Agricultural policies and development: A socioeconomic investigation applied to Sri Lanka

This paper explores the interrelationship between agricultural policies and development by means of a dynamically recursive, computable general equilibrium model applied to Sri Lanka. The agricultural policies investigated include elimination of the food subsidy, land reform, and technical change in agriculture. The goals considered are the levels and growth rates of GNP and employment, the distribution of income, and the real income level of the lowest income group. The study provides a quantitative assessment of the association between policies and goals and identifies the key economic mechanisms in this association.     

A model of price and quantity adjustments in primary commodity markets

This paper presents a dynamic, simultaneous model of price and quantity adjustments in world primary commodity markets. The model is formulated in a disequilibrium framework, emphasizing particularly the role of price adjustment. In addition to the price equation, commodity consumption and production equations are also specified. The empirical analysis of the model is carried out with the annual data of six primary commodities: coffee, cocoa, rubber, copper, tin, and sugar. This includes the estimation of price, consumption, production equations, the simulation tests of complete structural models for these six commodities, and the derivation of dynamic responses (measured by elasticities) of commodity prices to changes in world income, world inflation, and commodity outputs. Dynamic simulations strongly confirm the commonly observed self-generating and recurring boom-and-bust cycles of primary commodity prices. This finding lends credibility to the models constructed.     

A world iron and steel economy model: A projection for 1980–1995

This article presents an aggregate global model that projects steel markets for the period 1980–1995, with particular attention to investment in production capacities. The model is developed as a linear complementarity programming problem. The model distinguishes between newly constructed steel mills and average mills to characterize price formation and quantity balances respectively. Various validation tests of the model are discussed.     

The determinants of international creditworthiness and their policy implications

The present paper utilizes an empirical measure of creditworthiness based on bankers' perceptions to estimate the effect of various variables hypothesized to influence assessments of countries' debt-servicing capacity. The data pertain to a cross section of countries within the period 1979–1983. Such estimates necessarily employ a ceteris paribus assumption, which prevents a realistic assessment of the effects generated by policy changes. The second part of the paper develops, therefore, a dynamic simulation model of a hypothetical average economy. The simulations allow analysis of changes in macroeconomic variables and creditworthiness over time within a system that maintains accounting identities and behavioral constraints. Several changes in policy variables are considered that highlight the importance of export expansion. The latter is, of course, an often suggested policy objective, but the present paper demonstrates its effectiveness in terms of a somewhat nonstandard criterion.     

Policy responses to external shocks in sub-Saharan African countries

The author analyzes the experience of sub-Saharan African countries with external shocks in the form of the deterioration of the terms of trade and the world recession between 1973 and 1978, with distinction made between low-income and middle-income countries. Adjustment to external shocks in low-income sub-Saharan African countries took largely the form of reductions in imports through lower rates of economic growth and lower income elasticity of import demand while these countries lost export market shares. Losses in export market shares were smaller in the middle-income countries and in the entire group, export performance was positively correlated with the rate of economic growth.     

The World Bank model for global interdependence: A quantitative framework for the World Development Report

This paper describes the basic structure of the Global Model used in preparing various parts of the World Development Report (WDR) issued annually by the World Bank. The report is designed to help clarify linkages between the international economy and the domestic strategies of developing countries. The paper is divided in four parts. The first two present different aspects of the model structure and discuss the reasons that induced the authors to orient themselves towards given functional specifications. In the final parts the policy relevance of the exercise is studied in light of the results that the model has produced for 1975–1985.     

Productivity growth,external shocks,and capital inflows in Chile: A general equilibrium analysis

This paper uses a computable general equilibrium model to analyze the growth path of the Chilean economy during 1977–1981. During that period a comprehensive package of reforms liberalized international trade and removed restrictive labor legislation. As a result of the reforms, there were large changes in relative prices and in the structure of production and demand, and the economy enjoyed unprecedented growth with declining inflation. But large macroeconomic imbalance become evident toward the end of the period and in 1982 Chile experienced an abrupt and severe recession. Taking the real exchange rate as an exogenous policy variable, and using the observed levels of employment growth and foreign capital inflows, this paper compares model-generated growth paths with those of the economy. First, the benchmark simulation path is used to estimate the magnitude and pattern of growth and productivity change during the 1971–1981 period. Next, counter-factual simulations are used to assess how Chile's economic performance would have differed if (a) external events had been different; and (b) foreign capital inflows had been different. The analysis suggests that the macroeconomic imbalances that led to the crisis in 1982 were exacerbated by the large capital inflows and real exchange rate appreciation that resulted from the use of the exchange rate as a stabilization device.     

