Growing credibility gap

It was considered to be a warning by the scientists to the humanity. A night before the release of the much-publicised report of the inter-government International Panel on Climate Change (IPCC) at Brussels on 6 April, a significant proportion of the conclusions demonstrating the seriousness of the crisis ahead, were either diluted or removed. The report’s conclusions are frightening, but lack credibility. It faces a crisis of legitimacy.

Manipulating scientific, economic and environmental data to suit commercial and political interests has now turned into a major international activity. With only a thin line dividing commercial interests from political, inter-governmental studies and analysis are now being easily tailored to protect business and trade. Whether it is the United States, Europe, Japan or India, usurping economic and scientific numbers is becoming a norm rather than an exception.

The manipulation is not merely at the level of numbers, it extends into economic models. Over the years, there has been growing criticism of the veracity of economic analysis. To improve the quality of the global economy-wide analysis and using numerous economic models and innovative methodologies, the Global Trade Analysis Project (GTAP) was born in 1993. Based at the Purdue University in the United States, the GTAP (for an overview of the model, visit: gtap.agecon.purdue.edu) has now become a common ‘language’ for global economic research. Ironically, the IPCC report also banks heavily on the GTAP analysis for a wide array of issues ranging from domestic to international policies.

Purdue University’s Global Trade Analysis Project was expected to narrow down the differences and provide a more coherent and acceptable assessment of the impact. It did not happen.

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While I haven’t examined in detail the GTAP analysis used by IPCC, I have looked at the results fostered by the same analytical model in assessing the gains of the ongoing World Trade Organization (WTO) negotiations and more specifically the poverty reduction estimates from the conclusion of the Doha Development Round. These results are certainly subjective, and cast an ominous shadow on the future of the new economic model. More so considering that the promoters of GTAP, which includes the World Bank, had earlier decried the existing models for not being comprehensive and fair.

Differences in economic modelling frameworks used by different researchers have often produced widely varying results. For instance, the projected gains from the Uruguay Round of multilateral trade agreements varied wildly between US$ 50 billion to US$ 829 billion. The gains projected from the Doha Development Round, which vary between US$ 34.6 bilion to US$ 500 billion, too demonstrate the failure of economic modelling. GTAP was expected to narrow down the differences and provide a more coherent and acceptable assessment of the impact. It did not happen. Depending upon who is using the simulation model, and what political interests are behind it, the data can be easily manipulated to show diametrical opposite results.

Let us take a look further at the assessment of multilateral trade agreements. We are all aware that in the ongoing WTO negotiations, the deadlock continues over the Doha Development Round. The rich and industrialised countries want more market access from the developing countries, and the contentious issue of monumental agricultural subsidies that the developed countries provide to its agriculture has been conveniently pushed to the background. While the political stalemate continues, it is interesting to see the contradictory economic analysis.

Several working papers by the Centre for Global Trade Analysis at the Purdue University have used GTAP simulation models to assess the ‘welfare gains’ from the WTO agreements. Based on the typical neoclassic assumptions, the final assessment is more or less same – the more the developing countries remove the import tariffs, the more will be the reduction in poverty. On the other hand, a very comprehensive study by UNCTAD-India on ‘Green Box Subsidies: A Theoretical and Empirical Assessment’ in a way challenges these biased conclusions by bringing out the gains that will flow to developing countries once the farm subsidies are removed.

Interestingly, the UNCTAD-India study uses the same GTAP database for conducting the study. And yet the results are quite different.

Purdue University studies point out that a “50 per cent cut in domestic support for OECD will result in welfare losses for most of the developing nations, it also results in large declines in farm incomes in Europe.” This is contrary to what the UNCTAD-India study says. Although not using the term ‘welfare gains’, the UNCTAD study concludes that agricultural exports of the US and EU will decrease by 39 percent and 45 percent respectively, while the exports of the developing countries will increase by 22 percent. This means that more the exports from the developing countries, the more will be the welfare gains.

Removing Green Box subsidies will enable developing countries to increase production by US$ 41.9 billion; and thereby provide four per cent increase in employment opportunities. This is just the opposite of what the Purdue University concludes: “Developing countries will be well advised to focus their efforts on improved market access to the OECD economies, while permitting these wealthy economies to continue – indeed even increase – domestic support payments.”

Thomas Hertel of Purdue University, and one of the architects of the GTAP model, had made a strong plea for the reduction of import tariffs by the developing countries. Recently travelling through India (and some other developing countries), he made a fervent appeal to provide more market access for agricultural imports from the rich countries if India wanted to see the ‘welfare gains’. His entire assessment was based only on tariffs. When I asked why didn’t he take farm subsidies into consideration, his response was that it wouldn’t have made any difference.

Purdue University, as well as the World Bank, are pushing for greater trade and hence the need to convince the world in terms of welfare gains. The researchers very cleverly use the market access argument, while trying to blank out the negative impact of agricultural subsidies. And therein lies a danger. Knowing that the average citizen still has faith in empirical studies, and that scientific analysis and economic modelling convinces the educated and the academic about the legitimacy of the conclusions, the entire effort is to tutor the findings in such a way that it appears truthful. The more complicated the economic model, and the more financial resources made available for such modelling to be applied, the more is the acceptance.

But starting with a faulty assumption would lead to a flawed assessment. It is widely accepted that agricultural subsidies in developed nations play a very important role in distorting global agriculture trade, not otherwise. It is here that the developing countries need to be cautious.

Developing countries must build the capacity to scrutinise the economic data flowing from the western academic and research centres. Blindly accepting the analysis being put out by the western universities is fraught with unforeseen dangers.