1

4 From theory to empirics

1. Review & consolidation of the TEF approach

2. Empirical shortcomings of generic models

3. Development, resources and environmental pressures in Asia

2

Review & consolidation of the TEF approach

• ‘Macro’ approach (Copeland, Ulph) helps define growth/policy issues at broadest level– Links to welfare measures– Second-best analyses

• Recovery of critical quantities and prices– From (p, v, t, s) recover prod’n & input dd, factor

shadow prices, cons. dds, etc.– Extrapolate to environmental/NR outcomes

3

Extensions & issues

• Production externalities

• Endog. factor endowments & comm. prices– E.g. double dividend argument

• Heterogeneous consumers & inc. distb’n– And aggregation problems

• Political constraints on economic or environmental policy

4

Applications of generic approach

• Back-of-envelope GE calculations– E.g. Implications of US reduction of barriers to

Pakistan/African textile exports• Economic effects

– Wages and employment

• Environmental effects – Composition effects (TRI indices)

– Scale and income (technique) effects

5Figure 4.1 Linearly Weighted Acute Human Toxic Intensity Index

(Source: Hettige et al 1994: IPPS)<---

Apparel 3220

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6

Empirical shortcomings of generic models

• Market failures and distortions

• Spatial heterogeneity and transport-transactions costs

• Dynamic specification: transition to eq’m; non-convexity, irreversibility.

7

Market failures

• Land markets and property rights in natural resources

• Capital markets– Financial repression as a development policy

• Labor markets– Wage rigidity and unemployment

• Insurance markets

8

Spatial heterogeneity

• Watersheds and ‘airsheds’– E.g. Doolette and MacGrath (WB report, 1990)– E.g. Rains-ASIA model

• Frontiers and margins (forests, coastlines)

9

Spatial heterogeneity p/b

A

p/b

p/a

p=ax+by

y =distance off-road

x = distance along road

• r(x0, y0)

• r(x1, y1)

Figure 3.1 The spatial expansion of the market (adapted from Gersowitz 1989).

10

Development, resources and environmental pressures in Asia

• Growth and structural change

• Trade and trade intensity

• Capital accumulation and FDI

11

Table 3.1: GDP shares (%) major sectors, developing Asian countries

Country GDP growtha Years Agric. Industry (Mfg) Services

China 6.42 1960-80 35 40 31 251981-90 29 44 36 271991-00 20 48 37 32

Indonesia 3.97 1960-80 42 23 10 351981-90 22 37 16 401991-00 18 43 24 40

Malaysia 4.12 1960-80 29 30 14 411981-90 20 39 21 411991-00 13 42 27 45

Philippines 1.04 1960-80 28 31 23 411981-90 24 36 25 401991-00 20 32 23 48

Thailand 4.34 1960-80 29 25 17 461981-90 17 33 24 501991-00 11 39 29 50

Vietnamb 5.37 1960-80 .. .. .. ..1981-90 40 29 26 321991-00 29 30 20 41

a. Real per capita income (1995 US$), annual average 1970-2000. b. 1991-2000... = not available. Source: World Bank: World Development Indicators 2001

12

Table 3.3: Total exports (X, % of GDP), manufactured exports (MFG, % of exports),and trade/GDP ratio (per cent), developing Asian countries

Country Item 1961-70 1971-80 1981-90 1991-00Trade as % ofGDP, 2000)

China X 2 4 11 22 44.5MFG .. .. 62 83

Indonesia X 10 24 25 31 67.0MFG 2 2 18 49

Malaysia X 42 46 59 97 219.7MFG 5 14 34 73

Myanmar X 13 6 5 1 1.1MFG 1 6 6 10

Philippines X 16 22 25 42 91.0MFG 6 14 29 60

Thailand X 16 20 27 46 108.8MFG 3 16 42 71

Vietnam X .. .. 14 36 94.1MFG 1 11 5 ..

.. = not available. Source: World Bank: World Development Indicators 2001

13

Table 3.2: Gross fixed capital formation (per cent of GDP) and foreign directinvestment (per cent of GFCF), developing Asian countries

Country Item 1961-80 1981-90 1991-00

China GFCF 29 29 34FDI 0 2 11

Indonesia GFCF 22 25 26FDI 3 1 2

Malaysia GFCF 20 30 36FDI 13 11 15

Myanmar GFCF 12 15 13FDI .. .. ..

