Computable General Equilibrium Analysis Research Articles

An Economic Assessment of the EU–Japan Economic Partnership Agreement with Realistic Preference Utilization Rates

Abstract Recent years have seen an increased focus on the implementation of Preferential Trade Agreements (PTAs). While the number of PTAs has risen remarkably since early 2000, data on the utilization of preferential tariffs under these agreements point out that some businesses have not gained access to all the benefits that PTAs can provide. When utilization rates are low, the impact of the agreement will likely differ from what was anticipated by ex-ante economic research. This paper conducts a dynamic Computable General Equilibrium (CGE) analysis of the expected impact of the EU–Japan Economic Partnership Agreement and compares a scenario that includes realistic preference utilization data with a standard scenario where all tariff liberalization is assumed to be fully utilized by businesses. The results show considerable differences between the two scenarios and illustrate the need to make the inclusion of credible utilization data standard practice in the modelling of international trade.

Trade and distribution in Guinea-Bissau: A computable general equilibrium analysis

Trade and distribution in Guinea-Bissau: A computable general equilibrium analysis

Contribution of road transport infrastructure in mitigating the inward–immiserizing growth in Cameroon: An externality approach in computable general equilibrium analysis

The issue of immiserizing growth has been largely discussed in the literature since 1958. It describes a country context contending with high volume of exports relatively to its imports on the international market that benefits from high economic growth but losses in households’ welfare. This study aims to investigate the contribution of transport infrastructure to tackle immiserizing growth in developing countries, focusing on the Cameroon economy, a contending with a significant lack in the development of road transport infrastructure. Further, the study enriches the debate on the wider economic impacts, closely related to immiserizing growth. The loss of welfare is observed upstream to the investigations, as a response to the application of two types of fiscal policies: the import tariff and the capital income tax. Through a dynamic Computable General Equilibrium (CGE) model, the effect of road transport infrastructure is explored, using the externalities approach. This is an innovative methodology recently applied to access the economic impacts of infrastructure investment making a difference between productive and non-productive infrastructure investments. The findings reveal that productive transport infrastructure not only reduces the wider economic impact by improving households’ welfare but also enhances economic growth. A 10 percent increase in road transport infrastructure investment funded by import tariff leads to a welfare improvement of 1.94% and 1.66% in both short and long terms compared to respective losses of 0.58% and 0.15% if the generated financial funds are allocated in non-productive infrastructure such as monuments, defense etc. The similar tendency is observed for the capital income tax funding. Thus, policymakers are recommended to accentuate the road construction, in order to shorten the complex interplay between public decisions and households’ living conditions.

Global Shocks and Local Impacts: A CGE Analysis on the Impact of COVID-19 and Russia-Ukraine Conflict on Pakistan's Wheat Sector

Wheat is one of the most important and vital sectors of Pakistan adding around 2% to the country's GDP growth each year. The crop has been in turmoil for the past four years. The primary drivers of this turmoil are the COVID-19 pandemic and the Russia-Ukraine conflict, which have impacted wheat production. The current study employs a Computable General Equilibrium (CGE) model focusing on the individual and combined effects of these two global shock scenarios. The study initiates by exploring the baseline scenario which assumes that there is no existence of Covid-19 or Russia Ukraine Conflict, then the results are calculated firstly for the productivity loss due to pandemic and then due to the Russian Ukraine conflict. Finally, both the productivity shocks are combined to study the shared effect of both the losses. The results indicate that the sector has experienced a significant loss, with spillover effects on its subsidiaries, including flour mills, bakery and confectionary industries, animal feed industries, and processed food industries. The labor and export markets shocks are also simulated highlighting the loss in both sectors attributing to disrupted supply chains and restrictions in covid nineteen and high dependency on Ukraine and Russia wheat imports. Welfare analysis has also been done for all the four scenarios to capture the welfare losses faced in the previous 4 years and the results are compared to the baseline scenario to compare the damage. To mitigate these losses, two policy scenarios are proposed: an expansionary fiscal policy and increased subsidies, followed by increased tariffs and a shift towards locally produced wheat instead of relying on imports.

