Modelling trade and financial liberalisation effects for Argentina

224 Pages·2010·2.2 MB·English

by  Dario Debowicz

Modelling trade and financial liberalisation effects for Argentina

Dario Debowicz

Doctor of Philosophy
University of Sussex

July 2010
2
Statement

I hereby declare that this thesis has not been, and will not be, submitted in whole or in
part to another University for the award of any other degree.

Signature:……………………………………………………………………………….
3
Summary

This thesis is a response to the growing recognition that the workings of the financial
sphere significantly affect the value of social production, its distribution, and the
magnitude of income poverty. The thesis extends a general equilibrium single-country
model targeted to a developing economy (the IFPRI Standard Model) to account for the
workings of the financial sphere and ‘money in the production function’, in the tradition
begun by Milton Friedman (1969). The models are calibrated and their workings are
analysed. It is found that the inclusion of “money in the production function” by itself
only causes financial outcomes to significantly affect the overall level of production and
the unemployment rate in the presence of strong wage rigidities. This is explained in
terms of the model parameters. The extended model is employed in a stylised static way
to identify the short-run stresses generated by current and capital account liberalisation
in Argentina during its Currency Board Regime, adopted over 1991-2001, with the
finding that in the short-run the volatility of capital flows was transmitted to
employment and activity levels. The model is then linked in a sequential way to a
behavioural microsimulations model, separating out the different transmission channels
involved. It is found that the significant capital outflows witnessed by the country
surrounding the end of its Currency Board Regime worsened poverty and inequality
indicators in the country, and that the main transmission channel through which the
capital outflow had the most distributional impact was the selectivity of labour market
rationing.
4
Acknowledgements

I acknowledge the kind support of my supervisors Sherman Robinson, Ricardo
Gottschalk and Howard White, fellows at Economics Department and IDS of the
University of Sussex, my father, Jenny Golan, Mario Damill (CEDES and UBA),
Richard Agènor, Andy Mc Kay, Dirk Willenbockel, Manfred Wiebelt, Anne-Sophie
Robilliard and officials at statistic offices in Argentina (National Direction of National
Accounts, INDEC and Central Bank of Argentinean Republic), as well as the financial
support of Alban Scholarship.
5
Contents

Introduction ..................................................................................................................... 12

Part I Modelling the effects of globalisation in a typical middle-income country.......... 16
Chapter 1. The international debate 17
Chapter 2. Review of existing models 31
Chapter 3. Nested Models 40
Chapter 4. Model Calibration 66
Chapter 5. Models workings 74

Part II Short-run application: liberalisation in Argentina ............................................... 74
Chapter 6. CGE analysis 99
Chapter 7. Microsimulations 122

Conclusions ................................................................................................................... 154

Bibliography .................................................................................................................. 160

Appendix ....................................................................................................................... 167
I. Policy Matrix for Argentina 168
II. Mathematical Statement of the Model 173
III. Financial Assets and Liabilities by Institution 191
IV. Derivation of demanded asset shares 192
V. Construction of the Proto-SAM 194
VI. Additional shocks 211
6
Tables

On models review
Table 2-1 Macro FCGE Models ...................................................................................... 36

On 30 p.p. increase in perceived probability of default on domestic assets in RF
Table 5-1 Balance of Payments....................................................................................... 76
Table 5-2 Aggregate Demand Component Shares .......................................................... 77
Table 5-3 Sector Value Added Shares ............................................................................ 77
Table 5-4 Factor Use ....................................................................................................... 77
Table 5-5 Real Wages ..................................................................................................... 78
Table 5-6 Rates of Return ............................................................................................... 78
Table 5-7 Public Sector Finance ..................................................................................... 79
Table 5-8 Factor Income Shares ..................................................................................... 79
Table 5-9 Household Income Shares .............................................................................. 79
Table 5-10 Balance of Payments..................................................................................... 80

On 30 p.p. increase in perceived probability of default on domestic assets in RFA
Table 5-11 Real Wages ................................................................................................... 81
Table 5-12 Factor Income Shares .................................................................................. 81
Table 5-13 Household Income Shares ............................................................................ 81

