WIOD and WorldScan Feedback, state of affairs and planned policy impact analysis Paul Veenendaal

CPB Netherlands Bureau for Economic Policy Analysis Outline Feedback State of affairs Planned policy analysis Some alternatives May WIOT and WorldScan

CPB Netherlands Bureau for Economic Policy Analysis Feedback What did we try to accomplish? ­calibrate a model version of WorldScan on the WIOT-table 2004 ­missing data could then by taken from GTAP-7 and our numerous satellite accounts (same base year) ­we can compare simulation outcomes WIOT versus GTAP-based Did we succeed? ­No, not with the prelease of September 2010 (too many negative entries everywhere) ­Yes, we are up and running with the release of February 2011 May WIOT and WorldScan

CPB Netherlands Bureau for Economic Policy Analysis Our general findings WIOT is a beauty! inspired us to use the same lay-out for globally closed tables that we constructed from the GTAP-datasets for 2001 and 2004 (to build a database for the analysis of trade in value added indicators at the request of DG TRADE) WIOD sector classification is not/less suitable for climate change analyses there is no explicit sector split for coal, electricity, gas and oil products (coal and oil products are together, electricity and gas too) Unavailability of most taxes and subsidies this is a serious drawback for CGE-exercises as welfare impacts of policy measures depend strongly on distortions could compatible (with WIOT that is) national IOTs help us here? May WIOT and WorldScan

CPB Netherlands Bureau for Economic Policy Analysis General findings Supplies of international transport services are not available transport services in WIOT are primary inputs in GTAP they are intermediates (for trade in goods only: transport via water, air and road/rail) WIOT is not globally closed yet, it is covers about 80% of global GDP then, we cannot possibly make the small country assumption that world market prices are given There are still many negative entries for exports to RoW for us they turned out to be manageable in the second release No distinction of exports from production and exports from imports ­and no correction for re-exports either ­what does the decision not to address re-exports mean? just ignoring them? treating imports for re-exports as normal imports? Something else? May WIOT and WorldScan

CPB Netherlands Bureau for Economic Policy Analysis Specific comments Incomplete national tables no entries for China for trade rows c20 and c21 Incomplete WIOD country tables no split of value added (8 countries) no skill split of labour (15 countries) no capital split (20 countries) No price/volume split for skill classes we would need this to address human capital formation in China No capital stocks by type No mapping from final consumption at the sectoral level to household budget categories No mapping from sectoral gross fixed capital formation to changes in capital stocks by type May WIOT and WorldScan

CPB Netherlands Bureau for Economic Policy Analysis How did we get WorldScan afloat on WIOT? First, we corrected negative export entries with RoW in WIOT by adding a constant to both exports to and imports from RoW note: this implies that RoW receives a larger input share than in WIOT Next, we aggregated WIOT 2004 and GTAP 2004 to a common sector and country classification: 26 sectors and 40 (WIOT)/ 41(GTAP) countries thus obtaining RoW from GTAP Finally, we forced RoW to accept WIOT bilateral trade with RoW by adjusting final demands in RoW Thus, obtaining a merged, closed, global IO data set We calibrated WorldScan on this dataset and prepared a baseline on it as well.. and WorldScan is up and running on WIOT 1994 May WIOT and WorldScan

CPB Netherlands Bureau for Economic Policy Analysis Our planned impact analysis Impacts on EU (policies) of rising human capital formation in China what would be the implication of larger inflows into higher education for China in the medium term? what would be the impact of more R&D in China (made possible by a larger stock of high-skilled R&D workers) on Europe? To analyse this we need in WorldScan to model R&D investment Human capital formation May WIOT and WorldScan

CPB Netherlands Bureau for Economic Policy Analysis R&D modelling in WorldScan R&D expenditures accumulate in R&D stocks Firms decide on optimal R&D stock R&D stock accumulations are produced in a separate R&D sector R&D spills over to total factor productivity in own sector other sectors foreign sectors May WIOT and WorldScan

