Must high commodity prices depress the world economy? An application of a world model system

The impact of higher primary commodity prices on the world economy is central to the North-South dialogue. The less developed countries are seeking a way to obtain a larger share of world income. In the context of current discussions of commodity price stabilization, UNCTAD's “integrated programme” for example, this is likely to mean higher commodity prices. A critical question is then, “Must higher prices for primary commodities depress the industrial economies?”The cyclical swing of 1973–1975 would seem to support the thesis that high primary commodity prices lead to recession in the industrial countries. Yet this experience is not conclusive evidence. Many complex forces, some natural and others policy induced, accounted for the recession. The impact of primary commodity prices must be considered in a full system, recognizing not only the direct costs, but also the resulting demand feedback. Under different circumstances, higher payments to the commodity producing LDCs may well increase demand for manufactures and stimulate exports and industrial activity in the developed countries.This paper uses a version of the LINK world model system to examine the linkages between commodity prices and world economic activity. In the first part we examine the demand feedback in a simple theoretical model of the interrelationships between commodity consumer countries and the commodity producers. In the second part we use an empirical system, COMLINK, the version of the LINK system that incorporates commodity models and commodity price linkages, to simulate various types of commodity price impacts.     

Indexation of international commodity prices through international buffer stock operations

The developing economies have been advocating the indexation of the prices for their primary commodity exports by tying such prices to other relevant international prices, such as the prices of imports to the less-developed countries. We have used econometric models to simulate a program of indexation of the prices of the ten UNCTAD core commodities at their 1963 levels for 1963–1975. The results suggest definite difficulties in such a program. Most notably the order of magnitude of the costs of buffer stock operations and financing is likely to be prohibitive. Also the distribution of benefits and losses among the less-developed countries is quite arbitrary. Therefore we are very skeptical about indexation by buffer stock operations.     

Consistent price determination of income and production: A singular equation system applied to the MPS model

In this article we present a general methodology that can be used to estimate a singular equation system of relative prices for a large disaggregated macroeconometric model (MPS). The accounts consistency requirements and the necessity to utilize distributed lag restrictions and to impose a serial correlation structure on the estimated model make these sum constraints rather cumbersome. Estimates of the MPS model and multiplier analysis illustrate the use of these constraints on a large forecasting model as well as the feasibility of the technique.     

The linkage effects of raw material processing in economic development: A survey of modeling and other approaches

Processing of primary raw materials has become an important and widely recommended strategy for economic development. Yet, even as the councils of many LDCs call for primary commodity producers to gain greater participation in downstream activities, there remain doubts on fundamental questions:What comparative advantage and what disadvantages do processing activities have in the LDCs?What linkages do processing activities offer?What is the potential contribution of processing to economic goal attainment in the LDCs?In this article we survey the material on processing, particularly with respect to modeling direct and indirect linkages between processing and the LDC economies. The article examines the following topics: (1) the literature on processing in economic development; (2) modeling processing linkages; and (3) outstanding questions regarding processing linkages.We focus on quantifiable linkages between the processing industry and the rest of the economy. There is also the possibility of other linkages, such as the development of entrepreneurship and management talent and technology, that are more difficult to quantify. It is important to distinguish between micro linkages, which refer to the direct impact on supplier and user sectors, and macro linkages, which include indirect general economic effects transmitted through government revenue and expenditures, the money supply, and foreign exchange availabilities.     

Comments on Montague J. Lord's “distributional effects of international commodity price stabilization: Do the aggregate gains apply to individual producing countries?” [JPM 3:61–75 (1981)]

Lord discusses the impact of international commodity price stabilization on Latin American producing country export revenues. He correctly emphasizes that the directions and magnitudes of such effects may vary substantially across producers, depending on the degree of segmentation of the commodity markets and the nature and distribution of the shocks. However his potential contribution may be lost because of a number of inaccuracies, which I discuss under three general topics.     

Empirical aspects of protectionism: LINK results

General aspects of protectionism as they are revealed or treated in the LINK system are discussed in this paper. Attention is focused on the macroeconomic aspects of protection, about which relatively little is known: most of the vast body of knowledge on this subject concerns the microeconomic aspects of protection. Some simulations of trade liberalization (opposite of protectionism) and of protection within the context of the LINK system are reported. A movement away from protection would benefit the present world economy but not by a large enough extent to deal effectively with pressing international economic problems; therefore, trade liberalization within the context of a larger program of coordination policy among major industrial countries is examined. Finally, the relationship between protectionism and inflation is explored.     

Protectionism: An analysis from project LINK

The LINK system of world trade is used to examine present tendencies toward protectionism. In protectionist scenarios we increase the prices of manufactured imports into 13 LINK-OECD countries by 5, 10, and 20 percent respectively, for 1978–1979. If a country's import equations do not depend significantly on relative price, we impose corresponding quantitative import restrictions of 5, 10, and 20 percent. Smaller OECD countries, developing countries, and socialist countries are assumed to be nonprotectionist in these scenarios. The discrepancies between the values of leading variables in the protectionist scenarios and in a baseline case show the effects of the different degrees of protectionism assumed. The results describe and validate Adam Smith's principles of the gains from free trade.     

