Multi-sector Computable General Equilibrium Research Articles

Aid, spending strategies and productivity effects: A multi-sectoral CGE analysis for Zambia

Numerous econometric studies fail to detect a significant and robust relationship between international aid and economic growth in the recipient countries. Dutch Disease effects might be responsible for this result. This paper examines the relation between aid and its effectiveness in a multi-sector multi-household Computable General Equilibrium (CGE)-framework. Given that international transfers to African countries increasingly take the form of general financial support to the government, different spending strategies and their macroeconomic, sectoral and distributional effects are evaluated in a two-stage simulation making a distinction between immediate direct effects and possible long-run effects from increased productivity. The presence of sector-specific factors weakens Dutch Disease effects and shifts the burden of adjustment primarily to other exporting sectors. While the model simulates the effects of additional aid in Zambia it can be used as a blueprint for other African countries.

Decomposing the impact of alternative technology sets on future carbon emissions growth

What are the drivers of future global carbon dioxide (CO2) emissions growth and how would the availability of key energy supply technologies change their relative importance? In this paper, we apply a novel index number decomposition technique to the results of a multi-region, multi-sector computable general equilibrium model to quantify the influence of five factors on the growth of future carbon emissions: (1) growth in global economic activity; (2) shifts in the regional composition of gross world product; (3) shifts in the sectoral composition of regions' GDP; (4) changes in sectors' energy–output ratios; and (5) changes in the CO2 intensity of energy sources. We elucidate how the relative importance of these factors changes in response to the imposition of a global carbon tax and alternative assumptions about the future availability of key energy supply technologies. Rising global economic activity and shifts in regional composition put upward pressure on emissions while changes in energy and emission intensity and the sectoral output mix have attenuating effects. A global emission tax that increases over time slows economic expansion and shifts the fuel mix, with the most pronounced impacts on China, India, and Russia. Limited availability of carbon capture and storage, nuclear, and hydroelectric generation all lead to upward shifts in the long-run marginal abatement cost curve, causing some countries to choose to pay the tax rather than abate.

Macroeconomic costs to large scale disruptions of food production: The case of foot- and-mouth disease in the United States

We forecast the economic consequences of a widespread contamination of the food system based on a hypothetical outbreak of foot-and-mouth disease (FMD). Since the immediate effect on the livestock sector could affect the entire supply chain and US livestock, meat and dairy exports, we measure these impacts using GTAP, a multi-region, multi-sector computable general equilibrium (CGE) model of the global economy. The immediate “shocks” to the US livestock, raw milk and other animal products sectors indirectly affect all sectors of the economy, as well as international markets and trade. We decompose these effects due to each component of the initial shocks, and estimate the importance of these shocks to the national food system for the Mid-Atlantic Region using IMPLAN. Our GTAP results indicate that losses to the USA economy would be about $11.7 billion, and with the ripple effect throughout the rest of the world including beneficiary nations (Argentina, Brazil, Latin America, Australia and New Zealand) and losers (Canada, Mexico, European Union) would be 14.1 billion. We estimate the proportion of the domestic impact affecting the Mid-Atlantic Region. Based on a regional input–output model of that region, we estimate that total losses in value added are nearly $800 million; losses in labor income total about $565 million; and there are job losses of just over 12 thousand.

A COMPUTABLE GENERAL EQUILIBRIUM ANALYSIS OF BORDER ADJUSTMENTS UNDER THE CAP-AND-TRADE SYSTEM: A CASE STUDY OF THE JAPANESE ECONOMY

Using a multi-region and multi-sector computable general equilibrium model, this paper evaluates the border adjustment policies of carbon regulations in Japan. We consider five types of border adjustments and examine their effects on the welfare, carbon leakage, and competitiveness of the Japanese energy-intensive trade-exposed (EITE) sectors.Our analysis shows that no single border adjustment policy is superior to the other policies in terms of simultaneously solving three primary issues: Welfare degradation, carbon leakage, and a loss of competitiveness in the EITE sectors. In addition, we show that export border adjustments are effective at restoring the competitiveness of Japanese exporters and reducing leakage. Our analysis also reveals that border adjustment in Japan significantly affects carbon leakage to China and the competitiveness of the iron and steel sectors. Finally, we show that border adjustments with and without consideration of indirect emissions have similar impacts, which indicates that the information regarding direct emissions is sufficient for implementing border adjustment in Japan.

