24]. The study reviewed all the economies in the region that make it unique contribution in the existing literature. The study found that due to similar product mix all economies except Bangladesh will get benefit at moderate level due to trade liberalization. This liberalization will increase the household welfare in general. The study suggested that in case of Bangladesh, unilateral trade reforms are better solution. For India and Bangladesh, the study found that the trade liberalization under SAFTA will help to increase the income inequality and increase poverty level. A global CGE model MIRAGE was used [11] to investigate the gains and losses of SAFTA to members of and nonmember countries. The study analysed both the situations of including and excluding the products of sensitive list in the process of trade liberalization. The results revealed that if trade is liberalised at its full strength (including all products), it simply results into trade diversion effect. This liberalization did not seem to be in favour of LDCs of the region. It was interesting to note that it was Sri Lanka who obtained maximum benefits from SAFTA, it is because the country already imposed minimum tariff rates in the region. Further it was discovered that this liberalization is increasing the income of unskilled labour at higher rate. The study concluded that SAFTA is promising a low tariff income for all member countries.
In a similar manner [44] discussed the trade relationship between EU and Southern Africa by using the comparative static multi-region, multi-sector CGE globe model as a tool for conducting various simulation scenarios in order to examine the effects of the envisaged EU-SADC (Southern African Development Community) EPAs (Economic Partnership Agreements) on individual SADC economies. The modeling work utilized the most recent GTAP database. The simulation results suggested that a comprehensive EPA scenario is essential welfare-improving for many SADC members. The agreements, however, did not serve as a stumbling block towards more integration for SADC members into the world markets. The study further suggested that a comprehensive EPA scenario is the best option vis-à-vis the WTO-compatible alternatives for SADC non-LDCs. The CGE modeling was also used to measure the impact of public expenditures (macro-micro) on the economic growth in Pakistan. The dynamic CGE model was applied [6] considering two approaches in the simulation for public investment. Infrastructure investment for financed by production taxes in first approach and in second approach it was financed by foreign borrowings. It was important to note that the impact of both approaches was same especially when considering the long run goals of poverty reduction and macroeconomic gains. The study further discovered that financing by tax puts stress on output in short run at industrial level while financing through foreign borrowing have impact like “Dutch Disease1” in short run. Likewise the simple Computable General Equilibrium (CGE) was used [9] to discuss the role of fiscal policy in poverty reduction in Pakistan. The CGE model takes into account market interaction, it creates ripples in the whole economy by showing the outcome effects of pricing in one market and other markets. Further the model even shows the quantity effects of pricing in the original market. The study used SAM 2002 developed by [21]. The study found that a policy mix of sales tax, income tax and government expenditure help to reduce income inequality while at the same the lessen economy’s financial dependency. The impact of tax reforms i.e. reduction in tariff on income distribution was analysed in Pakistan in the CGE model framework [57]. The analysis was based on the Social Accounting Matrix (SAM) 1989-90 with aggregation of production activities into 5 sectors (agriculture, industry, education, health and ‘others’). Households were disaggregated into urban and rural households with further disaggregation of each urban and rural HH by 4 income groups2. The policy experiment was based on 80 percent reduction in tariff rate on industrial imports. The analysis indicated that tariff reduction led to decrease in prices of industrial imports that led to increase in imports. The results highlighted a reduction in the producers’ supply in the domestic economy, as reduction in the labor demand and wage rate in the industry specific sectors but increase in labor demand agriculture, health and education sectors. HH income decreased and the findings showed that gap between rich and poor increased as the decline in income of the poor households was greater than the decline in the income of rich HH’s. The government revenue decreased and income distribution becomes worse off in rural as well as in the urban areas. In extending the same phenomenon, the help of this technique was also taken to explore the impact of agricultural income tax on income inequality and welfare of household in Pakistan. The purpose of the study [41] was to estimate the possibility and validity of employing an agriculture income tax and estimating the possible affects occurring at micro and macro level in the country. The study applied a CGE model for analysing the situation of agricultural income tax and reduction in sales tax for production activities to adjust the budget surplus. The experiment was based on the two elements. The results suggested the implementation of agricultural income tax was beneficial for the economy in terms of household welfare at macro level and very important tool for the development strategies of future.
