Economy-wide Model Research Articles

Information for a developmental approach to mitigation: linking sectoral and economy-wide models for Brazil, Chile, Colombia, Peru and South Africa

Improved tools are required to deliver good information for decision-making on the potential socio-economic benefits of a transition to a low-carbon society. This article reports on modelling approaches to answer policy-relevant questions carried out research teams in Brazil, Chile, Colombia, Peru and South Africa. The teams link detailed models of sectors with economy-wide models and report methodological findings. Combining bottom-up and top-down models holds the promise of addressing short and long-term time-frames technological change, economy-wide interactions, direct costs, emissions reductions, and broader socio-economic implications of mitigation. While making different choices of models, common challenges were identified around: communication between the two models; treatment of time; convergence criteria; trade-offs between model accuracy and requirements of stakeholder processes; and level of integration of sectors within the economy-wide model. The teams each examined a diverse range of mitigation actions. By assuming the same range of carbon prices (US$10, US$20 and US$50 per ton of CO2-eq) results can be compared, while understanding that variation may also be due to assumed differences in carbon pricing mechanisms, recycling of revenue and models chosen. The studies for Brazil and Chile found relatively higher emission reductions at this medium carbon price than those for South Africa and Colombia. Our analysis of the socio-economic implications suggests that emissions reductions with a medium carbon tax would be accompanied by Gross Domestic Product (GDP) losses ranging from 0.5% of GDP to 3%. Three studies further examined implications for employment and wages and found negative effects, which could be softened only to some extent by recycling of revenue.

Growth and Distribution Analysis in SAM Models: Developing Countries

textabstractThe paper introduces the social accounting matrix, SAM, and treats the conversion of the SAM into an economy wide model that employs fixed relative prices and clears market imbalances via flexible quantities. The paper reviews multiplier results relating to the trade-off between economic growth and income distribution for ten developing countries. It then continues with decomposing these multipliers in various effects, identifying sector and institutional gainers and losers, and highlighting the significance of dual structures in production (formal and informal sectors) and earnings (poor and rich household groups) in generating interdependent patterns of growth and distribution.

Quantifying Australia's ‘Three-Speed’ Boom

We conjecture that a ‘secondary services boom’ is primarily responsible for the widespread nature of the gains in employment during Australia's recent ‘China boom’. An economy-wide model provides numerical theory for constructing hypotheses, which are tested econometrically. Predictions that include a services expansion and de-industrialisation are tested against pre-boom data and out-of-sample simulations through the boom. The secondary services boom appears clearly in both income and employment, though the effects on manufacturing are ambiguous, with stronger-than-hypothesised observed performance, suggesting that changes in industrial structure and the composition of assistance have favoured surviving manufacturing firms.

Japan's Oligopolies: Potential Gains from Third Arrow Reforms

Progress has been made in economic reform under the Abenomics first (monetary policy) and second (taxation reform) arrows. The third, which emphasises structural reforms, has been more politically difficult, thus far yielding mixed results. This paper explores the gains that are possible from the labour market, tax and competition reforms embodied in the third arrow program. Economic rents and industry concentration levels are first identified from Nikkei firm specific data and used to construct an economy-wide model that represents oligopoly behaviour and its regulation explicitly. The analysis finds that modest gains in efficiency are available labour growth and, when it is accompanied by corporate governance reform, the switch between company and consumption taxation. Larger gains are shown to be available from active competition policy and, particularly, from productivity enhancing FDI in services. Central to the results is that a resurgent Japanese economy requires efficiency improvements that raise home rates of return and rebalance its large home and foreign asset portfolio toward home investment and capital growth.

Economy-Wide Impacts of Promising Maize and Wheat Technologies on Food Security and Welfare in Kenya

A recursive dynamic economy-wide model incorporating productivity changes due to the introduction of promising maize and wheat varieties evaluates foresights for future food security, well-being and economic performance in Kenya. Adoption of promising new maize and wheat varieties not only increases overall economic growth and food availability, it also reduces import dependency and increases the welfare of vulnerable populations, especially rural households in lowland regions. Although maize-producing rural households in the highlands do not gain in terms of real incomes because of declining land income, they benefit from the increased food consumption stimulated by lower food prices. Promising maize technologies will have positive spill-over effect on all crops, mainly on wheat, and have larger positive impact on food security than the expected productivity change from the current promising wheat varieties. Although the lowland economy does not benefit from the adoption of new crop technologies, rural households in this region benefit the most in terms of increases in food and non-food consumption. The welfare gain in terms of food security is further amplified when technological change for the two crops is complemented by a reduction in the marketing costs, which facilitates market access for the increased surplus and further reduces domestic prices. With low marketing costs resulting from reduced trade and transport margins for these two crops, even highland maize producing households experience an increase in real income and the demand for both food and non-food commodities increase substantially, generating significant linkages between agriculture and other sectors.

