The Impact of Trade and Domestic Policy Reforms in India by Chadha Rajesh;Deardorff Alan Verne;Pohit Sanjib;Stern Robert Mitchell;

Author:Chadha, Rajesh;Deardorff, Alan Verne;Pohit, Sanjib;Stern, Robert Mitchell;
Language: eng
Format: epub
Publisher: University of Michigan Press

3.5 Model Implementation

The reference year of the model is 1989-90. The trade policy inputs into the model are the tariffs and NTBs that were applicable to India's trade in 1989—90. In order to investigate the sectoral employment effects of the unilateral trade liberalization, it has been assumed that the existing bilateral tariffs will be removed and NTBs relaxed in two stages, the first stage to be completed by the mid-1990s and the second towards the end of 1990s.

The domestic policy inputs include reduction in “other net indirect taxes” (indirect taxes net of custom duty and subsidies) and changes in administered prices in the regulated sectors. Since July 1991, there has been an effort to reduce indirect taxes and to increase the administered prices of paddy and wheat.

When policy changes are introduced into the model, its solution yields percentage changes in sectoral employment and certain other variables of interest for India. Multiplying the percentage changes by actual (1989-90) levels given in the data base yields the absolute changes, positive or negative, that might result from the unilateral trade and domestic policy reforms that have been undertaken.

In addition to the sectoral effects which are the primary focus of our analysis, the model also yields results for changes in total exports, total imports, the terms of trade, the overall level of welfare in the economy, and the economy-wide changes in real wages and returns to capital. Because both labor and capital are assumed to be homogeneous and intersectorally mobile in these scenarios, we cannot distinguish effects on factor prices by sector. Nor can we distinguish effects on different skill groups or other categories of labor. In particular we are unable to address the important question of how trade liberalization might affect the differential between the wages of skilled and unskilled workers.

In our model, we do not distinguish consumption from other forms of final demand. It is also assumed that aggregate expenditure varies endogenously to hold aggregate employment constant. Such a closure may be thought of as analogous to the Johansen closure rule (Deardorff and Stern, 1990). The Johansen closure rule consists of keeping the requirement of full employment while dropping the consumption function. This means that consumption can be thought of as adjusting endogenously to ensure full employment. However, in the present model, we do not distinguish consumption from other forms of final demand. That is, our assumption is that expenditure adjusts to maintain full employment. This may be thought of as analogous to the Johansen closure rule. This assumption is made so as to abstract from macroeconomic forces and focus on the intersectoral allocation of resources.

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