A lot of discussions have been made on the role of trade liberalization in poverty reduction. Many researchers tried to investigate the potential impacts of trade liberalization on the development and poverty reduction in developing economies. Similarly, classical and neo-classical trade theories also forecast that trade liberalization increases the general welfare level in an economy but these theories failed to explain the links between welfare and trade liberalization. In this context a two country, two goods and two factors theory presented by [26] states that if an economy desires to increase the exports and production, it has to focus on enhancing the productivity. Even today, the developing economies have abundant unskilled labour force and that can be compensate by increasing the trade and price of produced goods. Modern theories of trade suggest that trade liberalization brings efficiency through economies of scale, technological improvements, access to the information and spill over effects. It is unfortunate that
1 “Dutch disease” is a term that is used when an economy faces the negative impact of anything such as discovery of natural resources (oil, gas etc.), that causes a rapid inflow of foreign currencies which appreciates the domestic currency resulting into decline in exports of other goods due to increased prices in the foreign markets. 2 The four income groups are (i) Income level up to Rs. 2500 (ii). 2501-4000 (iii) 4001-7000 and (iv) 7000 and above.
J. Appl. Environ. Biol. Sci., 7(9)59-69, 2017
these theories even fail to explain the effects of liberalization on non-tradable and non-homogenous goods along with some explicit factors or segments of labour market [60]. Many researchers have used the CGE model to investigate the impacts of trade liberalization. Trade liberalization can be categorized into unilateral, bilateral or multilateral trade liberalization. Under the unilateral trade liberalization, economies are assumed to eliminate/reduce tariffs against rest of the world economies but the later do not need to do so. The bilateral trade liberalization is possible under the free trade agreement between two economies in which each one is agreed to reduce/eliminate tariff on its import from its trade partner. Under the multilateral trade liberalization, every member country of the free trade agreement (FTA) reduces or eliminates tariff against all the members of the FTA. Some of the studies based on the trade liberalization, are reviewed as follows. While employing the CGE model and adjustment in fiscal policy [55] trade liberalization was examined through the updated SAM [35] and by aapplying the methodology developed by [23]. The study incorporated additional sectors and actors into the model and it also allowed the intra household allocation of resources. The SAM included nine categories of the HH with aggregation into male and female and four education levels, nine social reproductive sectors and nine leisure sectors3. The SAM considered two sources of household income: the value of labour used in production sectors and adjusted income of the own account workers. The SAM also considered the market and non-market sectors as well as the paid and unpaid sectors of the economy with disaggregation of labour into male and female with further categorization in terms of four education levels4. The production accounts were consisted of 4 major categories; the agriculture (5 sectors), mining (1 sector), manufacturing (8 sectors) and others (7 sectors). The results found that compensatory trade liberalization increases the employability of male and female. It reduces the gap between the wages of male and female along with overburdening the female in Pakistan. It also helps to empower the women with greater pace than any other activity. The study suggested that with compensatory measures, the impact of liberalization should also be measured on the household work and leisure along with other market based activities. In the similar way, the impact of trade liberalization on different economic indicators was compared among seven African and Asian economies [18] through CGE model by giving more attention to the patterns of income, consumption, trade and production patterns along with basic tariff structure and the role of relative factor endowments. The trade liberalization affected different commodities and household sectors in different manners. Further the urban household were found befitting from liberalization while rural household were at loss, similarly agriculture sector seemed losing its growth rate while manufacturing sector gaining. Overall the trade liberalization helped to reduce poverty and increase the household welfare. Wages and prices increased and interestingly, increase in wage rate was more than increase in price level. Trade liberalization brought pro-urban effects which were considered due to major reduction in the land returns. In a broad review about the outcomes of trade liberalization on poverty [27] it was concluded that both micro and macro methodological approaches should be considered. The study concluded that to quantify the impact of trade liberalization on poverty, there are possible four methodological groups namely (a) cross-country regression analysis,
3 The study also incorporated the time allocation in market and non-market activities. 4 The four education levels are no education, less than 5 year of education, 5 but less than 10 years and 10 and above years of education.
