Trade and Employment From Myths to Facts - International Labour ...

Chapter 3: Assessing the impact of trade on employment: Methods of analysis
adjustment assistance. Indeed, CGE models are all but blind to any but the largest
contributors to GDP. The general rule of thumb is that sectors smaller than “1 per
cent of GDP” do not matter and show up only as rounding error. The 1 per cent
rule is hardly an adequate foundation on which to make policy except at the most
aggregate level. In this important sense, partial and CGE models do not directly
compete with but rather complement each other in any comprehensive policy
analysis.
The large-scale optics of CGE models are made worse by the tendency of
some modellers to regard their code as a commercial secret. There are two levels
on which modellers can infringe. The first, mentioned by Hammouda and Osakwe
(2006), is the obscurity with which model equations are described. Sensitivity testing
of key assumptions is lacking too frequently, although in much of the professional
literature it has become practically a requirement to post data and models on one’s
web page for replication purposes. In the case of some of the large CGE models,
this certainly can present a practical problem.
Critics also complain that authors seem to be devoted to discussing the specific
equations of their work without giving an overview of how the equations interact
so that model results can be compared across various modelling approaches. For
this reason, meta-studies are rare and not always of high value. The authors of the
commer cially available MIRAGE model, for a particularly egregious example, do
not even supply a listing of their code, creating a box that is truly black.
As suggested above, data requirements of CGE are very different from those
that feed econometric models. In addition to a base SAM, standard CGE models
require elasticities of substitution between labour and capital, the income and price
elasticities of household consumption demand, the elasticity of substitution for
the Armington and an elasticity of transformation. These four key sets of elasticities
cannot be estimated directly from the SAM and must, therefore, be derived from
econometric or other sources (Sadoulet and de Janvry, 1995). 43
3.4 ASSESSING THE EMPLOYMENT IMPACTS OF TRADE:
ECONOMETRIC METHODS
Just articulating the nature of the problem that econometrics is designed to tackle
unveils the difficulty in testing the hypothesis that trade liberalization causes employment
to rise. The first problem that has plagued all econometric research is the
nature of the subject. In principle, the subject should be an individual agent, rather
than a country. Were all countries of the same size, it would be possible to renormalize
43 “Other sources” include “guesstimation”, i.e. educated guesses, but as Sadoulet and de Janvry
(1995, p. 354) point out, “luckily, experience has shown that the empirical results obtained from
simulations with CGEs are quite insensitive to specific values of all these elasticities ...”. They go on
to identify the Armington as one of the crucial parameters for which the proper “order of magnitude”
must be obtained.
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