Gains from Economic Integration: Theory and Evidence from Agricultural Markets

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AbstractProposal Title: Gains from Economic Integration: Theory and Evidence from Agricultural MarketsProposal Number: SES - 1227635 Principal Investigator: Dave Donaldson How large are the gains from economic integration? Since researchers never observe markets that are both closed and open at the same time, the fundamental challenge in answering this question lies in predicting how local markets, either countries or regions, would behave under counterfactual scenarios in which they suddenly become more or less integrated with the rest of the world. This project will develop a new approach in order to obtain knowledge of such counterfactual scenarios.The central idea is to focus on agriculture, a sector of the economy in which scientific knowledge of how essential inputs map into outputs is uniquely well understood. As a consequence of this knowledge, agronomists are able to predict how productive a given parcel of land would be were it to be used to grow any one of a set of crops. The approach of this project combines these agronomic predictions about both factual and counterfactual technologies with a general equilibrium model in which heterogeneous parcels of land are allocated to multiple crops in multiple local markets under perfect competition.To date this research has focused on applying this new approach to the context of U.S. agricultural markets from 1880 to 2002. A combination of agronomic data from the Global Agro-Ecological Zones (GAEZ) project and historical data from the U.S. Census identifies the spatial distribution of crop prices across U.S. counties over time, while still allowing for unobserved crop-county-year specific productivity shocks. These estimates of local prices further identify changes in trade costs over time and, in turn, the gains from market integration over the period from 1880 to 2002. Ongoing work in this project applies a similar approach to study global agricultural trade reform. Despite its vital importance for many developing countries, there is relatively little work on trade in agricultural goods. The new approach developed here is potentially well suited to fill this gap by offering a flexible, tractable, and scientifically-informed framework for quantitative work on this topic. The goal will be to improve forecasts of how the removal of agricultural trade policies may affect the prices and trade flows of agricultural goods, as well as the welfare of those who produce and consume these goods. Such considerations are at the heart of the World Trade Organization's Doha Round.A second area of ongoing work focuses on the economic consequences of climate change. Since agronomic models (such as the GAEZ model) can be re-computed under a wide range of climate change scenarios, the new methodology developed here also has the potential to shed new light on how countries will adapt to climate change in the agricultural sector through changes in their output mix and through the ability to trade with other countries.