Post on 18-Mar-2016
description
Great Expectations: Ex Ante Assessment of the Effects of Trade Reform
Joe Francois and Will Martin
15 June 2006
We’ve made enormous progress
GTAP has given easy access to the data needed for global trade analysis
MAcMap 6-digit data for policy analysis With preferences included
Able to gain key insights into policy reforms Help highlight problems, identify opportunities
Contrast with the Uruguay Round Hard to get data even after the Round concluded
Are we there yet? Paul Krugman’s “dirty little secret”
remains: the welfare measures from trade reform are very small 0.7% of GDP in recent World Bank analysis
What sensible policy maker would stake her career on gains of 0.7% of GDP? A month’s growth in China or India
But perhaps it’s OK? Our standard measures are based on a
rigorous theoretical framework And perhaps the unmeasured gains
scale up these measures proportionately? So we might rank policies, without providing
a “number”? Alas, this is not always the case
Key questions What needs to be measured?
What should we do better?
How might we do it?
What needs to be measured?
Some indicator of the potential for the gainers to compensate the losers?
Where might these gains come from? Allocative efficiency changes Process productivity changes Product variety & quality effects Factor market & investment effects
Efficiency and Productivity
0 Q
Q
M
X
w
w
d
d U0
U0 a
U1
U1
b c e
A disturbing disconnect
0 Q
Q
M
X
w
w
d
d U0
U0 a
U1
U1
b c e
Traditional trade theory, and most empirical modeling, focuses on allocative efficiency
The difference between b and e in the figure With the PPF unchanged, except via input price Generally small
Macro-growth literature focuses mainly on shifts in the Production Possibility Frontier
Mainly due to process productivity Price distortions, variety & quality effects on
inputs included, but no consumer gain Sometimes large
What should we do better? Welfare measures Measures of distortions Aggregation of distortions Revenue replacement Process productivity Changes in product variety & quality Investment, factor markets & growth
Welfare measures The balance-of-trade function captures
production, expenditure & tariff revenues generalizes measures based on expenditure fnB = e (p,u) – r (p,v) – zp(p,u,v)´(p-p*)
Where e(p,u) is the expenditure fn; r(p,v) is GDP; zp=ep – rp; p* is world price
2nd order approximation with fixed # of products yields Harberger triangles
Can augment B to capture Process productivity gains Increases in product variety Improvements in product quality Declines in price-cost margins &
output increases at firm level Investment and growth
The ubiquitous EV’s The compensated measure of EV
ΔBc = B(p1,u0) - B(p0,u0) In applied work, usually use
uncompensatedEV = e(p0, u1) – e(p0, u0) Includes income effects on distorted goods
Can differ a lot if revenues used for public goods But quite close to a potential real GDP measure
Compensated measures internationally comparable & additive
Measuring distortions Doing much better with tariff measures
Ad valorem equivalents, preferences included Key issue now is non-tariff measures
(NTMs) Kee, Nicita and Olarreaga infer these measures
from a finely disaggregated trade model Suggest NTMs are twice tariffs in industrial-country
agriculture, four times as high in non-agriculture Would scale up the costs of protection by a factor of
9 in agriculture, 25 in non-agriculture
Measuring distortions (2) Francois and Woerz find ATC quotas were far
higher than we thought when rents captured by importers are included
From price comparisons, Bradford finds NTMs may be 10 times tariff barriers in the OECD
Not likely that the unmeasured benefits proportional to our measured gains from tariff cuts
Better data on distortions Detailed price comparisons and surveys of
exporters potentially very important Kym Anderson’s project on agric distortions Will provide better information on NTMs May reduce measured protection– water in
tariffs Also some insights into the counterfactual
Is protection stochastic? If so, benefits even if bound rate exceeds applied
Is mean protection stable, or increasing?
