Policy Simulations in the European Union

Amedeo Fossati, John Hutton

• Publisher: Taylor & Francis
• Year: 1998
• eBook ISBN: 9781134741892
• Edition: 1
• Topic: Business
• Subtopic: Business General
• Index: Business

The papers in this much-needed collection employ Applied General Equilibrium methodology to address a wide variety of concerns within the European Union. Contributors examine five main policy areas: * international market integration * policy simulations with alternative treatments of factor markets * policies for carbon dioxide abatement * competi

Part I
INTERNATIONAL MARKET INTEGRATION

1
A GENERAL EQUILIBRIUM ANALYSIS OF MEDITERRANEAN ECONOMIC INTEGRATION

The case of Italy and Algeria

Maurizio Bussolo and Giancarlo Pireddu*

1.1 INTRODUCTION

This chapter offers an examination of the Italian and Algerian economic relationship and studies the possible effects of the trade policy reforms currently discussed for the Mediterranean area. The economic benefits of further integration in terms of increased welfare, trade and growth rates are assessed using a multicountry computable general equilibrium (CGE) model.

The main results confirm the findings of previous studies concerned with similar set-ups of trade integration among partners at different levels of development.¹ Comparative static simulations of removing trade barriers show considerable gains, whose magnitude is directly linked to the initial level of protection, trade dependency and relative size of the economies participating in the regional agreement.

An additional objective of this chapter is to examine the sequencing issue of trade reforms. Adjustment costs generated by the non-instantaneous realignment of goods and factor prices represent a major concern of policy-makers implementing more liberal commercial policies. By using a recursive dynamic version of the multicountry CGE model, a comparison of different trade reforms is presented with an estimation of their effects in terms of adjustment costs and growth rates.

The simulations are based on the most recent policy package considered during the 1995 Barcelona conference between European Union (EU) ministers and representatives of non-EU Mediterranean countries. Although the European Mediterranean policy covers a broad range of measures and countries —from full EU membership discussed with Malta, Cyprus and Turkey, to minor political links with other countries—the analysis here is further restricted to the proposal of trade integration between Algeria and the EU. In particular, the Euro-Med Conference in Barcelona set 2010 as a target date for a free trade area (FTA) between the EU and its twelve Mediterranean partners, as far as industrial goods are concerned.

Various factors contributed to the realisation by the European governments of the high negative externalities they would face with an inadequate development of the southern Mediterranean region. Earlier EU policy towards the Maghreb region led these countries to a narrow export specialisation, highly dependent of preferential trade agreements, and contested by emerging developing countries with lower labour costs. Differences in income per capita between the two sides of the Mediterranean are very high, resulting in high migratory pressure. At the current unemployment rates and growth forecasts, European labour markets are not able to accommodate a steady flow of migrant workers. Other global concerns include common environmental problems, political instability and crime. The idea of an FTA in the region has emerged as a solution compatible with this changing environment. It is to be implemented first on a bilateral basis (each Mediterranean country vis-à-vis the EU), before being extended to a regional FTA, as Mediterranean countries will sign bilateral free trade agreements among themselves.

The approach used to measure the economic effects of the formation of such an FTA or other possible options of trade policy reform has been to construct a prototype two-country CGE model which includes all the main characteristics of a larger multicountry model of the Mediterranean area. The countries chosen for the prototype are Algeria and Italy. In order to provide a fuller picture of the integration process, a comparative static and a recursive dynamic version of the same CGE model are used. In this way, it is possible to assess the static welfare effects and also the growth interactions of alternative trade policy scenarios. The plan for the chapter is as follows. The next section introduces the basic features of the CGE model. Section 1.3 describes the policy experiments and reports, in two subsections, the results of the comparative static and dynamic versions of the model. Some brief conclusions are presented in the final section.

1.2 THE EMMA MODEL: AN OVERVIEW

This section presents a brief overview of the Economic Model of the Mediterranean Area (EMMA) used to simulate our policies. It consists of a two-country Computable General Equilibrium model that can be used in two modes: comparative statics and recursive dynamics.²

Dimensions

The EMMA model consists of two detailed regional sub-models for Italy and Algeria. The main link between them is given by their bilateral trade which is fully endogenous (price and quantities are determined by the equilibrium conditions). The other key dimension of the model is given by its sectoral disaggregation: the version used here details fourteen sectors/commodities as shown in Table 1.1 in the appendix to this chapter...

Table of contents

• Cover Page
• Title Page
• Copyright Page
• Figures
• Tables
• Contributors
• Preface
• Acknowledgement
• Part I: International Market Integration
• Part II: Policy Simulations with Alternative Treatments of Factor Markets
• Part III: Policies for Carbon Dioxide Abatement
• Part IV: Competitiveness and Convergence
• Part V: VAT and Income Tax Reform