WorldScan WIOT Feedback and Policy Impact Analysis

1. WIOD and WorldScan • Feedback, state of affairs and • planned policy impact analysis • Paul Veenendaal

2. Outline • Feedback • State of affairs • Planned policy analysis • Some alternatives WIOT and WorldScan

3. Feedback • What did we try to accomplish? • calibrate a model version of WorldScan on the WIOT-table 2004 • missing data could then by taken from GTAP-7 and our numerous satellite accounts (same base year) • we can compare simulation outcomes WIOT versus GTAP-based • Did we succeed? • No, not with the prelease of September 2010 (too many negative entries everywhere) • Yes, we are up and running with the release of February 2011 WIOT and WorldScan

4. Our general findings • WIOT is a beauty! • inspired us to use the same lay-out for globally closed tables that we constructed from the GTAP-datasets for 2001 and 2004 (to build a database for the analysis of trade in value added indicators at the request of DG TRADE) • WIOD sector classification is not/less suitable for climate change analyses • there is no explicit sector split for coal, electricity, gas and oil products (coal and oil products are together, electricity and gas too) • Unavailability of most taxes and subsidies • this is a serious drawback for CGE-exercises as welfare impacts of policy measures depend strongly on distortions • could compatible (with WIOT that is) national IOT’s help us here? WIOT and WorldScan

5. General findings • Supplies of international transport services are not available • transport services in WIOT are primary inputs • in GTAP they are intermediates (for trade in goods only: transport via water, air and road/rail) • WIOT is not globally closed • yet, it is covers about 80% of global GDP • then, we cannot possibly make the small country assumption that world market prices are given • There are still many negative entries for exports to RoW • for us they turned out to be manageable in the second release • No distinction of exports from production and exports from imports • and no correction for re-exports either • what does the decision not to address re-exports mean? • just ignoring them? treating imports for re-exports as ‘normal’ imports? Something else? WIOT and WorldScan

6. Specific comments • Incomplete national tables • no entries for China for trade rows c20 and c21 • Incomplete WIOD country tables • no split of value added (8 countries) • no skill split of labour (15 countries) • no capital split (20 countries) • No price/volume split for skill classes • we would need this to address human capital formation in China • No capital stocks by type • No mapping from final consumption at the sectoral level to household budget categories • No mapping from sectoral gross fixed capital formation to changes in capital stocks by type WIOT and WorldScan

7. How did we get WorldScan afloat on WIOT? • First, we corrected negative export entries with RoW in WIOT by adding a constant to both exports to and imports from RoW • note: this implies that RoW receives a larger input share than in WIOT • Next, we aggregated WIOT 2004 and GTAP 2004 to a common sector and country classification: 26 sectors and 40 (WIOT)/ 41(GTAP) countries • thus obtaining RoW from GTAP • Finally, we forced RoW to accept WIOT bilateral trade with RoW by adjusting final demands in RoW • Thus, obtaining a merged, closed, global IO data set • We calibrated WorldScan on this dataset and prepared a baseline on it as well • .. and WorldScan is up and running on WIOT 1994 WIOT and WorldScan

8. Our planned impact analysis • Impacts on EU (policies) of rising human capital formation in China • what would be the implication of larger inflows into higher education for China in the medium term? • what would be the impact of more R&D in China (made possible by a larger stock of high-skilled R&D workers) on Europe? • To analyse this we need in WorldScan to model • R&D investment • Human capital formation WIOT and WorldScan

9. R&D modelling in WorldScan • R&D expenditures accumulate in R&D stocks • Firms decide on optimal R&D stock • R&D stock accumulations are produced in a separate R&D sector • R&D spills over to total factor productivity in • own sector • other sectors • foreign sectors WIOT and WorldScan

10. R&D in CES production nest WIOT and WorldScan

11. R&D modelling equations WIOT and WorldScan

12. R&D spillover estimates N=2250; R2 = 0.183; Lejour, A.J. and R. Nahuis (2005), R&D spillovers and growth: specialisation matters, Review of International Economics, 2005 WIOT and WorldScan

13. Implications and modifications • The parameter estimates imply a social rate of return of 90% • Visser, S., R&D in WorldScan, CPB Memorandum 189, 2007 • Thus, stimulating R&D was one of the most promising policy instruments for meeting the overall goal of the Lisbon agenda • just second to increasing labour participation • Later on we improved WorldScan in three respects • high-skilled labour became a complement to capital in the production nest • four (education-based) skill classes were introduced: low skilled, medium skilled, high skilled and the top of the high skilled: the R&D workers • R&D workers are scarce and heavy subsidization of R&D will partly evaporate into higher wages of R&D workers WIOT and WorldScan

14. Modification of production nest forvalueadded (1) WIOT and WorldScan

15. Modification of production nest forvalueadded (2) WIOT and WorldScan

16. .. and introduction of wagedifferentialbetweenhigh-skilled and R&D workers • Hence, heavy subsidies on R&D will partly evaporate into wage increases for R&D workers • Rojas-Romagosa, H., Modelling Human Capital formation in WorldScan, CPB Memorandum 244, 2010 WIOT and WorldScan

17. Human capital satellite of WorldScan • Keeps track of skill cohorts • Has many policy parameters that may modify • the size of a skill class • the average efficiency of a skill class • the share of the high-skilled that is capable of doing R&D work • These modifications are sent each simulation year to WorldScan WIOT and WorldScan

18. Impacts of human capital formation • The human capital plus R&D components of WorldScan will generally indicate: • an increase of educational enrollment will reduce growth in the short term (less workers) • higher enrollment in the topclass of the high-skilled will be needed to boost R&D • if there is enough enrollment R&D-growth will become feasible • growing R&D stocks will foster growth at home • growing R&D stock will also foster growth abroad, especially if trade relations are intensive • Hence, it seems that – from the modelling point of view – we are well-prepared to analyse the impacts of human capital formation in China WIOT and WorldScan

19. … but what about the data? • WIOD labour split for China is not yet in sight • No price/volume split for skill classes available • OECD ANBERD is not abundant in supplying sectoral R&D expenditure in China (2000 is there, and to a lesser extent 2008 and 2009 as well, but only national totals for the years 2001-2007) • We have just 10 months left to do the work • Hence, we should perhaps conclude that addressing human capital formation in China within the WIOD-project has become infeasible WIOT and WorldScan

20. Some alternatives? • Exploit time-series character of WIOTs • re-estimate substitution elasticities of • production nests • Armington nests • Exploit wealth of trade information of WIOD • disaggregate Armingtons (and estimate elasticities) • construct plausible globalisation scenario’s • try to capture globalisation trends from WIOTs over the years 1995-2006 • extend these in a baseline up to 2025 • analyse • changes of trade structure with value added indicators • changes of position of skill classes on the labour market WIOT and WorldScan