KUCHING: The Global Policy Model (GPM) has been developed by the UN to study medium-term policy coordination issues but is not an economic model for the study of the impact of free trade agreements (FTAs) as deriving an economic impact conclusion on an FTA based on the GPM is misleading as it is not designed to incorporate the contents of an FTA in a robust manner.
Analysts from MIDF Amanah Investment Bank Bhd’s research arm (MIDF Research) noted that in a paper entitled ‘Trading Down: Unemployment, Inequality and Other Risks of the Trans-Pacific Partnership Agreement’ by Jeronim Capaldo and Alex Izurieta with Jomo KS in January 2016, the authors argue that the impact on the economic growth of TPPA member countries are not as great as that claimed by various studies.
The Paper is based on the Global Policy Model (GPM), which is a theoretical general equilibrium economic model developed by the UN for the study of medium-term policy coordination issues.
A similar study based on the GPM model had been carried out by the same main author, Jeronim Capaldo in October 2014 on the Trans-Atlantic Trade and Investment Partnership (TTIP). According to Capaldo, the TTIP will lead to a contraction of GDP, personal incomes and employment. The fact the same researcher, employing the same analytical approach, consistently reject FTAs reflects an element of systematic bias in the methodology and probably an inherent bias on the part of the individual noted the research house.
MIDF Research stressed that for a study which is intended to investigate the impact of FTAs, it found issues with the fact that the Paper is based on an economic model which is not designed to incorporate the contents of an FTA in a robust manner. The GPM employed in the Paper has not even included the most basic parameters such as tariff, not to mention non-tariff barriers.
Consequently, the model has indirectly disregarded the effects of the TPPA, namely lower tariff rates, greater transparency, higher intellectual property rights, stronger environmental protection and better labour standards.
Instead, the researcher has employed a very narrow base assumption that higher global competition as a result of the TPPA will lead to lower unit cost, disregarding the wider repercussions and dynamics as a result of various provisions in the agreement itself. Ideally, unit cost should have been left as an endogenous variable.
“From the Paper, it was specifically mentioned that the authors believe higher international competition would push countries to increase their trade performance. In order to preserve their market shares, producers in each country will have to sell at lower prices, and thereby cut costs.
“Hence, the authors assume that this process will lower nominal unit labour costs, the main factor in total costs, through the combined actions of business managers and policymakers who negotiate lower wages and introduce more capital-intensive technologies,” said MIDF Research.
“We note that the GPM does not differentiate between labour and technological costs. Thus, under its narrow base assumption that higher trade activity in TPPA will lead to lower unit labour cost, the authors effectively further assume that overall unit cost of production has declined. This is the source of the problem.”
In the GPM, unit labour cost is supposedly influenced by domestic inflation, which is influenced by the output gap.
However, by purposely imputing lower overall unit cost, the authors effectively portrays the economy as being in a deflationary state, which is caused by negative output gap. Due to this rigidity, the Paper will invariably lead to the conclusion that there will be a negative impact on the economy from competitive liberalisation.
The assumption that higher competition will lead to lower unit cost in order for the country to maintain its market share does not only apply to global competition. On the same premise, the authors, studying the impact of higher competition in the domestic economy, would follow the same logic that businesses will only try to cut unit cost to maintain market share without recourse to other business strategies.
Eventually, this will yield the same result, in which higher competition leads to lower GDP growth, higher unemployment and lower personal income.
As an analytical tool to perform impact assessment, the GPM developed by the UN’s Department of Economic and Social Affairs is highly valuable as it gives insights to policy makers. However, as in the case of other theoretical models such as Input-Output analysis and Computable General Equilibrium (CGE) modelling, the GPM is at risk of delivering misinformation if it is engineered to produce such an outcome, perhaps to achieve a certain agenda.
“We believe that is the case with respect to the Paper by the Global Development And Environment Institute of Tufts University.
“It cannot be denied that economies which have opened up have experienced higher growth and better employment rate. The Paper, based on which the erstwhile Professor Jomo KS has used to cast aspersions on the TPPA must really be understood within its proper context,” concluded the research house.