Global Models Applied To Agricultural And Trade Policies .
Agricultural Economics 26 (2001) 149–172Global models applied to agricultural and trade policies:a review and assessmentFrank van Tongeren a , Hans van Meijl a , Yves Surry b, ba Agricultural Economics Research Institue (LEI), P.O. Box 29703, 2502 LS The Hague, The NetherlandsInstitut National de la Recherche Agronomique (INRA), Unité d’Economie et de Sociologie Rurales de Rennes,Rue Adolphe Bobierre, CS61103, 35011 Rennes Cedex, FranceReceived 2 February 2000; received in revised form 12 July 2000; accepted 21 August 2000AbstractThe continuing process of global integration bears implications for farmers and related supplying and processing industriesin all parts of the world, but also for the rest of the world economy. An assessment of agricultural and trade policy impacts isbound to be complex and is often supported by quantitative modeling analysis. This article provides an assessment of the presentstate of applied modelling in the area of trade and agricultural policies. We provide in this paper a comparative assessment ofalternative modelling approaches, considering a total of 16 partial equilibrium and general equilibrium models. The assessmentincludes theoretical modelling foundations, datasets employed and institutional aspects, such as model maintenance anddissemination of results. A typology of models is provided by structuring the assessment along a clear set of evaluationcriteria. 2001 Elsevier Science B.V. All rights reserved.Keywords: Global modelling; Agriculture; Trade1. IntroductionThe 1990s have witnessed a growing interdependence of national economies. This global trend evenaccelerated since the signing of the Uruguay RoundTrade agreement in Marrakech in 1994. Signs of thisincreasing globalisation of the world economy takeseveral forms. World trade and foreign direct investment (FDI) have grown at a faster pace in the ninetiesthan in the previous decade (WTO, 1998). Financialmarkets are more and more interrelated on a worldwide scale and any shocks occurring in one finan Corresponding author. Tel.: 33-2-2348-5390;fax: 33-2-2348-5380.E-mail addresses: f.w.vantongeren@lei.wag-ur.nl(F. van Tongeren), surry@roazhon.inra.fr (Y. Surry).cial place have repercussions elsewhere in the world.Another sign of this world globalisation is the ongoingcreation of regional trade agreements and a consolidation of existing ones. On the policy side, globalisationof the world economy led policy makers, governmentsand international institutions to tackle global policyissues such as global warming and transboundary environmental problems and come up with some realpolicy proposals. This awareness among policy makers also manifests itself in the trade policy area with aglobal consensus to launch a new round of trade policynegotiations despite a bad start at Seattle in November1999.This overall trend of globalisation of economicactivity and simultaneously a global orientation ofpolicy discussions is continuing to represent an enormous challenge for economists. Assessments of such0169-5150/01/ – see front matter 2001 Elsevier Science B.V. All rights reserved.PII: S 0 1 6 9 - 5 1 5 0 ( 0 0 ) 0 0 1 0 9 - 2
150F. van Tongeren et al. / Agricultural Economics 26 (2001) 149–172phenomena has required the development of globaleconomic models. Such effort in global modelling isnow well established and has become an integratedpart of the economics field. Furthermore, the development of such models has been facilitated by therapid improvement in information and communicationtechnologies (ICT). In parallel with the globalisationof economic activity and policy making, economicsresearch is globalising as well. Large scale globalmodels are increasingly supported by internationalteams and international groups of stakeholders.The purpose of this article is to review the presentstate of applied modelling used to examine the globalimpacts of agricultural and trade policies. Althoughthe scope of this review is limited by a deliberate biastowards agricultural trade issues, we should also notlose sight that, nowadays, many global phenomenago beyond agricultural and trade policy issues, someof which are environmentally related. This led us toadopt an open-minded strategy in conducting this review of global models. More specifically, we reviewednot only global models with an exclusive agriculturaland trade policy focus but also looked at models whichmay also be used to assess other global problems suchas global macroeconomic and environmental issues.The continuing process of global integration bearsimplications, not only, for farmers and related supplying and processing industries in all parts of theworld, but also for the rest of the world economy.An assessment of likely policy impacts is bound tobe complex and should be supported by quantitativemodeling analysis that explicit the relations of countries between each other, and that explicit relevantinteractions between the agricultural sectors and therest of the economy.There is no model which can serve all purposes.The choice of theoretical