On 30 p.p. increase in perceived probability of default on domestic assets in RFAS
Table 5-14 Macro Indicators ........................................................................................... 82
Table 5-15 Balance of Payments..................................................................................... 82
Table 5-16 Factor Use ..................................................................................................... 83
Table 5-17 Rates of Return ............................................................................................. 83
Table 5-18 Household Income Shares ............................................................................ 84

On 10 per cent fall in import taxes in R
Table 5-19 Aggregate Demand Components Shares ...................................................... 87
Table 5-20 Balance of Payments..................................................................................... 87
Table 5-21 Sector Value Added Shares .......................................................................... 88
Table 5-22 Real Wages ................................................................................................... 88
Table 5-23 Factor Income Shares ................................................................................... 89
Table 5-24 Household Income Shares ............................................................................ 89

On 10 per cent fall in import taxes in RF
Table 5-25 Household Income Shares ............................................................................ 90

On 10 per cent fall in import taxes in RFA
Table 5-26 Rates of Return ............................................................................................. 90
Table 5-27 Balance of Payments..................................................................................... 91
Table 5-28 Real Wages ................................................................................................... 92
Table 5-29 Sector Value Added Shares .......................................................................... 92
7
Table 5-30 Balance of Payments..................................................................................... 93
Table 5-31 Household Income Shares ............................................................................ 93

On 10 per cent fall in import taxes in RFAS
Table 5-32 Factor Use ..................................................................................................... 94
Table 5-33 Aggregate Demand Components Shares ...................................................... 94
Table 5-34 Sector Value-Added Shares .......................................................................... 94
Table 5-35 Household Income Shares ............................................................................ 95

On Trade liberalisation with export reimbursement in RFAS
Table 6-1 Balance of Payments..................................................................................... 107
Table 6-2 Sector Value Added Shares .......................................................................... 107
Table 6-3 Factor Use ..................................................................................................... 108
Table 6-4 Real Wages ................................................................................................... 108
Table 6-5 Factor Income Shares ................................................................................... 108
Table 6-6 Household Income Shares ............................................................................ 109

On Increase in non-residents holdings of domestic assets in RFAS
Table 6-7 Balance of Payments.................................................................................... 111
Table 6-8 Aggregate Demand Component Shares ........................................................ 112
Table 6-9 Sector Value Added Shares .......................................................................... 112
Table 6-10 Factor Use ................................................................................................... 113
Table 6-11 Real Wages ................................................................................................. 113
Table 6-12 Macro Indicators ......................................................................................... 113
Table 6-13 Rates of Return ........................................................................................... 114
Table 6-14 Household Income Shares .......................................................................... 114

Other tables
Table 6-15 Sensitivity analysis on a set of elasticities for an increase in the perceived
probability of default on domestic assets ...................................................................... 118
Table 7-1 Consistency between the macro and micro models ...................................... 128
Table 7-2 Explanation of employment status in formal labour market segments ........ 134
Table 7-3 Explanation of log wages by labour market segment ................................... 137
Table 7-4 Estimated and simulated intercepts of labor and wage equations ................ 145
Table 7-5 Per capita income, inequality and poverty by simulation ............................. 149
8
Figures

