What if not all land is created equal? The role of heterogeneous land when assessing the impact of trade liberalization on developing countries

Land is a key input in agriculture, which is the most important sector in terms of employment and foreign exchange earnings in many developing countries. The way in which land is modeled is therefore crucial for understanding the impact of trade liberalization in developing countries. Our objective is to assess if the expected impact of trade liberalization on developing countries, which plays a central role in the current Doha development round, is affected by differences in land endowments. Our analysis relies upon a recent GTAP-compatible land use dataset containing data on land endowments, harvested area and yields by crop, agro-ecological zone and country. Given the prominent role of agriculture in our analysis we start from the GTAP-AGR model. Instead of defining production by AEZ we maintain a single production function by crop (as in GTAP-AGR) but redefine the single type of land as a land aggregate composed of land of different AEZs. We then add a nest to the production function to determine the composition of this land aggregate. By assuring that this land nest captures the productivity differences of land across AEZs we incorporate the same amount of information in the model as with defining production by AEZ (differences in yields across AEZs) without having an explosion of the model’s dimensions. The aim of this study is to assess whether heterogeneity of land affects the expected impact of trade liberalization on developing countries. We therefore compare the results of the model including the productivity differences across AEZs (GTAP-AEZ) with the findings of GTAP-AGR. First tests with a full trade liberalization scenario resulted in modestly lower gains from trade liberalization found in the first tests of the impact of heterogeneous land.