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 u Introduction u Some experiences & lessons u Reasons for scrutiny post-model analyses u Specific issues India application u Concluding remarks

Introduction

Science/models: Looking for an appropriate map

Why use models ? u Need for ‘systematics’ in the analysis u Need for quantification u Need for explicitizing assumptions u Need for framework to discuss disagreements u Need to clarify costs and benefits (welfare impacts) from policy changes u Need to explore policy options …

Why use models ? u Check for alternative policy scenario’s u Check for all kind of impacts (income, welfare, markets, budget, environment, … u Do sensitivity analysis about uncertainties and show impacts

Qualifications (i) u Models simplify reality u Models often hide uncertainties u Models use a lot of basic assumptions and supplementary assumptions u Models are weak in accounting for changes in behavior u Models are often too restrictive wrt market structure (e.g. deviations from full competition such as monopolistic comp., etc)

Qualifications u Model closure (and non-considered feedback links) are important u Models don’t prescribe policy, but can be easily abused for this u Institutional issues are often downplayed or presumed u It is difficult to include the full real world dynamics (expectations, non- linearities, comparative static)

Some experiences and lessons

Some examples u Use models for their strengths not their weaknesses u Power of GTAP and its ‘family’- members lies in world-wide impact analysis of trade policy changes u 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 researcher s come up with different results

Lessons from modelling WTO/TrLib (i) u Only a few model families are used u Caution needed for artifical consensus u More liberalisation leads to larger gains: already by assumption u Gains are actually quite small (0.x% of GDP) u In particular developing countries gain relatively little (although they did in older studies).

Lessons from modelling WTO/TrLib (ii) u More recent model version show smaller impacts due to better data (applied tariffs, TRQ-treatment, other NTBs) u 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) u Few models still take the relationship between intervention prices, tariffs and export subsidies properly into account (EU)

Post-modeling analysis

Model use matters u Model have limited direct impact, but large and increasing indirect impact u Models are (more) used in trade panels (with country focus!) u Need for good quality management & accountability about performance and limitations u When focus on specific country-market- impacts post-model analysis is required

Post-modeling analysis u Models are calibrated: lack empirical testing u Specification errors (aggregation, heterogeneity, down-scaling, macro-micro, lacking detail in policy implementation) u No market power u Instantaneous adjustments (signal transmission, responsiveness) u Dynamics & structural change not well- captured u Balance of trade-closure Also plea for pre-modeling analysis

Specific issues wrt India

Comments/questions on analysis u Modeling assumptions u BoP closure rule => dX = dM u Factor mobility assumption u Meat import fixation

Comments/questions on analysis u Context: quantitative assessment of India-EU FTA u Q1 : PTA or FTA? u Q2 : ‘external’ tariff assumption? u Q3: TC and TD (how to explain) u Q4: TRQ treatment u Scenario design

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

Concluding remarks

Some conclusions u GTAP contains lot and still increasing amount of expertise on modeling, trade volume, price and policy data u CGE is encompassing but captures not everything properly and with proper detail u Plea for (pre-) and post-modeling analysis –(scenario design) –(scenario implementation: policy transl.) –interpretation and modification of results –derived impact analysis