different policy scenarios simulated in the model. Policy scenarios such as reducing or eliminating tariffs and quotas to all or some sectors result in different policy simulations. To overcome revenue lost due to elimination or reduction of tariffs or quotas, different compensatory mechanisms are adopted by the countries. Combining dynamic CGE model to a representative household model in Vietnam [61] a macro-micro analytical approach was developed. The results showed a significant increase in economic growth with both gains from liberalizing trade against ASEAN and also a remarkable boost when expanding it to cover rest of the world. He also concluded that capital investment and human capital accumulation see a rise as soon as Vietnam expands its trade with other countries. In addition although poverty in Vietnam falls due to the substantial lift in the economic growth but in rural sector income inequality increase tremendously in most vulnerable households when liberalizing trade. To study the trade liberalization impact on poverty, a CGE model was developed [40] with different simulation for Bangladesh. The Result indicated that total elimination of tariffs favours export-oriented sectors in the economy. In short run both rural and urban states experience in the overall reduction in the short run with a marginal increase in poverty gap is projected for urban areas. In contrast the trade liberalization reduces absolute poverty both in urban and rural areas during long-run. While studying the changes in distribution of income due to foreign trade, [26] showed that overall consumption increased with increase in the foreign savings but decreased with increase in the import price of petroleum and industrial raw materials. The study used the SAM (2002) in which activities were aggregated into three major groups including agriculture (12 sectors), industrial (16 sectors) and service (6 sectors) with disaggregation of labour into ten categories based on size, type of employment (agri/non-agri) and skilled/unskilled. Households were grouped into Urban and Rural households disaggregated into total 17 sub-categories based on farm size and poor/non poor (urban and rural). The policy experiments included (i) 50 % increase in foreign savings (ii) 10% increase in the import price of petroleum and (iii) 10 % increase in the import price of industrial raw materials. The results showed that trade deficit increased due to increase in foreign savings. The findings highlighted that the only losers are the large and medium size farmers and the small farmers become better off. Poverty decreased and the Gini coefficient showing a slight decrease. Manufacturing sector stands the worst in all the sectors. Measuring the poverty and welfare impacts of trade liberalization in the CGE framework a study was conducted [49] using the SAM (1995-96)5. The activities were grouped into three groups; agriculture (7), industries (12) and services (6). The experimental design consisted of (a). Elimination of all types of tariffs accompanied by an increase in production tax and imposition of new taxes on the construction sectors. (b). full tariff elimination accompanied by increase in income tax (c). Reduction in tariff rate to the actual level of tariff reduction was undertaken by the government. The results showed that the import volume of many goods that included petroleum, chemical, clothing grains and machinery increased. Demand for import substitutes decreased and for composite import increased due to decrease in import prices. The results of the second simulation are similar to simulation 1 although they are lower in magnitudes. Exports price decreased which resulted into increase in demand for exports. Labour and capital demand in the protected sector (petroleum, chemical and machinery) decreased whereas in the less protected sector (ready-made garments and commercial) increased. Labour income in all simulations decreased along with decline in HH’s income with larger reduction in the income of rural households. Overall welfare decreased with greater loss in welfare of rural households than the urban and rich households. In the second simulation, the loss in welfare of rich households is higher than rural households whereas in the third simulation the overall consumption of all the households increased leading to welfare gain to all the households. Poverty level increased under the first simulation and decreased under the 2nd and 3rd simulations. In Argentina with special emphasis on export taxes, [15] studied both poverty and inequality due to trade reforms. The study used a national CGE model combine it with a global economy-wide CGE model (World Bank LINKAGE Model), and micro-simulations. They based the national CGE model on Social Accounting Matrix (SAM) with 24 activities and 26 commodities. The results obtained show that full trade liberalization of world excluding export taxes, the agricultural and non-agricultural goods, decreases poverty and income inequality in Argentina. However the effects on poverty and inequality were even deteriorated somewhat when only the agricultural goods were considered. In order to examine the effect of trade reforms and alternative global trade strategies on poverty as inequality of various households, a study was conducted [14] by using the comprehensive micro data of Brazilian states from 19872005. The results demonstrate that the states directly affected by tariff cuts witnessed a decline in household poverty and the inequality then the ones which received lesser exposure states. Liberalizing trade helps to enhance household poverty and inequality in metropolitans and if one can linked this into reductions in rural areas as during studies they found no significant effect on the rural poverty. Added to that they observed that world market integration, import
5 The SAM consisted of 26 production sectors and 7 factors of production (6 types of labour and one capital). HH were aggregated into 7 groups based on location, sociological and wealth criteria.
