23
Parameters are one of the most important considerations in a CGE model. Some studies have
found that different parameters lead to different policy results (Abler et al, 1999).
International trade is linked thought Armington substitution among goods differentiated by
country of origin. Trade liberalization simulation can produce positive or negative impact
depend on the Armington elasticities (Zhan, 2006). Basically, some parameters for this study
are calibrated from SAM. However, some parameters for the CGE model are not available in
Laos. As there is not estimation of free parameter in Laos. We used free parameter from
Warr (2008) .
6.3. Measuring Welfare Impacts
Household welfare is affected by four factors: changes in revenue, changes in expenditure,
changes in inputs, and changes in wages (see equation below). As mentioned in the research
framework, the measurement of welfare changes due to trade liberalization uses the top-down
approach linked to the GTAP model and micro-simulation. There are two steps to estimating
the effect of trade liberalization on household welfare. Firstly, we estimate producer and
consumer price changes, and factor production price changes from the GTAP model.
Secondly, the price and output changes from the GTAP model are used for micro-simulation
(Figure 6-3). Household welfare change is calculated using the formula in Chen and
Ravallion (2004) and Ravallion and Lokshin (2008).
The results of the GTAP model indicate that the four factors are influenced by changes in
consumer and producer prices, and wages. The changes in the price and production of
particular food and non-food items alter household welfare, which is based on a share of
revenue from these items. Changes in international demand for particular goods affect
household incomes, which depend on a proportion of their marketed production of goods.
Wage changes influence household income according to the share of waged income received.
Price changes also affect household consumption, with an increase in prices decreasing
household welfare. The welfare impacts from trade liberalization in the monetary value of the
change in utility for household income can be expressed as follows
16
:
gi
= The monetary value of the change in utility for household
= The revenue (selling value) from household production activities in sector
= Quantity supplied from household i in production activities in sector j
he (negative) weight for demand price changes
16
The measurement of welfare impacts from trade liberalization has data constraints because initial data of price
and wage levels are not included. Nevertheless, this problem can be overcome by calculating a first-order
approximation of the welfare impact in a neighborhood of the household’s optimum (Chen and Ravallion, 2004;
Ravallion and Lokshin, 2008).
24
= Demand price from household i in production activities in sector j
Commodities used as production inputs, of which
is used for production goods in
sector
= The weight for changes in the wage rate for activity
Household’s “external” labor supply to activity
Figure 6-3. Methodology framework, poverty analysis
6.4 Data Matching
There are 57 sectors of production and consumption in the GTAP database. There are 356
categories for consumption and 117 categories for production in the third Lao Expenditure
and Consumption Survey (LECS4) from 2007/2008. Therefore, in order to link the results
from the GTAP model to the micro-simulation model, it is important to reconcile the data.
The reconciliation of data from LECS4 with the GTAP database was achieved in the
following way
17
.
6.4.1 Consumption and production
We used GTAP database version 7, which consists of 57 sectors; factor products included
land, capital, skilled labor and un-skilled labor. We matched consumption and production
from LECS4 to the GTAP database. In LECS4 there are 357 categories for consumption and
117 categories for production. Since the agricultural section in LECS4 does not contain the
value of sales and the cost of the agricultural products, we cannot use the information in this
section. However, the diary section of LECS4 records the monthly transactions of agricultural
income and costs. So, we have obtained information on agricultural income by using the
dairy section of LECS4 but it is possible that this income has been underestimated because
the reference period is monthly.
17
It is important to note that while this study reconciled sectors of consumption, production, wages and income,
it did not reconcile their value.
25
6.4.2 Labor
There are two types of labor in the Lao GTAP model: skilled labor and un-skilled labor.
Skilled labor has been defined by whether wage earners have completed at least primary
education. Unskilled labor has been defined by whether wage earners have not completed
primary education. Since each entry on wage incomes in LECS4 has an ID for each person
but does not include information on the industry, the industry in which a person is engaged
for the greatest number of days and hours has been chosen as the industry supplying the
waged income.
6.4.3 Household income
Change in per capita income is used as the welfare indicator in this study. Household income
includes agriculture, non-agriculture business, waged income, and expenditure on own-
produced agricultural products. Own-produced consumption represents a large portion of
household consumption and to neglect this area of income would be to underestimate
household income. New income in the simulation is calculated by adding the estimated gain
to income in the baseline (as in Chen and Ravallion, 2004).
6.4.4 Poverty line income
An official estimation of the income that constitutes the poverty line is not established in
Laos. Estimation of the poverty line in Laos is mostly gauged from expenditure. Official per
capita expenditure in LECS4 established levels of poverty. The poverty line was obtained by
taking the mean per capita expenditure for poor households, based on their expenditure
18
.
The means were taken separately in four regions, both urban and rural, because poverty
expenditure in LECS4 is organized in the same way. Therefore, the poverty rates in this study
match those using the expenditure poverty rates in LECS4.
6.5. Simulation Design
Laos will gain various economic benefits from AFTA. The possible impact of AFTA on Lao
economy is shown through four simulationscenarios as follows:
Simulation scenario 1
The impact of AFTA on the Lao economy through reduced tariff rates. We assume that the
Common Effective Preferential Tariff (CEPT) Scheme for AFTA will reduce to 0% in
2015
19
.
Simulation scenario 2
The effects of an improvement in trade facilitation and in time costs reducing overall trade
costs.
This approach is followed by Hertel, Walmsley, and Itakura (2001); Minor and Tsigas (2008)
and Stone and Strutt (2009).We assume a reduction in costs of 25%
20
in the Lao economy.
18
The poverty line was set at the $1.25 poverty line comes to 142,181.56 kip per month ($38) for 2005.
following by Engvall et al (2009).
19
We do not consider the effects from the service sector.
20
We will shock ams(i,r,s) 10% for reducing cost by25% (From Laos to ASEAN countries and from ASEAN
countries to Laos)
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