framework, the extent ofregional and sectoral desegregation and the choiceof datasets and estimation methods determine thedomain of applicability of the model. Potential usersof applied models should be aware of strengths andweaknesses of alternative approaches. This reviewprimarily presents factual information about relevantmodels, and presents this information in a structuredformat so as to highlight common features, differencesand areas of applicability of modelling approaches. Inthis way we hope to assist the model user in makinghis own assessment.Table 1 lists the sixteen models discussed in thisreview, their initiating bodies (institutions and/orpersons) and their current status. A first distinctionin Table 1 is that between partial equilibrium models focusing on agriculture on the one hand, andeconomy-wide models on the other hand. These latterglobal models are designed in such a way that theycould address agricultural and trade policy issues butalso other global problems such as global macroeconomic and environmental ones. A large part of thesemodels are still operational and are currently usedfor policy- and outlook analysis. For these reasons,they are in a continuous state of flux of evolvingthrough successive updates and changes. This situation led us to conduct the model review at a pointof time (early 1999) and provide a snapshot of allthese models as they functioned at the beginning of1999. Changes that could have occurred to the operational models since this date are not consideredin this article. Information on the individual modelshas been gathered using published papers and journalarticles, unpublished working documents, electronicwww/documents and personal contacts. An annex tothis article, which is available on request, provides adetailed description of each of the models reviewed.The requirement that the model should be relativelyrecent and likely to be used in the 1990s has led us toexclude important precursors such as the IIASA BasicLinked System (Parikh et al., 1988), The GOL modeldeveloped by USDA-ERS (Roningen and Liu, 1983),OECD’s MTM model (Huff and Moreddu, 1990)and the Tyers–Anderson model (Tyers and Anderson,1992). We have also excluded single-commodity trademodels and linear (or non-linear) programming models that attempt to describe input–output relationshipsfor a certain production process in great detail.Although this review of global models has an agricultural and trade policy focus, it does not pretend tobe exhaustive. The authors are well aware that someglobal models have been excluded from this review.This is especially true in the area of environmentalmodelling and more especially in the area of globalwarming where a large and continuous research efforthas taken place over the last 10 years. 1 Also, existing1For a full review and state of the art in models of climaticchange, see the various chapters of the OECD Workshop on Economic Modelling of Climate Change (OECD, 1998).
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152F. van Tongeren et al. / Agricultural Economics 26 (2001) 149–172global trade models are increasingly taking environmental issues into account. In the same vein, we donot intend to review the large body of work dealingwith the specification of environmental models whichis out of the scope of this review. 22. Evaluation criteriaThis section introduces our set of evaluation criteria,which are subsequently used to describe and comparealternative modelling approaches. The set of criteria isbased on the recognition that applied modelling formsa combination of theory and empirical data, both ofwhich deserve due attention in policy relevant modelling.The general ‘filter’ for inclusion of models in thecurrent review has been that the model should be multi-region and global in nature; have relevance for agriculture, trade and natural resource based activities; be multi-commodity; have a medium term time frame (around 5 years); be an equilibrium model (i.e. not models that projectdemand-supply gaps using primarily technical relations); be of recent vintage, and likely to be used in someform in the 1990s; be an applied model, i.e. uses a combination of theory and empirical data; have a strong policy orientation.2.1. Conceptual framework: definition and scope2.1.1. Market equilibrium models versustime series projection modelsAlthough time series projection models have beenexcluded from the list, it is useful to distinguish this approach from equilibrium models. Time series projection models attempt to forecast the future on the basisof extrapolation of historical data. These models typically put more emphasis on the statistical behaviourof time series data than on the economic theoreticalunderpinnings of behavioural equations. A projectionmodel may, for example, project commodity supply2 For a recent review of these environmental models, see Conrad(1999), and Faucheux and Levarlet (1999).based on agronomic data on acreage and yields without taking into account farmers’ responses to changingmarket prices. For a discussion of this method and alarge scale application, see Alexandratos (1995). Another well known global model that relies heavily onthe projections method is found in Rosegrant et al.