Irish Unification. A
Simulation Study!
Klconsult.ca!
klcpem@gmail.com!
Background: COF!
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Curiosity and Black Swans!
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Opportunity: Demand driven!
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Feasibility: Is it doable?!
Feasibility: Dealing with Missing SAM
Data!
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SAM data for Northern Ireland are not available due
too established practices on the side of the UK!
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Proxy SAM as the way out!
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The data researcher for the project, Yuri Tricys, did
some pioneering work to allow a modelling
procedure!
Methodologies!
In the absence of Input-­‐output tables, internal and external transfer data, and regionalized trade data, adequately disaggregated, various methodologies and models were employed to compile and es=mate social accoun=ng matrix (SAM) data requirements for the Northern Ireland (NI) side of the NIROI CGE model. A non-­‐survey methodology known as the “Cross-­‐Hauling Adjusted Regionaliza=on Method” was used to determined total trade for NI. Regional employment shares were applied to na=onal level data to extract various por=ons of the supply and use table. Regressions of business registry data on aggregated data were used in supply side disaggrega=ons. Comprehensive trade data bases were compiled, harmonized, sorted and queried to proxy and extract regional trade data. Mul=step concordance methods enabled data harmoniza=on across classifica=ons. Travel surveys and transport sta=s=cs enabled applica=on of balance of payment methods in external transfers modelling. Sourcing of detailed interna=onal, na=onal and regional surveys enabled further proxy modelling and es=ma=on constraint. Finally, high levels of known informa=on were incorporated to limit reliance on mathema=cal balancing procedures and op=mize accuracy, enabling greater consistency with published sta=s=cs. The report provides a step-­‐by-­‐step procedure that demonstrates the proxy process. Special thanks go to Ana Corina Miller from Trinity College Dublin who happens to prepare for her PhD in Economics a DSAM for Northern Ireland Why the Going Down this
Road?!
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Choice of Modeling comes with data requirements!
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HERMES as an economy-wide structural computational
general equilibrium model that uses 180 core behavioural
equations and a total of 824 functional equations as a
prominent modelling framework!
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…runs into infeasible data problems!
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Korean Integration Model (KIM) developed by Noland/
Robinson for a Korean Unification Simulation seems as
advantageous as it is specified to exactly deal with regions
that are limited in data sources!
Modeling Approach!
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Multi-sector, multi-region dynamically recursive
computable general equilibrium model!
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Calibrated for 2009!
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Period 2018-2025!
Key Variables/ Drivers of
Simulation!
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Unified tax system as NI adopts ROI tax regime!
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Cross-border trading costs (modeled as a 5%
p.a.reduction)!
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Exchange rate (NI adopts the Euro)!
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Political Union modelled as a 2% p.a. reduction in NI
government expenditures due to elimination of duplicative
government functions!
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Fiscal transfer (NI budget deficits financed by ROI
transfers)!
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Each of the drivers is being analyzed separately !
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Next step was the combination of variables for
three differing scenarios!
Scenario 1!
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The extreme conservative scenario!
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Unified Ireland finances entire NI budget deficit;
harmonization of government functions reduces NI
expenditures by 2 % p.a.; adoption of ROI tax regime has
no impact on FDI and productivity!
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NI effects positive; ROI effects positive but small!
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In Euro terms; NI GDP gains accumulate to 8.8 billion; ROI
GDP gains accumulates to 1.8 billion!
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Catch-up petering out overt the simulation period!
Scenario 2!
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Unified Ireland finances budget deficit of NI region!
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NI government savings of 2% p.a. !
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Tax regime adoption and foreign direct investment
regime adoption attract FDI inflows that then drive
NI productivity !
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Strong productivity improvements in NI drive GDP
effects!
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GDP effects for NI accumulate to 11.27 billion Euro
over the simulation period!
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GDP effects for ROI accumulate to 18.5 billion
Euro!
Scenario 3!
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All of scenario 2 plus government savings are now
not applied to deficit reductions but reinvested to
improve government functions (expenditure
perspective)!
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NI GDP growth rate on a steady upward path!
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GDP effects for NI accumulate to 25.3 billion Euro!
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GDP effects for ROI accumulate 10.33 billion Euro!
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Modeling assumptions again: Noland makes the
correct point that political union in our simulation
has a negative GDP-effect due to the set up of the
model. If we would assume that the decrease in
public expenditure due to the abolition of
duplicative functions leads to free up labour
(resource perspective) and if we further assume
that freed up labour would go into productive use,
then overall output would likely increase. This
reallocation would be exactly the job of a proper
industrial policy approach – something we did not
include as it is part of the policy function.!
Conclusions!
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Irish unification pays off in terms of GDP gains!
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In relative terms it pays off more for NI then for ROI but pay
off is positive for both entities over the simulation period!
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No surprise: smaller and economically weaker region wins
more as the catch-up space is larger!
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exchange rate effect is positive due to devaluation but will
peter out over time (and thus no sustainable driver)!
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FDI regime and Tax regime drivers are prominent for
productivity effects!
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Sustainable driver: In particular FDI driver requires
active state policies in regards to education, skill
training and also ‘industrial policies’, including R & D. !
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Our modeling tried to be conservative, and still resulted
in positive net GDP gains for a United Ireland as well as
for both regions.!
And yet: Be aware that this is a modeling outcome. Politics
can generate some quite disturbing interferences.!