Developments in and prospects for external debt position and burden of developing countries: The case of Korea

The delay of strong economic recovery by industrialized nations, slowed world export growth, and higher interest rates have worsened the financial situation of a number of developing countries which have relied on external borrowings to sustain current account deficits and protect economic development. Recently, well-publicized concerns over the ability to these countries to repay their considerable debt burden have been raised. To shed light on these concerns, the paper focuses on Korea—one of the heavier debt-holding countries. It describes the process through which Korea has acquired its external debt over the past decade, assesses the trends in its debt burden, and presents prospects for the period 1982–1986. Using the Korean experience, the paper shows that the most common indicators used for evaluating foreign debt burden, such as the long-term service ratio, need to be supplemented by other measurements. In a world economy characterized by short-term debts with variable interest rates, the paper suggests that an important tool in analyzing the external debt burden should be the short-term debt burden.     

International cooperation in stockpiles and tariffs for coping with oil supply disruptions

This paper provides a unified treatment of oil stockpiling and demand restraint as policy responses for enhancing energy security and examines the implications of recent changes in the structure and performance of the international oil market for the design of policies. These issues are addressed using a dynamic programming framework in which international policy actions of key oil-importing countries are modeled as a Nash dynamic game. Significant policy implications from the analysis include: (1) the result that, with realistic assumptions about disruption risks and inventory capacities, differences between noncooperative and coordinated stockpile policies appear to be minor and (2) significant mutual gains could be reaped from a modest degree of collective restraint on normal market oil demand. The broader role of international cooperation in enhancing energy security is also discussed.     

Five ways to ration capital: The case of a developing economy

The performances of two programming models and three “simple” investment rules, the benefit-cost ratio, internal rate of return, and present value to constrained cost ratio, are compared in solving a four-year capital rationing problem in a Latin American nation. The properties and advantages of the various approaches are discussed and policy conclusions are drawn. In addition, the effects of including project timing variants and political/ bureaucratic constraints are explored.     

Protectionism and real wage rigidity: A discussion of the macroeconomic literature

The paper discusses the macroeconomic literature on the relationship between real wage rigidity and the case for protectionism. First, it gives an account of the analytical arguments that lie behind the protectionist position of the Cambridge Economic Policy Group (CEPG). Then, it provides a critical appraisal of the model of the CEPG; the discussion is focused on its supply side, on the role it assigns to financial markets as well as on the issue of retaliation. Finally, the paper considers and evaluates the subsequent work by Eichengreen, which incorporates aggregate supply and wealth effects into the CEPG analysis.     

Distributional effects of international commodity price stabilization: Do the aggregate gains apply to individual producing countries?

This paper demonstrates the different producer gains and losses that can occur from a price stabilization scheme in a same market. An international buffer stock model integrated in a trade flow model of commodity exports of the Latin American economies is used to simulate two representative products: coffee, where instability in the world market has originated mainly from changes in supply, and copper, where the major source of world market disturbances have been demand shifts. The results show that global generalizations as to the net benefits or costs of price stabilization are erroneous at the producer country level in supply or supply/demand dominated instability, a condition that typifies many primary commodity markets.     

Prospects for trade in manufactured goods between industrial and developing countries, 1978–1990

This paper examines prospective changes in trade in manufactured goods between the industrial and the developing countries. Assuming the continuation of the policies followed by the industrial countries, it is projected that the manufactured imports of these countries from the developing countries would rise at an average annual rate of 12.5% between 1978 and 1980 while their manufactured exports would increase 9 7% a year. Nonetheless, the export surplus of the industrial countries in trade in manufactured goods would rise, contributing to the growth of industrial output. The expansion of their exports of manufactured goods would also contribute to economic growth in the developing countries, and both groups of countries would benefit from specialization according to comparative advantage.     