(1995).On the other hand, market equilibrium models contain the response (behaviour) of economic agents tochanges in prices (costs), and prices adjust so as toclear markets. The objective of these models is the determination of equilibrium prices and quantities on (interrelated) sets of markets. 3 In a fully fledged globalequilibrium model, there will typically be endogenousprices attached to world markets as well as domestic markets. This class of models is firmly establishedwithin mainstream economics where the behaviouralresponse of suppliers and buyers is typically derivedfrom optimising assumptions: given a description ofthe production technology, the supplier chooses a combination of inputs such that costs are minimised fora given level of output. Given a description of consumer preferences, the buyer determines his preferredconsumption bundle such that his/her utility is maximised for a given level of his/her budget. Standardassumptions include constant returns technology, homothetic preferences, and markets characterised byperfect competition. While these basic theoretical assumptions underlie equilibrium modelling, the optimisation process is usually not modelled explicitly.Rather, a reduced form approach is common, wheredemand and supply are specified as functions of income, prices and elasticities.Depending on assumptions made about the flexibility of production factors, equilibrium models canbe classified as short term, medium term or long term.Short term (in the Marshallian sense) means that someproduction factors are fixed, and are not allowed toreallocate between alternative uses. The fixed factorswill typically be capital, agricultural land, and perhaps agricultural labour. Medium term models allow3This does not deny the existence and relevance of disequilibrium situations. Temporary shortages and excess supply situations(which may, for example, arise as a consequence of price or quantity regulations) can very well be captured in equilibrium models,for example, by allowing for stockpiling and depletion. The keypoint is that these models catch market interactions in a coherentand theoretically sound way.
F. van Tongeren et al. / Agricultural Economics 26 (2001) 149–172for reallocation of all production factors as responseto some exogenous events. Finally, long term models would also model endogenous capital formation.Within the group of market equilibrium models, wecan identify partial and economy-wide models.2.1.2. Representation of national economies:partial versus economy-wide modelsPartial models treat international markets for aselected set of traded goods, e.g. agricultural goods.They consider the agricultural system as a closedsystem without linkages with the rest of the economy. Effects of the rest of the domestic and worldeconomy on the agricultural system may be includedin a top-down fashion by altering parameters andexogenous variables. Partial models are in principleable to provide much product detail. See also Meilkeet al. (1996) who give a summary of global partialequilibrium models adapted to agricultural trade.Partial models may be single- or multi-product.Multi-product models are able to capture supply anddemand interrelationships among agricultural products. Most partial models include linear or log-linearbehavioural equations, which allows the representation of supply and demand relationships (responses)prevailing in the markets under study. 4 They also incorporate into their supply and demand relationshipsexogenous variables such as technical change, worldpopulation and household income.Partial models of international trade in agriculturegenerally focus on trade in primary commodities. Thatis, they capture agricultural supply, demand and tradefor unprocessed or first-stage processed agriculturalproducts without taking into account trade in processed food products, despite the fact that the lattercommodities represent an increasing share of worldtrade.The main area of application of partial equilibriummodels is detailed trade policy analysis to specificproducts, which represent only a small portion of theactivities of the economy in question. This (small sector) condition implies that policy-induced changes on4Some (single country) partial equilibrium modellers attempt toovercome the shortcomings that are implied by linear and log-linearbehavioural equations by estimating flexible functional forms. See,e.g. Frohberg et al. (1997). To our knowledge this has not yetbeen applied in global trade models, however.153the rest of the economy (outside the farm sector) areso small that they can safely be ignored.On the other hand, economy-wide models providea complete representation of national economies,next to a specification of trade relations betweeneconomies. A first step in moving from partial equilibrium to economy-wide modelling is to introducesupply and demand equations for an aggregate residual commodity. By imposing regularity restrictionson the