Output-Based Allocation of Emissions Permits for Mitigating the Leakage and Competitiveness Issues for the Japanese Economy

The adoption of domestic emissions trading schemes (ETS) can impose a heavy burden on energy-intensive industries. In particular, energy-intensive industries competing with foreign competitors could lose their international edge. Although the abatement of carbon dioxide (CO2) emissions in industrialized countries entails the reduction of their energy-intensive production, a corresponding increase in the production of energy-intensive goods in countries without CO2 regulations may lead to carbon “leakage.” This paper examines the effects of various allocation methods for granting emissions permits in the Japanese ETS on the economy and CO2 emissions using a multiregional and multisector computable general equilibrium model. Specifically, we apply the Fischer and Fox (2007) model to the Japanese economy to address carbon leakage and competitiveness issues. We compare auction schemes, grandfathering schemes, and output-based allocation (OBA) schemes. We further extend the model by examining a combination of auctions and OBA. Though the auction scheme is found to be the best in terms of macroeconomic impacts (welfare and GDP effects), the leakage rate is high and the harm to energy-intensive sectors can be significant. OBA causes less leakage and damage to energy-intensive sectors, but the macroeconomic impact is undesirable. Considering all three effects — leakage, competitiveness, and macroeconomics — we find that combinations of auctions and OBA (with gratis allocations solely to energy-intensive, trade-exposed sectors) are desirable.

Public Education Spending and Poverty in Burkina Faso: A Computable General Equilibrium Approach

The paper analyses welfare and poverty implications of different options for creating and using fiscal space for public education expenditures. The analysis uses a multi sectoral computable general equilibrium model calibrated for Burkina Faso. Education is demanded by households as an investment to “transform” unqualified workers into qualified workers. The simulations indicate that a 40% across-the-board increase in public subsidies for primary education, financed by an increase in taxes on household income and sales taxes, not only leads to an increase in welfare but also to a decline in the incidence of poverty for all household types.

Sectoral structure, heterogeneous plants, and international trade

I examine the impact of trade policy on manufacturing plant behavior by developing a methodology that addresses both plant heterogeneity and intersectoral resource reallocation. A plant-level microsimulation based upon the industry structure of Bernard et al. (2003) is linked to a multi-sector computable general equilibrium model. This linkage permits an analysis of plant-level behavior that encompasses the trade-induced changes in factor prices and consumption patterns. The methodology is applied in the examination of two counterfactual trade policy scenarios on the Chilean manufacturing sector. The results suggest that trade liberalization leads to a reallocation of output toward the most productive producers. This result is driven by two primary causes: (a) a reduction in the price of inputs that promotes the expansion of output by the most productive producers and (b) increased competition from overseas that drives the least productive producers out of the market.

Investigating the effects of targeting subsidies on macroeconomics variables of agricultural sector in Iran

The aim of this study is simulating the results of targeting subsidies on macroeconomics variables of agricultural sector in Iran. In order to achieving the objectives of this study, a multi-sector computable general equilibrium model with five quintiles of rural and urban households is developed to analyze the results of elimination and redistribution of subsidies according to the law of targeting subsidies in Iran. The results show that during targeting, high income and average income groups lose. Income rising (in the case of quintiles which their income rise) causes to increasing demand of agricultural products, food products and services in both urban and rural households. The level of factor demand in agricultural and food industrial sectors increases. Income of unskilled labours increase more than income of skilled labours. The produced commodities of petroleum, industrial and mineral sectors will be expensive and the other commodities will be cheap. The level of production in agricultural and food industrial sectors increase and in the other sectors decrease. Agricultural, food industrial and services exports rise and petroleum, industrial and mineral exports reduce. Agricultural imports increase and the level of imports in other sectors decrease. Key words: Targeting subsidy, computable general equilibrium, agriculture, Iran.

Disasters, FMD and Food Security: Macroeconomic Responses to Large Scale Disruptions of U.S. Food Production

