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Methodologies in the trade and poverty research

Methodologies in the trade and poverty research. Lucian Cernat International Trade Division. Outline. T&P methodologies: Simple: Econometric PE GE Nested: Econometrics -> CGE CGE -> econometrics PE -> CGE PE -> econometrics. Econometrics. Trade and growth

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Methodologies in the trade and poverty research

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  1. Methodologies in the trade and poverty research Lucian Cernat International Trade Division

  2. Outline • T&P methodologies: • Simple: • Econometric • PE • GE • Nested: Econometrics -> CGE CGE -> econometrics PE -> CGE PE -> econometrics

  3. Econometrics • Trade and growth • Empirical evidence is convincing, although disagreement persists • Problems with trade openess measurement • Causality from openess to growth difficult • Stops short of poverty impact analysis: • Mainly at « poor country » level of analysis, e.g. Dollar and Kraay • But also microeconometrics

  4. Microeconometrics • Directy poverty linkage based on econometric analysis of household surveys • require few restrictions on parameters • behavior of real households as opposed to representative households • Can focus on more subtle effects of trade policies, e.g. child poverty, health, informal sector, labour markets, etc.

  5. Balance-of-payments constraints (BPC) • estimation of the income elasticity of demand for imports, and time series regressions of regions or individual countries in order to compare predicted and actual growth rates • Unit roots tests and cointegration analysis to determine if there is a long-term common trend between export growth and GDP growth, and hence to test hypothesis of the BPC growth model

  6. Partial equilibrium • PE models to estimate price effects from trade reform • Such price effects are then loosely interpreted in terms of welfare and poverty implications • Major advantages: • simple, transparent, very relevant for trade policy makers and trade negotiators (often PE modelling conducted at tariff line level) • Major disadvantage: • low accuracy on poverty impact

  7. Partial equilibrium –> microanalysis • Price and quantities estimates from partial equilibrium -> consumption and production bundles at household level • Multicountry, multiproduct PE estimating trade changes at HS-6 digit level • Then impact on prices of goods produced and consumed by the poor • Impact on world demand of products sold by the poor • E.g. Kee, Nicita, Olarreaga (2007) estimates used in country studies (Ethiopia, Madagascar, Cambodia, etc).

  8. General equilibrium • Imposes income/expenditure and resource constraints. • Takes into account linkages between markets, both product and factor markets (including feedback to the original market) • market structure (im/perfect competition) • production function • representative household • government behaviour • substitutability between domestic and foreign products (Armington assumption) • Investment and dynamics • Model closure

  9. General equilibrium for poverty analysis Individual Households • GE modeling with multiple representative households • aggregating households from a household survey into several representative households • major limitation: there can be large differences among the households in each representative household Region 1 Region n …… Urban Rural Urban Rural Informal Formal Skilled Unskilled

  10. GE for poverty analysis • GE with “real” households from the household survey • First best option but very demanding • yet still possible, e.g. Rutherford et al (2005) • Ultimate goal: individual level welfare and poverty analysis • Intermediary step: Gendering CGE modelling e.g.Fofana et al (2006)

  11. Other options • In between: “open loop” or “top down” • 1st step: a single representative agent computable general equilibrium model -> estimated price changes • 2nd step: price changes -> microsimulation household model • But ignores feedback effects of the quantity changes on the equilibrium prices

  12. Other issues in CGE modelling • macroeconomic closure for the GE model • Fixed gov’t spending • Gov’t income is fixed • Tariff revenue loss compensated by VAT • Data reconciliation of ‘’super’’ SAMs • Household survey, enterprise data, IO tables, trade statistics, etc.

  13. Other extensions • Static vs. Dynamic • Comparative Static Analysis: compare initial and final steady-state • more simple (theoretically, computationally) • Dynamic Analysis: also looks at the evolution from the initial to the final equilibrium: • Other trade-related issues: • Imperfect competition • Climate Change • Trade and labour: migration, unemployment, etc

  14. Modelling - caveats for policy makers • Models provide a theoretically consistent, rigorous and quantitative way to evaluate different trade policies • E.g. what is the poverty impact of specific Doha formulas in NAMA? • But what if they don’t confirm the policymaker’s expectations? • E.g. Uruguay Round estimates – cheque still in the mail? • How about unintended consequences of major underlying assumptions and modelling choices? • E.g. Doha estimates – wide range and declining gains

  15. Conclusions • Each modelling method has some value-added • ‘’augmented ’’ CGE is gaining momentum Thanks. Any questions?

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