J. Appl. Environ. Biol. Sci., 7(9)59-69, 2017
dissemination will have a similar role to trade liberalization for both urban and rural states of Brazil. However, increasing export exposure seems to have drastically reduced both useful measures of household welfare. In order to better capture the heterogeneous household response to trade [17] suggested the use of CGE models in conjunction with micro simulation models. The study suggested that simplest approach to evaluate income & poverty effects using a CGE model is to disaggregate the total representative households (RH) to get the true picture of diverse learning patterns. The study further found that higher the number of RH, the more the problem is minimized. The two techniques widely adopted to evaluate the effects on poverty and income inequality are the RH approach and the micro simulation approach (MS). Another detailed literature review was conducted by focusing on the studies that employed CGE model [43]. The study attempted to investigate the relationship between poverty and trade liberalization through literature surveys. The study concluded that since last two decades, researchers are more focused on this issue by applying different methods but the CGE approach remained most successful among others. The study further investigated different approaches of CGE and discovered that Global Trade Project (GTAP) model is more sophisticated and popular among policy makers. The literature concluded that the impacts of trade liberalization on poverty are mixed. It depends on type of liberalization (ASEAN integration, Bilateral agreements and WTO), characteristics of the economy, price phenomenon and factor markets, patterns of taxes and governments spending and technological and economic development.
The following studies have relied on examining the impact of the bilateral and multilateral trade agreements in the CGE framework. Dynamic CGE framework was used to assess the effects of multiregional trade liberalization of markets in 14 countries [49]. The study combined global macro model also known as GTAP model with a Micro simulation model; based on country level household surveys that simulated the effects on poverty for Indonesia. As shown in many previous studies that very rich households report their capital income much lower than their actual income [50 and 51]. To offset this difference, non-agricultural profit-type returns was adjusted for richest of the households in the survey, to keep the ratio of agricultural and non-agricultural income from GTAP database. Furthermore, they also adjust GTAP database that would reflect the factor composition of income from the household survey. This micro simulation model estimated poverty line which measured poverty as level of utility as opposed to identifying a basic bundle of goods within a LES consumption function for households. Another study to calculate the effect of Vietnam’s trade reforms applied GTAP through a developed CGE model revealed that both imports and exports of all tradable sectors increase with the largest surge in textiles and apparel. While in case of unilateral liberalization total welfare gains increase substantially. Unskilled labour income boost up as much as 38 percent with the mainstream labour involves in the manufacturing of textiles, apparel, wood products and telecommunications. However these results were found unrealistic [52] and some kind of trade-off between labour use and wages was recommended as this closure will yield better results. The framework of both partial and general equilibrium analysis was used by [1] to examine the potential impacts of FTA between the United Sates and Morocco by using the GTAP (version. 6). The experimental design was consisted of ‘strongly asymmetric liberalization’, ‘intermediate asymmetric liberalization’ and ‘full liberalization’. Under the partial equilibrium analysis, only a single scenario was tested, that is; tariff reduction by Morocco on its imports from United States. The findings of the 1st and 2nd scenarios under the CGE modelling indicate that US received higher gain than its counterpart in terms of increase in GDP and welfare US continued to receive higher gains in the 3rd simulation (full liberalization) whereas Morocco received negative gain in terms of welfare. Rest of the world got suffered under all the three scenarios. Morocco benefitted in many sectors with textile and clothing sectors are the biggest winners but faced loss in transport and wheat production while US stood gainer in wheat production and poultry. The partial equilibrium analysis’ results indicated that Morocco received potential gains in terms of increase in consumers’ welfare and increase in exports. In order to assess the economic impacts of bilateral free trade agreements related to Japan [2] employed the GTAP model (version. 