Progress 10/01/09 to 09/30/14
Outputs
Target Audience: The target audience for this work includes: - policy makers in the departments of agriculture, energy, environmental protection, commerce as well as the US-ITC, along with their counterparts in international organizations including the WTO, World Bank, OECD, etc. - agribusiness executives focused on global scale issues relating to the food system - farmers seeking to make long term investments and evaluate market potential - consumers and taxpayers interested in the cost of food, environmental quality and taxes Changes/Problems:
Nothing Reported
What opportunities for training and professional development has the project provided? The project allowed the PI to devote time to the training of several PhD students who were externally funded, as well as two post-docs, also externally funded. How have the results been disseminated to communities of interest? 1. Journal articles and book chapters 2. Press releases through Purdue University 3. Media interviews, including interviews resulting in publications in the NYTimes and WSJournal 4. Invited lectures 5. Presentations and discussions at workshops and professional meetings. What do you plan to do during the next reporting period to accomplish the goals?
Nothing Reported
Impacts
What was accomplished under these goals?
1. To analyze the impact of agricultural, energy (including biofuels) and environmental policies on patterns of global trade, land use and household welfare: - Estimates of the indirect impacts of biofuels on global land use were developed and published and these formed the basis for California's regulation of GHG emissions from biofuels. - Estimates of the impact of climate mitigation policies on patterns of international trade, GHG leakage, food security and poverty were provided. - We published estimates of the interplay between water scarcity, biofuels expansion, international trade and food security. - We examined the impact of regional improvements in agricultural technology on global land use and GHG emissions. 2. To determine the impact of changes in climate on agricultural production, land use, trade, commodity prices and poverty: - Estimates of the impact of climate change on poverty in 15 countries in Africa, Asia and Latin America were published. - We provided an assessment of the adaptation potential to climate change in rich and poor countries and the capability of current models to capture these effects. - We assessed the interplay between extreme climate events and biofuels policies, noting the importance of flexibility in the latter. - We evaluated the potential for international trade to facilitate adaptation to climate change impacts. - We assessed the role of agricultural technology in ensuring future food security and facilitating adaptation to climate change.
Publications
- Type:
Book Chapters
Status:
Published
Year Published:
2014
Citation:
Walmsley, T.L., T.W. Hertel and D. Hummels (2014). Developing a GTAP-Based, Multi-Region, Input-Output Framework for Supply Chain Analysis, Chapter 2 in Asia and Global Production Networks: Implications for Trade, Incomes and Vulnerability, edited by Benno Ferrarini and David Hummels, Cheltenham: Edward Elgar Press.
Hertel, T.W., D. Hummels and T.L. Walmsley (2014). The Vulnerability of Asian Supply Chains to Localized Disasters, Chapter 3 in Asia and Global Production Networks: Implications for Trade, Incomes and Vulnerability, edited by Benno Ferrarini and David Hummels, Cheltenham: Edward Elgar Press.
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Progress 10/01/12 to 09/30/13
Outputs
Target Audience: My research is disseminated primarily to professionals working on global economic policy, including trade and climate issues. They include individuals at USDA, US-EPA, US-DOE, US-ITC as well as 24 other national and international government agencies. In addition, I reach out to the media on occasion in order to reach the general public, including farm audiences in the US and overseas. I also communicate my research to other economists and scienctists working on these issues. Changes/Problems:
Nothing Reported
What opportunities for training and professional development has the project provided? I have supervised two post-doctoral fellows and six PhD students over the past year. How have the results been disseminated to communities of interest? Press releases, interviews with the press, video abstracts and highlights sections in Environmental Research Letters. What do you plan to do during the next reporting period to accomplish the goals? I plan to continue to publish papers and present my work at conferences and in policy venues. I will also engage actively with the press when new papers are released.
Impacts
What was accomplished under these goals?
This project had an important impact on the way in which decision makers view the drivers of global land use change associated with agriculture. The California Air Resources Board makes its determination of indirect land use effects of biofuels using our framework. The US-EPA also formulates its policies using input from the GTAP-AEZ-BIO models. This research has also informed understanding of distant drivers of land use change amongst the broader environmental and ecology communities, as demonstrated by my co-authorship of a number of influential survey papers in this area. On the issue of climate change impacts and policies, my research has influenced the way decisionmakers think about the interaction between climate change, energy policies, and commodity market volatility. In particular, biofuel mandates run the risk of greatly increasing corn market volatility under future climate scenarios. On the mitigation front, our resarch has raised concerns about the impact of large-scale, land-based mitigation policies on food prices, rural and prices and poverty. Goals and Accomplishements 1. To analyze the impact of agricultural, energy (including biofuels) and environmental policies on patterns of global trade, land use and household welfare. The global land use implications of biofuel expansion have received considerable attention in the literature over the past decade. Model-based estimates of the emissions from cropland expansion have been used to assess the environmental impacts of biofuel policies. And integratedassessment models have estimated the potential for biofuels to contribute to greenhouse gas (GHG) abatement over the coming century. All ofthese studies feature, explicitly or implicitly, competition between biofuel feed stocks and other land uses. However, the economic mechanismsgoverning this competition, as well as the contribution of biofuels to global land use change, have not received the close scrutiny that they deserve.The purpose of this article is to offer a deeper look at these factors. We begin with a comparative static analysis which assesses the impact ofexogenously specified forecasts of biofuel expansion over the period: 2006–2035. Global land use change is decomposed according to the threekey margins of economic response: extensive supply, intensive supply, and demand. Under the International Energy Agency’s “New Policies”scenario, biofuels account for nearly one-fifth of global land use change over the 2006–2035 period. The article also offers a comparative dynamicanalysis which determines the optimal path for first and second generation biofuels over the course of the entire 21st century. In the absence ofGHG regulation, the welfare-maximizing path for global land use, in the face of 3% annual growth in oil prices, allocates 225 Mha to biofuelfeed stocks by 2100, with the associated biofuels accounting for about 30% of global liquid fuel consumption. This area expansion is somewhatdiminished by expected climate change impacts on agriculture, while it is significantly increased by an aggressive GHG emissions target and byadvances in conversion efficiency of second generation biofuels. All earlier studies of the land-use impacts of biofuels expansion have effectively ignored the distinction between rainfed and irrigated lands and neglected the facts that irrigated croplands typically have much higher yields than their rainfed counterparts in the same region and that expansion in irrigated crops are limited in some regions due to water scarcity and irrigation constraint. This paper shows that these omissions introduce systematic biases in the measurement of biofuel-induced land use change emissions. We developed a new computable general equilibrium model which distinguishes irrigated and rainfed agriculture. Using this model, we find that ignoring the irrigated-rainfed distinction modestly underestimates global land use change, but results in sharply different geographic patterns of cropland expansion, with stronger rainfed expansion in more carbon-rich environments. This points to a significant underestimate of land use emissions in earlier studies. 2. To determine the impact of changes in climate and climate policy on agricultural production, land use, trade, commodity prices and poverty. Successful adaptation of agriculture to ongoing climate changes would help to maintain productivity growth and thereby reduce pressure to bring new lands into agriculture. In this paper we investigate the potential co-benefits of adaptation in terms of the avoided emissions from land use change. A model of global agricultural trade and land use, called SIMPLE, is utilized to link adaptation investments, yield growth rates, land conversion rates, and land use emissions. A scenario of global adaptation to offset negative yield impacts of temperature and precipitation changes to 2050, which requires a cumulative 225 billion USD of additional investment, results in 61 Mha less conversion of cropland and 15 Gt carbon dioxide equivalent (CO2e) fewer emissions by 2050. Thus our estimates imply an annual mitigation co-benefit of 0:35 GtCO2e yr??1 while spending $15 per tonne CO2e of avoided emissions. These mitigation costs are quite competitive with other approaches to climate policy which do not share the same adaptation benefits. To date, there has been little systematic evidence provided on the impact of climate mitigation policy on the welfare of the poor in developing countries. In a paper published in ERL, we consider two alternative policy scenarios, one in which only the Annex I countries take action, and the second in which the first policy is accompanied by a forest carbon sequestration policy in the non-Annex regions. Using an economic climate policy analysis framework, we assess the poverty impacts of the above policy scenarios on seven socio-economic groups in 14 developing countries. We find that the Annex-I-only policy is poverty friendly, since it enhances the competitiveness of non-Annex countries—particularly in agricultural production. However, once forest carbon sequestration incentives in the non-Annex regions are added to the policy package, the overall effect is to raise poverty in the majority of our sample countries. The reason for this outcome is that the dominant impacts of this policy are to raise returns to land, reduce agricultural output and raise food prices. Since poor households rely primarily on their own labor for income, and generally own little land, and since they also spend a large share of their income on food, they are generally hurt on both the earning and the spending fronts. This result is troubling, since forest carbon sequestration—particularly through avoided deforestation—is a promising, low cost option for climate change mitigation. One response to concerns about excessive GHG emissions associated with food consumption is to eat more locally grown food. However, little work has included the variations in emissions intensities associated with food production. While shifting consumption patterns in wealthy countries from imported to domestic livestock products reduces GHG emissions associated with international trade and transport activity, we find that these transport emissions reductions are swamped by changes in global emissions due to differences in GHG emissions intensities of production. Therefore, diverting consumption to local goods only reduces global emissions when undertaken in regions with relatively low emissions.
Publications
- Type:
Journal Articles
Status:
Published
Year Published:
2013
Citation:
Avetisyan, M., T.W. Hertel and G. Sampson (2013). Is Local Food more Environmentally Friendly? The GHG Emissions Impacts of Consuming Imported vs. Domestically Produced Food, Environmental and Resource Economics doi:10.1007/s10640-013-9706-3.
- Type:
Journal Articles
Status:
Published
Year Published:
2013
Citation:
Baldos, U. and T.W. Hertel, Looking back to move forward on model validation: Insights from a global model of agricultural land use, Environmental Research Letters (8): doi:10.1088/1748-9326/8/3/034024
- Type:
Journal Articles
Status:
Published
Year Published:
2013
Citation:
Hertel, T., W. and W.E. Tyner (2013) Market-mediated Environmental Impacts of Biofuels, Global Food Security, http://dx.doi.org/10.1016/j.gfs.2013.05.003
- Type:
Journal Articles
Status:
Published
Year Published:
2013
Citation:
Hussein, Z., T.W. Hertel and A. Golub (2013). Poverty Impacts of Climate Mitigation Policy, Environmental Research Letters 8 (2013) 035009 (10pp): doi:10.1088/1748-9326/8/3/035009.
- Type:
Journal Articles
Status:
Published
Year Published:
2013
Citation:
Liu, J., V. Hull, M. Batistella, R. DeFries, T. Dietz, F. Fu, T.W. Hertel, R.C. Izaurralde, E.F. Lambin, S. Li, L. A. Martinelli, W. McConnell, E.F. Moran, R. Naylor, Z. Ouyang, K.R. Polenske, A. Reenberg, G. Rocha, C.S. Simmons, P.H. Verburg, P.M. Vitousek, F. Zhang and C. Zhu (2013). Framing Sustainability in a Telecoupled World, Ecology and Society 18 (2): 26, http://www.ecologyandsociety.org/vol18/iss2/art26/
- Type:
Journal Articles
Status:
Published
Year Published:
2013
Citation:
Meyfroidt, P., E.F. Lambin, K. Erb and T.W. Hertel (2013). Globalization of land use: Distant drivers of land change and geographic displacement of land use, Current Opinion in Environmental Sustainability http://dx.doi.org/10.1016/j.cosust.2013.04.003.
- Type:
Journal Articles
Status:
Published
Year Published:
2013
Citation:
Hertel, T. W., J. Steinbuks, and U.C. Baldos (2013). Competition for Land in the Global Bioeconomy, Agricultural Economics http://onlinelibrary.wiley.com/doi/10.1111/agec.12057/pdf.
- Type:
Journal Articles
Status:
Published
Year Published:
2013
Citation:
Taheripour, F., Hertel, T. W., and J. Liu (2013). The Role of Irrigation in Determining the Global Land Use Impacts of Biofuels, Energy, Sustainability and Society 3:4 doi:10.1186/2192-0567-3-4.
- Type:
Journal Articles
Status:
Published
Year Published:
2013
Citation:
Steinbuks, J. and T.W. Hertel (2013). Energy prices will play an important role in determining global land use in the twenty first century, Environmental Research Letters doi:10.1088/1748-9326/8/1/014014.
- Type:
Journal Articles
Status:
Published
Year Published:
2013
Citation:
Lobell, D., U. C. Baldos and T.W. Hertel (2013). Climate Adaptation as Mitigation: The Case of Agricultural Investments, Environmental Research Letters 8:1-12, doi:10.1088/1748-9326/8/1/015012.