Without question, it was the 9/11 attacks and subsequent anthrax incidents that sounded the alarm that deliberate contamination of the nation’s food supply is a real possibility. Some foods are more susceptible to deliberate contamination than others, but there is no practical way one can completely eliminate the possibility of being affected. Furthermore, while the psychological implications of an attack on the food supply are sobering, many of the human and economic dimensions of such an event are indistinguishable from those that would occur in the wake of a natural food contamination event. And, not surprisingly, the effects can be significant and wide spread.To contribute to this policy research agenda, we forecast the economic consequences of a major, but hypothetical, event leading to widespread contamination of the food system. For the simulation, we assume that there is an outbreak of foot-and-mouth disease (FMD). Our choice is based primarily on the fact that it would be reasonably easy to transport the disease into the United States, and to disseminate it among feedlots and farms across the country. Since the immediate effect of this disease on the productivity of the livestock sector could also have a potentially disastrous effect on the entire supply chain and U.S. exports of livestock, meat, and dairy products depending upon the extent of the outbreak, and the global response to it, we measure these impacts within the context of a computable general equilibrium (CGE) model of the global economy. The immediate impacts of FMD are modeled as “shocks“ to the outputs of the U.S. livestock, raw milk and other animal products sectors (which includes swine and poultry). These shocks, in turn, result in indirect impacts on all sectors throughout the U. S. economy. There are indirect effects in international markets as well, and these impacts on trade are particularly significant if one assumes that there is a complete ban on exports of livestock, animal products, meat, and dairy products from the United States to all FMD-free regions. In calibrating our initial shocks, we account explicitly for the fact that some primary factors of agricultural production, such as land and capital, are only partially mobile between sectors, particularly in the short run, and perhaps for some specialized resources in the longer run as well. We conduct the empirical analysis using GTAP, a multi-region, multi-sector computable general equilibrium model of the global economy.

Import Liberalisation and Revenue Replacement: Impacts in a Small Asian Developing Economy

Using a multi-sectoral computable general equilibrium model, we assess the macroeconomic and welfare impacts of import liberalisation along with revenue replacement from domestic taxes in the small developing economy of Nepal. We conclude that impact differs across activities. For example, agricultural and industrial activities expand whereas service activities contract. Overall, GDP grows marginally along with insignificant changes in other macroeconomic features. However, as an impact of this policy, incomes of the richest household group grow faster than that of poorer households. Furthermore, the replacement by the domestic indirect tax lowers the GDP growth rate and makes the distribution pattern more unfavourable to the poor; whereas the replacement by the income tax and non-agricultural commodity tax causes GDP to grow at a relatively higher rate and does not negatively affect the distribution pattern except for one of the richer household groups. The welfare gains to households in all the scenarios are positive but are very minimal. A l’aide d’un modele d’equilibre general calculable multi-sectoriel, nous evaluons les impacts macroeconomiques et sociaux de la liberalisation des importations dans une petite economie en voie de developpement, celle du Nepal. Nous concluons que les impacts different en fonction des secteurs d’activites; les activites industrielles et agricoles s’etendent tandis que les activites de services se contractent. Dans l’ensemble, on observe une augmentation marginale du PIB ainsi que d’autres evolutions moins significatives au niveau macroeconomique. Cependant, les revenus des menages les plus riches augmentent plus rapidement que ceux des menages les plus pauvres. Par ailleurs, la compensation des pertes de recettes par les seules taxes indirectes interieures ralentit la croissance du PIB et renforce le desequilibre dans la distribution des revenus, au depend des plus pauvres. Un remplacement des recettes par un impot sur le revenu et par une taxe sur les produits non agricoles permettrait une augmentation relativement plus rapide du PIB sans defavoriser les classes moins privilegiees, mais les effets de ce cas de figure sur le bien-etre social des menages resteraient limites.

Economic Crisis and Global Supply Chains

Much attention has been paid to the sharp fall in world trade associated with the economic crisis during the last quarter of 2008 and the first quarter of 2009. Alarming forecasts have been published for the whole year of 2009 and several explanations have been offered. In particular, beyond the credit crunch and the global drop in demand, it has been argued that, due to globalisation and the fragmentation of supply chains, world trade will inevitably overshoot the shock in world GDP. We contest this view using both simple accounting calculations and a simulation of the multi-region, multi-sector Computable General Equilibrium (CGE) model, which explicitly models input-output relations within and between sectors. Using the CGE MIRAGE, we ask whether the most recent forecasts of GDP change, together with a twist in the composition of demand (to the detriment of capital goods), a halt in the trend towards the reduction in trade costs and a collapse in the oil price can replicate a very similar multiplier effect on world trade to that currently being experienced. Firstly, we find that, when trade flows are deflated by the price of the world GDP, the order of magnitude for trade decline in 2009 is 8.9 percent in our exercise. However, when trade flows are deflated by the sector-specific trade prices computed by the model, the drop in world trade is much more limited (-2.4 percent). Hence a large part of the fall in trade predicted by the model comes from a relative price effect. Secondly, while this fall is still more than the –1.3% drop in world GDP forecast by the IMF in April 2009, even this magnification effect disappears when GDPs are aggregated using current exchange rates, which is the appropriate reference, rather than PPP weights. Thirdly, while, our paper does not support the hypothesis of a systematic over-shooting of trade due to globalisation and the fragmentation of supply chains, it seems likely that additional factors such as the credit shortage must have played a role in the short run to explain the sharp fall in world trade.