6.2) with aggregation of sectors and regions into 25 sectors and 24 regions. The experiments included simulations for all bilateral FTAs of Japan and simulations for the regional/multilateral trade agreements related to Japan. The first analysis was made for Japan’s bilateral FTAs with Malaysia, Singapore and Mexico in which Japan followed asymmetry in tariff elimination in terms of commodities while, its partners were assumed to abolish all their tariffs against Japan. The study showed that all the bilateral FTAs’ partners of Japan gained from FTA in terms of increase in their GDPs and EVs. Japan gained from FTA with Malaysia and Mexico only and experienced loss in its welfare from its ‘FTA’ with Singapore. Rest of the world got suffered due to the loss in share of market in Japan and its FTA partners but overall world welfare increased. Mexico led in gains in sectoral production as compared to the other economies. The study also carried out a number of simulations to examine the static as well as dynamic impacts of all the possible future bilateral FTAs of Japan as well as regional FTAs in the similar fashion. The results revealed that Japan’s gain increased with increase in the number bilateral FTAs. Rest of the world suffered due to loss in welfare gains. GTAP (version.6) was also employed to assess the impacts of FTA between Mercosur and EU in the framework of CGE model with the aggregation scheme of 33 commodity groups and 21 regions [13]. Two policy experiments were carried out; 1st: “full liberalization” and 2nd “partial liberalization”. The simulation results revealed that the interregional as well as intra-regional trade increased along with increase in GDP, exports and imports of the Mercosur region with improvement in the terms of trade (TOT). However, Mercosur experienced negative impact on its trade balance with differential impacts on various sectors across the member economies. The GDP of EU decreased exports and imports increased with improvements in the trade balance. Trade flows to rest of the world decreased for both the regions. The production of agriculture and light manufacturing sectors increased and of the heavy manufactured decreased for Mercosur. Both the regions gained as shown by efficiency changes in terms of re-allocation of resources, change in terms of the TOT and change in saving-investment balance. Following same methodology a study employed the higher version of GTAP model (version. 7) with the re-aggregation of regions and sectors into 20 regions and 35 sectors; to assess the impacts of India’s FTA with ASEAN [58]. Results showed that India’s exports to the AEAN member economies increased significantly. However, increase in imports was higher than exports and so India suffered due to loss in its terms of trade. The findings highlighted that Thailand, Singapore and Malaysia welfare increased. Total production of the ASEAN region increased along with increase in input demand and input prices. The simulations results also pointed out that rest of the world stood worst due to its loss in the market share in the ASEAN region. Another study attempted to investigate the impacts of trade liberalization between Pakistan and the SAFTA member economies by [51]. The study utilized the modified version of the GTAP (version.4) database with aggregation of regions into 10 regions and commodities into 10 commodity groups6. The policy experiments included ‘unilateral trade liberalization’, ‘regional trade liberalization’ and simultaneously ‘unilateral and regional trade liberalization’ with three additional experiments associated with one each to the initial three experiments. The study also employed the conditional sensitivity analysis (CSSA) associated with the three policy experiments to check the sensitivity results. The results indicated that Pakistan received a welfare gain of 1.53 % in terms of increase in GDP. Overall imports increased and exports decreased (textile exports increased while food, mining and manufacturing exports decreased) with improvement in its terms of trade (TOT). On the other hand, due to the regional trade liberalization or equivalently reduction in import tariff by SAFTA, the volume of trade in the SAFTA region increased with highest welfare gain to India followed by Pakistan which received relatively less gain. However, rest of the Asia adversely affected due to the trade diversion effect. The results also showed that the unilateral and regional trade liberalization simultaneously increased the welfare of both Pakistan and India with greater improvement in TOT. Rest of the Asia got suffered with loss