- Type:
Journal Articles
Status:
Published
Year Published:
2012
Citation:
Golub, A. and T. W. Hertel (2012). Modeling Land Use Change Impacts of Biofuels in the GTAP-BIO Framework, Climate Change Economics 3(3): doi: 10.1142/S2010007812500157
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Progress 10/01/11 to 09/30/12
Outputs
OUTPUTS: The study by Diffenbaugh and Hertel et al (2012) finds that future climate scenarios may cause significantly greater volatility in corn prices, which would be intensified by the federal biofuels mandate. The findings, published in the journal Nature Climate Change, show that severely hot conditions in corn-growing regions and extreme climate events that are expected to impact supply would cause swings in corn prices. When coupled with federal mandates for biofuel production, the price volatility could increase by about 50 percent over the period from 2020 -2040, as compared to recent history. However, closer integration of the corn and energy markets through the ethanol industry could aid in buffering these shocks, but this would not occur in the presence of a mandate. Under current rules, the federal government requires an increasing amount of ethanol and other biofuels be produced each year and blended with gasoline. The study finds that even if temperatures stay within the internationally recognized climate change target - a limit of 3.6 degrees Fahrenheit above pre-industrial levels - that global warming is still enough to make damaging heat waves much more common over the U.S. Corn Belt. The authors find that even one or two degrees of global warming is likely to increase heat waves enough to cause much higher frequency of low yield years, leading to greater volatility of corn prices. Regulating livestock greenhouse gas emissions could shift livestock production to unregulated, less developed countries, unless those poorer countries can be enticed to preserve their forested lands, according to the paper by Golub and Hertel et al. (2012). Agriculture and deforestation account for about one-quarter of global greenhouse gas emissions worldwide, with methane from livestock production being the most important type of emissions from farming. Emissions from agriculture have not gotten as much attention as those from fossil fuels combustion, but livestock sectors are the most important contributor to non-CO2 greenhouse gas emissions and would be seriously affected if a tax or regulations were implemented. Wealthy countries alone would have limited success in decreasing greenhouse gas emissions from livestock production because it would give poorer countries, with greater GHG emissions intensities, an incentive to expand their production. This negates greenhouse gas emissions reductions in the wealthy countries. This led the authors to examine what might happen if emission regulations in wealthy countries were paired with incentives to retain forested land in poorer countries. Without new grazing areas, those countries would not expand their livestock production as much. This combination of policies is quite effective at preventing emissions leakage to developing countries, while enhancing forest carbon stocks in the lower income regions. The effect, however, would be less meat available for consumption in the poorer countries and a price increase globally. This unwanted impact on livestock consumption and production in poorer countries could be reduced by designing an appropriate policy, the authors found. PARTICIPANTS: There are 28 national and international GTAP sponsor organizations. These include nearly all of the leading institutions around the world undertaking quantitative research on global trade and environmental issues. For example, in the US, these include: EPA, DOE, US-ITC and USDA. International institutions include: World Bank, OECD, WTO, several UN organizations, etc. Each year, we organize an annual conference. In 2012, this was hosted by the World Trade Organization in Geneva Switzerland, with approximately 230 participants from around the world. We also held short courses in Ethiopia, Denmark and Washington, DC. TARGET AUDIENCES: Trade economists and policy makers PROJECT MODIFICATIONS: Not relevant to this project.
Impacts
The Nature Climate Change study received international media coverage, including a prominent feature in the Business Section of the New York Times. It generated substantial interest at the time of publication, but also throughout the summer, as the authors predicted precisely the kind of commodity price spike which arose in the summer of 2012. The Department of Agricultural Economics at Purdue University is home to the Global Trade Analysis Project (GTAP) which comprises 10,000 researchers in more than 160 countries. It celebrated its twentieth birthday this year. Over these two decades is has brought in roughly $10 million in unrestricted consortium support and data base sales. The Center has held 32 short courses, training a total of 773 professionals in global trade analysis. At Purdue, the Center has trained three dozen graduate students. There have been 2,862 citations to the GTAP book, edited by Tom Hertel.
Publications
- Ahmed, S. A., N. Diffenbaugh, T. Hertel, and W. Martin (2012) Agriculture and Trade Opportunities for Tanzania: Past Volatility and Future Climate Change, Review of Development Economics 16(3):429-447.
- Golub, A.A., B.B. Henderson, T.W Hertel, P. Gerber, S.K. Rose and B. Sohngen (2012). Global Climate Policy Impacts on Livestock, Land Use, Livelihoods and Food Security, Proceedings of the National Academy of Sciences http://www.pnas.org/content/early/2012/09/26/1108772109
- Diffenbaugh, N.S., T. W. Hertel, M. Scherer, and M. Verma (2012). Implications of Climate Volatility for Agricultural Commodity Markets under Alternative Energy Futures, Nature Climate Change April 22, DOI: 10.1038/NCLIMATE1491.
- Hertel, T. W., Walmsley, T.L. and K. Itakura (2012). Dynamic Effects of the New-Age Free Trade Agreement between Japan and Singapore, Chapter 9 in Dynamic Modeling and Applications for Global Economic Analysis, edited by Elena Ianchovichina and Terrie Walmsley, New York: Cambridge University Press.
- Golub, A. and T.W. Hertel (2012). Global Economic Integration and Land Use Change, Chapter 11 in Dynamic Modeling and Applications for Global Economic Analysis, edited by Elena Ianchovichina and Terrie Walmsley, New York: Cambridge University Press.
- Avetisyan, M., A. Golub, T.W Hertel, S. Rose and B. Henderson (2011). Why a global carbon policy could have a dramatic impact on the pattern of worldwide livestock production, Applied Economics Perspectives and Policy doi:10.1093/aepp/ppr026.
- Hertel, T. W. (2012). Global Applied General Equilibrium Analysis using the GTAP Framework, in The Handbook of Computable General Equilibrium Modeling, edited by Peter Dixon and Dale Jorgenson, part of the Handbook of Economics Series from Elsevier Publishers.
- Walmsley, T.L., T.W. Hertel and E. I. Ianchovichina (2012). Assessing the Impact of Chinas WTO Accession on Investment, Chapter 8 in Dynamic Modeling and Applications for Global Economic Analysis, edited by Elena Ianchovichina and Terrie Walmsley, New York: Cambridge University Press.
- Itakura, K., T.W. Hertel and J. Reimer (2012). The Contribution of Productivity Linkages to the General Equilibrium Analysis of Free Trade Agreements, Chapter 12 in Dynamic Modeling and Applications for Global Economic Analysis, edited by Elena Ianchovichina and Terrie Walmsley, New York: Cambridge University Press.
- Hertel, T.W., 2011. Alan Deardorffs Contributions to Computational Analysis of International Trade, in Comparative Advantage, Economic Growth, and the Gains from Trade and Globalization: A Festschrift in Honor of Alan V. Deardorff, edited by Robert Stern, University of Michigan Press.
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Progress 10/01/10 to 09/30/11
Outputs
OUTPUTS: Energy has always played an important role in agricultural production inputs; however, the combination of recent high energy prices with policies aimed at promoting energy security and renewable fuel use have stimulated the use of crop feedstocks in biofuel production. With a mandate to further increase biofuel production in the United States, it is clear that the relationship among agricultural and energy commodities may grow even stronger.Results from this work indicate that the era of rapid biofuel production strengthened the transmission of energy price volatility into agricultural commodity price variation. The additional mandated production has the potential to further strengthen this transmission. However, the outcome will depend critically on the policy regime in which ethanol markets find themselves. The presence of a Renewable Fuels Standard can hinder the ethanol sectors ability to react to low oil prices, thereby destabilizing commodity markets. The presence of a liquid fuels blend wall causes a similar disconnection in the transmission of energy prices to agriculture, albeit at high oil prices and, therefore, also serves to increase commodity price volatility. Hertel and Beckman (2011) find that, when the blend wall is expanded to the point where the RFS is just binding, U.S. coarse grains price volatility in response to corn supply shocks is 57 percent higher than in the nonbinding case, and world price volatility is boosted by 25 percent. The analysis of indirect land use change owing to biofuels programs in the United States and Europe has become an important policy issue. Large-scale economic models have been used for this task; however, such models have resulted in widely differing predictions of where the land-use changes will occur, partly because of differences in the treatment of the interaction between bilateral trade and supply behavior. Villoria and Hertel investigate the validity of the two major competing views of global agricultural trade and find that the geographic (product differentiation) approach is more consistent with historical data. This has important implications for the global distribution of land area response following a shock to the U.S. corn market (e.g., through increased biofuels demand). The strongest response in coarse grains production is in suppliers competing with the US in third markets. Since these countries are more productive than the world average, there is a larger production response and smaller land use change/emissions impacts than under the Integrated World Markets approach commonly used in many analyses of indirect land use change. PARTICIPANTS: There are 27 national and international GTAP sponsor organizations. These include nearly all of the leading institutions around the world undertaking quantitative research on global trade and environmental issues. For example, in the US, these include: EPA, DOE, US-ITC and USDA. International institutions include: World Bank, OECD, WTO, several UN organizations, etc. Each year, we organize an annual conference. In 2011, this was hosted by the University of Venice, in Italy. There were 250 participants from all around the world. We also held two short courses - one at Purdue University, and one in Addis Ababa, Ethiopia, each with 24 participants from a range of national and international agencies as well as universities from Europe, Africa, Asia and the Americas. TARGET AUDIENCES: Energy and climate change policy analysts PROJECT MODIFICATIONS: Not relevant to this project.
Impacts
The Department of Agricultural Economics at Purdue University is home to the Global Trade Analysis Project (GTAP) which comprises 10,000 researchers in 150 countries. Until recently, GTAP was largely focused on analysis of global trade policies. However, recently more emphasis has been placed on the analysis of global environmental policies - particularly climate change. Through a combination of modeling and data base developments, focusing on land use and Greenhouse Gas Emissions, the GTAP framework is now also becoming the most widely used tool for economic analysis of global climate policies. It is also being regularly used by the California Air Resources Board and the US-EPA for environmental regulatory analysis of biofuels.
Publications
- Beckman, J., T.W. Hertel, and W.E. Tyner (2011). Validating Energy-Oriented CGE Models, Energy Economics 33:799-806.
- Ahmed, S.A., T.W. Hertel, and T.L. Walmsley (2011) Outsourcing and the US Labour Market, World Economy 34(2):173-329.
- Hertel, T., W. (2011) The Global Supply and Demand for Land in 2050: A Perfect Storm, American Journal of Agricultural Economics 93(2):259-275.
- Taheripour, F., T.W. Hertel and W.E. Tyner (2011). Implications of the Biofuels Boom for the Global Livestock Industry: A Computable General Equilibrium Analysis. Agricultural Economics
- Hertel, T.W., 2011. Alan Deardorffs Contributions to Computational Analysis of International Trade, in Comparative Advantage, Economic Growth, and the Gains from Trade and Globalization: A Festschrift in Honor of Alan V. Deardorff, edited by Robert Stern, University of Michigan Press.
- Hertel, T. W. and J. Beckman, (2011). Commodity Price Volatility in the Biofuel Era: An Examination of the Linkage Between Energy and Agricultural Markets, Chapter 6 in The Intended and Unintended Effects of U.S. Agricultural and Biotechnology Policies, edited by Joshua Graff Zivin and Jeffrey Perloff, NBER and University of Chicago Press, pp. 189-221.
- Beckman, J., T. W. Hertel, F. Taheripour and W.E. Tyner (2011). Structural Change in the Biofuels Era, European Review of Agricultural Economics.
- O'Hare, M., D. Kammen, D. Laborde, L. Marelli, D. Mulligan, R. Plevin and W. Tyner (2011). Comment on Indirect land use change for biofuels: Testing predictions and improving analytical methodologies by Kim and Dale: statistical reliability and the definition of the indirect land use change (iLUC) issue, Biomass and Bioenergy.
- Verma, M., T.W Hertel and Paul V. Preckel (2011). Predicting Within Country Household Food Expenditure Variation using International Cross-Section Estimates, Economics Letters 113:218-220.
- Verma, M., T.W Hertel and E. Valenzuela (2011). Are the Poverty Impacts of Trade Reforms Invisible, World Bank Economic Review.
- Hertel, T., W. (2011) The Distributional Impacts of Climate Policy: Discussion, B.E. Journal of Eocnomic Analysis and Policy.
- Villoria, N. and T.W. Hertel (2011). Geography Matters: International Trade Patterns and the Indirect Land Use Effects of Biofuels, American Journal of Agricultural Economics 93(4):919-935.
