1. 1 Measuring Global Welfare Gains from Aid and Trade Reforms François Bourguignon GTAP conference: Addis-Abeba, June 2006

2. 2 Motivation Global welfare gains = Sum of changes in money (dollar) metrics of national welfare Issue of interpersonal (inter country) comparability of welfare Why dollar rather than ppp-corrected values? To what extent the ranking of reforms in the global economy (aid, trade) depend on the measure of welfare that is being used?

3. 3 Outline 1.A simple model of the effects of aid in a small ‘dependent economy’ 2.Alternative money metrics of changes in national welfare due to aid 3.The effect of aid on global welfare 4.The effect of trade reforms on global welfare 5.Conclusion

4. 4 1.Aid in a small ‘dependent economy’ Tradables (T) vs non-tradables (N); production (q), consumption (c); prices : (1,  ) Budget constraint: Equilibrium : Comparative statics :

5. 5 2. Alternative money metrics of changes in national welfare due to aid Welfare : Money metric of welfare, W: Alternative definitions depend on reference price, π 0 a)Compensating Income Variation (CV) : π 0 = π b)International reference: But h( ) may be ‘complex’.

6. 6 2. Alternative money metrics of changes in national welfare due to aid (2) Practically: a)Compensating Income Variation (CV) : π 0 = π b)International reference = ppp-corrected GNI as a money metric of welfare Note that, in general: c)Other cases

7. 7 3. The effect of aid on global welfare Reference : Bourguignon, Levin, Rosenblatt (2005) Effect of aid on the international distribution of income without within country inequality Non-trivial problems of definition of aid (loans vs. Grants; debt relief; cash transfer vs. Administrative costs …) Ignoring the corrective term in : But not unlikely value = 20 to 30%

8. 8 3. The effect of aid on global welfare (2)

9. 9 4. The effect of trade reforms in global welfare Initial model to be expanded to distinguish among tradable goods :  as a vector. Welfare : V(Y,  ) = Yg(  ) Compensating variation : Ppp-deflated GNI : Relationship between the two criteria:

10. 10 4. The effect of trade reforms in global welfare ignoring corrective factor

11. 11 Conclusion Criterion for measuring welfare gain in global models matters for the size of the effects and ranking of reforms (aid, trade). Sum of CVs ( or EVs) problematic because of non- comparability of national welfare levels Rigorous evaluation (reference to an international price system) requires substantial changes in existing global modeling software

12. 12 Conclusion (end) Ppp-deflated GNI does not a bad job as an approximation brecause of its apparent simplicity. In particular it may scale up welfare gains from trade (which may cause problem elsewhere). However : – Corrective factor to take into account the identification of which needs specific analysis. Its effect remain to be evaluated. Note that global welfare evaluation does not take into account arbitrary domestic utility functions.

13. 13 END