The impact of climate change on global food supply and demand, food prices, and land use

Climate change induced crop yield change affects food production of countries to varying degrees, depending on the location of the farming activities. Differentiated yield changes of crops may lead to reallocation of agricultural land among uses. Key food exporters may reshuffle due to diverse climate change impact on crop farming among countries. We use a multi-region, multi-sector computable general equilibrium (CGE) model, which considers crop suitability of land in the optimal reallocation decision of land between uses, to simulate the impact on global food production, prices, and land use of crop yield change due to climate change as projected under the IPCC SRES scenario A2. Our findings show that developing countries are more adversely affected by climate change than developed countries. Developed countries are mostly located in higher latitudes, and climate change benefits the crop yield of these areas. In contrast, developing countries of the lower latitudes suffer from the reduction in crop yield being induced by climate change. Considering the fast growing population in the developing world, developed countries are expected to serve as the world’s key food exporters by 2020 should the climate change occurs as scenario A2 indicates.

DAMPAK KRISIS GLOBAL TERHADAP PEREKONOMIAN DAERAH: APLIKASI MODEL COMPUTABLE GENERAL EQUILIBRIUM DI MALUKU

This paper analyzes the global crisis impact on regional economy in Indonesia. Using the multiregion and multi-sector Computable General Equilibrium model, the result shows the magnitude of the impact depends on each provincial global shock exposure. In general, the capital intensive and the tradable sector face higher activity reduction.A specific simulation is designed for Province Maluku. The result shows that an increase of labour productivity is capable to reduce the global crisis impact and increase the production activity hence the labour participation. However, the increase of the aggregate demand in Province Maluku has put a higher inflation pressure mainly for the commodities supplied from other provinces. This requires a higher effort of the provincial government of Maluku to increase their sectoral capacity utilization.JEL Classification: C68, E27, R13Keywords: Global crisis, regional, Computable General Equilibrium, Maluku.

Biofuels and the Greater Mekong Subregion: Assessing the impact on prices, production and trade

Similar to many other countries, all nations in the Greater Mekong Subregion (GMS) have planned or are planning to develop strong national biofuel programs. The overall goal of this paper is to better understand the impacts of global and regional biofuels on agriculture and the rest of the economy, with a specific focus on the GMS. Based on a modified multi-country, multi-sector computable general equilibrium model, this study reveals that global biofuel development will significantly increase agricultural prices and production and change trade in agricultural commodities in the GMS and the rest of the world. While biofuel in the GMS will have little impacts on global prices, it will have significant effects on domestic agricultural production, land use, trade, and food security. The results also show that the extent of impacts from biofuel is highly dependent on international oil prices and the degree of substitution between biofuel and gasoline. The findings of this study have important policy implications for the GMS countries and the rest of the world.

Combining Rebates with Carbon Taxes: Optimal Strategies for Coping with Emissions Leakage and Tax Interactions

Emissions regulations like carbon pricing raise the price of covered sector goods and thus can interact with and exacerbate other preexisting distortions in the economy. One such distortion is labor taxes. Another is emissions leakage due to the lack of comparable emissions pricing abroad or among other emitting sectors at home. A potential response is to combine the emissions tax with a rebate to production to mitigate the price increases. We use an optimal tax framework to solve for the optimal emissions tax and output rebate, given these distortions. We then employ a multisector computable general equilibrium model based on the GTAP framework to simulate the effects of a $50 per-ton carbon tax on the major emissions-intensive sectors in the U.S. economy and estimate optimal rebates by sector.

The effect of energy end-use efficiency improvement on China’s energy use and CO2 emissions: a CGE model-based analysis