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Progress 10/01/09 to 09/30/10
Outputs
OUTPUTS: Allowing developing countries to increase import tariffs based on price and supply triggers under proposed World Trade Organization rules would actually harm those countries. A major factor in the breakdown of the Doha Development Agenda, which aimed to set new rules for agricultural trade under the WTO, was disagreement over whether a special safeguard mechanism (SSM) should be included to allow developing countries to increase tariffs if imports surged or world prices dropped past certain trigger points. Developing countries lobbied for those safeguards believing the measures would protect their producers from cheap commodities flooding their markets. But our research shows that those safeguards actually would increase price volatility with developing countries faring the worst. Rather than stabilizing domestic producers' incomes, it could destabilize them. It would also raise food prices faced by the poor. In general, this just isn't achieving the things the developing countries are trying to achieve. This work has been published in the World Bank Economic Review. It has also been highlighted in Purdue University news releases and picked up by various newspapers. Understanding the link between climate change and poverty is vital for policy formulation. Agriculture is the primary means by which the impacts of climate change are transmitted to the poor because of the predominance of rural poverty; the importance of food in poor households' expenditures; and the linkage between climate, farm production, and wages. Simultaneously, agriculture is at the forefront of climate change mitigation efforts in developing countries. The poverty impacts of climate change will be heterogeneous. Poverty levels could fall in areas where (i) farming is only moderately affected by climate change, (ii) poverty is concentrated in agricultural areas, and (iii) adverse climate shocks boost the demand for unskilled labor. However, any such gains are likely to be countered by climate impacts on publicly accessible forests and wildlife resources upon which the poor are also heavily dependent. And, the authors suggest that it is possible that the poverty impacts of programs to mitigate or adapt to climate change could have a greater effect on the poor in some developing countries than the climate change impacts themselves. This work has been published in Applied Economics Perspectives and Policies. It has also been featured in the World Bank's Research Digest, and it will be published in the widely read, on-line journal: VoxEU. PARTICIPANTS: There are 28 national and international GTAP sponsor organizations. These include nearly all of the leading institutions around the world undertaking quantitative research on global trade and environmental issues. For example, in the US, these include: EPA, DOE, US-ITC and USDA. International institutions include: World Bank, OECD, WTO, several UN organizations, etc. Each year, we organize an annual conference. In 2010, this was hosted by the United Nations Economic Commission for Asia and the Pacific, in Penang, Malaysia. There were 200 participants from all around the world. We also held two short courses at Purdue University, with 50 participants from 20 different countries. TARGET AUDIENCES: Not relevant to this project. PROJECT MODIFICATIONS: Nothing significant to report during this reporting period.
Impacts
The Department of Agricultural Economics at Purdue University is home to the Global Trade Analysis Project (GTAP) which comprises 8,000 researchers in 150 countries. Until recently, GTAP was largely focused on analysis of global trade policies. However, recently more emphasis has been placed on the analysis of global environmental policies - particularly climate change. Through a combination of modeling and data base developments, focusing on land use and Greenhouse Gas Emissions, the GTAP framework is now also becoming the most widely used tool for economic analysis of global climate policies.
Publications
- Hertel, T., W. and S. Rosch (2010) Climate Change, Agriculture and Poverty, Applied Economic Perspectives and Policy 32(3): 355-385-31: doi: 10.1093/aepp/ppq016.
- Hertel, T., W., M. B. Burke and D. B. Lobell (2010) The Poverty Implications of Climate-Induced Crop Yield Changes by 2030, Global Environmental Change doi:10.1016/j.gloenvcha.2010.07.001.
- Hertel, T., W. Martin and A. Leister (2010) Potential Implications of the Special Safeguard Mechanism (SSM): The Case of Wheat, World Bank Economic Review doi: 10.1093/wber/lhq010.
- Narayan, B.G., T.W. Hertel, and J.M. Horridge (2010) Disaggregated Data and Trade Policy Analysis: The Value of Linking Partial and General Equilibrium Models Economic Modelling, Economic Modelling 27:755-766.
- Hertel, T., A. Golub, A. Jones, M. OHare, R. Plevin and D. Kammen (2010) Global Land Use and Greenhouse Gas Emissions Impacts of US Maize Ethanol: Estimating Market-Mediated Responses, BioScience 60(3):223-231.
- Preckel, P.V., J.A.L. Cranfield and T. W. Hertel, (2010). A Modified, Implicit Directly Additive Demand System, Applied Economics, 42(2):143-155.
- Reimer, J.J. and T.W. Hertel, 2010. Non-Homothetic Demands and the Factor Content of Trade, The Review of International Economics 18(2):408-425.
- Taheripour, F., T.W. Hertel and W.E. Tyner, (2010). Biofuels and their Byproducts, Biomass and Bioenergy, 34: 278-289 http://dx.doi.org/10.1016/j.biombioe.2009.10.017.
- Hertel, T.W., W.E. Tyner and D.K. Birur, (2010). Global Impacts of Biofuels, Energy Journal, 31(1):75-100.
- Britz, W. and T. W. Hertel, (2009). Impacts of EU Biofuels Directives on Global Markets and EU Environmental Quality: An integrated PE, Global CGE analysis, Agriculture, Ecosystems and the Environment, doi:10.1016/j.agee.2009.11.003
- Hertel, T. W., R. Keeney, M. Ivanic, and L. A. Winters, 2009. Why isnt the Doha Development Agenda more Poverty Friendly, Review of Development Economics 13(4):543-559.
- Golub, A., Hertel, T. W., H. Lee, S. Rose and B. Sohngen, (2009). The Opportunity Cost of Land Use and the Global Potential for Greenhouse Gas Mitigation in Agriculture and Forestry, Resource and Energy Economics, 31(4):299-319.
- Golub, A., T. W. Hertel, F. Taheripour and W. E. Tyner (2010). Modeling Biofuels in General Equilibrium, Chapter 6 (pp. 153-187) in J. Gilbert (ed.), Frontiers of Economics and Globalization Vol. 7, Emerald Publishing.
- Strutt, A., T. W. Hertel and S. Stone (2010). Exploring Poverty Impacts of ASEAN Trade Liberalization for Cambodia, Lao PDR, Thailand and Vietnam, Chapter 8 (pp. 217-245) in J. Gilbert (ed.), Frontiers of Economics and Globalization Vol. 7, Emerald Publishing.
- Hertel, T. W. and R. Keeney (2010). Poverty Impacts in 15 Countries: The GTAP Model, Chapter 4 (pp. 119-144) in K. Anderson, J. Cockburn and W. Martin (eds), Agricultural Price Distortions, Inequality and Poverty, Washington, DC: The World Bank.
- Zhai, F. and T. W. Hertel (2010). China, Chapter 5 (pp. 147-178) in K. Anderson, J. Cockburn and W. Martin (eds), Agricultural Price Distortions, Inequality and Poverty, Washington, DC: The World Bank.
- Hertel, T. W. and T. Mirza (2009). The Role of Trade Facilitation in South Asian Economic Integration, Chapter 2 (pp. 12-39): The Asian Development Bank Study on Intraregional Trade and Investment in South Asia, Manila: The Asian Development Bank.
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Progress 10/01/08 to 09/30/09
Outputs
OUTPUTS: Extreme climate events could influence poverty by affecting agricultural productivity and raising prices of staple foods that are important to poor households in developing countries. With the frequency and intensity of extreme climate events predicted to change in the future, informed policy design and analysis requires an understanding of which countries and groups are going to be most vulnerable to increasing poverty. Using a novel economic-climate analysis framework, we assess the poverty impacts of climate volatility for seven socio-economic groups in 16 developing countries. We find that extremes under present climate volatility increase poverty across our developing country sample - particularly in Bangladesh, Mexico, Indonesia, and Africa - with urban wage-earners the most vulnerable group. We also find that global warming exacerbates poverty vulnerability in many nations. We analyze the origins of the recent bio-fuel boom, using the historical period 2001-2006. We find that, in the US, the rising oil price was the most important contributor to the biofuel boom in that country, followed by the MTBE additive ban. In the EU, fuel tax exemptions were the most important factor in driving biofuel growth, followed by oil prices. Our prospective analysis of the impacts of the biofuels boom on commodity markets focused on the 2006-2015 time period, during which existing investments and new mandates in the US and EU are expected to substantially increase the share of agricultural products (e.g., corn in the US, oilseeds in the EU, and sugar in Brazil) utilized by the biofuels sector. In the US, this share could more than double from 2006 levels, while the share of oilseeds going to biodiesel in the EU could triple. With the recent adoption by the California Air Resources Board of California's Low Carbon Fuel Standard, and USEPA's Energy Independence and Security Act, greenhouse gas releases from indirect land use change triggered by crop-based biofuels have taken center stage in the debate over the role of biofuels in climate policy and energy security. This paper presents an analysis of these releases for US maize ethanol. Our analysis highlights the key role of market-mediated responses to biofuels mandates. Factoring these into our analysis reduces cropland conversion by 72%. As a consequence the associated GHG release estimated in our framework is just 800 g CO2 y per MJ (27 g per MJ for 30 years of ethanol production). Our central estimate is roughly a quarter of the only other published estimate of the indirect land use value; however this is still large enough to eliminate the global warming mitigation benefits of most corn ethanol. We conclude by noting there are a number of significant uncertainties remaining that warrant further study. PARTICIPANTS: There are 27 national and international GTAP sponsors. These include nearly all of the leading institutions around the world undertaking quantitative research on global trade and environmental issues. For example, in the US, these include: EPA, DOE, US-ITC and USDA. International institutions include: World Bank, OECD, WTO, several UN organizations, etc. Each year, we organize an annual conference. In 2009, this was hosted by the United Nations Economic Commission on Latin America and the Caribbean in Santiago, Chile. There were 230 participants from all around the world. We also held a short courses at the United Nations offices in Bangkok, Thailand. TARGET AUDIENCES: Not relevant to this project. PROJECT MODIFICATIONS: Not relevant to this project.
Impacts
The Department of Agricultural Economics at Purdue University is home to the Global Trade Analysis Project (GTAP) which comprises 8,000 researchers in 150 countries. Until recently, GTAP was largely focused on analysis of global trade policies. However, recently more emphasis has been placed on the analysis of global environmental policies - particularly climate change. Through a combination of modeling and data base developments, focusing on land use and Greenhouse Gas Emissions, the GTAP framework is now also becoming the most widely used tool for economic analysis of global climate policies. The debate over biofuels and their potential impacts on Greenhouse Gas emissions has been particularly intense over the past year. The most controversial element has been the impact of biofuels on global land use. Through research undertaken at Purdue, the GTAP framework has become the preferred tool for analysis of these global land use impacts. Professor Hertel has been provided input for the US Environmental Protection Agency and the California Air Resources Board (CARB), both of which have been focused on setting standards for biofuels to qualify as a renewable, low-carbon alternative to petroleum. In April of 2009, CARB formally approved the use of Professor Hertel's to determine emissions associated with global land use change under the California Low Carbon Fuel Standard.
Publications
- Lee, H.L., T. W. Hertel, S. Rose and M. Avetsiyan (2009). An Integrated Land Use Data Base for CGE Analysis of Climate Policy Options, Chapter 4 in: Economic Analysis of Land Use in Global Climate Change Policy, edited by, T.W. Hertel, S. Rose and R. Tol, UK: Routledge Press.
- Grant, J., T. W. Hertel and T. F. Rutherford (2009). Dairy Tariff-Quota Liberalization: Contrasting Bilateral and Most Favored Nation Reform Options , American Journal of Agricultural Economics 91(3):673-684.
- Keeney, R. and T.W. Hertel (2009). The Indirect Land Use Impacts of United States Biofuel Policies: The Importance of Acreage, Yield, and Bilateral Trade Responses , American Journal of Agricultural Economics 91(4):895-909.
- Hertel, T. W., S. Rose and R. Tol (eds.) (2009). Economic Analysis of Land Use in Global Climate Change Policy. Abingdon: Routledge.
- Birur, D.K., T.W. Hertel, and W.E. Tyner (2009). The Biofuels Boom: Implications for World Food Markets , Chapter 4 in: The Food Economy: Global Issues and Challenges, edited by Frank Bunte and Hans Dagevos, Paris: OECD.
- Hertel, T. W., C. E. Ludena and A. Golub (2009). Economic Growth, Technological Change and Patterns of Food and Agricultural Trade in Asia , Chapter 6 (pp. 175-210) in: From Growth to Convergence: Asias Next Two Decades, edited by Fan Zhai, UK: Palgrave MacMillan.
- Hertel, T. W., S. Rose and R. Tol (2009). Land Use in Computable General Equilibrium Models: An Overview , Chapter 1 in: Economic Analysis of Land Use in Global Climate Change Policy, edited by, T.W. Hertel, S. Rose and R. Tol, UK: Routledge Press.
