# **5. The economy-wide effects of services trade liberalization in Tunisia**

# _Modeling framework_

The effects of these reform initiatives have been projected using the FTAP model of the world economy, which was developed by Dee and Hanslow (2001), is documented fully in Hanslow, Phamduc and Verikios (1999), and is available for download at http://www.crawford.anu.edu.au/staff/pdee.php. The FTAP model is a computable general equilibrium model incorporating services delivered via FDI. It differs in turn from GTAP (Hertel 1997), the ‘plain vanilla’ model from which it was derived, in three important respects.

First, because many services are delivered primarily via commercial presence, the modelling framework includes foreign direct investment as a mode of services trade delivery, and covers separately the production and trading activity of foreign multinationals. In other words, GTAP, the conventional multi-country model, is split out by ownership as well as location. In the current version of FTAP, the foreign ownership shares for Tunisia were obtained from survey data provided by Tunisia’s Institut National de la Statisique (INS). The relative size of the Tunisian communications industry was also adjusted upwards, compared with that in the original GTAP database (version 6), based on value added shares provided by INS.

Second, by virtue of foreign ownership, at least some of the profits of foreign multinationals will be repatriated back to the home countries. Thus the profit streams in the conventional multi-country model have to be reallocated from the host to the home country, after provision is made for them to be taxed in either the home or host country. This reallocation leads to a distinction between GDP — the income _generated_ in a region — and GNP — the income _received by residents_ of a region. The latter forms the basis of (although is not identical to) the welfare measure in FTAP. The information on profit repatriation comes from the Balance of Payments Statistics of the International Monetary Fund (IMF).

Finally, not all profits of foreign multinationals need be repatriated to the home country. Some may be reinvested in the host country. To account for this phenomenon, and to allow for the effect that regulatory reform may have on both domestic and foreign direct investment more generally, the model makes provision for savings and capital accumulation. This is particularly important, since some regulatory barriers are aimed directly at limiting foreign equity participation. It is therefore important to capture how regulatory reform will affect not just foreign ownership _shares_ , but also the _total amount_ of productivity capacity available to an economy. National savings rates are derived from the macroeconomic data in the International Financial Statistics and Balance of Payments Statistics of the IMF. Government savings rates are derived from the Government Finance Statistics of the IMF. Household savings rates are calculated as a residual.

The FTAP model also differs from GTAP in other respects. In particular, it allows for firm-level product differentiation, economies of scale and large-group monopolistic competition. This is also important, since services tend to be highly specialized, being 9