With its rapid economic growth, China is now confronted with soaring pressure from both its energy supply and the environment. To deal with this conflict, energy end-use efficiency improvement is now promoted by the government as an emphasis for future energy saving. This study explores the general equilibrium effect of energy end-use efficiency improvement on China’s economy, energy use, and CO2 emissions. This paper develops a static, multisector computable general equilibrium model (CGE) for China, with specific detail in energy use and with the embodiment of energy efficiency. In order to explore the ability of subsidizing non-fossil-generated electricity on moderating potential rebound effects, in this model, the electricity sector was deconstructed into five specific generation activities using bottom–up data from the Chinese electricity industry. The model is calibrated into a 16-sector Chinese Social Accounting Matrix for the year 2002. In the analysis, seven scenarios were established: business as usual, solely efficiency improvement, and five policy scenarios (taxing carbon, subsidized hydropower, subsidized nuclear power, combination of taxing carbon and subsidized hydropower, combination of taxing carbon and subsidized nuclear power). Results show that a sectoral-uniform improvement of energy end-use efficiency will increase rather than decrease the total energy consumption and CO2 emissions. The sensitivity analysis of sectoral efficiency improvement shows that efficiency improvements happened in different sectors may have obvious different extents of rebound. The three sectors, whose efficient improvements do not drive-up total national energy use and CO2 emissions, include Iron and Steel, Building Materials, and Construction. Thus, the improvement of energy end-use efficiency should be sectoral specific. When differentiating the sectoral energy-saving goal, not only the saving potential of each sector but also its potential to ease the total rebound should be taken into account. Moreover, since the potential efficiency improvement for a sector over a certain period will be limited, technology measures should work along with a specific policy to neutralize the rebound effect. Results of policy analysis show that one relatively enhanced way is to combine carbon taxing with subsidized hydropower.

The Impact of Trade Liberalization on Water Use: A Computable General Equilibrium Analysis

Water is scarce in many countries. One instrument to improve the allocation of a scarce resource is (efficient) pricing or taxation. However, water is implicitly traded on international markets, particularly through food and textiles, so that impacts of water taxes cannot be studied in isolation, but require an analysis of international trade implications. We include water as a production factor in a multi-region, multi-sector computable general equilibrium model (GTAP), to assess a series of water tax policies. We find that water taxes reduce water use, and lead to shifts in production, consumption, and international trade patterns. Countries that do not levy water taxes are nonetheless affected by other countries’ taxes. Taxes on agricultural water use drive most of the economic and welfare impacts. Reductions in water use (welfare losses) are less (more) than linear in the price of water. The results are sensitive to the assumed ability to substitute other production factors for water. A water tax on production would have different effects on water use, production and trade patterns, and the size and distribution of welfare losses than would a water tax on final consumption.

Do Small Town Development Projects Matter, and Can CGE Help?

Small regions and towns often experience problems such as high out-migration and unemployment. In these situations there is an urgent need to do something positive. Infrastructure development projects, partially financed by the national government, are a popular suggestion. We ponder the relevance of these actions in this paper in a context of project evaluation. We introduce computable general equilibrium (CGE) modelling as a complement of the other quantitative evaluation techniques. We will use the town of Lapua in South Ostrobothnia, Finland, which is planning to implement two large-scale infrastructure projects, as an example. Our simulation tool is the Finnish multi-sector and interregional CGE RegFin model. We consider the regional short-run effects of the construction phase, the long-run effects of new business activity and the so-called secondary effects based on the commuting and trade patterns of the households.

The economic impact of water taxes: a computable general equilibrium analysis with an international data set

Water is scarce in many countries. One instrument for improving the allocation of a scarce resource is (efficient) pricing or taxation. However, water is implicitly traded on international markets, particularly through food and textiles, so that the impacts of water taxes cannot be studied in isolation, but require an analysis of international trade implications. We include water as a production factor in a multi-region, multi-sector computable general equilibrium model (GTAP), to assess a series of water tax policies. We find that water taxes reduce water use and lead to shifts in production, consumption and international trade patterns. Countries that do not levy water taxes are nonetheless affected by other countries’ taxes. Taxes on agricultural water use drive most of the economic and welfare impacts. Reductions in water use (welfare losses) are less (more) than linear with the price of water. The results are sensitive to the assumed ability to substitute other production factors for water. A water tax on production would have different effects on water use, production and trade patterns and the size and distribution of welfare losses than would a water tax on final consumption.

Dynamic Multi-Sector CGE Modeling: Reply to Assmann and Hogrefe

Farmer and Wendner (2004) consider the sensitivity of policy effects, as implied by dynamic multi-sector computable general equilibrium models, with respect to the specification of capital and investment aggregation. They demonstrate that (small) differences in the specification of capital and investment aggregation may yield large differences in the policy effects predicted by dynamic multi-sector computable general equilibrium models. Assmann and Hogrefe, AH in the following, conclude that Farmer and Wendner's (FW) result indeed also holds in different model frameworks. However, they criticize FW's model that is based on the puzzling value capital approach. Here, FW reply to AH's critique.