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Endogenous Risk and Long Run Effects of Liberalisation in a Global Analysis Framework

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  • Boussard, Jean-Marc
  • Gerard, Françoise
  • Piketty, Marie Gabrielle
  • Ayouz, Mourad
  • Voituriez, Tancrède

Abstract

In a classical Walrassian framework of smoothly functioning markets and comparative static analysis, the beneficial effects of trade liberalisation are well known. In the real world, production decisions develop along time. They are fringed with uncertainty, and subject to unfulfilled expectations. Depending upon demand elasticity, such phenomena lead to converging or diverging cobwebs. Yet, even if demand is inelastic, diverging cobwebs are rarely observed, because there exist also many return strings which call systems back in the vicinity of (unstable) equilibrium. Among the latter, as already noticed by Knut Wicksell in the 1930’s, attitudes toward risk and investment functions play a large role. In effect, introducing such mechanisms into a dynamic market equilibrium leads to “chaotic motion”, a now well documented mathematical being, with very specific characteristics. In this context, market price fluctuations no longer occur because of the “hand of God”, from completely external sources, such as climatic events. They are endogenous, generated by the market itself. While external risk is subject to the “law of large number”, thus allowing for the benefit of risk pooling through insurance mechanisms, endogenous is not. In particular, any effort to lower individual decision maker exposition to risk affects the values of the key model parameters, such as supply elasticity, thus changing the risk regime itself. Now, while many studies (especially by Hertel et al) have been undertaken in order to elicit the consequences of external risk for the magnitude and distribution of the trade liberalisation benefits, the endogenous risk case has generally been benignly ignored by the world research community. The present paper aims at filling this gap. To this end, a GTAP model along that line is developed, with and without agricultural liberalisation. It is shown that, after a while, the tendency to divergence is smoothed out by risk considerations. Yet, because of a greater price uncertainty, over 60 years, long run world growth is significantly affected by liberalisation. Increased price volatility plays the role of a negative technical progress, which offset the benefits from a more efficient use of comparative advantage. Distributional effects are discussed, both between regions and within. Results suggest that liberalisation is not likely to reduce poverty, quite the contrary, because rich are less risk averse than poor, and thus, can accumulate more reinsvestible benefits. However, richest nations do not benefit in the whole, because of the investment slowing down mechanism outlined above. Efforts have been done to test the model, taking opportunity of its dynamic character, which allows for the comparison between “predicted” and “actual” series. Although results in this respect can still be very much improved, price regimes from this model are compared with a few actual long run observed series, and found to be similar. The paper briefly discuss the difficulty of such comparisons, which, because of the “sensitivity to initial condition”, cannot be reduced to the simple point per point measurement of the discrepancy between “predicted” and “observed”. Series must be characterized by global indices, such as moments or Fourrier spectrums. Most of these results very much contradict common wisdom. This is why they are interesting. More research is thus needed to specify the deep sources of this outcome and their political significance.

Suggested Citation

  • Boussard, Jean-Marc & Gerard, Françoise & Piketty, Marie Gabrielle & Ayouz, Mourad & Voituriez, Tancrède, 2004. "Endogenous Risk and Long Run Effects of Liberalisation in a Global Analysis Framework," Conference papers 331212, Purdue University, Center for Global Trade Analysis, Global Trade Analysis Project.
  • Handle: RePEc:ags:pugtwp:331212
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    References listed on IDEAS

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    Cited by:

    1. Narayanan, Badri G. & Hertel, Thomas W. & Horridge, J. Mark, 2010. "Disaggregated data and trade policy analysis: The value of linking partial and general equilibrium models," Economic Modelling, Elsevier, vol. 27(3), pages 755-766, May.
    2. Leaky, R. & Caron. P. & Craufurd, P. & Martin, A. & McDonald, A. & Abedini, W. & Afiff, S. & Bakurin, N. & Bass, S. & Hilbeck, A. & Jansen, T. & Lhaloui, S. & Lock, K. & Newman, J. & Primavesi, O. & S, 2009. "Impacts of AKST on development and sustainability goals," IWMI Books, Reports H042791, International Water Management Institute.
    3. Gohin, Alexandre & Zheng, Yu, 2020. "Reforming the European Common Agricultural Policy: From price & income support to risk management," Journal of Policy Modeling, Elsevier, vol. 42(3), pages 712-727.
    4. Galtier, F., 2009. "Comment gérer l'instabilité des prix alimentaires dans les pays en développement ?," Working Papers MoISA 200904, UMR MoISA : Montpellier Interdisciplinary center on Sustainable Agri-food systems (social and nutritional sciences): CIHEAM-IAMM, CIRAD, INRAE, L'Institut Agro, Montpellier SupAgro, IRD - Montpellier, France.
    5. Femenia, Fabienne, 2010. "Impacts of Stockholding Behaviour on Agricultural Market Volatility: A Dynamic Computable General Equilibrium Approach," Journal of International Agricultural Trade and Development, Journal of International Agricultural Trade and Development, vol. 59(3).
    6. Christophe Gouel, 2014. "Food Price Volatility and Domestic Stabilization Policies in Developing Countries," NBER Chapters, in: The Economics of Food Price Volatility, pages 261-306, National Bureau of Economic Research, Inc.
    7. Féménia, Fabienne & Gohin, Alexandre, 2011. "Dynamic modelling of agricultural policies: The role of expectation schemes," Economic Modelling, Elsevier, vol. 28(4), pages 1950-1958, July.
    8. Pratt, Stephen & Blake, Adam & Swann, Peter, 2013. "Dynamic general equilibrium model with uncertainty: Uncertainty regarding the future path of the economy," Economic Modelling, Elsevier, vol. 32(C), pages 429-439.
    9. Alexandre Gohin, 2019. "General Equilibrium Modelling of the Insurance Industry: U.S. Crop Insurance," Journal of Global Economic Analysis, Center for Global Trade Analysis, Department of Agricultural Economics, Purdue University, vol. 4(2), pages 108-145, December.
    10. Sylvain Chabe-Ferret & Julien Gourdon & Mohamed Ali Marouani & Tancrède Voituriez, 2007. "Trade-Induced Changes in Economic Inequality: Assessment Issues and Policy Implications for Developing Countries," Working Papers DT/2007/11, DIAL (Développement, Institutions et Mondialisation).
    11. repec:dau:papers:123456789/4331 is not listed on IDEAS
    12. Boussard, Jean-Marc, 2006. "Consequences of price volatility in evaluating the benefits of liberalisation," MPRA Paper 4467, University Library of Munich, Germany.
    13. Christophe Gouel, 2012. "Agricultural Price Instability: A Survey Of Competing Explanations And Remedies," Journal of Economic Surveys, Wiley Blackwell, vol. 26(1), pages 129-156, February.
    14. Gohin, Alexandre & Zheng, Yu, 2015. "Assessing the Market Impacts of the Common Agricultural Policy: Does Farmers’ Risk Attitude Matter?," 2015: Trade and Societal Well-Being, December 13-15, 2015, Clearwater Beach, Florida 229235, International Agricultural Trade Research Consortium.
    15. Sophie Mitra & Jean‐Marc Boussard, 2012. "A simple model of endogenous agricultural commodity price fluctuations with storage," Agricultural Economics, International Association of Agricultural Economists, vol. 43(1), pages 1-15, January.
    16. Leakey, Roger & Kranjac-Berisavljevic, Gordana & Caron, Patrick & Craufurd, Peter & Martin, Adrienne M. & McDonald, Andy & Abedini, Walter & Afiff, Suraya & Bakurin, Ndey & Bass, Steve & Hilbeck, Ange, 2009. "Impacts of AKST on development and sustainability goals," Book Chapters,, International Water Management Institute.
    17. Alexandre Gohin & Yu Zheng, 2016. "Assessing the Market Impacts of the Common Agricultural Policy: Does Farmers' Risk Attitude Matter?," FOODSECURE Working papers 46, LEI Wageningen UR.
    18. Narayanan, Badri & Thomas Hertel & Mark Horridge, 2010. "Linking Partial and General Equilibrium Models: A GTAP Application Using TASTE," GTAP Technical Papers 3192, Center for Global Trade Analysis, Department of Agricultural Economics, Purdue University.
    19. Femenia, Fabienne, 2010. "Impacts of Stockholding Behaviour on Agricultural Market Volatility: A Dynamic Computable General Equilibrium Approach," German Journal of Agricultural Economics, Humboldt-Universitaet zu Berlin, Department for Agricultural Economics, vol. 59(03), pages 1-15, September.
    20. Vincent H. Smith & Joseph W. Glauber, 2020. "Trade, policy, and food security," Agricultural Economics, International Association of Agricultural Economists, vol. 51(1), pages 159-171, January.
    21. Niek Koning & Arthur Mol, 2009. "Wanted: institutions for balancing global food and energy markets," Food Security: The Science, Sociology and Economics of Food Production and Access to Food, Springer;The International Society for Plant Pathology, vol. 1(3), pages 291-303, September.
    22. Galtier, F., 2009. "How to Manage Food Price Instability in Developing Countries ?," Working Papers MoISA 200905, UMR MoISA : Montpellier Interdisciplinary center on Sustainable Agri-food systems (social and nutritional sciences): CIHEAM-IAMM, CIRAD, INRAE, L'Institut Agro, Montpellier SupAgro, IRD - Montpellier, France.
    23. Yankou Diasso, 2014. "Dynamique du prix international du coton : aléas, aversion au risque et chaos," Recherches économiques de Louvain, De Boeck Université, vol. 80(4), pages 53-86.
    24. Ludovic Temple & Sylvain B. Ngassam & Guy B. Nkamleu, 2009. "Filières d'approvisionnement en ignames de Douala et changements technologiques," Post-Print hal-00802701, HAL.

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