Service Oligopolies and Australia's Economy-Wide Performance*

Australia's services industries now contribute almost four-fifths of gross domestic product. The microeconomic reforms of the 1990s left behind numerous regulated private service oligopolies that contribute one-quarter. Using an economy-wide modelling approach that represents service oligopoly behaviour explicitly, the extent of sectoral interactions and the potential economy-wide gains from price cap regulation are assessed. Non-linear interaction between oligopoly industries is shown to support economy-wide over sectoral analysis. Moreover, the results from the economy-wide modelling suggest that the cost of unabated oligopoly distortions would amount to one-third of Australia's gross domestic product.

Social Development Introduced in Economic Models: An Application to Past Korea

The paper explores quantified ways of incorporating social development goals and basic needs indicators in economy-wide models. We evaluate the welfare and productivity effects of higher satisfactions against the costs involved, and examine the optimal ordering of various social and economic development goals in the policy making process. The model is applied to the Republic of Korea during its period of takeoff. The modelling application demonstrates high degrees of positive complementarities between social development and economic growth in the Korean context that can be replicable elsewhere.

The Impact of Public Expenditures in Education, Health, and Infrastructure on Economic Growth and Income Distribution in Peru

The Peruvian economy has exhibited remarkable growth in the past 20 years. Good tax and monetary policies, along with comprehensive structural adjustment, which has attracted substantial foreign investment, are regarded as the pillars of this success. Notwithstanding the advances experienced on reducing poverty, lowering inequality and unemployment continue to be elusive targets for the Peruvian government and constitute main causes of social unrest. This paper assesses the impact of Peruvian public expenditures in education, health, and infrastructure on economic growth, poverty, and income distribution in the past 20 years using a Dynamic Computable General Equilibrium Model (DCGEM), which is an economy-wide model that describes the behavior of producers and consumers and the linkages among them.

Grain Price Spikes and Beggar-thy-Neighbor Policy Responses: A Global Economywide Analysis

When prices spike in international grain markets, national governments often reduce the extent to which that spike affects their domestic food markets. Those actions exacerbate the price spike and international welfare transfer associated with the terms of trade change. Several recent analyses have assessed the extent to which those policies contributed to the 2006-08 international price rise, but only by focusing on one commodity or using a back-of-the-envelope method. This paper provides a more comprehensive analysis that uses a global economywide model that is able to take account of the interactions between markets for farm products that are closely related in production or consumption. The model is able to estimate the impacts of those insulating policies on grain prices and on the grain trade and economic welfare of various countries. The results support the conclusion from earlier studies that there is a need for stronger World Trade Organization disciplines on export restrictions.

The feasibility, costs, and environmental implications of large-scale biomass energy

What are the feasibility, costs, and environmental implications of large-scale bioenegry? We investigate this question by developing a detailed representation of bioenergy in a global economy-wide model. We develop a scenario with a global carbon dioxide price, applied to all anthropogenic emissions except those from land use change, that rises from $25 per metric ton in 2015 to $99 in 2050. This creates market conditions favorable to biomass energy, resulting in global non-traditional bioenergy production of ~150 exajoules (EJ) in 2050. By comparison, in 2010, global energy production was primarily from coal (138 EJ), oil (171 EJ), and gas (106 EJ). With this policy, 2050 emissions are 42% less in our Base Policy case than our Reference case, although extending the scope of the carbon price to include emissions from land use change would reduce 2050 emissions by 52% relative to the same baseline. Our results from various policy scenarios show that lignocellulosic (LC) ethanol may become the major form of bioenergy, if its production costs fall by amounts predicted in a recent survey and ethanol blending constraints disappear by 2030; however, if its costs remain higher than expected or the ethanol blend wall continues to bind, bioelectricity and bioheat may prevail. Higher LC ethanol costs may also result in the expanded production of first-generation biofuels (ethanol from sugarcane and corn) so that they remain in the fuel mix through 2050. Deforestation occurs if emissions from land use change are not priced, although the availability of biomass residues and improvements in crop yields and conversion efficiencies mitigate pressure on land markets. As regions are linked via international agricultural markets, irrespective of the location of bioenergy production, natural forest decreases are largest in regions with the lowest barriers to deforestation. In 2050, the combination of carbon price and bioenergy production increases food prices by 3.2%–5.2%, with bioenergy accounting for 1.3%–3.5%.

