Macroeconomic Impacts of Prevention Policies for NCDs: Making the Case to the Finance Department Paul J. Thomassin McGill University, Department of Agricultural Economics Workshop on the “Economics of Prevention of Noncommunicable Diseases and Risk Factors (Obesity, Physical Inactivity, and Poor Diets) Mexico City, Mexico November 13-15, 2011

General Equilibrium GE theory is a branch of theoretical economics. It seeks to explain the behaviour of supply, demand and prices in the whole economy with several or many markets A situation where all markets in an economy are simultaneously in equilibrium.

Structure of GTAP The basic structure of the Global Trade Analysis Project (GTAP) model includes: industrial sectors, households, governments, and global sectors across countries. Countries and regions in the world economy are linked together through trade. Prices and quantities are simultaneously determined in both factor markets and commodity markets. Five main factors of production are included in the model: labour (skilled and unskilled), capital, natural resources and land.

Structure of GTAP (Con’t) Household behaviour in the model is determined with an aggregate utility function. Firms minimize input costs given their level of output and fixed technology. International trade is linked through Armington substitution among goods differentiated by country of origin. The transportation sector takes into account the difference in the price of a commodity as a result of the transportation of the good between countries. The global banking sector brings savings and investment in the model into equilibrium.

Structure of GTAP (Con’t) In Equilibrium: – All firms have zero real profits – Households are on their budget constraint – Global investment is equal to savings Demand equals supply in all markets. Changes in the model’s parameters allows one to estimate the impact from a country’s/region’s original equilibrium position to a new equilibrium position.

Closure Closure is the classification of the variables in the model as either endogenous or exogenous variables. Endogenous variables are determined (solved for) by the model and exogenous variables are predetermined outside the model. Therefore, these variables may be shocked. Closure can be used to capture policy regimes and structural rigidities. The closure elements of GTAP can include: population growth, capital accumulation including FDI, industry capacity, technical change, and other policy variables (taxes and subsidies). The number of endogenous variables has to equal the number of equations. This is a necessary but not a sufficient condition for a solution.

GTAP Database Version 7 of the GTAP database was prepared for the 2004 reference year. Dataset includes 57 commodities (sectors) and 113 countries/regions. The 57 sectors in the model provide a broad disaggregation of the industrial sectors in each country and region. Version 8 database includes 128 regions and 57 commodities for the reference year 2007 (available early in 2012).

Strengths of the GTAP Database Relatively standard, multi-region GE model. Fully documented, easy to use and easy to modify. Widespread use facilitates replication by others. Global CGE modelling allows economists to explore a broad range of policy issues numerically; in particular future policy changes. These types of issues cannot be undertaken with econometric approaches. Widely used for “regulatory” analysis of trade policy analysis; both at the bilateral and multilateral trade agreements. CGE framework provides a complete accounting of impacts on other sectors. Database is peer-reviewed and continually improved.

Limitations of the GTAP Database Large models involve many parameters that are difficult to validate. Given the ease of access, GTAP applications vary widely in quality. CGE simulations are not predictions but rather thought experiments about what the real world would be like if the policy change had occurred given the assumptions about the closure variables. CGE models are quantitative but have limited possibilities for testing against experience. Trade policy is sensitive to the trade restrictions in the database.

The Research Project Sponsored by the Public Health Agency of Canada 5 phases. – Phase 1. Impact of changes in food consumption patterns to a healthy diet. – Phase 2. Increased worker productivity and income from better health. – Phase 3. Impact of changes in Public Health Care Expenditures. – Phase 4. Portfolio of policies to obtain healthy eating results. – Phase 5. Dynamic analysis.

Required Changes in Diet A comparison was made between the actual and the required consumption of three food categories: fruits and vegetables, dairy products, and meats. Scenario 3. fruit and vegetable consumption increases by 35%, dairy product consumption by 46%,and meat consumption decreases by 43%. Scenario 4: fruit and vegetable consumption increases by 50%, dairy increases by 41% and meat consumption decreases by 20%.

Adoption of the Healthy Diet Guidelines: Change of GDP (%) Due to a Change in Diet Strategy 2 Scenario 3Scenario 4 Garriguet, 2006Statistics Canada, 2010 Canada USA Brazil Chile Mexico Rest of LACs Rest of OECD Rest of Asia ROW

Changes in Total Output (%) Due to a Change in Diet Strategy 2 Scenario 3Scenario 4 Garriguet, 2006Statistics Canada, 2010 Canada USA Brazil Chile Mexico Rest of LACs Rest of OECD Rest of Asia ROW

Changes in Sectoral Output (%) in Canada as a Result of Changes in Consumption of Fruits and Vegetables, Dairy Products, and Meat Products. Strategy 2Scenario 3Scenario 4 Wheat cereal grains nec vegetables fruits nuts Oilseeds sugarcane and sugar beet plant based fibre crops nec cattle, sheep, goats and horses Animal products nec raw milk Livestock and Meat Products Forestry Fishing vegetable oils and fats dairy products processed rice Sugar

STRATEGY 2Exports Imports Scenario 3Scenario 4Scenario 3Scenario 4 Canada USA Brazil Chile Mexico Rest of LACs Rest of OECD Rest of Asia ROW Changes in Total Exports and Imports (%) by Country/Region with the Adoption of a Healthy Diet

Conclusions Having Canadians adopt a “Healthy Diet” would require an increase in the consumption of fruits and vegetables and dairy products and a reduction in our consumption of meat. The impact of adopting a “Healthy Diet” for Canada is positive for all indicators: GDP, industrial output, and welfare. This occurs because the positive economic impact of increased fruit and vegetable and dairy products consumption is greater than the negative economic impact of decreased meat consumption.

Conclusions (Con’t) The economic impact on industrial sectors varies depending upon the scenario being analyzed. As expected, the fruit and vegetable primary agricultural sector and the dairy product sector experience positive benefits. While the meat products and primary livestock sectors experience negative impacts. The crop growing sectors; wheat, cereal grains, oilseeds, and other crops, all experience negative growth rates when compared to the business as usual case. Other sectors, such as light manufacturing, petroleum and coal industries, chemical and rubber, plastics industries, and transportation have experienced positive growth.

Conclusions (Con’t) A suitable portfolio of fiscal policies is needed to provide the incentives for household consumption to change their consumption patterns towards a healthy diet. The impact of having Canadians consume a healthy diet would be a reduction in the amount of nutrition related chronic diseases. Recently, questions have been raised about which policies would be the best to address the issues of healthy eating. Policies being considered by governments include both consumption taxes and subsidies for healthy alternatives. For example, government can encourage the consumption of fruits and vegetables by providing a subsidy for these commodities.