Joaquim Bento de Souza Ferreira Filho Escola Superior de Agricultura “Luiz de Queiroz”

Universidade de São Paulo

Land Use Change in Computable General Equilibrium Models

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Plan of presentation   Computable Equilibrium (CGE) Models in the evolution of

applied economic models.   Illustrate the main applications and uses of CGE models.

  Point to the main drivers of CGE models.   Show how CGE models treat Land Use Change   Point to the new directions and developments.

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CGE models   The most recent development in a long tradition of economic

multi-sector economic planning models   Initiated with the work of Leontief in the 30’s: Input-Output

(IO) analysis.   Used when the complex interactions between economic

variables must be taken into account for policy analysis.

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IO table for Brazil – 2005 – MAKE MATRIX

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IO table for Brazil – 2005 - USE

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Input-Output models (IO)   Consists of explicitly modeling the inter-industry (or users)

flows of products in an economy.   n linear equations, n unknowns. System solved by matrix

inversion.   Solution: inputs requirements to satisfy a given vector of final

demands.   General equilibrium in the production side of a economy.   Does not take into account restrictions about production

capacity: a solution always exists.   Fix price models, no substitution in inputs space in

production.

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Linear Programming Models   Have an explicit objective function for optimization

purposes: introduce choices.   Allow inequality restrictions (non used capacity).

  Explicitly model maximum capacity.   Generate a dual price system, which represents the

opportunity cost of any production factor (market prices).   Problem: cannot treat prices endogenously. Resource

allocation in production is not compatible with income generated in the process. Prices does not change in response to resource scarcity or excess supply.

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Computable General Equilibrium Models   Simultaneous solution for prices and quantities.   Simulates the interaction of many agents with optimizing

behavior in the markets.

  Explicitly model structural features of particular economies, with complete specification both from the supply and demand sides.

  REPRODUCE THE CIRCULAR FLOW OF INCOME IN A GIVEN ECONOMY: incomes generated in the production side must be consistent with expenditures of agents.

  First CGE model: 1960, Norwegian economy, Leif Johansen.

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Equilibrium models   Equilibrium models solve a set of nonlinear equations that

include market clearing conditions, efficiency or zero-profit conditions, and income balance equations.

  Equations are paired with unknowns such as:   market prices   levels of output by production activity   Expenditures and savings, etc.

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CGE models   Very data demanding models.   The IO matrix gives a large part of the information required,

but not all.

  Remaining information: National Accounts, Economic Censuses, Household Surveys, etc.

  Circular flow and consistency: data organized in a Social Accounting Matrix (SAM). Double-keeping accounting method.

  The model is calibrated based on one year picture of a given economy.

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An illustrative SAM

Primary Factors Institutions

Activities Produts Labor Capital

(Land) Household Governme Capital Account

Stocks Rest of the World

TOTAL

Activities Domestic Supply

Exports Domestic Production Value

Produts Intermed. use

Househ Consump

GovernmeConsumpt

Investimen Stocks Supply in the Domestic Market

Factors Labor wages Labor

Income Capital (Land)

rents Capital Income

Institution Household Wages Rents Transfers Household

Income Governm Indirect

taxes Tariffs Direct

taxes Capital Governme

nt Income

Capital Account

Savings Savings Capital Savings

Stocks Stocks Stocks Rest of the World

Imports Capital Income from Overseas

TOTAL Domestic Production Value

Supply in the Domestic Market

Labor Income

Capital Income

Household Expenditures

Government Expenditures

Capital Account

Stocks Payments to Overseas

Real flows Money flows

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Primary Factors Institutions

Activities Produts Labor Capital

(Land) Household Governme Capital Account

Stocks Rest of the World

TOTAL

Activities Domestic Supply

Exports Domestic Production Value

Produts Intermed. use

Househ Consump

GovernmeConsumpt

Investimen Stocks Supply in the Domestic Market

Factors Labor wages Labor

Income Capital (Land)

rents Capital Income

Institution Household Wages Rents Transfers Household

Income Governm Indirect

taxes Tariffs Direct

taxes Capital Governme

nt Income

Capital Account

Savings Savings Capital Savings

Stocks Stocks Stocks Rest of the World

Imports Capital Income from Overseas

TOTAL Domestic Production Value

Supply in the Domestic Market

Labor Income

Capital Income

Household Expenditures

Government Expenditures

Capital Account

Stocks Payments to Overseas

Supply Demand Partial equilibrium analysis

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How is land treated in these models?   Land is a primary factor of production, like labor and capital

(and perhaps natural resources).   It’s a factor which limits the supply response of the economy.

  In the SAM the amount of land is represented by it’s payments as a factor of production (or rentals), just like capital. Actually, land rentals must be disaggregated from capital rentals (Gross Operational Surplus in agricultural activities) in the National Accounts.

  Two general formulations: labor demand and labor supply.

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The Constant Elasticity of Transformation Production Frontier

Land for corn

Land for soybeans

Psoy/Pcorn

Total land availability frontier

Relative prices

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Curvature of the frontier: easiness of land movement

So, in a CGE model we have   A complete specification of the demand side of the economy;   A complete specification of the supply side of the economy;

  CGE models: have the ability to capture the indirect land use effect caused by policies in a integrated framework:   For example, how the fall in trade barriers in USA would affect

land use in Mato Grosso?   Partial equilibrium models, on the other hand, model spatial

and land management in great detail, since the rest of the economy is not taken into account.

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What about details in CGE models?   Increasing computer power capacity turned it possible to

work even at a very fine grid cell level, watersheds or Agro Ecological Zone (AEZ), for example.

  However, the level detail on data is the limitation: modeling at sub-national level requires estimation of input usage and production by spatial unit. We typically have it at national level (IO tables).

  There are many different solutions in the literature, which is in the frontier of CGE modeling, linked now to the climate change literature.

  A host of new issues arises from detailed land representation.

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Mobility of land across uses at sub-national level grid   Why farms do not specialize if land is homogeneous?   Farms are often diversified. Two main considerations:

  Risk aversion (not a market level phenomenon).   Non-homogenous land, even at very fine grid level. Some activities on

hills and others on valleys, for example. Substitution not easy.   One possible solution: again, the CET framework with particular

values for the elasticity of substitution at sub-national level.   In any case, the land supply function is nested, with decisions at

different levels: first, decide how many land allocate for particular crops, than distribute this total at sub-national level.

  Thousands of units of analysis? Size wouldn’t be the problem, but data…..

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What about GHG emissions?

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  Once the economy is modeled the emissions tracking is straightforward.

  Emissions either linked to:  Use of products (fuels, for example)   Level of activity of producing sectors (CH4 in livestock, for

example).

And what about deforestation?   A major challenge in modeling, still immature.   CGE models are good for phenomena which are guided by

prices.   This is not the case of deforestation as we know it in Brazil.   A range of non-market variables, like poorly defined

property rights in Amazon and roads constructions, for example, have a determinant impact on deforestation.

  There are attempts to link CGE models with specific forestry models. Forestry involve investment decisions, inter-temporal.

  This is an issue difficult enough even in partial equilibrium.

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An illustration: ethanol export expansion in Brazil

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An illustration: distributive and poverty effects

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Directions for future research in CGE and LUC in Brazil   Develop a CGE model of land use with the actual modeling

technology: increase land use representation at sub-national level.

  Presently models work at state (27 regions) level.   Work on estimation of parameters for this detailed land use

model: elasticity of substitution between activities:   Initially by region  Maybe at sub-national unit level?

  Integration with the general equilibrium framework.

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Thank you

  Email: jbsferre@esalq.usp.br

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