The Model

The model used in this study was a dynamic, CGE model of the global economy. It was built on the LINKAGE model developed at the World Bank (van der Mensbrugghe 2005; Anderson, Martin, and van der Mensbrugghe 2006), and has its intellectual roots in the group of multi-country applied general equilibrium models used over the past two decades to analyze the global trade and environmental issues (Shoven and Whalley 1992; Hertel 1997). This section describes the major features of the model.

Production in each economic sector was modeled using nested constant elasticity of substitution (CES) functions and constant returns to scale was assumed. There were three types of production structures, depending on activities. Crop sectors reflected the substitution possibility between extensive and intensive farming. Livestock sectors reflected the substitution possibility between pasture and intensive feeding. All other sectors reflected the standard capital-labor substitution.

The study assumed differentiation of products by regions of origin; i.e., the Armington assumption (Armington 1969). Top-level aggregate Armington demand was allocated between goods produced domestically and an aggregate import following a CES function. In the second level, the aggregate import was further disaggregated across the various trade partners using an additional CES nest. On the export side, it was assumed that firms treat domestic markets and foreign markets indifferently. Thus the law of one price would hold; i.e., the export price was identical to that of domestic supply.

Incomes generated from production were assumed to accrue to a single representative household in each region. Households maximized utility using An Implicitly Direct Additive Demand System (AIDADS) (Rimmer and Powell 1996). AIDADS is a demand system which allows the marginal budget shares to vary as a function of total expenditure. Recent work by Yu et al. (2004) has demonstrated the superiority of AIDADS over other demand systems in projecting food demand, especially for long-term projections involving a wide range of countries.

All commodity and factor markets were assumed to clear through prices. There are five primary factors of production: agricultural land, skilled labor, unskilled labor, capital, and natural resources. Agricultural land and the two types of labor were assumed to be fully mobile across sectors within a region. Some adjustment rigidities in capital markets were introduced through the vintage structure of capital, under which the “new” capital was fully mobile across a sector, while “old” capital in a sector could be disinvested only when this sector was in decline. In the natural resource sectors of forestry, fishing, and mining, a sector-specific factor was introduced into the production function to reflect the resource constraints. These sector-specific factors were modeled using upward sloping supply curves. For other primary factors, stocks were fixed for any given year. The numeraire of the model was defined as the manufactured export index of the high-income countries, which was held fixed.

The model was recursive dynamic, beginning with the base year of 2004 and being solved annually through 2080. Dynamics of the model were driven by exogenous population and labor growth and technological progress, as well as capital accumulation, which was driven by savings. Population and labor force projections were based on the United Nations' (UN) medium variant forecast. As the UN population forecast covers only 2005–2050, the growth rates of population and labor forces were assumed to decline exponentially at a rate of 2% per year. The household savings rate was set as a function of economic growth and demographic changes, which were drawn from a global cross-country analysis by Bosworth and Chodorow-Reich (2006). Technological progress was assumed to be labor-augmented, so the model could reach a steady state in the long run.

The model was calibrated to the Global Trade Analysis Project (GTAP) version 7, using twenty-one countries/regions and nineteen sectors. There was a heavy emphasis on agriculture and food, which account for ten of the nineteen sectors. Six Southeast Asian countries are explicitly modeled as individual regions in the model.

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