But perhaps the most important contribution that dynamic models could make is to show how much greater are the gains from trade liberalization than is apparent from comparative static models, and how little are the adjustments needed because of trade reform relative to those due to the normal pace of structural changes that accompany economic growth.

# _e. Effects on factor markets and especially wages and employment_

The evident concern about the possibility that trade reform could have adverse impacts on wages and/or employment for lower-skilled workers in developed countries attracted considerable interest of analysts in the latter 1990s (see Greenaway and Nelson 2001) but less interest from empirical CGE modellers than one might expect eve n though in principle CGE models are well served to provide insights. The problem in practice is that the factor market assumptions used by many modellers are often rather simplistic (and horrify labour economists): full employment before and after the policy shock, a perfectly inelastic supply curve for labour, few if any skill differentials or sector-specific skills, costless adjustment to shocks, and often no minimum wages or any other factor market distortions. Parading factor market results would require exposing those assumptions (and those assumed for land and capital markets). Clearly these factor market issues should be being dealt with for the sake of getting better trade and welfare results anyway, so if greater demands for such modelling results lead to more-realistic specifications of factor and especially labour markets, that will be a doubly good thing.

In many people’s eyes the private and social costs of adjustment for firms and households to trade reform are paramount. Those one-off costs need to be weighed against the non-stop flow of economic benefits from reform, even if they tend to be small when there are long phase-in periods or small tariff or subsidy cut per year. Even so, they are of great significance to communities and hence to politicians, and estimates for them have been provided much less than have estimates of the gross benefits from reform.

# _f. Effects on household and regional income disparities and poverty alleviation_

The Seattle debacle in late 1999 and the protests at numerous global economic leaders’ meetings since then make clear that there is a strong demand for empirical modellers to say something also about the impact of shocks such as trade policy reform on the distribution of incomes across households and regions within each country, and in particular on the incidence of poverty, especially in poorer countries. That requires going beyond calculating just factorial income distributional effects. It requires including utility and earnings functions for several instead of just a single household. Inputs into that specification could be household survey data for urban and rural areas, from which it may be possible to estimate the shares of different (say) quintiles or deciles of households’ incomes from different productive factors and from government transfers net of taxes, and the shares of their expenditure on different products.<sup>27</sup>

# _g. Effects of domestic policy responses to trade reform_

Having identified the gainers and any losers from a trade policy change, one could draw on our understanding of the political economy of economic policy formation to

> 27 Early examples of modelling exercises along these lines are Friedman (2000), Hertel et al. (2002) and Bhattasali, Li and Martin (2004). Hertel and Winters (2005) will report the results from a multi-country World Bank research project along similar lines, focusing on the poverty effects of a likely Doha Round outcome.

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