Measuring impact of trade policy reform on Ireland


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Presents preliminary work on the development of a simulation model based on a CGE computable general equilibrium model with a disaggretated household and agrifood sector which can be used to estimate the likely effect of further trade liberalisation or other policy shocks.

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Measuring impact of trade policy reform on Ireland

  1. 1. Measuring the impact of trade policy reform in Ireland: an analysis of household impacts Miller, C., Boysen, O., Matthews, A., Donnellan, T. and O’Donoghue, C. Department of Economics and Institute for International Integration Studies, Trinity College Dublin Rural Economy Research Centre, Teagasc, Athenry 122 nd European Association of Agricultural Economists Seminar Evidence-Based Agricultural and Rural Policy Making Methodological and Empirical Challenges of Policy Evaluation February 17 th – 18 th , 2011, Ancona (Italy) associazione AlessandroBartola studi e ricerche di economia e di politica agraria Centro Studi Sulle Politiche Economiche, Rurali e Ambientali Università Politecnica delle Marche
  2. 2. Motivation <ul><li>Potential of Irish agrifood sector to contribute to economic recovery.. </li></ul><ul><li>… but vulnerable to policy shocks – CAP reform, trade liberalisation, climate change policy </li></ul><ul><li>Desirable to take economy-wide view of policy impacts… </li></ul><ul><li>… but also to account for increasingly differentiated policy instruments </li></ul><ul><li>… and to describe distributional outcomes </li></ul>
  3. 3. Paper contribution and objectives <ul><li>Presents a single country CGE model with disaggregated agri-food sector and disaggregated households as a tool for ex-ante policy impact analysis </li></ul><ul><li>Reports results of a Doha Round trade liberalisation agreement </li></ul><ul><li>Contributes to the limited literature using single country CGE models for policy analysis in the EU </li></ul><ul><li>Highlights the treatment of CAP subsidies </li></ul>
  4. 4. Database – the 2005 Irish AgriFood SAM <ul><li>Three-step process </li></ul><ul><ul><li>Construction of a 55 sector macro SAM based on 2005 Irish input-output tables (one ag, one food industry sector) </li></ul></ul><ul><ul><li>Disaggregation of the agri-food sector </li></ul></ul><ul><ul><li>Disaggregation of the household sector by explicit incorporation of all households in the Household Budget Survey into the SAM (linked to National Farm Survey sample) </li></ul></ul><ul><li>Features of agri-food disaggregation </li></ul><ul><ul><li>Separate accounts for calves (linking milk and cattle production) and fodder production </li></ul></ul><ul><ul><li>Valuation of family-owned resources </li></ul></ul>
  5. 5. The CGE database and model <ul><li>SAM aggregated to 10 agricultural activities, 10 food industry activities, 1 manufacturing and 1 services activity </li></ul><ul><li>3 production factors (labour, capital and land used only in agriculture and forestry, no differentiation of labour or land by quality) </li></ul><ul><li>2 external accounts </li></ul><ul><li>Households aggregated to 9 representative households </li></ul><ul><li>Model is a modified form of the IFPRI standard model </li></ul>
  6. 6. Treatment of the CAP
  7. 7. Treatment of CAP subsidies <ul><li>SFP treated as a coupled payment in 2005, in addition to carryover of coupled payments from 2004 </li></ul><ul><li>The two other big subsidies (REPS agri-environment payments and DACAS less favoured area payments) are also currently treated as payments coupled to activities </li></ul><ul><li>Milk quotas not explicitly modelled – if positive quota rents in 2005, then this underestimates size of milk sector assuming quotas removed </li></ul>
  8. 8. Closure rules <ul><li>In current model version: </li></ul><ul><ul><li>Factors including land assumed fixed in supply </li></ul></ul><ul><ul><li>Factors perfectly mobile across sectors (long-run equilibrium) </li></ul></ul><ul><ul><li>Government savings are allowed to change as the government expenditure is a constant share of total absorption and the tax rates in the model are (largely ) fixed </li></ul></ul><ul><ul><li>The current account is balanced by changes in the exchange rate keeping foreign savings constant </li></ul></ul><ul><ul><li>The marginal propensities to save of households and enterprises are assumed to adjust to the changes of the domestic value of the rest of the world savings and price changes of investments to keep investment a constant share of total absorption   </li></ul></ul>
  9. 9. Simulation scenarios <ul><li>Pre-experiment (SFP simulation) </li></ul><ul><ul><li>Coupled subsidies including SFP payments treated as coupled in 2005 are paid to households as lump-sum payment </li></ul></ul><ul><li>Trade policy experiment </li></ul><ul><ul><li>Mimics successful Doha Round agreement based on Chairmen’s modalities 2008 </li></ul></ul><ul><ul><li>Irish agricultural tariffs reduced by 70%, manufacturing tariffs and export subsidies removed </li></ul></ul><ul><ul><li>No change in agricultural subsidies; agricultural subsidies held constant by varying subsidy rates </li></ul></ul><ul><ul><li>Rest of world shocks (shifts in export prices and quantities, import prices) taken from Doha study by Balzer et al (2008) </li></ul></ul>
  10. 10. Linking the model to global shocks <ul><li>Follows approach recommended by Horridge and Zhai (2006) </li></ul><ul><li>The aim is to allow the single country model to determine export supply behaviour and to use the changes in demand by the rest of the world as presented in the global model </li></ul><ul><li>The shift in the export demand curve facing Irish exports is derived from the expression </li></ul><ul><ul><li>fp = p + q/(elasticity of substitution among imports) </li></ul></ul><ul><ul><li>where p is percentage change in export prices and q is percentage change in export quantities </li></ul></ul><ul><li>Vertical shifts in import supply proxied by the import price shocks taken directly from the global model </li></ul>
  11. 11. Shock parameters Own import tariffs - Ag -70% - Man -100% Own export subsidies – 100%
  12. 12. Output changes
  13. 13. Macroeconomic impacts
  14. 14. Impacts on households’ real consumption
  15. 15. Reflections on the results <ul><li>Results from a single country CGE simulation for a trade policy shock very dependent on quality of multilateral results </li></ul><ul><li>Long-run closure modelled does not reflect policy-makers’ concerns regarding impact effects of trade liberalisation on agriculture </li></ul><ul><ul><li>Better to adopt more short-run closure with imperfect or zero substitution between agricultural and non-agricultural factors </li></ul></ul><ul><li>Improve treatment of CAP subsidies </li></ul><ul><li>Household incomes affected by changes in factor returns plus changes in transfer incomes – leaves challenge of modelling targeted payments </li></ul>