- Monfreda, C., N. Ramankutty, and T. W. Hertel, (2009). Global Agricultural Land Use Data for Climate Change Analysis, Chapter 2 in: Economic Analysis of Land Use in Global Climate Change Policy, edited by, T.W. Hertel, S. Rose and R. Tol, UK: Routledge Press.
- Ahmed, A., N. Diffenbaugh and T. Hertel, (2009) Climate Volatility Deepens Poverty Vulnerability in Developing Countries , Environmental Research Letters (4) doi:10.1088/1748-9326/4/3/034004.
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Progress 10/01/07 to 09/30/08
Outputs
OUTPUTS: The recent rise in world oil prices, coupled with heightened interest in the abatement of greenhouse gas emissions, led to a sharp increase in biofuels production around the world. There are also strong interactions among these programs, as they compete in world markets for feedstocks and ultimately for a limited supply of global land. In this paper, we offer the first global assessment of these multinational biofuel programs - focusing particularly on the EU and US. We find that, if these mandates are indeed fulfilled, the impact on global land use would be substantial, with potentially significant implications for greenhouse gas emissions. In the debate over global land use impacts of biofuels, one of the most controversial elements has to do with the role of crop yield growth as a means of avoiding significant cropland conversion in the face of biofuels growth. We examine the agricultural land use impacts of mandate-driven ethanol demand increases in the United States in a formal economic equilibrium framework which allows us to evaluate the importance of yield-price relationships. We find that the standard assumption of trend yield growth is unduly restrictive. Furthermore, we identify both the acreage response and bilateral trade specifications as critical modeling considerations for predicting global land use change. Over the longer run, other forces will play an important role in determining the pattern of global land use. We analyze the competition for land amongst alternative agricultural activities as well as forestry. We isolate the impact on land markets of the following elements of growth and globalization: (i) population growth, (ii) real income growth, (iii) access of new forest lands, and (iv) international trade. We find that international trade plays a very substantial role in mediating between the land-abundant, slower growing economies of the Americas and Australia/New Zealand, and the land-scarce, rapidly growing economies of Asia. Beyond these current drivers of land use change, the prospect of serious action on climate policy offers yet another potential policy-driven demand for land around the world. Land-based activities are responsible for over a third of global greenhouse gas emissions, yet the economics of land-use decisions have not been explicitly modeled in global mitigation studies. In our analysis of carbon taxation, we find significant changes in the global pattern of comparative advantage as a result of differential mitigation costs across sectors, regions, and land types. We find that forest carbon sequestration is the dominant strategy for GHG emissions mitigation globally in the land using sectors. However, when compared to the rest of the world, land-use emissions abatement in the US and China comes disproportionately from agriculture, and, within agriculture, disproportionately from reductions in fertilizer-related emissions. In the world as a whole, agriculture-related mitigation comes predominantly from reduced methane emissions in the ruminant livestock sector, followed by fertilizer and methane emissions from paddy rice. PARTICIPANTS: There are 26 national and international GTAP sponsors. These include nearly all of the institutions around the world undertaking quantitative research on global trade and environmental issues. For example, in the US, these include: EPA, DOE, US-ITC and USDA. International institutions include: World Bank, OECD, WTO, several UN organizations, etc. Each year, we organize an annual conference. In 2008, this was hosted by the Government of Finland and the UN in Helsinki. There were 250 participants from all around the world. We also held two short courses at Purdue University where we trained 50 economists from Asia, Africa, North America and Europe. TARGET AUDIENCES: International trade analysts and policy makers PROJECT MODIFICATIONS: Nothing significant to report during this reporting period.
Impacts
The Department of Agricultural Economics at Purdue University is home to the Global Trade Analysis Project (GTAP) which comprises 6,500 researchers in 140 countries. Until recently, GTAP was largely focused on analysis of global trade policies. However, recently more emphasis has been placed on the analysis of global environmental policies - particularly climate change. Through a combination of modeling and data base developments undertaken over the past five years, the GTAP framework is now also becoming the most widely used tool for economic analysis of global climate policies. The debate over biofuels and their potential impacts on Greenhouse Gas emissions has been particularly intense over the past year. The most controversial element has been the impact of biofuels on global land use. Through research undertaken at Purdue, the GTAP framework has become the preferred tool for analysis of these global land use impacts. Professor Hertel has been providing input for the US Environmental Protection Agency and the California Air Resources Board, both of which have been focused on setting standards for biofuels to qualify as a renewable, low-carbon alternative to petroleum. As such our research is feeding directly into the national decision making process. In addition, GTAP-based research, undertaken by collaborators in The Netherlands, is proving influential in Europe as well.
Publications
- Golub, A., and T. W. Hertel. (2008). Global Economic Integration and Land Use Change, Journal of Economic Integration 23(3):463-488.
- Valenzuela, E., K. Anderson and T. W. Hertel. (2007). Impacts of Trade Reform: Sensitivity of Model Results to Key Assumptions. International Economics and Economic Policy 4:395-420.
- Ramankutty, N., T. W. Hertel and H. Lee. (2007). Global Agricultural Land Use Data for Integrated Assessment Modeling, chapter 21 in: Human-Induced Climate Change, edited by Michael Schlesinger, Cambridge University Press, U.K.
- Grant, J. T. W. Hertel and T. F. Rutherford. (2007). Tariff Line Analysis of US and International Dairy Protection, in: Keijiro Otsuka and Kaliappa Kalirajan (eds.), Contributions of Agricultural Economics to Critical Policy Issues. Malden, MA: Blackwell, pp. 271-280 , also published in Agricultural Economics, 37(s1): 271-280.
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Progress 10/01/06 to 09/30/07
Outputs
OUTPUTS: Hertel, T.W. "The Biofuels Boom: Implications for World Food Markets", based on a joint paper with D. Birur and W.E. Tyner, presented to a joint OECD/Netherlands Food Economy Conference, The Hague, October 18, 2007. Hertel, T.W. "Distributional Effects of WTO Agricultural Reforms in Rich and Poor Countries", based on a joint paper with R. Keeney, M. Ivanic and L. A. Winters, presented to the United Nations Economic Commission on Latin America, Santiago, Chile, January 19, 2007. Hertel, T.W. "Asian Agricultural Production and Trade: Prospects for 2025", based on a joint paper with A. Golub and C. Ludena, presented at the conference on Shaping the Future: Prospects for Asia's Long Term Development over the Next Two Decades, Asian Development Bank, Bangkok, Thailand, December 11, 2006. Hertel, T.W. "The Role of Firms in International Trade: Implications for CGE Analysis", presentation at a RIETI workshop, Tokyo, Japan, December 15, 2006. Hertel, T.W. "Analyzing the Long Run
Supply and Demand for Land", based on a joint paper with A. Golub and B. Sohngen, presented to the Energy Modeling Forum Annual Meetings on Climate Change Policy, Tsukuba, Japan, December 14. Hertel, T.W., H. Lee, S. Rose and B. Sohngen, "The Role of Global Land Use in Determining Green House Gas Mitigation Costs", presented to the Energy Modeling Forum Annual Meetings on Climate Change Policy, Tsukuba, Japan, December 14. Hertel, T.W. "The Role of Firms in International Trade: Discussion", Theme Day of the International Agricultural Trade Research Consortium, St. Petersburg, Florida, December 3, 2006. Hertel, T. W., based on a paper with J.H. Grant and T.F. Rutherford. "Disaggregated Analysis of US Dairy Liberalization: Options for Reforming Tariff Rate Quotas", presented to the annual meetings of the International Agricultural Trade Research Consortium, St. Petersburg, Florida, December 4, 2006. Hertel, T.W. "Distributional Effects of WTO Agricultural Reforms in Rich and Poor
Countries", based on a joint paper with Roman Keeney, Maros Ivanic and L. Alan Winters, presented to the 44th Economic Policy Panel, Helsinki, Finland, October 21, 2006. Hertel, T.W. "Distributional Effects of WTO Agricultural Reforms in Rich and Poor Countries", based on a joint paper with Roman Keeney, Maros Ivanic and L. Alan Winters, presented to the IFPRI Policy Seminar, Washington, DC, November 2, 2006. Hertel, T. W., based on a paper with J.H. Grant and T.F. Rutherford. "Disaggregated Analysis of US Dairy Liberalization: Options for Reforming Tariff Rate Quotas", presented to ERS/USDA, Washington, DC, November 3, 2006.
PARTICIPANTS: I organized the Tenth Annual Conference on Global Economic Analysis, held on the Purdue campus in June 2007. This gathered more than 200 economists and policy makers from around the world for detailed discussions and the presentation of research on global trade and environmental policy issues. I also participated in a short course aimed at training professional economists from around the world.
TARGET AUDIENCES: Policy makers and economists in national and international institutions, as well as private sector individuals, focusing on economic policies in the area of international trade and the environment.
PROJECT MODIFICATIONS: The work on the trade impacts of biofuels mandates is new and responds to increasing interest on the part of the general public and policy makers. This has also led to an increasing emphasis on the analysis of land use.
Impacts
Research on the distributional impacts of trade reform highlighted the potential for an improved WTO outcome if agricultural protection were simultaneously reduced in BOTH the rich and poor countries. Research on the impact of biofuels mandates for 2010 on world food markets highlighted the very significant impacts on agricultural trade.
Publications
- Ludena, C.E., T.W. Hertel, P.V. Preckel, K. Foster and A. Nin, 2007. Productivity Growth and Convergence in Crop, Ruminant and Non-Ruminant Production: Measurement and Forecasts, Agricultural Economics 37:1-17. Hertel, T.W., R. Keeney, M. Ivanic and L.A. Winters, 2007. Distributional Impacts of WTO Reforms in Rich and Poor Countries, Economic Policy 50(1):1-49 (April).
- Elbehri, A. and T.W. Hertel, 2006. A Comparative Analysis of the EU-Morocco FTA vs. Multilateral Trade Liberalization, Journal of Economic Integration 21(3): 496-525.
- Ramankutty, N., T. W. Hertel and H. Lee. 2007. Global Agricultural Land Use Data for Integrated Assessment Modeling, chapter 21 in: Human-Induced Climate Change, edited by Michael Schlesinger, Cambridge University Press, U.K.
- Dimaranan, Betina, Thomas Hertel, and Will Martin, 2006. Potential Gains from Post-UR Trade Reform: Impacts on Developing Countries, chapter 6 in Reforming Agricultural Trade for Developing Countries (Vol. 2), edited by Alex F. McCalla and John Nash, Washington, D.C.: The World Bank.
- Hertel, T. W. and R. Keeney. 2006. Assessing the Impact of WTO Reforms on World Agricultural Markets: A New Approach, chapter 16 in: Agricultural Commodity Markets and Trade: New Approaches to Analyzing Market Structure and Instability, edited by Alexander Sarris and David Hallam, Edward Elgar Publishing, U.K.
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Progress 10/01/05 to 09/30/06
Outputs
The prospect of a global trade agreement under the auspices of the Doha Development Agenda (DDA) has generated widespread interest in its likely poverty impacts. Many developing countries have high expectations for poverty reduction following the proposed elimination of subsidies for farm production as well as cuts in merchandise tariffs in the industrialized countries. However, studies to date of this issue have been either highly aggregated, global evaluations, or country-specific case studies. This research aims to address the vast gap between these two groups by reporting on a cross-country evaluation of the poverty impacts of a prospective DDA. To accomplish this, we draw on a previously published methodology which links results from a global trade model with a country-specific micro-simulation framework built upon household survey data in each of the fifteen countries in our sample. We find that the prospective DDA tends to consistently raise poverty, albeit
very slightly, in this sample of countries, as the impact of higher food prices on the cost of living for the poor is not offset by the rise in their factor earnings. We then turn to the reforms not undertaken in this DDA scenario and consider what steps could make this prospective agreement more poverty friendly for this particular sample of countries. Overall, we find that reductions in agricultural subsidies are likely to increase poverty across most of the developing countries in our sample because of their impact on food prices for the poor. On the other hand, tariff reductions in developing countries, taken as a group, tend to enhance the poverty outcome in our sample of countries. Because the prospective Doha reform includes relatively small tariff cuts among developing countries, we conclude that deepening these commitments to reform would make it more poverty friendly. Of course these poverty reductions will not occur in the absence of WTO reforms, and these are presently
stymied by an impasse between the EU and the USA on agricultural trade policies. Subject to widespread criticism, these policies nonetheless appear to be almost immune to serious reform, and one of their most common defenses is that they protect poor farmers. Our findings reject this claim. The analysis conducted under this project uses detailed data on farm incomes to show that major commodity programs are highly regressive in the USA, and that the only serious losses under trade reform are among large, wealthy, farmers in a few heavily protected subsectors, in particular: dairy, sugar, cotton, and rice. Compensation of these farmers is feasible, and, if appropriately targeted, would not be prohibitive in cost.
