Modeling Public Policies in Latin America and the Caribbean

In response to scepticism over the supposed trickle-down effects of Latin American trade reforms, the region's policymakers are increasingly focusing attention on the distributive impacts of the reform measures and the channels through which they are transmitted. For their part, economists are developing cutting-edge quantitative methodologies and high-quality databases to support policy analysis in this inherently complex field.

A promising development in this regard is the growing use and sophistication of computable general equilibrium (CGE) analysis. This technique ?which is particularly applicable to trade policy analysis, where distributive and cross-border impacts are significant? is increasingly being used to perform assessments at the national, regional and global levels.

In 2001, the Inter-American Development Bank (IDB) and the Centre d'Études prospectives et d'informations internationales (CEPII), acting through the Institute for the Integration of Latin America and the Caribbean (INTAL), sponsored a conference entitled "Impacts of Trade Liberalization Agreements on Latin America and the Caribbean", based on CGE models. This conference was held at IDB headquarters in Washington, D.C., and was a landmark event in the creation of the region's Computable General Equilibrium Modeling Network.

After developing parallel lines of research and in an effort to enhance the region's institutional capacity to perform trade policy analysis in a CGE framework, IDB and the Economic Commission for Latin America and the Caribbean (ECLAC) launched the Computable General Equilibrium Modeling Regional Network as an interactive platform for dialogue between CGE experts across the region. The objective of the initiative is twofold. First, it puts the Latin American region in the vanguard of knowledge about CGE modelling techniques, emphasizing ?but not confined to? trade policy analysis. Second, it helps to create a dialogue between modellers and policymakers in which the former raise awareness of CGE while the latter identify relevant areas for analysis, research questions and simulation scenarios.

Subsequently, in 2007, IDB, ECLAC and CEPII organized the first Regional Meeting on Computable General Equilibrium. Held in Santiago, Chile, the event focused primarily on the link between trade and poverty, but also included CGE studies evaluating agricultural and fiscal policies, among others.

In 2008, in collaboration with the Central American Institute of Business Administration (INCAE), IDB and ECLAC held the second Regional Meeting in San José, Costa Rica. In addition to themes addressed at the Santiago conference, this event also examined the impact of increases in world food prices, the use of spatial models, and emerging areas for CGE analysis such as climate change and liberalization in the services sector.

These meetings have helped to promote a better understanding of policy issues, opportunities and challenges through the use of CGE models. They have also strengthened the analytical capabilities of governmental technical teams in Latin America responsible for policy formulation and implementation.

IDB and ECLAC are now collaborating on the publication of a selection of the papers presented at the last two meetings mentioned above. The selection process has been difficult, given the number of papers presented and their high quality. We feel that the sample included in this book represents the main areas discussed at the meetings and provides analysis of relevance to the Latin America and Caribbean region.

The papers included in this book can be categorized into four main groups. First, we review the usefulness of CGE models for policymakers and discuss the relevance of this tool for international organizations and governments. The second group consists of five papers that assess trade integration scenarios for Latin American countries, with a particular focus not only on macroeconomic indicators but also on socio-economic and welfare variables. One conclusion from this group of papers is that similar shocks do not have similar effects across countries, indicating the need for country-specific studies; i.e., results cannot be generalized. The third group of papers presents applications of CGE models in two new areas: climate change and liberalization of services. The final paper offers a practical contribution to general and partial equilibrium analysis by estimating a set of Armington elasticities for the Brazilian economy.