The implications of the Russian invasion of Ukraine for African economies: A CGE analysis for Ethiopia

The Russian invasion of Ukraine contributed to soaring world market prices of many commodities with severe repercussions for many African countries. This study examines the implications of the 2022 world market price increases for wheat, fuels, and fertilizers for Ethiopia. Using a computable general equilibrium (CGE) model, the study shows negative impacts on GDP, wage rates, and households’ consumption in the country. The effects of fertilizer and petroleum price changes are notable and unequal across production sectors. With increasing import prices of inorganic fertilizers, crop growing activities substitute inorganic fertilizers with animal manure reducing the use of manure as cooking fuel. The effects on urban households are more severe than the effects on rural households. Policies supporting biofuels and biogas digesters may dampen the adverse effects stemming from petroleum price surges.

Labour market dynamics in the era of technological advancements: The system-wide impacts of labour augmenting technological change

The employment impact of future technological change is much debated. Some commentators predict devastating job losses, while others are more sanguine, claiming that technological change raises living standards without reducing total employment. Our analysis a use a combination of partial equilibrium and dynamic computable general equilibrium (CGE) analysis with neo-Keynesian characteristics. These models are employed to assess the implications of skill-biased labour-augmenting technological change. They are calibrated on recent German Social Accounting Matrix data and parameterised using the best available empirical results from developed economies. The numerical CGE multi-sectoral model simulates the system-wide impacts of pervasive technical change affecting all sectors of the economy. The model allows investigation of alternative scenarios based around a common economic structure and set of parameter values. The results suggest that labour-augmenting technological change typically stimulates GDP growth and long-run total employment. However, there are negative short- and medium-run employment and real wage implications which might require government policy intervention. The simulations indicate that for open developed economies, improving the efficiency of skilled workers, as opposed to unskilled workers, is the most beneficial. This improvement has positive long-run impacts that are spread across both skill classifications. On the other hand, increasing the efficiency of the unskilled produces negative impacts on skilled employment and real wages. Additionally, the openness of the economy to migration and trade are important in determining the scale of these system-wide effects.

A computable general equilibrium analysis of the EU CBAM for the Japanese economy

The EU plans to introduce a carbon border adjustment mechanism (CBAM) to curb carbon leakage and to protect energy-intensive and trade-exposed (EITE) industries. This move by the EU to introduce CBAMs has raised concerns in Japan that it will harm Japanese industry and the Japanese economy. To address these concerns, this study tries to provide an ex ante and quantitative analysis of the economic and environmental effects of the introduction of the EU CBAM. To capture the effects of the EU CBAM, this study employs a global multiregional, multisector computable general equilibrium model with 18 sectors and 17 regions. The main insights obtained from the analysis are as follows. First, we find that the introduction of the EU CBAM significantly reduces carbon leakage from the EU. Second, the effects of the introduction of CBAMs on the GDP and welfare of each country vary from country to country, but the effects are generally very small. While there is a positive impact on GDP and welfare in Japan, the magnitude of the impact is very small. There will also be a negative impact on Japan’s EITE industries, but the magnitude of this impact is very small and not of great concern.

Impact of skilled labour migration on energy, environment and economic growth in home and host countries: A computable general equilibrium analysis

AbstractMigration of both skilled labour force can alter economic conditions and environmental sustainability of both host and home countries. Therefore, this study aims to explore the effect of skilled labour force migration on economic growth, energy demand and environmental sustainability of home and host countries. This objective is realised by constructing a multiregional computable general equilibrium model for developed and developing countries. Furthermore, developing countries are subcategorized into four groups such as high income, upper middle‐income, lower middle‐income and low‐income countries. The results of policy simulations indicate that skilled labour migration can reduce the gross domestic product, welfare, energy consumption and carbon emissions in home countries, and the reverse is true for the host countries. Whereas the inflow of remittances to home counties can enhance their economic growth, energy consumption, and CO2 emissions, while reverse trend of remittances outflow is observed in host countries. Similarly, reverse migration can increase economic increase in developing countries along with increasing energy demand and carbon emissions. The study urges for developed countries for utilise skilled immigrants in environment friendly manufacturing industries.

