Goals of the Paper

1. Goals of the Paper • Explore the dynamic adjustment to a new WTO Round of Trade Liberalization from 2000 to 2010 • Explore how this helps Asia Crisis economies relative to a direct transfer of foreign Aid from OECD economies • Explore the impact of incorporating an empirical model of endogenous total factor productivity growth ( Chand (1999))

2. Key dynamic features • annual frequency • physical capital is accumulation is endogenous but subject to adjustment costs • forward looking agents in goods, factor and financial markets • full accounting of stock flow relations • combination of intertemporal optimization by agents plus liquidity constraints • sticky nominal wages

3. Some Important Issues • Trade, capital flows and adjustments in domestic financial markets are central to global adjustment to shocks; • Agents arbitrage between different assets within countries and across countries - taking into account the adjustment costs of changing the physical capital stock in each sector.

4. What are Financial Assets? • Each financial asset represents a claim over real resources • Money over purchasing power • Bonds are claims over future tax collections • Equity is a claim over the future dividend stream of a firm • Foreign assets are a claim over the future exports of the debtor country • Asset values embody expectations of future real activities

5. Sectors • Energy • Mining • Agriculture • Durable Manufacturing • Non-Durable Manufacturing • Services

6. The Simulations

7. A New Millenium Round • In 2000, it is announced that existing tariffs will be reduced by 1/3 from 2000 to 2010 in most countries • Tariffs on goods trade are based on the GTAP4 database (see Table 3a) • For services it is assumed there is a cost reduction based on work by Centre for International Economics (see Table 3b)

22. Summary • Largest gains to countries liberalizing most • short run losses outweighed by long run gains • trade impacts /exchange rate adjustments tend to be the opposite in the short run relative to the medium run (role of intertemporal budget constraints)

23. Direct Aid to Asia Crisis Countries

24. Aid Simulation • Indonesia, Korea, Thailand and Philippines receive a direct transfer from the OECD economies such that: • The transfer declines by 10% per year after 2000 • Receiving countries are no worse off in terms of the present value of consumption than under the trade liberalization simulation. • Donor countries donate in proportion to their share of GDP in the donor total

29. Summary • Income transfer causes adjustment through the balance of payments • consumption of receiving countries rise • consumption of donating countries fall • trade liberalization is a better way to help crisis economies

30. Total factor productivity growth in manufacturing endogenous to the change in tariffs (following the econometric results of Satish Chand (1999)

35. Summary • Making TFP growth endogenous to changes in tariff rates increases the gains from liberalization • But also accentuates the adjustment process through the balance of payments in the short run

36. Conclusion • Dynamics in the sense used in this paper adds a richer story to trade liberalization • In particular there are many problems - noticeable to policy makers in the real world - which need to be understood • Many short term results (over a decade) are the opposite of the long term neoclassical results that come from conventional CGE models.