The Law of the Sea treaty and the regulation of nodule exploitation

The production of nonferrous metals from manganese nodules from the ocean floor has potential impact on prices of cobalt, copper, nickel, and manganese and on the earnings of land-based producers. These effects must be considered in the Law of the Sea negotiations. This article uses econometric models to evaluate the impact of nodule production on the LDC producers. We find that the price impact is greater for cobalt whose nodule production is very large relative to conventional output, but that the impact on LDC earnings is greater for copper and nickel.     

A disaggregated model of world production and trade: An estimate of the impact of the Tokyo Round

We present in this paper a computational model of world production, trade, and employment that is disaggregated by country and sector and report on the application of the model to the changes in tariffs and quantifiable nontariff barriers negotiated in the Tokyo Round that was concluded in 1979. The model incorporates supply and demand functions and market-clearing conditions for 22 tradable industries, plus markets for 7 nontradable industries, in each of the 18 major industrialized countries and 16 major developing countries. The equations of the model are presented in the text and the explicit functional forms in an appendix. The implementation of the model is discussed briefly.Application of the model to the Tokyo Round suggested that there will be small but beneficial effects on trade, domestic prices, and economic welfare in practically all the major industrialized countries and in some of the major developing countries. Because many of the NTB codes negotiated in the Tokyo Round were stated in advisory terms, their impact cannot be evaluated unambiguously at present. Further, many existing NTBs of importance were exempted altogether from the negotiations. The Tokyò Round must be viewed accordingly as having dealt with a somewhat limited part of all interferences with trade.     

A joined input-output and econometric approach to endogenous calculations of final demands and outputs

The principle of interacting between input-output and econometric systems is illustrated so that both final demands and gross outputs are treated as endogenous. Using a planned economy as an example, a model is constructed with an econometric accelerator and an input-output multiplier. Due to its special structure, the system solution is found with immediate formulas without matrix inverting. Necessary and sufficient conditions for solvability are formulated on the basis of the specific characteristics of the system's matrix. The results are interpreted in terms of familiar economic categories.     

Simulation of a debtor country: The example of Colombia

A dynamic model, illustrated on Colombian data, simulates the functioning of an open economy under specified parametric conditions and selected policy scenarios. Unlike the usual two-sector models, the rate of growth of GDP is generated endogenously. Whereas related models perform sensitivity analysis for variations in parameters our procedure makes n possible to simulate policy alternatives under balance-of-payments pressure. The simulations explore the implications of policy options when debt services on inherited and new foreign indebtedness act as constraints on the debtor's growth, especially when new external borrowing is limited.     

The impact of trade policies on income distribution in a planning model for Colombia

This paper develops a multisector Computable General Equilibrium (CGE) model to simulate the effects of trade on the distribution of income among socioeconomic groups defined both by the factors of production they own and the sector in which they work. The categorization of recipients includes landless rural labor, land owners, workers in the urban traditional sector, and workers in the organized sector and capitalists. Experiments are conducted with an application to Columbia, a primary-exporting economy. The results indicate that, for such an economy, outward-looking policies with increased primary exports are likely to be more detrimental for the distribution of income in the medium term than inward-looking ones.     

Investment priorities and income distribution: The case of Brazil in 1970

In this paper, we study the conditions (ie., social disarticulation) by which choices in government policy priorities toward sectoral production may instigate increased income inequality. A dynamic multisectoral model is proposed in which the main link that is put forward is the necessary correspondence between rapid growth of production of certain types of goods and the expansion of demand for those same goods in the internal market. Application to Brazil illustrates the possibilities of such a tool for economic analysis and shows that the regressive wage policy implemented in Brazil was indeed consistent with that country's economic priorities and policy emphases.     

Input-output technologies and the effects of tariff reductions

Using input-output (IO) tables from several developed countries (United States, EEC, and Japan) and one developing country (Brazil), we calculate the effects of tariff removal using various combinations of these tables to represent technologies for the countries included in the Michigan Computational Model of World Production and Trade. Among the IO tables, Brazil's reflected unusually high shares of value added, low labor shares, and small supply elasticities. Supply elasticities for the developed countries were somewhat lower than for the United States. Using the Michigan model, our calculated effects of tariff reductions are overstated using the U.S. IO table to represent technologies for other developed countries. Further, for developing countries that use import licensing, the model shows considerable sensitivity to IO table specification. It is especially important, therefore, for computational purposes to obtain the most accurate information possible about IO structures of developing countries.     

Can educational policy affect the distribution of earnings?—A quantitative exploration

The widely held belief that education is an effective policy instrument for affecting the distribution of earnings is examined within a comprehensive framework of the labor market. The structure affords a view of different roles that education might play and concludes that years of schooling combined with other individual characteristics is an important factor, but it is limited. The educational factor is most reliable in determining earnings within occupations. Supplemental policies other than general provision of education, which could serve to provide access among occupations would substantially enhance the overall tractability of policy vis-a-vis the earnings distribution.     

Aspects of a new world development strategy II: Factors affecting the long-term prospects of developing nations

This paper explores some quantitative dimensions of the interdependence of rich and poor regions in the context of the United Nations World Model. It extends the original work on that model in three ways: (1) by updating some of the key parameters and exogenous variables in the light of recent data; (2) by developing a “control” solution to be used as a point of reference in policy simulations; and (3) by exploring the sensitivities of each of two groups of regions— developed and developing—to changes in one another's growth rates. Goals of closing the income gap between developed and developing regions and of increasing income levels in the latter are discussed.