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An Application of the Quebec’ s
General Equilibrium Model
Impact of the Elimination of the
15-year Rule
Ministère des Finances, Politiques économiques et fiscales
Institut de la statistique du Québec
Centre de recherches en économie et finance appliquées
(CRÉFA, Université Laval)
September ..., 2002
Table of Contents
1.
2.
3.
4.
5.
6.
7.
Challenges of a large-scale model
Issues of the 15-year rule
Definition of the shock
Adaptation of the basic model
Interpretation of the results
Lessons learned
Visualization interface
1. Challenges of a Largescale Model
Challenges of a Large-scale Model

Time factor
— the GAMS solver

Data confidentiality

Importance of a functional interface

Advantage
— allows simulation of highly focused shock effects
4.
2. Issues of the
15-year Rule
Patent protection in some OECD
countries and the “15-year rule”
A. PATENT PROTECTION IN SOME OECD COUNTRIES
Application
for patent
Marketing
(ten-year average)
Appearance of
generic substitutes
20 years
5 years
Protection stipulated in WTO agreements
Patent extension
B. 15-YEAR RULE IN QUÉBEC
Application
for patent
Marketing and
entry on formulary
(ten-year average)
15-year rule in Québec1
20 years
Protection stipulated in
WTO agreements
1.
Full application of the
low price policy
Appearance of
generic substitutes
The 15-year rule applies as of entry on the drug formulary. Accordingly, it may apply more or
less quickly, as the case may be.
Sources: OECD and Québec government.
6.
The Context


The Montmarquette Committee
recommended that the government study
the impact on Québec’s economy of
eliminating the “15-year rule”.
Elimination of the 15-year rule is equivalent
to the full application of the “low-price
policy”.
— According to CCP estimates, this would reduce the
cost of the drug insurance plan by $24 million
annually.
7.
3. Definition of the Schock
Definition of the Shock

Two possible effects:
— The average price of drugs drops because generic
drugs increase their market share at the expense of
brand-name drugs.
— The pharmaceutical research industry reduces its
investments in Québec because of:
• lower profitability further to the drop in price;
• weakening of the essential factor that determines
investment location.
9.
Investment growth in Québec and the rest
of Canada
Growth of stock of capital from 1994 to 2001
(%)
12
Québec
Canada without Québec
9.5%
10
8
6
9.6%
6.5%
4.4%
4
2
0
1990 to 1994
Sources:
1994 to 2001
Statistics Canada, Canadian pharmaceutical research companies
(Rx&D).
10.
Size of the pharmaceutical research
industry in Québec
Number of jobs, total and R&D investment by province, in 2000
(Rx&D member companies)
Millions of $
Jobs
12 000
1 500
1 500
1 400
9 032
10 000
9 090
8 000
1 000
6 000
500
396
372
4 000
331 2 451
2 000
83 528
102
25
0
0
Maritimes
Québec
Total investments
Sources:
Ontario
Number of jobs
Western provinces
R&D spending
Statistics Canada, Canadian pharmaceutical research companies
(Rx&D).
11.
Investment growth in Québec
since 1994
Stock of capital
Québec (millions of current dollars)
(M $)
1 800
1 601
1 600
1 443
1 280
1 400
1 186
1 095
1 200
985
1 000
843
876
800
600
400
200
0
1994
Source:
1995
1996
1997
1998
1999
2000
2001
Statistics Canada
12.
Investment growth in British Columbia
since 1994
Stock of capital
British Columbia (millions of current dollars)
(M $)
40
35
34
34
34
1998
1999
2000
35
31
30
24
25
19
20
1994
1995
20
15
10
5
0
Source:
1996
Statistics Canada
1997
2001
Definition of the Shock

Pharmaceutical products price reduction
— 1.4%, i.e. a reduction of $20 million in government
spending

Transfer of the stock of capital of the
pharmaceutical industry from Québec to the
rest of Canada of $150 million:
— a conservative estimate:
• rise of over $150 million in 2000 and 2001
• does not take into account either the cumulative
effect over many years, or growth in Canada
14.
4. Adaptation of the Basic
Model
Adaptation of the Model
- main difficulties

Rationing mechanism
• attenuate disruptions caused by the drop
in average price

Formation of value-added of the
chemical industry in Québec
• Cobb-Douglas vs. Leontieff function

Representation of government
expenditures
• fixed value vs. fixed volume
16.
Selected variants

Variant 1 — fixed labour supply by
profession (neo-classical closing)

Variant 2 — variable labour supply and
wages (labour supply elasticity 0.5)

Variant 3 — inelastic wages
(Keynesian closing)
17.
5. Interpretation of Results
Main Transmission Channels - II
+
Total production
Corporate
profits
Corporate
savings
Household income
Household savings
- 0.05%
Transfer of the
chemical industry’s
capital to RoC
: $150 M
Labour demand
-0.06%
Drop in average price
of pharma products:
-1.4%
Remuneration of
capital
-0.3%
-0.04%
Wage rates
-0.11%
Total
investment
-0.03%
Household
consumption
-0.02%
Real GDP
-0.17%
Government
spending
-0.05%
Government
revenue
-0.08%
Government
savings
-0.181%
19.
Interpretation of Results
Impact of a transfer of $150 million of the stock of capital of
Québec’s chemical industry to the rest of Canada, with a decline
in the local price of pharmaceutical products of 1.4%
Base
amount
Variant 1
$M
$M
Total Québec government revenue
51 017¹
-43
Total Québec government spending
49 565¹
Consumer price for pharmaceutical product
Variant 3
$M
%
$M
%
-0.084
-39
-0.076
-41
-0.080
-44
-0.088
-25
-0.051
-3
-0.006
---
---
-0.16
---
-0.14
---
-0.12
Total production volume (average of variations)
---
---
-0.02
---
-0.05
---
-0.11
Labour supply
---
---
0.00
---
-0.06
---
-0.16
Wage rates
---
---
-0.18
---
-0.11
---
0.00
Household income (average of variations)
---
---
-0.04
---
-0.04
---
-0.05
223 481²
-313
-0.14
-380
-0.17
-492
-0.22
Real gross domestic product
%
Variant 2
¹ Results for 2000-2001. See 2002-2003 Budget, Budget Plan.
² GDP at market prices for 2000. See Provincial Economic Accounts, Statistics Canada.
20.
Interpretation of Results
External trade variables (variations in real terms)
Variant 1
Variant 2
Variant 3
International imports
-0.046
-0.064
-0.105
International exports
-0.163
-0.218
-0.320
Inter-provincial imports
-0.014
-0.013
-0.038
Inter-provincial exports
-0.395
-0.449
-0.552
Trade balance
-0.592
-0.824
-1.126
5.518
5.509
5.482
Total trade
Pharmaceutical trade
International imports
International exports
Inter-provincial imports
Inter-provincial exports
-7.755
3.969
3.968
3.943
-7.098
21.
Interpretation of Results

Decrease in GDP
— between $300 and $500 million

Decrease in government spending
— resulting from the drop in drug prices

Drop in government revenue
— resulting from decreased economic activity

Overall:
— negative impact on the budget

Rise in drug imports
— likely from Ontario, where the generic industry has a
significant presence
22.
6. Lessons learned
Lessons learned

Chief strength – detailed explanation of
economic implications

Versatility of the GEM

Importance of correct formulation of the
problem

Importance of sensitivity analyses
24.
7. Visualization Interface
Visualization Interface

Challenges:
— manage a large volume of output data
— maintain confidentiality of results
26.