Agricultural trade liberalization in a world of uncertainty: discussion of the results of a world CGE model

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Agricultural trade liberalization in a world of

uncertainty: discussion of the results of a world CGE model

Jean-Marc Boussard, Françoise Gerard, Marie-Gabrielle Piketty, Ane-Kathrine Christensen, Tancrède Voituriez

To cite this version:

Jean-Marc Boussard, Françoise Gerard, Marie-Gabrielle Piketty, Ane-Kathrine Christensen, Tancrède Voituriez. Agricultural trade liberalization in a world of uncertainty: discussion of the results of a world CGE model. 5. Annual Conference on Global Economic Analysis, National Tsing Hua University. TWN.; Purdue University. USA., Jun 2002, Taipei, Taiwan. �hal-02762963�

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Agricultural trade liberalization in a world

of uncertainty: a CGE model

by

J.M. Boussard, F.Gerard, M.G. Piketty, A.K. Christensen, T. Voituriez

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CGE and agricultural trade liberalization

•

• CGE CGE good to take care of good to take care of sectoralsectoral interactions interactions •

• Easy to make use of (thanks to GAMS/GTAP!)Easy to make use of (thanks to GAMS/GTAP!) •

• Yet dangerous ! Yet dangerous ! •

• be careful not to confuse model and reality! be careful not to confuse model and reality! •

• Such confusions occurred when evaluating Such confusions occurred when evaluating benefits from agricultural trade liberalisation

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The problem of agricultural trade liberalization

•

• Agriculture disconnected from market since Roosevelt

Agriculture disconnected from market since Roosevelt

–

– Concern with food security issuesConcern with food security issues –

– Ezekiel analysis of price instability Ezekiel analysis of price instability

•

• Reinserted into WTO negotiations in Marrakech

Reinserted into WTO negotiations in Marrakech

–

– "Farm problem" (Olson, Gardner) issues "Farm problem" (Olson, Gardner) issues –

– Overproduction problems in developed countries Overproduction problems in developed countries –

– Large efficiency gains expected from comparative Large efficiency gains expected from comparative advantages

advantages

•

• CGE models played a role in

CGE models played a role in

evaluating change

–

– Gains significant, but less than expectedGains significant, but less than expected –

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Why is stability

important in agriculture ?

•

• Large efficiency gains may be expected from

Large efficiency gains may be expected from

stabilized prices

–

– Farmers (and bankers) are risk averseFarmers (and bankers) are risk averse –

– Risk premium are inefficient Risk premium are inefficient

•

• Neglecting instability may

Neglecting instability may

underestimate

benefits from liberalisation

–

– MutualisingMutualising losses may have an insurance effect, losses may have an insurance effect, and decrease climate induced price fluctuations

and decrease climate induced price fluctuations

(Bale and Lutz

(Bale and Lutz))

•

• Neglecting instability may

Neglecting instability may

overestimate

benefits from liberalisation

–

– If genuine market instability always keeps prices If genuine market instability always keeps prices away of equilibrium

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Now, CGE's ignore instability !

•

• They fail to take account of the facts at the

They fail to take account of the facts at the

origin of price intervention in agriculture, and

thus, of the very problem they are addressing

•

• They thus may under

They thus may under

-

or over

-

estimate benefits

from liberalisation, and misguide political

bodies

But how can we introduce risk and instability

into a CGE model ?

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Three key

points in modelling

risk and instability in CGE's

•

• First order conditions in presence of risk

First order conditions in presence of risk

•

• The possible local instability of market

The possible local instability of market

equilibriums

•

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First order conditions in presence of risk

:

•

• Neglecting risk leads to the standard first o

Neglecting risk leads to the standard first o

r

der

condition:

•

• Introducing risk gives:

Introducing risk gives:

•

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Modelling instability

•

• Sources of instability

Sources of instability

•

• Exogenous: No problems…

Exogenous: No problems…

•

• Endogenous:

Endogenous:

–

– Lags in deliveryLags in delivery

[ while standard CGE's assume consumption and production

are simultaneous]

–

– Imperfect expectationsImperfect expectations

[while standard CGE's assume expectations are not only

rational

rational but also but also perfectperfect] ]

–

– Poorly elastic demandPoorly elastic demand

[how are demand elasticities in most models ?]