in their terms of trade (TOT) and trade volumes. To examine the potential trade effects between Pakistan and India, research study involved GTAP analysis to judge the welfare effect of Pakistan Most favoured Nation (MFN) status to India [36]. The study discussed the major trade barriers to bilateral trade as well as for regional trade. The simulation has been studied in 10 regions and 29 commodities. The study presented the comprehensive assessment of the trade relations between India and Pakistan with detailed analysis of trade modalities. The study concluded that the welfare effect of MFN status for both countries is higher if it is supported by improved trade facilitation across the borders. This can not only increase the trade volume but also exports between the two countries. The GTAP simulation further analyzed that Pak-India trade cooperation would have positive affects for other South Asian countries. The same issue of trade liberalization between Pakistan and India was further studied by employing the GTAP’ (version 8) [47] with aggregation of regions and commodities into 13 regions and 20 commodity sectors. The policy simulations included (i) ‘full liberalization of trade against each other’, (ii) “simulation 1 plus 50% productivity improvement in all modes of transportation services” and (iii) “simulation 2 plus full liberalization. The analysis revealed that due to trade liberalization, the welfare of both India and Pakistan increased with higher benefit to India under policy experiment 1. Welfare increased for both the economies when a 50% productivity improvement was introduced in the modes of transportation engaged in trade between Pakistan and India. The welfare for India increased by 4 times when full liberalization was included in FTA whereas the welfare of Pakistan decreased as compared to simulation 2. All the three types of policy experiments showed an increase in exports to each other. A CGE model for Mozambique was developed by [58] to analyze the impact of free trade agreement on poor households. The study employed MyGTAP developed by [37] to investigate the distributional consequences of three
6 The 10 regions in GATP were, Pakistan, India, Rest of Asia, ASEAN, and rest of Asia, Japan, European Union, NAFTA, Middle East and rest of the world. The 10 groups of commodities were agri-groups, mining and quarrying, processed food, textile, wearing appraisal, petroleum and coal, machinery, transport, services and others.
J. Appl. Environ. Biol. Sci., 7(9)59-69, 2017
trade agreements namely Regional Economic Agreement (REA), Tripartite Free Trade Agreement (TFTA) and African Continental Custom Union (ACCU). The study includes 21 Regions, 10 households and 22 commodities. The results of the study found that the completion of REC’s have minimal effect on household’s income and loss of government revenue. In case of TFTA, sugar export has been increased and rendered positive effect on the real income of the agriculture households. In addition to this, in case of ACCU the poor household would suffer. Moreover the projected income of the country would fall. To calculate the impact of food and nutrition security on multiple household of Ghana [6] a study employed the newly developed MyGTAP database of [37]. The study involved a multiple household to study the effects of food policy on the most vulnerable sector of the society helping the government to design intervention in order to provide relief to the poor segment of the society. The study embedded 19 commodities and 9 households. In the study, the following three approaches were used to incorporate multiple household data in GTAP data base. Firstly, user weights have been assigned to household and incorporate in GTAP. Secondly, the study included household data through national SAM. Thirdly, they directly place household survey in GTAP analysis. The result suggested that the removal of export subsidy is useful to the poor people of Ghana.
The study concludes that CGE models are widely used in research to analyze the affects of various policies in economic sectors. Either in static or dynamic form, CGE models normally use the data bases of Social Accounting Matrix (SAM) or Global Trade Analysis Project (GTAP) to calculate the impact of different simulations. It was further discovered that GTAP models are best suitable when studying the multiple economies. Initially the CGE studies only used the local SAM to calculate the impact of different policy options and this form of CGE is more suitable to calculate the impact on poverty and household income. GTAP model are relatively more useful for open economies when studying the impact trade agreements.
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