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Computable General Equilibrium Modeling: Influencing Debates

Washington, June 2011—Before a proposal becomes official, policy makers often want to know how it would affect various parts of the economy. For example, what winners and losers would a carbon tax produce? How would nonfarm workers be affected by a tariff on wheat or another agricultural commodity?

To answer those questions, economists often turn to Computable General Equilibrium, or CGE, modeling. This class of economic models assesses how the entire economy, including industries and households, is affected by policy changes in areas such as taxation, migration and trade policy.

In a new research paper, for example, World Bank economists Will Martin and Dominique van der Mensbrugghe, along with David Laborde of the International Food Policy Research Institute, use CGE modeling to show that under the World Trade Organization’s Doha tariff-cutting formulas, tariffs would be halved in industrial countries, and lowered—though, to a smaller degree—in developing countries. The resulting market opening is substantially reduced—but not eliminated—by exceptions that allow smaller cuts on many tariff lines.

Not surprisingly, CGE modeling has influenced many debates in international development, such as trade policy, migration, climate change, carbon trading, food prices and pro-poor economic growth policies.

"This is the most convincing way to build a quantitative picture of the linkages between different parts of the system," says Peter Dixon, a leading expert in general equilibrium modeling and professor at Australia’s Monash University.

Dixon, along with about 40 other economists, attended a recent CGE conference hosted by the World Bank’s Development Economics Vice Presidency in Washington. The gathering, from June 1-3, featured presentations of original research on CGE models, which will be included in the prestigious Elsevier Handbook series on CGE models. The volume, which will be edited by Dixon and Harvard University’s Dale Jorgenson, aims to provide definitive accounts of key approaches to CGE modeling.

The first CGE model, whose theoretical origins can be traced back to the work of Léon Walras over a century ago, was developed in 1960 by Norwegian economist Leif Johansen. With advances in technology and better datasets, CGE models entered the arsenal of applied economic policy analysis beginning in the 1970s.

The World Bank played a critical role in the early development of CGE modeling, with an important book on the topic published by Kemal Derviş, Jaime de Melo and Sherman Robinson in 1984. The institution also played a key role in developing better software platforms for model implementation. CGE models continue to be widely used in the Bank for projections and policy analysis.

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