supply and demand elasticities of the amendedmodel, one obtains a model that includes demand andsupply interactions between agricultural commodities and other commodities in a consistent way. Afuller economy-wide specification is obtained whenthe model is closed with respect to the generation offactor income and expenditures, which requires theexplicit specification of factor markets for land, labourand capital. In other words, the essential generalequilibrium features are captured by including factor movements between sectors, next to allowing fordemand interactions. Economy-wide models captureimplications of international trade for the economyas a whole, covering the circular flow of income andexpenditure and taking care of inter-industry relations.There are three broad classes of economy-widemodels: macro-econometric models, input–outputmodels and applied general equilibrium (AGE) models. Macro-econometric models do not concern ushere, since they will not zoom in on agriculture, butrather are concerned with macro-economic phenomena such as inflation and exchange rates. Input–outputmodels provide a comprehensive description ofinter-industry linkages and a full accounting of primary incomes earned in production activities.AGE models do also usually contain full input–output detail, but on top of that they contain equationsthat describe the behavioural response of producers,consumers, importers and exporters and possibly otheragents in the economy. 5 AGE models are specifically concerned with resource allocation issues, thatis, where the allocation of production factors overalternative uses is affected by certain policies or exogenous developments. International trade is typicallyan area where such induced effects are important5Limitations of open Leontief input–output models include fixedprices, exogenous final demand, perfectly elastic factor supplies,and an inability to demonstrate welfare effects.
154F. van Tongeren et al. / Agricultural Economics 26 (2001) 149–172consequences of policy choices. Needless to say, suchinduced effects are not visible in partial models. In theface of changing international prices, resources willmove between alternative uses within the domesticeconomy, or even between economies if productionfactors are internationally mobile. Only if a completedescription of the multi-sectoral nature of the economy is provided, can such developmental issues beanalysed.2.1.3. Regional scopeMulti-region models differ with respect to theirregional coverage. 6 Global trade models attempta closed accounting of the selected commoditytrade flows for the entire world. If the model iseconomy-wide, the global model also includes aglobally closed income accounting system. At theother end of the scale, a model might focus ontrade between a selected set of trading partners,without attempting a globally closed accounting.Or it might even single out one group of countries,such as the EU-15, and describe its trade on worldmarkets.A globally closed database does not imply that allregions or countries distinguished are treated with thesame amount of detail. An intermediate position isfrequently adopted, wherein the model’s database isclosed with respect to the world, but only selectedregions are treated with a great amount of detail, andconfining the description of other regions to a smallerrange of variables that are of crucial importance.2.1.4. Linked individual country models orparametric differences between regionsThere are two broad approaches with respect to themodelling of individual economies within the globaleconomic system. One approach starts by giving a detailed representation of individual economies, takinginto account much of the institutional and economicdetails of the individual countries, and subsequentlylinking individual country models through trade flows,capital flows and possibly factor mobility betweencountries. 7The other route to global modelling starts byassuming the same modelling structure for all individual economies, and representing differencesbetween economies in terms of data and parametersonly. This approach yields a relatively transparentmodel structure, since there is only one economicmodel. This in turn greatly facilitates both the datahandling aspects as well as the interpretation of results. In the linked country models approach, theindividual country models may be based on differenttheoretical assumptions, which may make it difficultto disentangle model results into the effects of exogenous events on the one hand and differences intheories on the other hand. A disadvantage of the‘one model fits all’ approach is clearly its limitedcapability to handl
Agricultural Economics 26 (2001) 149–172 Global models applied to agricultural and trade policies: a review and assessment Frank van Tongerena, Hans van Meijla, Yves Surryb, a Agricultural Economics Research Institue (LEI), P.O. Box 29703, 2502 LS The Hague, The Netherlands b Institut National de la Recherche Agronomique (INRA), Unité d’Economie et de Sociologie Rurales de Rennes,
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