Computable general equilibrium analysis of neutral carbon trading scheme and revenue recycling impacts on income distribution in China

Utilizing a dynamic computable general equilibrium (CGE) model, this paper critically assesses the potential distortions and efficacy of various revenue-neutral carbon emission trading schemes (ETSs) in China, through government subsidies and value-added tax (VAT) relief strategies aimed at achieving peak carbon emissions before 2030. The analysis reveals that reallocating market revenues to the production sector, either through government subsidies or VAT reductions, can feasibly attain carbon peaking before 2030, with minimal impact on GDP. Notably, both government subsidies and VAT cuts foster output growth in the oil, gas, and ETS-covered sectors. Moreover, directing carbon market revenue toward ETS-covered industries via VAT relief emerges as the most effective approach to reducing income disparities. In contrast, redistributing carbon market revenue to non-ETS-covered industries via VAT relief is found to be the least effective in promoting social equity. The study emphasizes that the reallocation of carbon market revenues to ETS-covered sectors is paramount. This strategy not only regulates the overall energy consumption effectively but also steers the nation towards a more sustainable and optimized energy consumption pattern. In light of these findings, this paper offers detailed insights and tailored policy recommendations, aiming to assist policymakers in striking a balance between environmental goals and economic and social imperatives.

The impact of public infrastructure investment on South Africa’s economy: evidence from social accounting matrix and computable general equilibrium-based approaches

This paper assesses the general equilibrium impacts of public infrastructure investment in the South African economy, as a case of an emerging economy, by making use of complementary general equilibrium models, such as the social accounting matrix (SAM) multiplier, the Structural Path Analyses (SPA) and the Computable General Equilibrium (CGE) models. Contrary to studies that use partial equilibrium models, this paper shows the importance of an economy-wide model to analyse the effects of public infrastructure investment in an emerging economy. The results of the analysis, based on the SAM and CGE analyses using a 2015 SAM for South Africa, indicate that increasing public economic infrastructure can be an effective way of stimulating the economy in a way that has a positive impact on labour. SPA shows that the leading and most important path of influence is the direct influence of the public infrastructure investment on each formal labour category. However, because the public infrastructure investment does not employ informal labour, this labour account is only indirectly connected via intermediate consumption of the output of the construction sector. These results suggest that an increase in public economic infrastructure could help address the unemployment problem that exacerbates poverty in South Africa.

Macroeconomic Outcomes of Healthcare Financing Reforms in Nigeria: A Computable General Equilibrium Analysis

Macroeconomic Outcomes of Healthcare Financing Reforms in Nigeria: A Computable General Equilibrium Analysis

Welfare effects of food-processing development in agriculture-based economies: a CGE analysis for Benin

ABSTRACTMost agriculture-based economies in Africa are working on increasing their agricultural productivity and production following the African Union (AU) recommendations. However, it has been shown that increasing agricultural production without ensuring value-chain development may end up in welfare losses for farmers due to falling farm-gate prices. Little research has been conducted so far on the economy-wide effects of food value-chain development. This article contributes to filling this gap by analysing the effects of food-processing sector development on welfare in an agriculture-based economy, taking the example of Benin. We calibrate a Computable General Equilibrium (CGE) model to a comprehensive 2019 Social Accounting Matrix (SAM) for Benin. We introduce a novel welfare measure, accounting for changes in savings. Results show that enhancing the food-processing sector increases demand for agricultural raw materials and hence agricultural production and prices. Accordingly, the price of low-skilled labour increases. This primarily benefits low-income households, who derive most of their income from this factor. The overall income and welfare effects are pro-poor. Accordingly, income disparity as well as poverty incidence and gap decrease. We conclude, that the development of food-processing has the potential to make agricultural development in agriculture-based economies more pro-poor.