•

• The road to explosive cobwebs

The road to explosive cobwebs

[but risk as a return string]

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How is capital allocated to sectors ?

•

• The third component:

The third component:

Non

shiftable

capital

–

– If capital is sector specific, savings must be allocated betweeIf capital is sector specific, savings must be allocated between n sectors

sectors

–

– Then, a classical Then, a classical MarkowitzMarkowitz model makes the trick: In a model makes the trick: In a separate module, households choose z to maximize:

separate module, households choose z to maximize:

with:

•

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These ideas have been implemented

in a large model in progress

A GTAP model

Two versions : Standard CGE Incertitude

World aggregations :3regions /10 sectors 12 regions/10 sectors

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Model presentation

Îmain characteristics shared by the 2 versions : -economy wide model, world coverage

-recursive dynamic

- production function : CES of CI(aggregate intermediate consumption) and VA (aggregated added value)

- consumption : linear expenditure system

- international trade : armington, bilateral flow

- GTAP parameters, parametric difference between regions - Endogenous volume and prices for goods and factors

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The 10 Sectors

• 1. Paddy

• 2. Grains : Wheat,others cereal grains

• 3. Autres cultures : Vegetables-fruits-nuts, oil seeds, sugar cane-sugar

beet, plant-based fibers, others crops

• 4. Productions animales : Bovine cattle-sheep-goats-horses, other

animal products, raw milk, wool, silk worm cocoons, fishing

• 5. Sylviculture: Forestry

• 6. Industries agro-alimentaires (9 secteurs GTAP)

• 7. Industries du bois

• 8. Manufactures (15 secteurs GTAP)

• 9. Energie et ressources naturelles (7 secteurs GTAP)

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Other features

five production factors :

•Land : used only by agricultural sectors, perfect mobility, flexible prices

•Natural resources : used only by forestry and energy-resources sectors, perfect mobility, flexible prices

•Highly qualified workers : mobility inside aggregated sectors, rigid wages

•Low qualified workers : mobility inside aggregated sectors, flexible wages

•Capital : sector specific, flexible prices

2 types of households : Middle-Rich / Middle-Poor 2 modules :

Real : physical flows of products

consumption and production decision Financial :investment decision

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Preliminary results

-80 -60 -40 -20 0 20 40 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 time % of ba se -r un poor.RDM poor.USA poor.UE rich.RDM rich.USA rich.UE -5 0 5 10 15 20 25 30 35 40 45 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 2002-2047 % of base-ru n poor,RDM poor,USA poor,UE rich,RDM rich,USA rich,UE

Losses associated with trade liberalization in

the version

considering risk and uncertainty Gains associated Gains associated with trade with trade liberalization in the liberalization in the standard version standard version

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Research agenda and conclusion

ÎIn progress: In progress:

Calibrating, performing sensitivity analysis and Calibrating, performing sensitivity analysis and validating on real data the reference scenario validating on real data the reference scenario……..

Improving capital module : endogenous exchange and Improving capital module : endogenous exchange and

interest rates interest rates

Î But we can be sure of :But we can be sure of :

•

•Liberalization gains may be considerably Liberalization gains may be considerably reduced by uncertainty

reduced by uncertainty •

• Necessity to define market friendly Necessity to define market friendly

intervention, which may prevent crisis intervention, which may prevent crisis

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An example :

Price (constant 1998 $ ) and production of US wheat 1840-2000

0 2 4 6 8 10 12 14 16 18411849 1857 18651873 1881 1889 1897 1905 1913 1921 1929 1937 194 5 1953 1961 196 9 1977 1985 1993 Market price ($/b) Target price($/b) Loan rate($/b) Production(MT/5)

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The agricultural exception

Tomatoes retail price index in large American cities, as compared to new car retail price index Source: Econom agic.com

0 100 200 300 400 500 600 700 800 900 196 7 196 8 196 9 1970197 1 1972197 4 1975197 6 19771978197 9 198 1 198 2 1983198 4 198519861988198 9 1990199 1 199 2 199 3 19951996199 7 1998199 9 C ars To m atoe s