Impacts
Rich countries agricultural trade policies are the battleground on which the future of the WTOs troubled Doha Round will be determined. Subject to widespread criticism, they nonetheless appear to be almost immune to serious reform, and one of their most common defenses is that they protect poor farmers. Our findings reject this claim. The analysis conducted here uses detailed data on farm incomes to show that major commodity programs are highly regressive in the USA, and that the only serious losses under trade reform are among large, wealthy, farmers in a few heavily protected subsectors, of which we focus on dairy, sugar, cotton, and rice. Compensation of these farmers is feasible, and, if appropriately targeted, would not be prohibitive in cost. In contrast, analysis using household data from fifteen developing countries indicates that reforming rich countries agricultural trade policies would lift large numbers of developing country farm households out of poverty.
In the majority of cases these gains are not outweighed by the poverty-increasing effects of higher food prices among other households. Agricultural reforms that appear feasible, even under an ambitious Doha Round, achieve only a fraction of the benefits for developing countries that full liberalization promises, but protects US large farms from most of the rigors of adjustment. Finally, the analysis conducted here indicates that maximal trade-led poverty reductions occur when developing countries participate more fully in agricultural trade liberalization.
Publications
- Hertel, T.W. and F. Zhai, 2006. Labor Market Distortions, Rural-Urban Inequality and the Opening of Chinas Economy, Economic Modelling 23:76-109.
- Hertel, T.W. and J. J. Reimer, 2005. Predicting the Poverty Impacts of Trade Reform, Journal of International Trade and Economic Development 14(4):377-405.
- Hertel, Thomas W. and L. Alan Winters (editors), 2006. Poverty and the WTO: Impacts of the Doha Development Agenda, New York: Palgrave MacMillan.
- Hertel, T. W. and R. Keeney. 2006. Assessing the Impact of WTO Reforms on World Agricultural Markets: A New Approach, chapter 16 in: Agricultural Commodity Markets and Trade: New Approaches to Analyzing Market Structure and Instability, edited by Alexander Sarris and David Hallam, Edward Elgar Publishing, U.K.
- Hertel, T. W. and L. A. Winters, 2006. Poverty Impacts of WTO Agreement: Synthesis and Overview, Chapter 1 in T. W. Hertel and L.Alan Winters (eds.) Poverty Impacts of a WTO Agreement: Putting Development Back into the Doha Agenda, New York: Palgrave-MacMillan.
- Zhai, F. and T.W. Hertel, 2006. Impacts of the Doha Development Agenda on China: The Role of Complementary Education Reforms, Chapter 10 in T. W. Hertel and L.Alan Winters (eds.) Poverty Impacts of a WTO Agreement: Putting Development Back into the Doha Agenda, New York: Palgrave-MacMillan.
- Hertel, T.W., and R. Keeney, 2006. The Balance between Domestic Support, Market Access and Export Competition: Where do Developing Country Interests Lie?, Chapter 2 in K. Anderson and W. Martin (eds.) Agricultural Trade Reform and the Doha Development Agenda, New York: Palgrave-MacMillan.
- Elbehri, A. and T.W. Hertel, 2006. A Comparative Analysis of the EU-Morocco FTA vs. Multilateral Trade Liberalization, Journal of Economic Integration 21(3): 496-525.
- Hertel, T. W. and M. Ivanic, 2006. Making the Doha Development Agenda More Poverty-friendly: The Role of South-South Trade, Review of Agricultural Economics 28(3):354-361.
- Walmsley, T., T. W. Hertel, and E.I. Ianchovichina 2006. Assessing the Impact of Chinas WTO Accession on Investment, Pacific Economic Review 11(3):315-339.
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Progress 10/01/04 to 09/30/05
Outputs
This year, Dr. Hertel was on sabbatical at the World Bank, where he undertook a major international research project investigating the poverty impacts of a potential Doha Development Agenda to be concluded under the auspices of the World Trade Organization (WTO). This research combines, in a novel way, the results from several strands of research. Firstly, it draws on an intensive analysis of the DDA Framework Agreement, reached by WTO negotiators in July of 2004. Particularly close attention is paid to potential reforms in agriculture. The scenarios are built up using newly available tariff line data and their implications for world markets are established using a global modeling framework. These world trade impacts, in turn, form the basis for thirteen country case studies of the national poverty impacts of these DDA scenarios. The focus countries include: Bangladesh, Brazil (2 studies), Cameroon, China (2 studies), Indonesia, Mexico, Mozambique, Philippines,
Russia, Vietnam and Zambia. A few of the main findings follow: The liberalization targets under the DDA have to be quite ambitious if the round is to have a measurable impact on world markets and hence poverty. Assuming an ambitious DDA, including, among other things, a tiered formula for developed country agriculture, with marginal tariff cuts of 45, 70 and 75 percent, we find the near-term poverty impacts to be mixed; some countries experience small poverty rises and others more substantial poverty declines. On balance, poverty is reduced under this DDA, and this reduction is more pronounced in the longer run. Allowing minimal tariff cuts for just a small percentage of special and sensitive products reverses the results, with the ensuing DDA raising, rather than lowering, global poverty. Deeper cuts in developing country tariffs would make the DDA more poverty friendly. Key determinants of the national poverty impacts include: the incomplete transmission of world prices to rural
households, barriers to the mobility of workers between sectors of the economy, as well as the incidence of national tax instruments used to replace lost tariff revenue. In order to generate significant poverty reductions in the near term, complementary domestic reforms are required to enable households to take advantage of new market opportunities made available through the DDA. Sustained long term poverty reductions depend on stimulating economic growth. Here, the impact of the DDA (and trade policy more generally) on productivity is critical. In order to fully realize their growth potential, trade reforms need to be far reaching, addressing barriers to services trade and investment in addition to merchandise tariffs.
Impacts
Thomas Hertel and L. Alan Winters (Director of Research at the World Bank) have recently completed a major international research project investigating the poverty impacts of a potential Doha Development Agenda currently under negotiation at the World Trade Organization, in Geneva. These findings were presented to trade negotiators in Geneva twice during the spring of 2005, and Professor Hertel also met with the chairmen/chairwomen of key negotiating committees of the WTO. Important messages for the negotiators included the following: Allowing industrialized countries to exempt just two percent of their products from cuts under the so-called sensitive products proposal would largely eliminate the poverty reducing potential for such a WTO agreement. In addition, the Hertel emphasized the importance of market access negotiations for developing countries. Up to this point, they had been focusing most of their attention on domestic subsidies for agriculture in the
industrialized countries. This, however, was shown to have an adverse impact on developing countries as a group. As a consequence of these presentations and the associated publications, a number of countries have reconsidered their negotiating positions.
Publications
- Dimaranan, Betina, Thomas Hertel and Roman Keeney, 2004. OECD Domestic Support and the Developing Countries, in B. Kuha-Gasnobis (ed.) The WTO, Developing Countries and the Doha Development Agenda, New York: Palgrave-MacMillan.
- Hertel, Thomas W. and L. Alan Winters, 2005. Estimating the Poverty Impacts of a Prospective Doha Development Agenda, World Economy. August, 28(8):1057-1072.
- Hertel, T., J. Reimer, and E. Valenzuela. 2005. Incorporating Commodity Stockholding into a General Equilibrium Model of the Global Economy. Economic Modelling 22(4): 646-64.
- Reimer, J.J. and T.W. Hertel, 2004. Estimation of International Demand Behavior for Use with Input-Output Based Data, Economic Systems Research, 16(4):347-366.
- Liu, J., T.C. Arndt and T.W. Hertel, 2004. Parameter Estimation and Measures of Goodness of Fit in a Global General Equilibrium Model, Journal of Economic Integration, 19(3):626-649.
- Yu, Wusheng, T.W. Hertel, P.V. Preckel, and J.S. Eales, 2004. Projecting World Food Demand Using Alternative Demand Systems, Economic Modeling 21(1):99-129.
- Hertel, Thomas W., Maros Ivanic, Paul V. Preckel, and John Cranfield, 2004. The Earnings Effects of Multilateral Trade Liberalization: Implications for Poverty, World Bank Economic Review 18(2):205-236.
- Cranfield, J. A. L., P. V. Preckel, J. S. Eales, and T. W. Hertel 2004. Simultaneous Estimation of an Implicit Directly Additive Demand System and the Distribution of Expenditure: An Application of Maximum Entropy, Economic Modeling 21:361-385.
- Hertel, T.W., F. Zhai and W. Zhi, 2004. Implications of WTO Accession for Poverty in China, Chapter 15 in Bhattasali, D., Li, Shantong and Martin, W. eds, China and the WTO: Accession, Policy Reform, and Poverty Reduction Strategies, Oxford University Press.
- Hertel, T.W. and F. Zhai, 2004. Labor Market Distortions, Rural-Urban Inequality and the Opening of Chinas Economy, World Bank Policy Research Working Paper, WPS-3455, November.
- Hertel, T.W. and J. J. Reimer, 2004. Predicting the Poverty Impacts of Trade Reform, World Bank Policy Research Working Paper, WPS-3444, November.
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Progress 10/01/03 to 09/29/04
Outputs
We explore in considerable detail the mechanisms by which OECD agricultural reforms affect developing country welfare. The primary channel for such effects works through the terms of trade which in turn depend in part on whether a country is a net exporter or a net importer of the affected OECD products. Long term support for agricultural program commodities in OECD countries, coupled with relative taxation in many developing countries, has left the latter increasingly dependent on imports of these subsidized products. This has, in turn, made them more vulnerable to agricultural reforms that raise these prices. As a result, we find that an across-the-board, a 50% cut in all domestic support for OECD agriculture leads to welfare losses for most of the developing regions, as well as for the combined total group of developing countries. The 50% cut in domestic support also results in large declines in farm incomes in Europe, and, to a lesser degree, North America. This
makes such a reform package an unlikely political event. An alternative approach to reforming agricultural policies in the OECD would be to focus on broad-based reductions in market price support. This has already been occurring in the EU, in particular, where domestic support has increasingly replaced border measures. The basic economic principles of agricultural support policies suggest that a shift from market price support to land-based payments could generate a win-win outcome whereby farm incomes are maintained and world price distortions are reduced. This is the direction charted by the OECD in its recent Positive Reform Agenda for agriculture. We formally examine such an agricultural reform scenario, implementing a 50 percent cut in market price support for OECD agriculture, with a compensating set of land payments designed to maintain farm income in each of the member economies. This comprehensive reform scenario results in increased welfare for most developing countries,
with gains on other commodities offsetting the terms of trade losses from higher program crop prices. We conclude that developing countries will be well advised to focus their efforts on improved market access to the OECD economies, while permitting these wealthy economies to continue domestic support payments. Provided these increased domestic support payments are not linked to output or variable inputs, the trade-distorting effects are likely to be small, and they can be a rather effective way of offsetting the potential losses that would otherwise be sustained by OECD farmers. This type of policy re-instrumentation will increase the probability that such reforms will be deemed politically acceptable in the OECD member economies, while simultaneously increasing the likelihood that such reforms will also be beneficial to the developing economies.
Impacts
The GTAP data base and modeling framework, based at Purdue University, is currently in used by more than 2000 researchers in more than 100 countries (see: www.gtap.agecon.purdue.edu) GTAP-based results have recently been featured in major publications by the leading international organizations, including: FAO, IMF, World Bank and OECD. It is also heavily used by agencies of the US government, including the Economic Research Service of USDA, the International Trade Commission and the US Environmental Protection Agency.
Publications
- Liu, J., T.C. Arndt and T.W. Hertel, 2004. Parameter Estimation and Measures of Goodness of Fit in a Global General Equilibrium Model, Journal of Economic Integration.
- Hertel, Thomas W., Maros Ivanic, Paul V. Preckel, and John Cranfield, 2004. The Earnings Effects of Multilateral Trade Liberalization: Implications for Poverty, World Bank Economic Review.
- Cranfield, J. A. L., P. V. Preckel, J. S. Eales, and T. W. Hertel 2004. Simultaneous Estimation of an Implicit Directly Additive Demand System and the Distribution of Expenditure: An Application of Maximum Entropy, Economic Modelling 21:361-385.
- Dimaranan, Betina, Thomas Hertel and Roman Keeney, 2004. OECD Domestic Support and the Developing Countries, in Basudeb-Guha Khasnobis (ed.) The WTO, Developing Countries and the Doha Development Agenda, Palgrave.