Services trade barriers Current measures are extremely poor Widely suspected that average barriers
to services trade are larger than in goods And many of these barriers likely create
higher costs per unit than tariffs Through rent seeking; reduction in
competition; or x-inefficiency A priority, albeit a difficult one
Aggregating distortions The ubiquitous weighted-average has major
problems Averaging problem– understates costs Weighting problem-- low weights on highly
protected goods The differences can be huge
Manole and Martin found costs with optimal aggregators 15 times those with weighted average
Some with higher average tariffs had lower costs
Estimated costs of protection
0
0.5
1
1.5
2
2.5
3
3.5
0 0.05 0.1 0.15 0.2 0.25
Trade weighted
Opt
imal
Aggregation We have all the information we need to
do better Currently, we just throw much of it away
There are papers at this conference looking at different approaches
This is surely one area where we can do better?
Revenue replacement
Most trade liberalization studies assume that tariff revenues are redistributed costlessly to consumers Alas, such lump-sum transfers rarely exist
Tariff revenues must be replaced via an alternative tax, or expenditure changes Harrison, Rutherford & Tarr found that tariff
replacement via a VAT cut the benefits of liberalization by 40%
Process productivity Evidence from the firm level that liberalization
increases productivity by expanding the availability and quality of intermediate inputs
Also an extensive literature on transmission of knowledge through trade
Pavcnik found productivity gains in import-competing firms through competition, exit and reallocation The adjustment that governments often fear is a
major source of gain
Process productivity: exports
Exporting firms have higher productivity Traditional explanations --Arrow’s learning-by-doing
But Clerides, Lach & Tybout, & Bernard & Jensen, cast doubt on this explanation Seemed to be little increase in productivity post-
export More efficient firms self-selected into exporting
Also highlighted the fact that firms are very heterogeneous in their productivity
And that price-cost margins decline with liberalization
Process productivity:Heterogeneous firms
Melitz (2003) provided a framework where trade liberalization with heterogeneous firms yields productivity gains High productivity firms self-select into exports Competitive pressure following liberalization
causes exit of less-productive firms, reallocation of resources to more efficient
Some recent studies question the rejection of gains from learning-by-doing
Variety & quality of exports
Our traditional models assume that all export growth is at the intensive margin Expanded exports involve more of the same
products going to the same markets Hummels & Klenow (HK 2005) find that 2/3 of
export expansion is in new products Evenett & Venables find that 1/3 of export growth
in developing countries is from new markets HK find quality upgrading on intensive margin
Export variety and quality
Assuming preference for variety, increases in export variety augment export demand Shift out the export demand curve Offset terms of trade fall implied by usual
models May help resolve old puzzles on elasticities
Quality upgrading augments these gains Hummels-Klenow find rising intensive-margin
prices in growing economies These gains are additional to the gains
from process productivity
Factor Markets: Labor
Desirable to include labor supply Relevant supply elasticities are compensated, so
even response by prime-working-age males nontrivial
Labor market performance is important Simple closures like fixed consumer real wage
increase the gains from libn, but are they realistic?
Doing better seems to require knowledge of countries’ institutions
Investment climate
Investment climate always important In Melitz-type models, firms “die” and need to
be replaced Recent work suggests that the full gains
from trade are much greater if the investment climate is supportive Rutherford and Tarr (2002) find an 11% gain
from 10% point tariff cut, with variety effects on intermediates and with domestic reinvestment
But 37% with foreign investment allowed
To conclude: Some key potential
improvements Improved estimates of distortions Better aggregation of distortions Better representation of process productivity
Heterogeneous firms & reallocation Learning-by-doing?
Capturing changes in product variety & quality Capturing gains associated with investment
Implementation New data needs are difficult but important
Aggregation looks more straightforward Many of the new approaches involve
distributions of firm productivity, costs of exporting, elasticities of substitution Might we be able to obtain adequate, agreed
measures of these parameters To get agreed consequences of liberalization?
An ambitious agenda, and we can surely learn a lot trying