CGE model allows for assessment of the impact of changes in the economic policy

A panel discussion, Russia's Economy in a General Economic Equilibrium Model, was at the Gaidar Forum 2015 by the International Budget Sustainability Research Department of the Gaidar Institute and RANEPA, headed by Laurence Kotlikoff, Professor of Economics at Boston University.

In his keynote professor L. Kotlikoff noted that the computable general equilibrium model (CGE) developed by the foregoing department works for a set of regions/countries, namely the United States, Japan, Europe, China, Asia and Russia, and will allow one to understand how demographic changes and fiscal policy worldwide have in time an effect on real wages growth, interest rates, and economic growth (both global and regional/domestic).

The report «Simulating Russia's Trouble Transition» (report presentation ) made by senior researcher of Economic Growth Research Department, IAER RANEPA, Kristina Nesterova is the result of calibration of this model implemented by the Department's research team under various scenarios which provide for a crude oil price shock (permanent price fall by 50%) and tax reform, a crude oil price shock and pension reform, as well as a crude oil price shock and a combination of the foregoing reforms.

The results of calibration revealed that:

• tax reform may be a useful instrument in terms of dealing with a crude oil price shock. In this case, every economic agent will see its welfare increase;

• pension reform tends to be less efficient in terms of mitigating the crude oil price shock. Generations born in several decades will benefit from the pension reform;

• a combination of tax and pension reforms tends to be the most efficient way of overcoming the effects of crude oil price shock.

Overall, the CGE model in question has a wide range of application. In particular, there are plans to subsequently calibrate the model taking account of the other regions of the world (Africa, Latin America, Australia, etc.), as well as employ this approach in terms of simulating various economic policies, as well as embed into the model an environmental deterioration block, including tax instruments which are intended to mitigate this global issue.

The discussants shared their experience in employing general equilibrium models for the assessment of various economic aspects and economic policy impacts, including international trade simulation as part of a computable general economic equilibrium model GLOBE.

For instance, CEFIR (Center for Economic and Financial Research) senior researcher Natalya Turdyeva made a report on Impacts of Meta-Agreements on Russia (report presentation ) and shared her experienced in employing a GLOBE model to assess the effect of meta-agreements on Russia's economy. These agreement include, first, Russia's accession , after 18 years of negotiations, to the World Trade Organization (WTO) in 2012; second, the Eurasian Economic Union with Armenia, the Republic of Belarus and Kazakhstan; and, third, regional initiatives on integration of trade within the Customs Union framework. According to Mrs. Turdyeva, the estimations show that Russia wouldn't benefit unless the Customs Union gets involved in the international trade liberalization process. The Free-trade zone in the Asia-Pacific Region (APR) is the only scenario of steady-state growth in both real GDP and real production in Russia. However, the term of implementation of this scenario is uncertain, because the APR's free-trade zone is geographically vast. Therefore, as Mrs. Turdyeva noted, Russia will benefit from active trade negotiations within the WTO.

Dmitry Kuznetsov, a researcher of Gaidar Institute's International Trade Department , shared his experience in employing a GLOBE model to assess the effect of on EEU member countries participation in various free-trade zones (FTZs) (report presentation «Последствия для стран ЕАЭС от участия в различных ЗСТ» [The Effect of EUU member countries participation in various FTZs ]). The GLOBE-based research has led D. Kuznetsov to the following key conclusions.

GDP-related benefits from creating FTZs with various countries depend drastically on the importance of a trade partner for EEU member countries. At the same time, an adverse cumulative effect of trade deviation towards EEU member's GDP manifests itself only in certain cases and in the short run. In other cases, income growth in the blocks' member countries results in benefits , insignificant though, for EEU member countries. Mr. Kuznetsov noted that EEU countries participation in FTZs on the basis of various blocks appears to be beneficial first of all for EEU countries, whereas incremental growth of benefits for other FTZ members should be recognized as less significant in a relative sense. Russia's embargo leads to losses not only for Russia, but also Kazakhstan. Although EU member countries' GDP losses in absolute terms are comparable with Russia's losses, the former are far less sweeping. In this case, Belarus has substantial benefits both in the short run and the long run.

The research shows that the list of most vulnerable industries in each scenario differs between the countries, however, clothes, textile, automobile industry, electronic equipment and machinery, other manufacturing industry for the most part come off losers in the economy of EEU member countries.

Industries with low-processed products (minerals, mineral by-products, iron and steel industry) for the most part come off winners among the industries in EEU countries. In the case of liberalized trade, the losing industries' total is much less than the gain of the winning industries. It is food production industries that eventually win in the EEU countries from Russia's food embargo. At the same time, chemical and iron and steel industries see a slump in production.

Olesya Ployakova, advisor of the Methodology and Analysis Division, Macroeconomic Policy Department of the Eurasian Economic Commission shared the EEC's experience in employing the computable general economic equilibrium model to assess the effects of integration, в частности EEU (Создание системы оценивания эффектов Европейского экономического союза на основе СGЕ модели [Developing a system employing a CGE model to assess the effects of the European Economic Union, report presentation]). According to Mrs. Polyakova, the model was built to assess the economic effects of abolishing non-tariff regulation measures (NTRM) on the way toward free movement of goods, services, capital and workforce; assess the cross impact of coordination, approval of EEU member countries' economic policy measures; assess the effects of EEU expansion (accession of new member states).

Mrs. Ployakova noted that the CGE model was built taking account of the aspects of the EEU agreement on the Union member states' economy, such as increasing returns on scale; non-tariff barriers in trade (through preliminary assessment of ad valorem equivalents of respective barriers); barriers in foreign direct investment (especially in respect to foreign direct investment in service sectors, which is a method of stimulating service market liberalization); redeployment of labor barriers; harmonization of technical regulations (introduction of single standards should result in higher elasticity of the replacement between imported goods and domestically manufactured goods).

In his report (presentation to the report DSGE model for Russian economy. Oil export duty reduction ), senior researcher of the Central Banks Research Center, Institute of Applied Economic Research (IAER), RANEPA, Gaidar Institute, Andrei Zubarev shared the results of the assessment of macroeconomic effects of changes in the export crude oil duty in Russia by employing a DSGE model. This model was evaluated under two scenarios: 1) the baseline scenario: the crude oil export duty is lowered by 80% and the crude refining efficiency goes up to 85% from 70%; 2) optimistic scenario: the crude oil export duty is lowered by 80%, the crude refining efficiency goes up to 85% from 70%, as well as the margin in the crude refining sector slides to 15% from 30%.
According to Mr. Zubarev, the estimates show that abolishment of the crude oil export duty may result in a 15% rise of gasoline prices, a 1% growth in GDP in the short run, while GDP would see no growth in the long run, and consumption would increase 2%.

Hence the general economic equilibrium approach is quite a relevant and promising line, because it allows for simulation of various economy's sectors, as well as assessment of the effect of various changes in the economic policy.

Maria Kazakova, Ph.D. in Economics, Deputy Head of Gaidar Institute's International Center for Budget Sustainability Study