Philippines GFCF 20 22 22FDI 1 4 8

Thailand GFCF 22 30 34FDI 2 4 10

Vietnam GFCF .. 12 25Source: World Bank, World Development Indicators 2001

14

Real GDP growth and growth of industrial emissions, 1975-87

15

Table 3.4: Agricultural land use trends in developing Asian economies

Percent of total land area:

Country/Region Arable landa Permanent cropsb Agricultural Areac

1980 1997 1980 1997 1980 1997

Cambodia 11.3 21 0.4 0.6 11.7 21.6

India 54.8 54.5 1.8 2.7 56.6 57.2

Indonesia 9.9 9.9 4.4 7.2 14.3 17.1

Lao PDR 2.9 3.5 0.1 0.2 3.0 3.7

Malaysia 3.0 5.5 11.6 17.6 14.6 23.1

Philippines 14.5 17.2 14.8 14.8 29.3 32.0

Sri Lanka 13.2 13.4 15.9 15.8 29.1 29.2

Thailand 32.3 33.4 3.5 6.6 35.8 40.0

Vietnam 18.2 17.4 1.9 4.7 20.1 22.1

Low-mid. inc. LDC 9.4 10.3 1.0 1.2 10.4 11.5

E. Asia and Pacific 10.0 12.0 1.5 2.6 11.5 14.6

Latin Am & Car. 5.8 6.7 1.1 1.3 6.9 8.0

ME & N. Africa 4.4 5.2 0.4 0.7 4.8 5.9

S. Asia 42.4 42.5 1.5 2.1 43.9 44.6

Sub-Saharan Africa 5.4 6.4 0.7 0.9 6.1 7.3Source: World Bank, World Development Indicators 2000.a Arable area is defined as land under temporary crops, temporary pastures, and short-term fallow. Excludes land abandoned as the result of shifting cultivation.b Permanent crops area is defined as land cultivated with crops that occupy the land forlong periods and need not be replanted after each harvest (flowering shrubs, fruit trees,nuts trees, vines, etc). Excludes areas of trees grown for wood or timber.c Sum of arable area and permanent crops

16

Economic & policy heterogeneity in ‘representative’ economies

• Manufacturing industry policies – Broadly, ISI vs. EOI

• Food policies– Exporter/importer; trade-based self-sufficiency

policies

• Nature of economic activity at land/forest margin– Subsistence, plantation, comm’l food & fiber

17

Economic & policy heterogeneityUpland Land Use by

Crop Type (%)EconomyType

Manufacturingindustry

orientationMarket for

staple cereals 0-----25-----50-----75----100

Jeepney

Import- Non- Non-traded

Becak

substituting(ISI)

traded food crops

Plantation

Proton

Export-

Non-traded

crops

Tuk-Tuk

oriented(EOI)

TradedTraded food

& fibre

Figure 3.2: Schematic summary of economic structure in representative economies

18

Endog. prices, tax interactions and the ‘double dividend’

• In a second-best world, will an environmental tax raise or reduce welfare?– Gains from reduced pollution– Possible losses from tax interactions

• E.g. Bovenberg & Goulder, AER 1996: energy producers pass on carbon taxes as higher prices, which reduces real eff. wage and labor supply, narrowing base of labor tax.

– What about trade taxes? • Coxhead 2000, http://www.feem.it, paper # 88.2000

19

Private and social marginal costs

Z1 Z0 Emissions

P1

P0

SMC

PMC

MB

AB

20

Labor mkt response to eff. wage

Wg0

Wn0

Wn1

L1 L0 Labor hours

CD

21

Is there a double dividend?

• Pollution tax raises revenue (area A) and improves welfare by area B– Can use A to reduce income tax rate --> DD

through reduction in DWL (area C)

• But fall in real net wage when tax costs are passed on– RNW = W(1 - t)/P, so tax/price equivalence– If |dP| > |dt| excess burden could increase (area D)

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