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EC 936 ECONOMIC POLICY MODELLING
LECTURE 7:
CGE MODELS
OF
STRUCTURAL CHANGE
AND
ECONOMIC REFORM
WASHINGTON CONSENSUS (Williamson, 1989)
• STRUCTURAL ADJUSTMENT POLICIES
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Budget deficit reduction
Public expenditure reform
Tax reform
Financial liberalization
Foreign exchange liberalization
Trade liberalization
Privatization of state-owned enterprises
Competition policy
Deregulation of foreign direct investment
AUGMENTED WASHINGTON CONSENSUS
(Rodrik, 2002)
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Land reform
Poverty reduction
Social safety nets
Anti-corruption policy
Legal reforms
Governmental/institutional reforms
WHY CGE MODELS?
• General vs partial equilibrium analysis
• Counterfactual modelling
• Decomposition of complex array of
simultaneous influences (exogenous as
well as policy decisions)
• Simulation exercises
• Evaluation of key parameters
CGE MODELS OF STRUCTURAL ADJUSTMENT
AND ECONOMIC REFORM IN AFRICA
CAMEROON
MADAGASCAR
THE GAMBIA
NIGER
• Key structural similarities:
– High share of labour force in agriculture
– Export oriented/primary commodities
– Small industrial sectors
• Similar external shocks pre-reform:
– Terms of trade shocks (falling commodity prices)
– Real exchange depreciation (except for Cameroon)
• Structural divergences:
– Budget balance
– Nominal exchange rates
– Financial stability
THE CORNELL CGE MODEL
(Dorosh, Sahn et al)
• SAM based model
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Four household sectors (urban non-poor, urban poor, rural non-poor, rural poor)
Cameroon 14 sectors (6 agric, 2 ind)
The Gambia 17 sectors (6 agric, 1 ind)
Madagascar 15 sectors (5 agric, 4 ind)
Niger 14 sectors (5 agric, 3 ind)
• CES value-added production function
– Disaggregated labour (formal/informal by skill type)
– Sector-specific fixed capital (formal/informal)
– Disaggregated land by ecological type
• LES or fixed-share consumption functions
CLOSURE RULES
• Micro:
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Market clearing in commodity and labour markets
Aggregate labour supply fixed
Armington elasticities for imports
CET functions for exports
Government spending exogenous
• Macro:
– Savings driven
– Current account deficit held constant
FOUR SIMULATION EXERCISES
How might governments respond to external shocks?
I: Impose import quotas to maintain real exchange rate
(‘de facto adjustment’)
II: Real exchange rate deprecation (‘foreign exchange
liberalization’)
III: Real exchange rate depreciation and maintain budget
balance (i.e. cut government expenditures)
IV: Real exchange rate depreciation and impose trade taxes to
maintain level of government expenditure
CONCLUSIONS
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Terms-of-trade shocks lowered real incomes for most households
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Foreign exchange rationing and quotas exacerbate the negative effects on
poor households, while raising incomes for the urban non-poor
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Foreign exchange rationing and quotas lower long-run growth potential via
lowered savings/investment
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Cutting government expenditures raises savings/investment relative to
raising trade taxes
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Cutting government expenditures increases urban poverty relative to raising
trade taxes
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Political economy implications
POTENTIAL CRITICISMS
• Sensitivity of results to closure rules, both macro and micro (do
markets clear? should economies be modeled as savings-driven or
investment-driven? and so on)
• How well is the model calibrated to changes in variables as well as
static representation of resource flows (via the SAM)?
• Is it appropriate to model households as homogenous within
categories such as poor/non-poor; urban/rural?
• Is neo-classical modelling appropriate for evaluating neo-classical
policy agendas?