Figure 3-1 Nested Models ............................................................................................... 42
Figure 3-2 The Production Function in the Real Model ................................................. 48
Figure 3-3 Matrix of Financial Assets and Liabilities .................................................... 55
Figure 3-4 The Production Function in the Real Financial Augmented Model .............. 62
Figure 4-1 Conceptual Social Accounting Matrix for Argentina .................................... 70
Figure 5-1 Models parameters accounting for external shocks ...................................... 74
Figure 5-2 Macro effects of 30 p.p. increase in perceived probability of default on
domestic assets ................................................................................................................ 75
Figure 5-3 Transmission channels for a 30 p.p. increase in the perceived probability of
default on domestic assets in the short run...................................................................... 85
Figure 5-4 Macro effects of 10 per cent fall in import taxes ......................................... 86
Figure 5-5 Transmission channels for a 10 percent fall in import tariffs in the short run
......................................................................................................................................... 97
Figure 6-1 Transmission channels for trade liberalisation with export reimbursement 110
Figure 6-2 Transmission channels for an increase in the non-residents holdings of
domestic assets .............................................................................................................. 115
Figure 6-3 Transmission channels for a 60 p.p. increase in the perceived probability of
default on domestic assets ............................................................................................. 122
Figure 7-1 Behavioural Microsimulations .................................................................... 140
Figure 7-2 Transmission channels for a 60 per cent fall in the domestic deposits held by
non-residents ................................................................................................................. 141
Figure 7-3 Newton’s Method ........................................................................................ 142
Figure 7-4 Lorenz Curves ............................................................................................. 148
Figure 7-5 Income Simulations 1 and 2 by ventiles ...................................................... 152
Figure 7-6 Income Simulations 2 and 3 by ventiles ...................................................... 152
Figure 7-7 Income Simulations 3 and RHG by ventiles ............................................... 152
Figure 7-8 Income and Employment Simulation 3 by ventiles .................................... 152
Figure 7-9 Income Simulations 1 and 2 by percentiles ................................................. 153
Figure 7-10 Income Simulations 2 and 3 by percentiles ............................................... 153
Figure 7-11 Income Simulations 3 and RHG by percentiles ..................................... 153
Figure 7-12 Income and Employment Simulation 3 by percentiles .............................. 153
9
Abbreviations

% Percentage
A$ Argentinean Pesos
B$ Billions of Argentinean pesos
BCRA Banco Central de la República Argentina (Central Bank of Argentinean
Republic)
CDF Cumulative distribution function
CE Cross Entropy
CES Constant elasticity of substitution
CET Constant elasticity of transformation
CGE Computable general equilibrium
CIF Cost, insurance and freight (price)
CPI Consumer Price Index
DFID United Kingdom Department for international development
DSGE Dynamic Stochastic General Equilibrium
ECLAC Economic Comission for Latin America and the Caribbean
EPH Encuesta Permanente de Hogares (Permanent Household Survey in
Argentina)
Eq(s). Equation(s)
FCGE Financial Computable General Equilibrium
FDI Foreign Direct Investment
FGT Foster-Greer-Thorbecke (poverty indicators)
FOB Free On Board (price)
GDP Gross Domestic Product
GNP Gross National Product
GS&D Global Supply and Demand
GTAP Global Trade Analysis Project
IADB Inter-American Development Bank
IFPRI International Food Policy Research Institute
IIP International Investment Position
ILO International Labour Organization
IMF International Monetary Fund
IMMPA Integrated Macroeconomic Model for Poverty Analysis
10
INDEC Instituto Nacional de Estadisticas y Censos (National Institute of
Statistics and Census in Argentina)
ISIC International Standard Industrial Classification
ISS International Institute of Social Studies
LAC Latin American Countries
LCU Local currency units
LDC Least Developed Countries
LES Linear Expenditure System
LSE London School of Economics
MDG Millennium Development Goals
MIPAr97 Matriz Insumo-Producto (Input Output Matrix) Argentina 1997
MRTS Marginal Rate of Technical Substitution
MSM Microsimulation model
NDFRA National Direction of Fiscal Research and Analysis in Argentina
NDIA National Direction of International Accounts in Argentina
NFS Non-financial services
NSNA National System of National Accounts in Argentina
OLS Ordinary Least Squares
p.p. Percentage points
PDF Probability Distribution Function
R Real (model)
r.t. respect to
RBR Robilliard, Bourguignon et al. (2008)
RER Real Exchange Rate
RF Real financial (model)
RFA Real financial augmented (model)
RFAS Real financial augmented (model), short run version
RHG Representative household group
SAM Social Accounting Matrix
SDR Special Drawing Right
SIM Simulation
SNA System of National Accounts
SURE Seemingly Unrelated Regression Equations
TPE Table of Public Expenditure 1991-2001