Estimating the Economic Effect of the South-to-North Water Transfer Project on Beijing—An Applied Computable General Equilibrium Analysis

What exactly is the contribution of the South-to-North Water Transfer Project (SNWTP)? This is a subject of much debate. There are concerns about the possible effects on the macroeconomy. Most previous studies have tried to answer this question. In order to answer this question quantitatively, it is necessary to separate the effect of SNWTP from many influencing factors. A computable general equilibrium model (SICGE) was built to estimate the economic effect of the South-to-North Water Transfer Project on Beijing. This CGE model was modified by joining the subdivided water substitution module, the total water constraints module, and the water-capital substitution module. Two scenarios were set: one with SNWTP and one without SNWTP. The what-if scenario (without SNWTP) indicates that the water reduction poses a direct threat to economic growth. Employment, capital, and GDP are lower, largely due to water shortages suffered by many industries by comparative analysis with or without SNWTP. The water utilization for the water-intensive industry will decrease the most, and its output will also decrease the most. Without SNWTP, groundwater extraction will increase, which suggests that SNWTP water will tentatively replace groundwater.

Economic consequences of climate change impacts on South Asian agriculture: A computable general equilibrium analysis

AbstractSouth Asia is one of the most vulnerable regions of the globe in terms of climate change, with agriculture the most affected economic sector of the region. This study employs an environmental Global Trade Analysis Project model to simulate the impact of an average global 2°C temperature increase by 2050, with a focus on South Asian countries. The economic costs of climate change in relation to crop productivity losses due to increasing temperature, land productivity losses caused by rising sea levels and heat stress‐induced agricultural labour productivity losses are assessed based on model simulations. The results show that the unfavourable climate change impacts on agricultural productivity (crop, land and labour) will reduce food production and create upward pressure on food prices. This will lead to a reduction in food consumption at the household level, threatening future food security in the region. The results further predict a contraction in all South Asian economies by 2050, due to adverse climate change impacts on the agricultural sector. In addition, out of the three climate change damage factors considered, labour productivity causes the greatest economic losses, while land productivity losses caused by rising sea levels impact the least. The study also found that low‐income countries would suffer most severely due to the impacts of climate change on the agricultural sector, while high‐income countries would be impacted the least.

Assessment of Possible Economic Alignment Between G20 Nations with Special Focus on India, G7 and G12: A General Equilibrium Analysis

The article analyses the ex-ante effects of India’s possible alignment with G20 countries. The study considers G7, G12 and G20 countries as separate blocks. The study analyses India’s bilateral tariff and non-tariff liberalisation, free flow of factors of production, Global Value Chain (GVC) participation, output-oriented technological progress in manufacturing, transport and communication and the introduction of shipping technology in India. The study considers liberalisation in G7 standalone, G12 standalone, G20 standalone and also G20 comprehensive liberalisation. The study also considers India’s bilateral standalone liberalisation with G7, G12 and G20 countries separately using computable general equilibrium (CGE) analysis with the help of the Global Trade Analysis Project (GTAP) 10 database. The overall results indicate that strengthening of GVC standalone in the G20 region may bring maximum welfare to the region. Further, the sectors which may gain the most seem to be grain crops, meat and meat products, textiles and apparel, etc., and in terms of factors of production, all other factors of production would gain but land and natural resources seem to lose in terms of real returns to factor of production. Addressing issues related to factor movements and policies strengthening GVCs can bring about relatively higher growth and welfare, respectively, in the G20 nations as compared to other trade and industrial policies.

Economy-wide assessment of achieving carbon neutrality in China's power sector: A computable general equilibrium analysis

The low-carbon transition in the power sector is essential for realising carbon peak and neutrality goals. However, there is a lack of research assessing the policy mix needed to achieve ambitious targets such as power sector's carbon neutrality. Therefore, using a computable general equilibrium model with a detailed power technology module, this study evaluates the macroeconomic and environmental impacts of four abatement approaches for achieving carbon neutrality in China's power sector. Results show that, first, subsidising renewable electricity combined with carbon pricing is a relatively optimal means of achieving power sector's carbon neutrality, with the lowest carbon price and the least loss to the macroeconomy and household welfare. Moreover, it will increase the renewable energy proportion most strongly, also exerting the superior co-benefits on pollutants. Second, subsidising CCS combined with carbon pricing is the least advantageous mean. It causes the largest loss of both GDP and household welfare, and the promotion effects of renewable energy and co-benefits are relatively weak. Third, considering the carbon neutrality goal in China's power sector, if subsidised renewable electricity and carbon pricing are adopted, the targeted measures for pollutants could be significantly relaxed, whereas combined CCS subsidies and carbon pricing can moderately weak measures intensity for pollutant.

