and new investment, which is a fixed ratio of real GDP in the previous period.

The behavior of the third component—productivity—is factor- and sector-specific. Labor and capital productivity in agriculture grow exogenously at one percent per year, broadly consistent with the econometric literature on productivity growth in low income countries.<sup>23</sup> For all other sectors, capital productivity remains fixed throughout the model horizon, while growth in labor productivity (which is assumed to be Harrod-neutral, purely labor-augmenting technical change) can be exogenous or endogenous depending on the type of simulation. The evolution of skill- and sector-specific labor productivity _λ_<sup>_L_</sup> _l,i_<sup>isgivenbythefollowingequation:</sup> In the baseline scenario, also referred to as Business-as-Usual ( _BaU_ ) scenario, _γt_<sup>_L_isendogenous</sup> while real GDP growth is fixed. This allows the user to calibrate the model to any given GDP growth rate. In scenarios other than _BaU_ , _γt_<sup>_L_isfixedineachperiodatthe</sup><sup>_BaU_solutionlevel,</sup> and GDP growth becomes endogenous. Thus, in the absence of any shocks, the _BaU_ GDP growth rate is reproduced exactly. In policy simulations, real GDP growth may differ from _BaU_ due to faster/slower accumulation of labor or capital, or shocks to the sector-specific productivity shift parameters for labor, capital, or land ( _χ_<sup>_L_</sup> _l,i_<sup>_, χ_</sup> _k,i_<sup>_K, χ_</sup> _t,i_<sup>_T_).Inotherwords,variationsinGDPgrowth</sup> across scenarios can be directly attributed to the simulated policy reforms, allowing for clear welfare comparisons.

The elasticity values used in this paper come from the World Bank’s global LINKAGE model (van der Mensbrugghe, 2005b). The substitution (Armington) and transformation (CET) elasticities are “middle of the road” values in the range of elasticities used in the recent CGE literature. Many econometrically estimated Armington elasticities tend to be quite low, often below one, while the estimated CET elasticities are usually several times greater than the corresponding Armingtons (Annabi et al., 2006). Many of the CGE studies published by the International Food Policy Research Institute (see, for example, Lofgren, 2001) also use fairly low Armington elasticities, ranging between 0.2 and 2.4, while their CET elasticities tend to be around 1.5. On the other hand, studies such as Harrison et al. (2001) often use Armington (CES) elasticities of 15 at the top level and as high as 30 at the bottom. Armington elasticities in the GTAP model, which are both econometrically estimated and drawn from literature surveys, are on average 3.5 for the top nest and 7.0 for the bottom (Dimaranan, 2006). However, users of the GTAP model have often used higher elasticities; for example, Hertel et al. (1996) double the default Armington (CES) elasticities in their evaluation of the consequences of the Uruguay Round. The LINKAGE elasticities, which are on average 19 percent higher than the default GTAP elasticities, thus appear to be a reasonable compromise between the extremely high and low values.

significant progress toward this goal is bound to have large distributional and temporal effects on the labor force: as enrollment, completion, and continuation to the next education cycle rates rise, the relative share of unskilled labor would decline in favor of more skilled categories. Furthermore, increasingly larger parts of the labor force would leave the labor market (to go to school) and return after having completed their education. We ignore these possibilities for the sake of simplicity and to keep the discussion focused on trade liberalization and its immediate consequences. See Bussolo and Medvedev (2006) for a more detailed exposition.

> 23For example, Martin and Mitra (1999) estimate that total factor productivity in agriculture grows at an annual rate of 1.44 to 1.99 percent in low income countries.

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