Prioritizing Rural Investments in Africa: A Hybrid Evaluation Approach Applied to Uganda

Prioritizing public investments requires information on relative returns that is difficult to derive from disparate evaluation studies. This article presents a ‘hybrid’ approach that combines ex post evaluation data with an economywide model for experimenting ex ante with alternative investment portfolios within a consistent, structural framework. The approach is used to evaluate rural investments in Uganda. Agricultural research and extension services are found to be more effective at promoting economic growth and poverty reduction than either rural feeder roads or irrigation infrastructure. This suggests that the government’s recent shift in emphasis from extension services to irrigation may potentially reduce the overall benefits of its agricultural investment plan.

Effects of foreign direct investment in African agriculture

Purpose – The purpose of this paper is to review the key issues surrounding foreign direct investment (FDI) in agriculture, and examine the potential impacts of FDI in African agriculture. Design/methodology/approach – The dynamic Global Trade Analysis Project model (GDyn) is used to analyse the potential impacts of improvements in land productivity and FDI in Africa. Findings – The results illustrate that combined efforts to improve land productivity and growth in FDI could potentially increase Africa’s share in global agricultural output and exports, particularly with respect to oil seeds, sugar, and cotton. Originality/value – The authors employ a global economy-wide modelling framework to simulate the effects of growth in FDI in African agriculture.

The Economic Costs of Climate Change: A Multi-Sector Impact Assessment for Vietnam

We adopt a multi-sectoral approach and consider the full range of climate projections. Biophysical damages are translated into economic costs using a dynamic economy-wide model. Our results indicate that the negative impacts on agriculture and roads are modest to 2050. Larger costs are caused by rising sea levels and cyclone strikes. Overall, climate change is likely to reduce national income by between one and two percent by 2050 (relative to a historical baseline). Damages double under more extreme projections. Our findings suggest that there are net benefits from selected pre-emptive actions though careful consideration of opportunity costs is required.

Asia’s Changing Role in World Trade: Prospects for South–South Trade Growth to 2030

Developing Asia’s rapid economic growth has been shifting the global economic and industrial centers of gravity away from the North Atlantic, raising the importance of Asia in world trade, and boosting South–South trade. How will trade patterns change over the next 2 decades in the course of economic growth and structural changes in developing Asia and the rest of the world? In particular, what can be expected of developing Asia’s intraregional trade and its trade with other developing country regions? This paper addresses these questions by projecting a core baseline for the world economy from 2004 to 2030 and comparing it with alternative scenarios for 2030. We employ the global economywide GTAP model and Version 7.1 of the GTAP database, and assume for the core projection that trade-related policies do not change over the next 2 decades. Alternative scenarios explore (i) slower economic growth rates in the “North”, (ii) slower productivity growth in primary sectors, and (iii) various trade policy reforms in developing Asia without and with policy reforms also in the “North” and in South–South trade. Projected impacts on international prices, sectoral shares of regional gross domestic product and trade, “openness” to trade, and welfare gains from trade reforms are highlighted, in addition to their effects on regional shares of global gross domestic product and trade. The paper concludes by drawing out implications for regional and multilateral trade policy.

Integrated Carbon Metrics and Assessment for the Built Environment

One third of global greenhouse gas emissions are emitted from the building sector contributing significantly to the problem of climate change. While more work has been done on decreasing direct emissions from the operation of buildings, embodied emissions of construction materials receive little consideration even though they constitute a significant additional proportion of emissions. The main objective of this study is to harmonise different data and methods such as Life Cycle Assessment (LCA), Input Output Analysis (IOA) and Material Flow Analysis (MFA) to accurately calculate the embodied carbon emissions of construction materials in Australia. This study will develop and streamline efficient hybrid methodologies in analysing embodied emissions of the built environment at multiple scales and develop a comprehensive database of embodied carbon LCI data for building and construction materials that will be derived from an economy-wide modelling framework. This work is part of the Cooperative Research Centre for Low Carbon Living under the Integrated Carbon Metrics project.

Climate uncertainty and economic development: evaluating the case of Mozambique to 2050

Abstract We apply a probabilistic approach to the evaluation of climate change impacts in Mozambique. We pass a distribution of climate shocks through a series of structural biophysical models. The resulting joint distributions of biophysical outcomes are then imposed on a dynamic economywide model. This framework produces distributions of economic impacts of climate change thus identifying an explicit range of potential economic outcomes and associating probability levels with given sets of outcomes. For example, we find that the economy of Mozambique may be up to 13 % smaller in 2050 compared with a fictional no climate change scenario (and assuming global policy fails to constrain emissions growth). The probability of gross domestic product (GDP) declines of greater than 10 % is relatively small at 2.5 %. These large declines are principally the result of dramatic reductions in flood return periods. To 2050, about 70 % of future climates result in GDP losses of between zero and five percent. In about 9 % of cases, climate change shocks result in higher GDP outcomes. We conclude that, relative to current practice, this structural probabilistic approach provides (i) significantly more information to decision-makers, (ii) more detailed insight into the importance of various impact channels, and (iii) a more holistic and comprehensive approach for evaluating adaptation options.