The importance of having a more realistic welfare transfer determination rule: A CGE analysis for Ireland

While unemployment benefits constitute a significant share of welfare transfers in developed countries, the computable general equilibrium (CGE) literature ignores the impact of unemployment rate changes on these transfers. This paper investigates the impacts of alternative welfare transfer determination rules by using a dynamic CGE model for Ireland. We find that indexing the nominal welfare transfer budget to the consumer price index (CPI) and the aggregate unemployment rate is superior to the CPI alone. Although both specifications generate similar macroeconomic outcomes, our novel specification improves household welfare as well as income distribution across households. We argue that it is more in line with the behaviour of governments and that the literature ignores the progressivity elements embedded in the welfare system, which will reduce the welfare cost of carbon taxation. The results can be generalised in analysing the impacts of tax reform in countries where unemployment benefits are essential elements of welfare transfers.

Welfare Effects of the AfCFTA on the Least Developed Countries in Africa: A Computable General Equilibrium Analysis

Welfare Effects of the AfCFTA on the Least Developed Countries in Africa: A Computable General Equilibrium Analysis

Resource efficiency and climate change policies to support West Asia's move towards sustainability: A computable general equilibrium analysis of material flows

The resources and energy sectors make a significant contribution to economic performance in the economies of West Asia. In this study we explore the effect ambitious policies for resource efficiency and greenhouse gas abatement would have on West Asian economies and what their contribution to environmental sustainability could look like. We employ the Global Trade and Environmental Resource Model (GTEM-Resource) to empirically assess the economic and environmental implications of global policy initiatives in the region. Results show that resource efficiency and greenhouse gas (GHG) abatement policies are complementary in their effects. Resource efficiency policies boost resource use productivity in the region, reduce all categories of material extraction based on sustainable consumption and production behaviour and also caused by trade, and foster economic performance. By contrast, GHG emission abatement policies have a small effect on resource productivity but drive significant GHG reductions that are accompanied by reduced economic performance. When these two policies are combined, real GDP in West Asia is projected to increase by 8% relative to business-as-usual by 2060, while resource extraction and GHG emissions levels in the region would decline dramatically by 40% and 50%, respectively. Saudi Arabia and the United Arab Emirates would be much better off, compared to other countries in the region, with large increases in real GDP and major reductions in GHG emissions and resource extraction levels. Findings suggest that technology development and climate mitigation policies would result in a win-win solution for all countries in West Asia, contributing to maintaining well-being and protecting the environment on regional and global scales. This shows that there is a pathway to economic prosperity for resource-rich countries and regions.

Modeling the Impact of Public Infrastructure investments in the U.S.: A CGE Analysis

AbstractThis study offers a computable general equilibrium analysis of the $550 billion devoted to new infrastructure investment (new and remodeled physical infrastructure for transportation, information and public services) in the United States under the Infrastructure Investment and Jobs Act, a federal law signed by President Joseph Biden in November 2021. The simulations are based on the state-level distribution of funds and distinguish between the construction phase (short run) and the operational phase (long run). Gross domestic product (GDP) and labor demand react to the government spending stimulus after the first year by growing 0.24% and 0.44%, respectively. The gains derived from this investment plan are higher in the long term once investments increase the country’s capital stock; GDP increases by 1.39% and wages by 3.94%. This paper analyzes the efficiency of the current distribution of funds across sectors, and finds that the current distribution benefits the United States economy more. Even though a slightly higher GDP impact could have been reached (1.42%) if all the funds were devoted to transport services, the price increases would result in lower real wage increases.