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Saade Chami is a Division Chief in the Middle East and Central Asia Department, Selim Elekdag is an Economist in the Middle East and Central Asia Department, and Ivan Tchakarov is an Economist in the Research Department. The authors are indebted to Douglas Laxton for his invaluable comments, constant support, and encouragement. Susanna Mursula and Dirk Muir have been extremely helpful in developing the procedures used in the model simulations. All remaining errors are the authors’.
Relatedly, the GCC countries also possess 20 percent of proven world natural gas reserves. With the discovery of the North Gas Field in 1971—the world’s largest nonassociated natural gas field—Qatar itself controls 11 percent of proven global natural gas reserves.
Another paper that investigates the issues of monopolistic competition and economic integration is Peretto (2003). Using a different approach, he considers a world economy populated with oligopolistic producers and argues that integration improves growth and enhances welfare.
Multi-country versions of GEM are currently under development, however, we believe a two-country version of GEM captures the main features we wish to highlight.
The model introduced in this section is a simpler variant of the IMF’s GEM based on the work of Bayoumi, Laxton, and Pesenti (2004). For a more detailed presentation of GEM, see Laxton and Pesenti (2003).
The convention throughout the model is that variables which are not explicitly indexed (to firms or households) are expressed in per capita (average) terms. For instance,
Although the details are deferred to Appendix I, these imported goods are all differentiated products which motivate the existence of monopolistic competition.
Labor services provided by the households are also differentiated products as explained in Appendix III.
We consider a range of country sizes for Yemen based on population, GDP, and per capita income. There are not substantial changes in our results for a range between 5 to 20 percent.
The calibration of the parameters is for the most part very standard, see Bayoumi, Laxton, and Pesenti (2004) for further details and discussions.
Consistent with Bayoumi, Laxton, and Pesenti (2004), the results are extremely robust to the calibration of these parameters.
These are the only parameters that change and thus distinguish the baseline nonstochastic steady state with the new nonstochastic steady state after the markups have been altered. Although it is conceivable that economic integration will affect other parameters, we are interested in isolating the impact due to the change in the market structure in each block.
Even though in these experiments we compare the nonstochastic steady state in the baseline to a new nonstochastic long-run equilibrium, stochastic experiments are easily conducted using GEM.
It is important to highlight that each column reflects an individual experiment. We consider a broad range of markup decreases to capture a plausible depiction of the monopolistic structure in each block. Although in principle the markup can decline over time, this need not be the case. Moreover, regional integration can increase competition so that the markups only decline by an arbitrary percentage. Furthermore, the decrease in the markup need not start from the value of 40 percent.
This is more relevant to the GCC block, where labor market rigidities are more prevalent and where labor of locals is shorter in supply. See Section IV C for further details.
This stems from the slight nonlinearity, which is a consequence of consumer preferences for the continuum of differentiated products.
In fact, many GCC countries realize the inherent problems in their respective labor markets. One policy that is being promoted to improve the efficiency of their labor market structure is to induce citizens to work in the private sector, especially in nonhydrocarbon-related industries. In Oman, Qatar, and Saudi Arabia, this policy is referred to as Omanization, Qatarization, and Saudization, respectively.
It is important to emphasize that these dynamic simulations are not impulse response functions. Rather, we take a novel approach and provide the path of a boundary value problem. Each experiment depicts the evolution of the economic indicators from the baseline nonstochastic steady state (t = 0), to the new nonstochastic steady state (t = 100), that is the new long-run equilibrium.
This gradual rate of convergence was chosen to reflect the slow effects of most structural changes on the respective economies.