- Hertel, T.W., F. Zhai and W. Zhi (2004). Implications of WTO Accession for Poverty in China, Chapter 15 in Bhattasali, D., Li, Shantong and Martin, W. eds (2004), China and the WTO: Accession, Policy Reform, and Poverty Reduction Strategies, Oxford University Press.
- Hertel, Thomas W., Kym Anderson, Joseph Francois, and Will Martin, 2004. The Global and Regional Effects of Liberalizing Agriculture and Other Trade in the New Round, Chapter 11 (pp. 221-244) in Agriculture and the New Trade Agenda: Creating a Global Trading Environment for Development, M. Ingco and A. Winters (eds.), Cambridge University Press.
- Elbehri, A., M. Ingco, T.W. Hertel, and K. Pearson, 2004. Liberalizing Tariff Rate Quotas: Quantifying the Effects of Enhancing Market Access, Chapter 10 (pp. 194-220) in Agriculture and the New Trade Agenda: Creating a Global Trading Environment for Development, M. Ingco and A. Winters (eds.), Cambridge University Press.
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Progress 10/01/02 to 09/30/03
Outputs
Specific Aims: This project aims to provide quantitative assessments of the implications of global trade liberalization on US agriculture, the US economy and the economies of major trading partners. It also helps to support such quantitative analysis around the world, through the widely used Global Trade Analysis Project (GTAP) modeling framework based at Purdue University and directed by the PI. Results and Conclusions: One of the important concerns surrounding the recent, failed WTO negotiations is the potential impact of such trade liberalization measures on the poor in developing countries.However, making the link between developed country policies and individual households in developing countries is no small task. Research conducted under this project has developed a methodology for combining national household survey data with results from international economic modeling to assess the linkages between multilateral trade policies and poverty. We find that the
impacts of trade liberalization vary considerably by country, as well as within countries. Also, the short run impacts are more diverse than those in the longer run, when labor and capital are able to move among sectors in search of the most favorable wage. In the long run, the key determinant of poverty changes is the change in unskilled wages that follows trade liberalization. If real wages, rise, then poverty tends to fall across all household strata.In the area of climate change policy, the US has chosen to opt out of the formal international agreement (Kyoto Protocol) due to the perceived high cost of implementation. However, most such cost estimates do not take account of the potential for multi-gas (i.e. nonCO2) mitigation as well as carbon sequestration options. Analysis with a prototype model involving the US and the EU shows that taking account of these other options may lower the cost of meeting the Kyoto targets by as much as 30 percent. The potential for carbon
sequestration through changes in land use also has a significant impact on land prices and hence on agricultural production and trade. We have developd a methodology to combine the GTAP data base with a global data base on land use by agroecological zone. This will greatly facilitate analysis of land use change and the consequences for the cost of climate change mitigation policies.
Impacts
The GTAP data base and modeling framework, based at Purdue University, is currently in used by more than 2000 researchers in more than 100 countries see (www.gtap.agecon.purdue.edu) GTAP-based results have recently been featured in major publications by the leading international organizations, including: FAO, IMF, World Bank and OECD. It is also heavily used by agencies of the US government, including the Economic Research Service of USDA, the International Trade Commission and the US Environmental Protection Agency.
Publications
- Cranfield, J.A.L., J.S. Eales, T.W. Hertel, and P.V. Preckel, 2003. Model Selection when Estimating and Predicting Consumer Demands using International, Cross Section Data, Empirical Economics 28(2)353-364.
- Hertel, Thomas W., Will Martin, and Bernard Hoekman, 2002. Developing Countries and a New Round of WTO Negotiations, World Bank Research Observer, (17)113-140.
- Hertel, Thomas W., Paul V. Preckel, John Cranfield and Maros Ivanic, 2003. OECD and non-OECD Trade Liberalization and Poverty Reduction in Seven Developing Countries, presented to the OECD Global Agricultural Forum and Agricultural Trade and Poverty, Paris, May 24, published in Agricultural Trade and Poverty, Paris, OECD, 2003.
- Hertel, Thomas W., 2002. Applied General Equilibrium Analysis of Agricultural and Resource Policies, Chapter 26 in Volume 2A of in B. Gardner and G. Rausser (eds) Handbook of Agricultural Economics, Amsterdam: North Holland.
- Hertel, T. W., B. Hoekman, and W. Martin (2002). Agricultural negotiations in the context of a broader round: a developing country perspective, Chapter 6 in Lynn Kennedy and Won Koo eds., Agricultural Trade Policy in the New Millennium, Haworth Press.
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Progress 10/01/01 to 09/30/02
Outputs
Specific Aims: This project aims to provide quantitative assessments of the implications of global trade liberalization on US agriculture, the US economy and the economies of major trading partners. It also helps to support such quantitative analysis around the world, through the widely used Global Trade Analysis Project (GTAP) modeling framework based at Purdue University and directed by the PI. Results and Conclusions: Poverty reduction is an increasingly important consideration in the deliberations over multilateral trade liberalization. However, studies of multi-country, global trade liberalization have had little to say about this. Research conducted under this project has developed a methodology for combining national household survey data with results from international economic modeling to assess the linkages between multilateral trade policies and poverty. We find that such liberalization reduces poverty in Indonesia, Philippines, Thailand, Uganda, and
Zambia, while it is increased in Brazil and Chile. The impact of individual countries' trade policies can also be individually examined. Agricultural trade policies in the OECD countries are found to be particularly important in affecting poverty in these countries. Their liberalization leads to a reduction in poverty among the agriculture-specialized households in all the focus economies. However, the impact on other poor households is mixed. In the area of climate change policy, the US has chosen to opt out of the formal international agreement (Kyoto Protocol) due to the perceived high cost of implementation. However, most such cost estimates do not take account of the potential for multi-gas (i.e. non-CO2) mitigation as well as carbon sequestration options. Analysis with a prototype model involving the US and the EU shows that taking account of these other options may lower the cost of meeting the Kyoto targets by as much as 30%. The potential for carbon sequestration through
changes in land use also has a significant impact on land prices and hence on agricultural production and trade. Future research will refine these estimates by drawing on improved data bases on land use by agro-ecological zone available from the FAO.
Impacts
The GTAP data base and modeling framework - based at Purdue University -- is currently in use by more than 1500 researchers in more than 90 countries (see http://www.gtap.agecon.purdue.edu). GTAP-based results have recently been featured in major publications by the leading international organizations, including: FAO, IMF, World Bank and OECD. It is also heavily used by agencies of the US government, including the Economic Research Service/USDA, the International Trade Commission and the US Environmental Protection Agency.
Publications
- Cranfield, J. A. L., P. V. Preckel, J. S. Eales, and T. W. Hertel 2002. "Estimating Consumer Demand Across the Development Spectrum: Maximum Likelihood Estimates of an Implicit Direct Additivity Model," Journal of Development Economics 68 (2002) 289-307.
- Anderson, K., B. Dimaranan, J. Francois, T. W. Hertel, Bernard Hoekman and Will Martin, 2001. "The Cost of Rich (and Poor) Country Protection to Developing Countries," Journal of African Economies, 10(3):227-257 .
- Hertel, T. W., T. Walmsley and K. Itakura, 2001. "Dynamic Effects of the New Age Free Trade Agreement between Japan and Singapore", Journal of Economic Integration, December, Vol. 16, No. 4, pp. 446-484.
- Hertel, T. W., P. V. Preckel, J. Cranfield and M. Ivanic, 2001. "Poverty Impacts of Multilateral Trade Liberalization", Plenary Paper presented to the annual meetings of the German Agricultural Economics Society (GeWiSola), Braunschweig, Germany, October 8, published in Liberalisierung des Weltagrarhandels - Strategien und Konsequenzen, M. Brockmeier, F. Isermeyer and S. von Cramon-Taubadel (eds.) Muenster: Landwirtshcaftsverlag.
- Hertel, T. W., 2001. "A Global Perspective on Regional Integration in North America," in R.M.A Lyons, K. Meilke, R.D. Knutson, A. Yunez-Naude, Trade Liberalization under NAFTA: Report Card on Agriculture: Friesen: Altona, Manitoba.
- Itakura, K. and T. W. Hertel (2002). "The Uruguay Round, Chinas Accession to the WTO and the Japanese Manufacturing Industry in East Asia: A Dynamic Analysis", chapter 1 in Daisuke Hiratsuka (ed.) Global Development of Gifus Manufacturing Industry in East Asia, Tokyo: Institute of Developing Economies.
- Martin, W., B. Dimaranan, T.W. Hertel and E. Ianchovichina (2002). "Trade Policy, Structural Change and Chinas Trade Growth", in N. Hope, D. T. Yang and M.Y. Li (eds.) How Far Across the River: Chinese Policy Reform at the Millennium, Stanford University Press.
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Progress 10/01/00 to 09/30/01
Outputs
Specific Aims: This project aims to provide quantitative assessments of the implications of global trade liberalization on US agriculture, the US economy and the economies of major trading partners. It also helps to support such quantitative analysis around the world, through the widely used Global Trade Analysis Project (GTAP) modeling framework based at Purdue University and directed by the PI. One of the big objections to further trade liberalization under the WTO is that this will cause an increase in poverty in developing countries. Therefore, a specific aim in the past year has been to assess the extent to which this assertion is true. Results and Conclusions: Poverty reduction is an increasingly important consideration in the deliberations over multilateral trade liberalization. However, the analytical procedures used to assess the impacts of multilateral trade liberalization on poverty are rudimentary, at best. Most poverty studies have focused on a single
country using detailed household survey data. When it comes to multi-country, global trade liberalization analyses, researchers are forced to resort to a discussion of average, or per capita effects. This severely limits their capacity to address the poverty question. This research combines results from a newly available international, cross-section consumption analysis, with earnings data from household surveys from seven countries, to analyze the implications of multilateral trade liberalization for poverty in several developing countries in Asia, Africa and Latin America. The multilateral trade liberalization scenario that we examine involves complete elimination of merchandise tariff barriers as well as textile and apparel quotas in place in 1997. This ignores the potential impact of other non-tariff barriers as well as the significant barriers to trade and investment in services and trade distorting domestic farm policies. While this liberalization scenario is accordingly
stylized, it does offer a useful benchmark for assessing the potential poverty impacts of multilateral measures. Of particular interest is our partitioning of the effects of countries own policies versus those of other countries on poverty. We measure poverty using the Foster-Greer-Thorbecke transfer measure that reports the total transfer required to lift all households out of poverty, as a proportion of the poverty level of income. We find that the aggregate measure of poverty is reduced in Indonesia, Philippines, Uganda, and Zambia, while it is increased in Brazil, Chile, and Thailand, following multilateral trade liberalization. The largest percentage reduction in poverty occurs among agriculture-specialized households in Brazil. Indonesia experiences the largest national reduction. The largest increases in poverty occur in the non-agriculture, self-employed and wage-labor households in Brazil, Chile, and Thailand. Plans for the Coming Year: In the coming year we will continue the
work on poverty and trade liberalization. We also plan to begin a major project in the area of agricultural emissions of Greenhouse Gases and the potential for mitigation.
Impacts
We find that the impact of multilateral trade liberalization, undertaken under the auspices of the WTO, on poverty in seven developing countries is mixed. An aggregate measure of poverty is reduced in Indonesia, Philippines, Uganda, and Zambia, while it is increased in Brazil, Chile, and Thailand, following multilateral trade liberalization. The largest percentage reduction in poverty occurs among agriculture-specialized households in Brazil. Indonesia experiences the largest national reduction. The largest increases in poverty occur in the non-agriculture, self-employed and wage-labor households in Brazil, Chile, and Thailand.
Publications
- Walmsley, T., Thomas W. Hertel, 2001. 'China's Accession to the WTO: Timing is Everything,' World Economy. Aug 2001, Vol 24, No 8. p1019-1049.
- Hertel, Thomas W. and Will Martin, 2001. 'Second-best Considerations in Multilateral Trade Liberalization,' Review of International Economics, May 9(2):215-232.
- Cranfield, J.A.L., P.V. Preckel, J.S. Eales and Thomas W. Hertel, 2000. 'On the Estimation of an Implicitly Additive Demand System,' Applied Economics , December, 32(15):1907-1915.
- Hertel, Thomas W., Alejandro Nin, Allan Rae and Simeon Ehui (2000) 'China: Future Customer or Competitor in Livestock Markets?' Choices , third quarter.
- Masters, W.A., R. Davies and T.W. Hertel, 2000. 'L'Europe, L'Afrique du Sud, et l'Afrique Australe: Integration Regionale dans un Contexte Mondial,' Revue d'Economie du Developpement 3/00: 113-134.
