Agriculture, trade and development: future economic issues and methodological challenges: Agriculture, trade and development: future economic issues and methodological challenges Philip Abbott Purdue University 2007 EAAE PhD Workshop Economic Research in Food, Agriculture, Environment and Development September 4-5, 2007 • Rennes, France


Agriculture, trade and development: future economic issues and methodological challenges: Agriculture, trade and development: future economic issues and methodological challenges


Agriculture, trade and development: future economic issues and methodological challenges: Agriculture, trade and development: future economic issues and methodological challenges


Agriculture, trade and development: future economic issues and methodological challenges: Agriculture, trade and development: future economic issues and methodological challenges


Context and background – assertions and experience: Context and background – assertions and experience Institutional and academic assertions Critiques Trends and predictions The “anecdotal” support – evidence from bilateral trade agreement outcomes


Institutional Perspectives on Trade and Development: Institutional Perspectives on Trade and Development Governments (U.S. and European Union) and Multilateral Organizations (World Bank, IMF, UN MDG) Academics See trade liberalization as a key method to achieve development, spur economic growth and reduce poverty in developing countries See the WTO’s Doha Development Agenda as the vehicle through which that trade liberalization and reforms to enhance development can be brought about


Rob Portman, former U.S. Trade Representative: Rob Portman, former U.S. Trade Representative “Perhaps most important, there was a recognition among trade ministers that we cannot afford to miss this once-in-a-generation opportunity to energize the global trading system, create economic growth and lift millions of people out of poverty. The consensus that more open trade is an important development tool is stronger as a result of our commitments in Hong Kong.” After December 2005 Hong Kong WTO Ministerial


European Union, 2006 Web page: European Union, 2006 Web page Trade and development “The importance of trade as a factor for development and growth is becoming more and more evident. If accompanied by the proper flanking policies and if used correctly, trade policies can provide opportunities for promoting economic development and tackling poverty reduction. Development is a fundamental tenet of the EU trade strategy which aims to support the gradual integration of developing countries in the world economy and the multilateral trading system.” http://europa.eu.int/comm/trade/issues/global/development/index_en.htm


World Bank, 2002: World Bank, 2002 A “development round” would help— These issues provide fertile areas where reciprocal negotiations in a “development round” could provide substantial benefits for development. Open trade in agriculture and labor intensive manufactures would raise incomes among the world’s poor. World Development Report, 2002 $500 billion dollar gain in developing countries from successful Doha outcome


Millennium Development Goals: Millennium Development Goals Goal 8. Develop a global partnership for development Goal 8 of the Millennium Development Goals sets out by the year 2015 to: Develop further an open trading and financial system that is rule-based, predictable and non-discriminatory. Includes a commitment to good governance, development and poverty reduction—nationally and internationally. Address the least developed countries’ special needs. This includes tariff- and quota-free access for their exports; enhanced debt relief for heavily indebted poor countries; cancellation of official bilateral debt; and more generous official development assistance for countries committed to poverty reduction. Goal 1 of the Millennium Development Goals sets out by the year 2015 to Eradicate extreme poverty and hunger : Reduce by half the proportion of people living on less than a dollar a day. Reduce by half the proportion of people who suffer from hunger. 2000 UN Millennium Summit


Sachs and Warner, 1995: Sachs and Warner, 1995 Jeffrey Sachs and Andrew Warner, p.2 Assertion most used in academic citations


More Skeptical Viewpoints: More Skeptical Viewpoints


Critics of Trade Liberalization via WTO go further: Critics of Trade Liberalization via WTO go further In meetings with senior negotiators in Hong Kong, it was shocking to find that, despite all the rich-country rhetoric about changing the rules to make trade a positive force for poverty reduction, the EU and US had reverted to type – they were there to get as much for themselves as they could. This was a genuine surprise to me, even as a veteran campaigner. The result was a profoundly disappointing text and a betrayal of development promises by rich countries. Developing countries were put in an impossible position: either accept a seriously flawed text, or be blamed for the failure of the Round. Phil Bloomer Oxfam GB, Director of Campaigns and Policy Unfortunately, in the years since it was launched , the Doha Round has not delivered on its development mandate in several important respects. Joe Stiglitz and Andrew Charlton


Early CGE Projections WDR 2002: Early CGE Projections WDR 2002


Own Liberalization versus Terms of Trade Improvement: Own Liberalization versus Terms of Trade Improvement “Dynamic gains” = trade related productivity increases


Recent Critiques of Projections – Less Ambitious Round Shrinking Gains (Ackerman): Recent Critiques of Projections – Less Ambitious Round Shrinking Gains (Ackerman) Limited Doha outcome – gains virtually disappear Prior liberalization due to structural adjustment


Results Comparisons – WTO Guide: Results Comparisons – WTO Guide BDS – Pro-competitive effects of services trade reform


Results Comparisons – WTO Guide: Results Comparisons – WTO Guide


Trade, FDI, GDP and Poverty: Trade, FDI, GDP and Poverty


Trade, FDI, GDP and Poverty - Vietnam: Trade, FDI, GDP and Poverty - Vietnam


Bilateral trade agreements: Bilateral trade agreements


Exports to U.S., EU, Asia after BTAs: Exports to U.S., EU, Asia after BTAs


Conceptual and Theoretical Underpinnings: Conceptual and Theoretical Underpinnings Trade, Development theory Second best Timmer, Johnson-Mellor


Interpreting the Asian Miracle: Interpreting the Asian Miracle Economic success of Korea, Taiwan, Hong Kong and Singapore – Why? Using the same studies, different analysts draw markedly different conclusions: Bhawati and Kreuger, Sachs and Warner – Outward oriented regimes more closely approximate free trade Rodrick and Stiglitz – Export promotion and significant government intervention key to Asian success Oxfam – Asian countries used tariff protection as a key development strategy


