Trade and Industrial Policy in Developing Countries: What Scope for Interfaces between Agent-Based Models and Computable-General Equilibrium Models?

How best to assess trade and industrial policy in developing countries is a controversial question that unlocks a host of modelling complexities. Large computable general-equilibrium (CGE) models dominate many economic policy debates, but recent developments in the field have demonstrated that it is by no means clear that they give reliable results to questions of how trade reforms affect the poor. Over the last decade or so, a new approach to modelling complex systems has emerged using agent-based models (ABMs). This paper explores the question of whether ABMs are useful for economic policy-makers seeking to quantitatively model the effects of trade and industrial policies and whether constructive interfaces could be developed between CGE models and ABMs. The paper argues that in developing economic policy, ABMs can and should be used in conjunction with CGE models and that there is much to be gained from a greater understanding of the strengths and weaknesses of different modelling approaches, and what domains are most appropriate for their use. It concludes with some reflections on the reasons for the success of CGE approaches and ways in which ABMs could be made more widely understood and used among economists. 1 PhD candidate, Department of Econometrics & Business Statistics, Monash University. I would like to thank my supervisors Brett Inder (Monash), John Madden (Monash), David Green (Monash) and David Batten (CSIRO) for their valuable assistance. Comments are welcome. Please direct correspondence to [email protected]