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Progress 10/01/99 to 09/30/00
Outputs
The ongoing trend towards livestock product consumption in many Asian countries has been accompanied by growth in some countries' imports of feed grains for their domestic livestock sectors. It has also has put pressure on available grain supplies for human consumption. With regard to China, this contributes to the ongoing debate over future levels of her grain and livestock imports. Yet published projections often pay too little attention to developments in livestock production. We project an 11.0 percent annual rate of growth in China's poultry productivity between 1995 and 2005 -- more than double the 4.9 percent annual rate of growth in pig productivity. The resulting growth in supplies will likely be offset by projected growth in meat demand, and China's net exports as a share of total meats trade will probably deteriorate, while feed grain imports will increase strongly. However, if livestock productivity growth is higher than expected, and if there is a
slow-down in the rest of the economy, China could become a fierce competitor in export markets for meat products in the coming decade. Assessment of potential gains under a future WTO Round of negotiations suggests that trade liberalization in manufactures accounts for three-quarters of the subsequent 20% increase in global trade. However, in terms of potential welfare gains, agricultural liberalization ranks higher, accounting for $164 billion of the estimated $349 billion in annual gains from full trade > liberalization in 2005. This is followed by manufactures liberalization which contributes $130 billion to the total gain, with the remainder due to liberalization in the business, finance and construction services sector. (Liberalization of other services sectors - most notably transport services - has not been explored.) We find that the majority of the gains from manufacturing tariff cuts accrue to developing countries. This stands in contrast with agriculture and services
liberalization where the majority of the absolute gains accrue predominately to high-income countries. The modalities of liberalization in a future WTO Round will be particularly important in the agricultural sector, particularly in light of the Tariff Rate Quotas (TRQs) that were installed to protect market access under the Uruguay Round Agreement on Agriculture. Unfortunately, these TRQs reduce transparency. They also have served to create (or in some cases preserve) substantial quota rents. The presence of these rents increases the risk that some countries will lose from further liberalization, particularly when liberalization takes the form of reductions in out-of-quota tariff rates. Fortunately, it appears that these risks can > be greatly diminished by policies that combine reductions in out-of-quota tariffs with increases in the volumes allowed under the quotas. The combination of these measures will also ensure a more rapid move towards free trade in agricultural products.
Impacts
We project an 11.0 percent annual rate of growth in China's poultry productivity between 1995 and 2005 -- more than double the 4.9 percent annual rate of growth in pig productivity. The resulting growth in supplies will likely be offset by projected growth in meat demand, and China's net exports as a share of total meats trade will probably deteriorate. However, if livestock productivity growth is higher than expected, and if there is a slow-down in the rest of the economy, China could become a fierce competitor in export markets in the coming decade.
Publications
- Hertel, Thomas W. 2000. "Potential Gains from Reducing Trade Barriers in Manufacturing, Services and Agriculture," Federal Reserve Bank of St. Louis Review, July/August 2000 (82):4, 77-99.
- Hertel, Thomas W., 2000. "GTAP: A Tool for Analyzing Agricultural Trade," Agrarwirtschaft 49: 151-156.
- Hertel, Thomas W. and Kyle Stiegert, 2000. "Managerial Heterogenity and the Compositional Effect," Applied Economics Letters 7:271-274.
- Hertel, Thomas W. and Will Martin, 2000. "Liberalizing Agriculture and Manufactures in a Millennium Round: Implications for Developing Countries," World Economy 23: 455-470.
- Ianchovichina, Elena, James Binkley, and Thomas W. Hertel, 2000. "Estimating the Procompetive Effects of Foreign Competition" Review of International Economics 8(1): 134-148.
- Rae, Allan and Thomas W. Hertel, 2000. "Livestock Productivity Convergence and Food Trade in the Asia-Pacific Region," Australian Journal of Agriculture and Resource Economics 44:3 393-422.
- Randhir, Timothy O. and Thomas W. Hertel, 2000. "Trade Liberalization as a Vehicle for Adapting to Global Warming, Agriculture and Resource Economics Review 29(2): 1-14.
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Progress 10/01/98 to 09/30/99
Outputs
There is increasing demand for quantitative analysis of global economic issues. During the course of this project, the PI has overseen development of the Global Trade Analysis Project (GTAP) database and modeling framework. This framework is now in use by more than 300 researchers in 40 countries around the world. It has become the primary tool for quantitative assessment of the likely impact of multilateral trade negotiations, and it is being widely used to analyze the likely consequences of alternative proposals in the next round of WTO talks. The GTAP framework builds on applied general equilibrium analysis which is the methodological tool of choice for evaluating the impact of trade policies. The PI has contributed to the development of this field and summarizes the current state of research in a survey chapter for the forthcoming Handbook of Agricultural Economics. In addition to applications focused on trade policy, the PI has introduced use of the GTAP
framework for examining the impact of macro-economic shocks on world trade in general, and US agriculture, in particular. In an analysis of the Asian financial crisis, it was shown that, while the crisis is expected to hurt North American agricultural producers, the food processing industry could actually benefit. Furthermore, the flight of capital from the East Asian region is shown to benefit the US, which is the world's largest debtor.
Impacts
In an analysis of the Asian financial crisis, it was shown that, while the crisis is expected to hurt North American agricultural producers, the food processing industry could actually benefit. Furthermore, the flight of capital from the East Asian region is shown to benefit the US economy as a whole, which is the world's largest debtor.
Publications
- Ianchovichina, E., T.W. Hertel, and R.A. McDougall (1999) "The East Asian Meltdown: It is Not All Bad News", Choices, second quarter, pp. 15-22.
- Hertel, Thomas W., 2000. "Future Directions in Global Trade Analysis", plenary paper presented to the Second Annual Conference on Global Economic Analysis, Fuenen, Denmark, published as Purdue Agricultural Economics Staff Paper No. 99-8.
- Hertel, Thomas W., 2000. "Applied General Equilibrium Analysis of Agricultural and Resource Policies", in B. Gardner and G. Rausser(editors) Handbook of Agricultural Economics, Amsterdam: North Holland.
- Hertel, Thomas W. and Will Martin, 2000. "Would Developing Countries Gain from Inclusion of Manufactures in the WTO Negotiations," forthcoming in the Review of International Economics.
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Progress 10/01/97 to 09/30/98
Outputs
We use a modified version of the GTAP model, incorporating an new demand system estimated on cross section data for 64 countries, to analyze the relative role of different forces underlying the compositional changes in world agriculture and food trade in the last 15 years. Our primary finding is that the fundamental supply and demand factors are most important in explaining the shift in global trade composition from bulk to non-bulk commodities (livestock, horticulture, and other processed foods). The demand side, driven by rising incomes and associated changes in income elasticities of demand, is the most important factor. Differential accumulation of production factors ranks a close second. Declining transportation costs falls a distant third. Finally, it appears that changes in trade policy did not contribute to the observed shift away from trade in bulk products. Regional trade agreements (RTAs) have played a key role in the world economy, particularly for basic
food commodities. Our review of theory and historical experience concludes that most RTAs have probably raised world welfare, by reducing national trade barriers - but that RTAs imposing regional barriers can have the opposite effect, facilitating higher levels of distortion than would otherwise have been imposed. Empirical models of actual RTAs reveal that their impact depends heavily on their interaction with domestic policies, and since the food sector is heavily distorted it plays a major role in many agreements. By far the most important example is the EU, where countries seeking to raise agricultural support levels were able to do so through the CAP, resulting in very high economy-wide welfare costs both within and outside the region. Looking ahead, we find that eastward expansion of the EU is likely to be beneficial to the world economy, mainly by reducing subsidized food output in western Europe. We expect that APEC integration will also raise world welfare, although the
development of a protectionist Asian bloc remains possible.
Impacts
(N/A)
Publications
- Hertel, Thomas W. and William A. Masters, 1997. "Regionalism in World Food Markets: Implications for Trade and Welfare," Proceedings of the XXIII Conference of the International Association of Agricultural Economists. Brockmeier, Martina, Joseph F. Francois, Thomas W. Hertel and P. Michael Schmitz (editors), 1998. Economic Transition and the Greening of Policies: Modeling New Challenges for Agriculture and Agribusiness in Europe, Kiel: Wissenschaftsverlag Vauk.
- Arndt, Channing and Thomas W. Hertel, 1998. "Rapid Growth in China: Should it be Feared or Cheered?", chapter 9 in Brockmeier, Martina, Joseph F. Francois, Thomas W. Hertel and P. Michael Schmitz (editors) Economic Transition and the Greening of Policies: Modeling New Challenges for Agriculture and Agribusiness in Europe, Kiel: Wissenschaftsverlag Vauk.
- Hertel, Thomas W., 1998. "Introduction", chapter 1 in Brockmeier, Martina, Joseph F. Francois, Thomas W. Hertel and P. Michael Schmitz (editors) Economic Transition and the Greening of Policies: Modeling New Challenges for Agriculture and Agribusiness in Europe, Kiel: Wissenschaftsverlag Vauk.
- Swaminathan, Padma, Martina Brockmeier and Thomas W. Hertel, 1998. "Integration of Central and Eastern Eurpean Economies into the European Union", chapter 4 in Brockmeier, Martina, Joseph F. Francois, Thomas W. Hertel and P. Michael Schmitz (editors) Economic Transition and the Greening of Policies: Modeling New Challenges for Agriculture and Agribusiness in Europe, Kiel: Wissenschaftsverlag Vauk.
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Progress 10/01/96 to 09/30/97
Outputs
The study by Stiegert and Hertel analyzes the status of manufacturing capacity in the United States' anhydrous ammonia industry between from 1971-91. A real option model based on the work of Pindyck was extended to account for mean-reverting tendencies in prices. This model was used to determine optimal capacity over this period, taking into account the irreversible nature of investment in this industry and the high degree of uncertainty. The model captures the value of discounted cash flows as well as the value derived from the shut-down option. These benefits are weighed against the costs of investing and the cost of exercising the option to wait and invest later. The study focused on the 1973-74 period during which rising ammonia prices resulted in a 30% increase in ammonia production capacity which later proved to be in excess of that actually needed. This excess capacity has persisted into the 1990's and has cost the industry dearly. Our finding is that this
expansion phase would not have been recommended by the real option model which takes price uncertainty and irreversibility of investment decisions into account. This finding underscores the importance of bringing this new tool to bear in the decisions facing agribusiness today.
Impacts
(N/A)
Publications
- Lanclos, D. Kent and Thomas W. Hertel, 1997. "An Assessment of the Effects of Trade Reform on Disaggregate Food Manufacturing Industries", Agricultural Economics.
- Arndt, Channing and Thomas W. Hertel, 1997. "Revisiting the Fallacy of Free Trade," Review of International Economics 5(2):221-229.
- Stiegert, Kyle and Thomas W. Hertel, 1997. "Irreversible Investment under Uncertainty: A Case Study of the Anhydrous Ammonia Industry," American Journal of Agricultural Economics.
- Hertel, Thomas W., Elena Ianchovichina and Bradley McDonald, 1997. "Multiregion General Equilibrium Modeling", chapter 9 in J. Francois and K. Reinert (eds.), Applied Trade Policy Modeling, Cambridge: Cambridge University Press.
- Hertel, Thomas W., Martina Brockmeier, and Padma Swaminathan, 1997. "Sectoral and Economywide Analysis of Integrating Central and East European (CEE) Countries into the European Union (EU): Implication of Alternative Strategies," European Review of Agricultural Economics, 1997, 24:359-386.
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Progress 10/01/95 to 09/30/96
Outputs
After controlling for natural nitrogen sources and differences in land quality, there remains tremendous variation in current nitrogen fertilizer application rates in Indiana corn production. As a consequence, changes in the price of nitrogen fertilizer have a differential impact on managerial profitability. The resulting turnover in management is shown to play an important role in the sector#s response to higher nitrogen prices. For example, in the case of a 30% tax on nitrogen use in US corn production, Indiana producers are estimated to reduce nitrogen use by 9.6%. Of this total, 4% is estimated to come from compositional changes in management, 3% is attributed to reduced corn output, and 2.6% is due to nitrogen conservation by individual managers. While average net returns to corn production are little affected, due to the estimated rise in corn prices, managers using excessive amounts of fertilizer experience significant reductions in profitability. Analysis of
the implications of expanding the European Union (EU) to the East shows that this has important implications for world trade in food products, as well as for the well-being of the Central and Eastern European (CEE) economies joining the EU. In the absence of further reform of the EU#s Common Agricultural Policy (CAP), accession is expected to lead to substantial pressure on the EU budget as well as a deterioration of efficiency in the CEEs as they raise food prices to match the EU. However, when combined with further reform of the C.
