India-EU trade reforms: Comments on modelling and policy analysis

R. Jongeneel (LEI-WU)

Agricultural Trade Project

25 April 2008 LEI Seminar

Agricultural Trade Policies and Development

Contents

Introduction Some experiences & lessons Reasons for scrutiny post-model

analyses Specific issues India application Concluding remarks

Introduction

Science/models: Looking for an appropriate map

Why use models ? Need for ‘systematics’ in the analysis Need for quantification Need for explicitizing assumptions Need for framework to discuss

disagreements Need to clarify costs and benefits

(welfare impacts) from policy changes Need to explore policy options …

Why use models ?

Check for alternative policy scenario’s Check for all kind of impacts (income,

welfare, markets, budget, environment, …

Do sensitivity analysis about uncertainties and show impacts

Qualifications (i) Models simplify reality Models often hide uncertainties Models use a lot of basic assumptions and

supplementary assumptions Models are weak in accounting for changes

in behavior Models are often too restrictive wrt market

structure (e.g. deviations from full competition such as monopolistic comp., etc)

Qualifications Model closure (and non-considered

feedback links) are important Models don’t prescribe policy, but can

be easily abused for this Institutional issues are often

downplayed or presumed It is difficult to include the full real

world dynamics (expectations, non-linearities, comparative static)

Some experiences and lessons

Some examples

Use models for their strengths not their weaknesses

Power of GTAP and its ‘family’-members lies in world-wide impact analysis of trade policy changes

See overview partial (Harbinson) (slide 1) and full trade liberalisation analysis (slide 2) (source J-C. Bureau)

Model use and WTO /TrLib (i)

Models and WTO/TrLib (ii)Even with

same model and same scenario different

researchers come up

with

different results

Lessons from modelling WTO/TrLib (i)

Only a few model families are used Caution needed for artifical

consensus More liberalisation leads to larger

gains: already by assumption Gains are actually quite small (0.x%

of GDP) In particular developing countries

gain relatively little (although they did in older studies).

Lessons from modelling WTO/TrLib (ii)

More recent model version show smaller impacts due to better data (applied tariffs, TRQ-treatment, other NTBs)

Better desaggregation of DC (still weak on impacts of binding overhang, tariff data precision, somtimes simplistic assumptions wrt consumer surplus changes offsetting producer surplus changes)

Few models still take the relationship between intervention prices, tariffs and export subsidies properly into account (EU)

Post-modeling analysis

Model use matters

Model have limited direct impact, but large and increasing indirect impact

Models are (more) used in trade panels (with country focus!)

Need for good quality management & accountability about performance and limitations

When focus on specific country-market-impacts post-model analysis is required

Post-modeling analysis Models are calibrated: lack empirical testing Specification errors (aggregation,

heterogeneity, down-scaling, macro-micro, lacking detail in policy implementation)

No market power Instantaneous adjustments (signal

transmission, responsiveness) Dynamics & structural change not well-

captured Balance of trade-closure

Also plea for pre-modeling analysis

Specific issues wrt India

Comments/questions on analysis

Modeling assumptions

BoP closure rule => dX = dM Factor mobility assumption Meat import fixation

Comments/questions on analysis

Context: quantitative assessment of India-EU FTA

Q1 : PTA or FTA? Q2 : ‘external’ tariff assumption? Q3: TC and TD (how to explain) Q4: TRQ treatment Scenario design

Comments/questions on analysis Post-modeling analysis (fed/state level desagr?) Check for main affected products– Padi rice– Processed rice– Sugar cane, sugar beet?– Textiles and leather?– Wool, silkworm cocoons?– (Manufactures)

Analyse in detail– Policy representation– Price transmission

Concluding remarks

Some conclusions GTAP contains lot and still increasing

amount of expertise on modeling, trade volume, price and policy data

CGE is encompassing but captures not everything properly and with proper detail

Plea for (pre-) and post-modeling analysis– (scenario design)– (scenario implementation: policy transl.)– interpretation and modification of results– derived impact analysis