Commodity prices and the world distribution of income

Some advocates of a new international economic order recommend raising prices of commodities exported by developing countries as a means of reducing the inequality of world income distribution. A simulation model using commodity trade data and income distribution data for 68 industrial and developing countries examines this policy alternative. Initial data compilation reveals that internal inequality is as important as international: The world income share of the poorest 40% of people would be twice as high in the absence of intracountry inequality. Calculations using actual price experience in the “great inflation” of 1972–1975 show that despite the large relative price changes for some commodities (especially oil), these changes left the world size distribution of income virtually unchanged. Separate policy simulations show that even a quadrupling of the price of ali “equalizing” commodities (those mainly exported by LDCs) would leave the size distribution of world income practically unaltered (even under optimistic assumptions about intracountry distributional incidence), although some individual LDCs would gain. Increasing commodity prices therefore appears to be an ineffective means of increasing international equity, quite apart from questions about the feasibility of cartels or commodity agreements.     

Three models of OPEC leadership and policy in the aftermath of Iran

Collapse of the Shah's regime has transformed Iran's attitude regarding oil production policy. The nature of OPEC leadership is changing as well. Three models examine the nature of this leadership inside OPEC: (1) the conventional price leadership model, (2) a model emphasizing a concept of egalitarian leadership, and (3) a team model composed of coalitions. The three models establish the limits within which OPEC leadership is exercised. A composite model drawing upon all three sets of results suggests that Saudi Arabia shapes cartel policy not by itself, but through a dominant coalition of states. For most of the period 1969–1978 this coalition has been stable. Following the unsettling changes of 1973, cooptation of Iran into the dominant coalition in 1974 was an important step in achieving a new level of stability. But during the turbulence of regime transformation in Iran, the nature of the governing coalition appears to have changed. One consequence may be that in the future Saudi Arabia will yield more willingly to arguments heard within OPEC on behalf of upwards price pressure, especially in an atmosphere of growing political isolation and overall tight supply.     

Effects of fiscal policy on the U.S. economy: Empirical estimates of crowding out

This study examines the short-and intermediate-run effects of a permanent reduction in U.S. personal income taxes on interest rates, output, prices, exchange rates, and the current account, holding government spending and money growth fixed. The theoretical analysis suggests that interest rates and domestic consumption will rise but that net exports and interest-sensitive expenditures will fall. Also, the foreign currency value of the dollar will rise except possibly when output increases due to positive supply-side effects or to elimination of unemployment. These theoretical conclusions are essentially confirmed by simulations using the Federal Reserve Board's MPS quarterly econometric model and its multicountry model.     

The international trade in automobiles: Explaining short-run changes in the import share of the United States market, 1979–1981

This paper examines the underlying causes for the rapid rise of the import share of the U.S. automobile market in the 1979 to 1981 time frame. Using data on the import share by state for the 1975–1979 period, a logit model is developed explaining movements in the import share. The principal purpose is to demonstrate that the rapid growth of the import share was due to a unique set of short-run factors such as constrained U.S. small car production capacity and exceptional consumer preference for fuel efficient automobiles. The sensitivity of the import share to changes in different factors is examined. The article concludes that U.S. policy makers concerned with the long-run viability of the U.S. automobile industry should discriminate between changes in import penetration caused by short-run factors and those caused by a secular deterioration of the U.S. comparative advantage in automobile production.     

Planning studies with an optimal control multisectoral dynamic economic model: The case of Sri Lanka

This article investigates the impact of different development scenarios on optimal investment strategy and economy of Sri Lanka and studies the potential of applying control theory techniques to economic planning. The multisectoral dynamic planning model is formulated as a linear quadratic tracking problem. Targets to be tracked define the development strategies: economic growth, trade deficit reduction, food self-sufficiency, and balanced growth. Besides providing insights into these strategies, empirical results show that the difficulty in setting inequality constraints and ensuring nonnegative solutions could undermine the linear tracking optimal control technique for development planning.