CPB Netherlands Bureau for Economic Policy Analysis R&D in CES production nest May WIOT and WorldScan

CPB Netherlands Bureau for Economic Policy Analysis R&D modelling equations May WIOT and WorldScan

CPB Netherlands Bureau for Economic Policy Analysis R&D spillover estimates CoefficientParameter estimateAverage elasticity Own sector R&D spillover (0.022) Other sectoral R&D spillover (0.107) Foreign R&D spillover0.868 (0.233) Total0.180 May WIOT and WorldScan N=2250; R 2 = 0.183; Lejour, A.J. and R. Nahuis (2005), R&D spillovers and growth: specialisation matters, Review of International Economics, 2005

CPB Netherlands Bureau for Economic Policy Analysis Implications and modifications The parameter estimates imply a social rate of return of 90% Visser, S., R&D in WorldScan, CPB Memorandum 189, 2007 Thus, stimulating R&D was one of the most promising policy instruments for meeting the overall goal of the Lisbon agenda just second to increasing labour participation Later on we improved WorldScan in three respects ­high-skilled labour became a complement to capital in the production nest ­four (education-based) skill classes were introduced: low skilled, medium skilled, high skilled and the top of the high skilled: the R&D workers ­R&D workers are scarce and heavy subsidization of R&D will partly evaporate into higher wages of R&D workers May WIOT and WorldScan

CPB Netherlands Bureau for Economic Policy Analysis Modification of production nest for value added (1) May WIOT and WorldScan

CPB Netherlands Bureau for Economic Policy Analysis Modification of production nest for value added (2) May WIOT and WorldScan

CPB Netherlands Bureau for Economic Policy Analysis.. and introduction of wage differential between high- skilled and R&D workers Hence, heavy subsidies on R&D will partly evaporate into wage increases for R&D workers ­Rojas-Romagosa, H., Modelling Human Capital formation in WorldScan, CPB Memorandum 244, 2010 May WIOT and WorldScan

CPB Netherlands Bureau for Economic Policy Analysis Human capital satellite of WorldScan Keeps track of skill cohorts Has many policy parameters that may modify the size of a skill class the average efficiency of a skill class the share of the high-skilled that is capable of doing R&D work These modifications are sent each simulation year to WorldScan May WIOT and WorldScan

CPB Netherlands Bureau for Economic Policy Analysis Impacts of human capital formation The human capital plus R&D components of WorldScan will generally indicate: an increase of educational enrollment will reduce growth in the short term (less workers) higher enrollment in the topclass of the high-skilled will be needed to boost R&D if there is enough enrollment R&D-growth will become feasible growing R&D stocks will foster growth at home growing R&D stock will also foster growth abroad, especially if trade relations are intensive Hence, it seems that – from the modelling point of view – we are well-prepared to analyse the impacts of human capital formation in China May WIOT and WorldScan

CPB Netherlands Bureau for Economic Policy Analysis … but what about the data? WIOD labour split for China is not yet in sight No price/volume split for skill classes available OECD ANBERD is not abundant in supplying sectoral R&D expenditure in China (2000 is there, and to a lesser extent 2008 and 2009 as well, but only national totals for the years ) We have just 10 months left to do the work Hence, we should perhaps conclude that addressing human capital formation in China within the WIOD-project has become infeasible May WIOT and WorldScan

CPB Netherlands Bureau for Economic Policy Analysis Some alternatives? Exploit time-series character of WIOTs ­re-estimate substitution elasticities of production nests Armington nests Exploit wealth of trade information of WIOD ­disaggregate Armingtons (and estimate elasticities) ­construct plausible globalisation scenarios try to capture globalisation trends from WIOTs over the years extend these in a baseline up to 2025 analyse changes of trade structure with value added indicators changes of position of skill classes on the labour market May WIOT and WorldScan