The Economywide Effects of Teff, Wheat, and Maize Production Increases in Ethiopia: Results of Economywide Modeling

The government of Ethiopia is investing significant public resources to increase overall national production of teff, wheat, and maize. To better understand the likely economywide effects of increases of between 12 and 14 percent in the national production of these cereals, a set of production increase scenarios for each crop were run using a computable general equilibrium model of the Ethiopian economy. The analyses were extended to also consider the effects of several international wheat price and wheat import scenarios, a wheat subsidy program, and maize exports. Among the effects considered are changes in economic growth, prices, total household consumption, cereal and calorie consumption levels, and poverty measures.The model estimates that the Ethiopian economy would be 1.4 percent larger if the desired production increases for all three cereals were jointly achieved. However, the cereal production increases do not bring about much change in the structure of the economy of Ethiopia. While the agriculture sector expands by 3.1 percent, there is virtually no increase in the size of the nonagricultural sector as a result of increased cereal production. The impact of these cereal initiatives on the consumption and welfare of various household groups in the country are uniformly positive — higher consumption and reduced poverty. However, different household groups benefit depending on which cereal sees its production levels rise. Teff production increases will provide greatest benefits for urban consumers, particularly poor urban households, while the economic benefits of increases in maize production will principally flow to rural households, both poor maize consumers and maize producers. The benefits of increased wheat production are more evenly shared.

Food security policy options for China: Lessons from other countries

As China becomes more industrial and urbanized, it is likely to become more dependent over time on imports of (especially land-intensive) farm products, most notably livestock feedstuffs. If farmers are slow to adjust to their declining competitiveness, for example by obtaining off-farm employment, the farm–nonfarm household income gap may increase. A decline in food self-sufficiency may be perceived as undermining national food security, and a persistent farm–nonfarm income gap as contributing to social unrest. In these circumstances, what offsetting or compensating policy options should the government consider for ensuring adequate long-term food security and less income inequality? This paper evaluates China’s historical record since 1980 and then projects China’s economy to 2030, using the GTAP global economy-wide model. It draws on past policy experiences of both China and other economies to evaluate prospective interventions by government to address food security and income inequality concerns. The potential effects of some of those are estimated for 2030, again using the GTAP model. The paper concludes by suggesting alternative ways to achieve the fundamental objectives of national food security and less rural–urban income inequality, namely via generic social safety nets and improved rural infrastructure.

William W. Cooper: Innovator, Fighter, and Scholar

W illiam Wager Cooper was born on July 23, 1914 in Birmingham, Alabama, where his father was a bookkeeper and later a distributor for Anheuser-Busch. Bill’s family moved to Chicago when he was three years old. His father owned a chain of gasoline stations, but lost them during the Great Depression. With his father in ill health and no family revenue, Bill left high school after his sophomore year to work at whatever jobs he could find. These included spotting pins in bowling alleys, caddying at golf courses, and even professional boxing, where his record was 58 wins, 3 losses, and 2 draws. While hitchhiking to the golf course one day, Bill met Eric L. Kohler, a principal with Arthur Andersen & Co., who became his life-long mentor. Kohler loaned him money to enroll as a non-degree student at The University of Chicago. Bill liked the academic atmosphere and took the college entrance examinations, intending to become a physical chemist. During his studies, Kohler asked him to review the mathematics used in a patent infringement suit. After Cooper found errors in the mathematics used by the plaintiff’s engineers, Andersen hired him part time during the school year and full time in the summer. This awakened Cooper’s interest in accounting, and he switched his major to economics. While at Chicago, Bill became good friends with a political science student, Herbert A. Simon. Cooper graduated Phi Beta Kappa with his A.B. in 1938.

Introducing carbon taxes in South Africa

South Africa is considering introducing a carbon tax to reduce greenhouse gas emissions. Following a discussion of the motivations for considering a carbon tax, we evaluate potential impacts using a dynamic economywide model linked to an energy sector model including a detailed evaluation of border carbon adjustments. Results indicate that a phased-in carbon tax of US$30 per ton of CO2 can achieve national emissions reductions targets set for 2025. Relative to a baseline with free disposal of CO2, constant world prices and no change in trading partner behavior, the preferred tax scenario reduces national welfare and employment by about 1.2 and 0.6 percent, respectively. However, if trading partners unilaterally impose a carbon consumption tax on South African exports, then welfare/employment losses exceed those from a domestic carbon tax. South Africa can lessen welfare/employment losses by introducing its own border carbon adjustments. The mode for recycling carbon tax revenues strongly influences distributional outcomes, with tradeoffs between growth and equity.