Second best -- Lessons for Trade Policy: Second best -- Lessons for Trade Policy Second best is the operative trade theory in a world of distortions No theoretical presumption in favor of trade-growth link Tariffs may be optimal policy but only when distortions are in trade Reduction of tariffs may exacerbate another distortion, worsen welfare Domestic policies interact with trade policies Outcomes of trade negotiations are not establishing free trade, by only reducing some tariffs This outcome is not necessarily welfare enhancing Numerical solutions may be necessary to assess second best outcomes Direct Trade policy impacts are static reallocations, with no impact on steady state growth – may impact transitions


Agricultural Development: Agricultural Development


Traditional methods – approaches and their limitations: Traditional methods – approaches and their limitations CGE modeling (static and “dynamic”) Cross country regressions Productivity (FDI spillovers, heterogeneous firms )


Relevant Literatures: Relevant Literatures


CGE Models Implement Riccardo Viner Theory: CGE Models Implement Riccardo Viner Theory Many goods, many factors, numerical solution Sluggish movement of factors across sectors RV would fix capital by sector, but not labor Factors and borders Savings but not physical capital moves Labor immobile across countries Small variations on generic RV model: Elements of models to insure “realistic” solutions – preserve status quo Armington trade specification Factor mobility sluggishness - labor and capital Productivity shifts exogenously imposed (or ad hoc) to match growth forecast


Closure: Closure Accounting identities and equilibrium conditions are represented in SAM - Macroeconomic assumptions Closure – Which variables are exogenous and which are endogenous? Which cells of the SAM are represented by behavioral relationships and which are fixed as constants? What is the underlying macroeconomic model? How is Saving = Investment treated What is the underlying exchange rate determination model? How are international capital flows treated? More critical if dynamics investigated Financial markets and money supply – in very few SAMs


Outline of Critiques: Outline of Critiques Base Data Parameters Specification Market Failure Closure Factor Markets Exchange Rates Macroeconomics Price Transmission and Market integration Policy details matter as tax equivalents Trade transactions costs Solution limitations Linearization Armington parameters “Dynamic” impacts imperfect competition, scale economies X-inefficiency, technical change Short, medium or long run perspectives Adjustment costs Investment Dynamics Predicting investments by sector Macro closures in short run Actual FTA outcomes FTAs are not Free Trade Zero flows Specialized results T ariff impacts measured Non-binding constraints Disaggregation, detail


Model Predictions Versus Actual Vietnamese Exports to the U.S. Following the BTA Implemented in 2002: Model Predictions Versus Actual Vietnamese Exports to the U.S. Following the BTA Implemented in 2002


CGE Models - Lessons learned: CGE Models - Lessons learned


Cross country growth regressions: Cross country growth regressions


Agenor graphs Tariffs versus gY: Agenor graphs Tariffs versus gY


Sachs Warner conclusions: Sachs Warner conclusions Unconditional convergence for open economies (only) Closed economies grow more slowly Good policies matter to growth Controlling for other factors does not diminish role of trade policy Poor trade policies not only affect growth directly, but also affect rate of capital accumulation (investment) Open economies adjust more rapidly from being primary product exporters to becoming manufacturing exporters Open economies avoided macroeconomic crises


Rodrick and Rodriguez – Deconstruction of Trade – Growth Regressions: Rodrick and Rodriguez – Deconstruction of Trade – Growth Regressions Widespread view that outward oriented strategies promote growth – Kreuger, Stiglitz , Sachs and Warner Indicators of openness flawed, in particular do not correspond with trade liberalization Methodological flaws in studies Dissects: Dollar(1992) Ben-David (1993) Sachs and Warner(1995) Edwards (1998) Frankel and Romer, Acemoglou -- later papers dealt with in Institutions Rule, focusing on endogeneity, rule of law as an omitted variable Anderson and Daalgard International integration broadly construed – trade trumps! Don’t take variables too literally


Binding constraints?: Binding constraints?


Productivity: Productivity


Getting Development into Models: Getting Development into Models Export supply determination Macro closures Investment dynamics Understanding productivity growth Imperfect factor markets Avoiding Armington Institutional reform


Development mechanisms: Development mechanisms


Export supply determination: Export supply determination


Market failure: Market failure Stiglitz perspective – Market failure rampant in developing countries CGE models fail to capture relevant imperfections Unemployment and migration Local exporters, competition with multi-nationals Risk markets Information externalities and entrepreneurs Coordination of upstream and downstream industries Rural credit Market integration Government failure versus market failure Imperfect Factor Markets Macroeconomic stories based on distortions Unemployment and labor markets Investment and cash flow Development accompanies more efficient factor markets (causality?) Rates of return appear not to be equalized across sectors Wages differ by sector


Concluding thoughts on a research agenda for agricultural economists: Concluding thoughts on a research agenda for agricultural economists


Investment Regressions and Dynamic CGE: Investment Regressions and Dynamic CGE


Conclusion: Conclusion


Method Recommendations: Method Recommendations Incorporate market failures relevant to developing countries Pursue dynamics, alternative closures SAMs (identities) sacred (but need to be right) Accounting identities hold even if we don’t understand behavior Ex-SAM relationships matter (investment, finance) Foreign exchange, savings investment balances, public sector? Regression on microeconomic data Explore mechanisms of development Institutional factors Conditional factors, binding constraints Bilateral agreement impacts Criticisms are an opportunity for new and improved models and approaches