Impacts
(N/A)
Publications
- HERTEL, T.W., STIEGERT, K. J., and VROOMEN, H. 1996. Nitrogen-land substitution in corn production: A reconciliation of aggregate and firm-level evidence. Amer.J. Agri. Econ. 78:30-40.
- HERTEL, T. W., BROCKMEIER, M., SWAMINATHAN, P. 1996. Sectoral and economywide analysis of integrating Central and East European countries into the European Union: Implication of alternative strategies. Invited paper presented at the 8thEur.
- HERTEL, T.W. (ed.) 1996. Global trade analysis: Modeling and applications. New York: Cambridge University Press.
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Progress 10/01/94 to 09/30/95
Outputs
This project has utilized the Global Trade Analysis Project (GTAP) data base andmodeling framework to construct projections of growth in trade with East Asia over the next decade. GTAP is a global, economywide framework, which offers the potential for capturing the impact of supply-side structural change on the demand for food imports in East Asia. These projections rely on World Bank forecasts of endowments and technology in the year 2005. Results predict a significant shift in regional shares of global food consumption from OECD countries (57% in 1992 and 51% in 2005) to Asia (including Southeast Asia, the NICs, China and South Asia -- 19% in 1992 and 25% in 2005). Because this shift in consumption is accompanied by a rapid expansion of the non-food economy in Asia, we expect to see a relative decline in the agricultural sector in this region. Therefore, the prospects for increased US exports to East Asia are very good. The share of US exports to OECD countries is
projected to fall (53.6% in 1992 and 46.6% in 2005) with exports to Asia increasing (16.8% in 1992 and 22.3% in 2005). The GTAP framework has also been used to evaluate the impact of the Uruguay Round agreement on projected patterns of agricultural trade and output. While the increases in market access and reductions in export subsidies dictated by the GATT are significant, they are generally dominated by changes in output due to ongoing economic growth. The most important cuts in protection will be in East Asia. These cuts will re.
Impacts
(N/A)
Publications
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Progress 10/01/93 to 09/30/94
Outputs
One issue on which general equilibrium analysis has been able to shed new light is that of trade liberalization. Peterson, Hertel and Stout take an existing partial equilibrium model used extensively in analyses of the Uruguay Round and identify some of its significant limitations. These are especially problemmatic for assessing the welfare consequences of agricultural trade reform. The authors rectify the shortcomings and conduct a series of experiments which serve to identify farm-nonfarm factor mobility as a key issue for future research in this area. Another dimension of trade liberalization which is often ignored, is how changes in protection interact with imperfect competition in the domestic economy. Hertel examines this issue in a theoretical context. Ianchovichina provides an empirical analysis of the procompetitive effects of foreign competition on domestic markups. A related issue is that of product differentiation and associated fixed costs. Lanclos shows
that the joint effects of tariff reform in both the input and output markets is ambiguous in the presence of endogenous product differentiation. Lanclos and Hertel provide an empirical analysis of this issue in the context of the US food manufacturing industries. They show that the input effect dominates when current applied tariffs are eliminated. This leads to increases in output per firm and in the number of food manufacturing firms.
Impacts
(N/A)
Publications
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Progress 10/01/92 to 09/30/93
Outputs
There continues to be tremendous demand for quantitative analyses of the impact of trade liberalization. This is fueled by both the GATT Round of multilateral trade talks as well as numerous regional free trade agreements which are currently under consideration. Reform of food and agricultural policies is an important, but contentious part of all of these agreements. Unfortunately most of the studies focusing on the effects of these agreements devote little attention to higher value food products. Peterson, Hertel and Preckel develop a framework for analyzing the impact of food and agricultural policies on the food manufacturing, wholesale and retail sectors. They also show how economic growth is likely to alter farm-retail price spreads in the future. Most studies of the impact of trade policy reform on the food system typically assume that food manufacturers produce a homogeneous product and are perfectly competitive. Holloway and Hertel test, and subsequently
reject, the hypothesis that key components of the US food industry are perfectly competitive. Hertel and Lanclos explore the implications of trade liberalization when the food industry engages in endogenous product differentiation and is imperfectly competitive. They find that the traditional models may well be understating the ability of East Asian food producers to compete in a liberalized environment.
Impacts
(N/A)
Publications
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Progress 10/01/91 to 09/30/92
Outputs
A stumbling block in the GATT negotiations has been the failure to reach an agreement over what constitutes acceptable reform of the European Community's Common Agricultural Policy. The U.S. has not been satisfied with EC proposals & consequently contributed to a stalemate in negotiations. In a commissioned paper for a conference & forthcoming book on GATT, Hertel, Gehlhar, & McDougall question the wisdom of this stance. Their paper, "Reforming the European Community's Common Agricultural Policy: Who Stands to Gain.", points out that reform of CAP generates less than one-fifth of the total U.S. gains to be had from trade reform. Thus there is a significant incentive to move ahead with a compromise agreement. Peterson et al. find impacts of biotechnology on US livestock sector to be far less dramatic than many have projected in the past. The authors estimate the bST will lower unit costs for milk production by less than 3%. While significant, this is not remarkable
when placed in the context of annual rates of technical change in agriculture of 2%. The reason the stimulus is not larger is feed costs comprise only about one-third of total costs. This quickly dillutes the 8.25% increase in feed efficiency and 12.25% increase in production per cow. In the case of ractopamine (growth stimulant for pork), unit costs fall by less (1.28%). Also leaner pork results in less waste in the processing sector, so that fewer hogs are required to generate the same amount of output.
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Progress 10/01/90 to 09/30/91
Outputs
In 1985 the U.S. took a major step toward severing the link between deficiency payments for grain producers and their production decisions. This involved freezing the yield used to calculate these payments. Economists and environmental groups hailed this as an important reform, but producers feared they were being short-changed. Some lobbied Congress to undo this reform under the 1990 Farm Bill. However, analysis conducted by Dr. Hertel and his colleagues demonstrated that, while such a step would raise producers' revenues, their costs would rise faster due to the renewed incentive to "prove" higher yields. Thus, from the point of view of producer incomes, the policy reform was also shown to be beneficial Dr. Hertel has also examined the economywide implications of supply control measures designed to boost U.S. Farm prices. His research suggests that the current method of restricting acreage is far less efficient than alternative approaches to limiting supplies. These
in turn are inferior to more direct methods for reducing excess capacity in agriculture. Finally, during this past year Dr. Hertel has worked with the Australian Industry Commission to quantify the global gains available from liberalization of agricultural trade in the industrialized market economies. They have estimated that the gains amount to $47 billion, or approximately $2.40 per dollar transferred to farm households in these economies.
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Progress 10/01/89 to 09/30/90
Outputs
General equilibrium analysis of the U.S. sugar program indicates that purported benefits to corn producers, due to increased production of High Fructose Corn Syrup (HFCS) have been greatly overstated. Complete elimination of sugar imports would likely raise corn grain prices by less than one percent, and these small gains disappear in the longer run. Analysis of the impact which the U.S. grains programs have on variable input usage and land values indicates that the freeze on program payment yields, implemented as part of the 1985 Food Security Act, was a sound reform. By eliminating the incentive to "prove" yields, it reduced costs more than revenues, thus raising net returns to farmers. Conversely, recent proposals to unfreeze program payment yields are found to be wasteful, since there are more effective means of raising net returns which do not encourage excessive usage of fertilizers and pesticides. Econometric analysis of data from the U.S. food marketing
system indicates significant support in favor of the hypothesis of perfect competition in retail product markets for beef and veal, pork, poultry, eggs, and dairy. By contrast, the farm-commodity markets for these products show strong evidence of oligopolistic behavior on the part of the processing firms which purchase raw farm produce. In contrast to earlier studies, these findings do not rely on resistrictive assumptions about marketing firm technology (e.g., constant returns to scale).
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Progress 10/01/88 to 09/30/89
Outputs
In the past year, Dr. Hertel has conducted a considerable amount of research in support of the GATT negotiations which have as their objective the liberalization of world agricultural trade. He has shown how factor mobility and technology interact to determine the impact of an overall reduction in agricultural support. He has also demonstrated how the mix of support (e.g., input vs. output subsidies) might be altered in order to meet certain objectives (e.g., onfarm employment) while still achieving a given reduction in aggregate support. Drs. Hertel, Thompson and Tsigas have estimated the annual costs of maintaining U.S. farm support at 1984 levels. Measured as a cost per farm job saved, those amount to $28,700/year in reduced real domestic income, $80,500/year in increased treasury outlays and $107,000 in reduced nonfood output, per farm job saved. Dr. Hertel has also investigated the economywide costs of supply control measures. Acreage controls, the
predominant method employed in U. S. agriculture, are shown to be an extremely costly method for raising farm prices. This is due to the diversion of productive resources and the ensuing overapplication of inputs, including fertilizers and chemicals, on the remaining acreage. This likely exacerbates environmental problems in some areas. In collaboration with Dr. Ehui, now in residence at the International Institute for Tropical Agriculture, Dr.
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Progress 10/01/87 to 09/30/88
Outputs
Research during the previous year focussed on the economywide analysis of U.S. farm and food issues. Key findings are divided into three areas: mandatory supply controls, agricultural trade liberalization, and the determinants of land rents in a growing economy. Mandatory Supply Controls. Four different approaches to supply control in U.S. agriculture were examined: output quotas, non-farm marketing certificates, domestic sales quotas and acreage controls. Each of these methods transfers income from foreign and domestic consumers to U.S. farmers. However, they differ significantly in their effects on budget outlays, farm supply industries and real incomes. For example, land retirement sufficient to raise grain, oilseeds and cotton prices by 10% above their 1984 levels would have reduced real income in the U.S. by about $10 billion. Agricultural Policy and Trade Liberalization. The current configuration of U.S. domestic and trade policies represent a very inefficient
means of protecting jobs in agriculture. They are estimated to result, in: (a) $107,000/year in reduced non-food output, (b) $80,500/year in increased budget costs, and (c) $28,700/year in reduced real income, for every farm job saved. Long Run Determinants of Land Prices. In an attempt to better understand the rapid rise in land values over the period 1976-80, an effort was made to decompose this growth into its various components. Fifty-three percent of this increase was attributed to growth in grain and oilseeds exports.
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Progress 01/01/87 to 12/30/87
Outputs
Analysis of the commodity market effects of extending the Conservation Reserve Program from 40 to 44 million acres in 1990 was conducted. Results indicate that, in the absence of binding target prices, soybean prices would rise (+1.4%) relative to corn (+1.0%) and wheat (+0.8%) prices. The largest impact would be on the government's cost of bidding additional land into the reserve program. This would rise by 3.4% per acre rented. Binding target prices for corn and wheat cause those market prices to rise by more (+3.0% and 2.3% respectively), while the soybean price hike is dampened (+0.7%). General equilibrium analysis of tax preferences for U.S. farm and food sectors indicate that these served to lower food costs by $4.5 billion in 1977. The associated loss in tax revenues was between $5.5 and $6.6 billion, which far exceeded the value of farm price and income support payments ($3.8 billion).
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Progress 01/01/86 to 12/30/86
Outputs
Dr. Hertel's research over the last year has proceeded along a variety of avenues, in the area of production economics. A multiproduct analysis of retail fertilizer operation in Indiana indicates that plants can lower average cost by increasing output and by diversifying into anhydrous ammonia. Another study used firm level data for a sample of dairy farms in Indiana to examine the adjustment process of farmers when relative prices or tax laws change. Results indicate that the dairy herd adjusts more rapidly than does machinery and equipment. Also this capital adjustment process was found to be important in determining the levels of supplies and demands of other goods. Drs. Hertel and Preckel are currently wrapping up the second year of a cooperative agreement with USDA, the end-product of which should assist in predicting the likely effects of the Conservation Reserve Program on commodity prices. This project has generated two journal papers which are currently
under review. One of these develops an important new methodology for summarizing linear programming models, while the second provides an application to the Iowa State model of U.S. agriculture. A final area in which Dr. Hertel is working involves applied general equilibrium analysis of U.S. agriculture. He has recently obtained the renewal of a second cooperative agreement with USDA which has as its objective the quantitative analysis of farm and food policy in an economy-wide framework. Dr.
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Progress 01/01/85 to 12/30/85
Outputs
Analysis of the relationship between cost and output for retail fertilizer plants in the eastern Corn Belt revealed significant economies of diversification, in addition to scale economies. In particular, the average plant in our sample can lower short run average costs by diversifying into anhydrous ammonia and increasing overall output levels. Preliminary evidence also indicates that the sampled firms are also over-invested in plant and equipment. Research in the area of electricity demand indicates that costly errors in previous utility forecasts resulted in part from misspecified models. Improved forecasts must take greater account of the dynamic interaction between the utility's financial condition, electricity prices and demand.
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