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EMF SR 2: Application of Quantitative Methods for Energy-Economic Planning in Semisocialized Economies

This volume investigates quantitative modeling techniques as applied to economies other than textbook free market economies. Most existing quantitative modeling approaches are descended from textbook supply-demand balancing ideas, which frankly do not apply in most economies of the world. Indeed most economies of the world are not comprised solely of private producers and private consumers; the government is a large and important player in most economic systems. And the government does not necessarily pursue the textbook objectives of profit maximization or utility maximization upon which quantitative models are founded. We shall term economies with a large and important government sector <em>semisocialized economies</em>, and we shall investigate the fundamental nature of such economies, the adaptations in economic modeling approaches needed to characterize such economies, and how such adaptations can be used to support public policy analysis. <br /><br />The volume is separated into six sections:<br /><br />1. <em>Energy and Economic Planning in a Semisocialized Economy </em><br /><br />This paper characterizes the fundamental nature of the energy-economy system in what we will term a semisocialized sociopolitical environment. As an aid to such characterization, we will highlight the differences between semisocialized economies and free market economies. Our purpose is to investigate the relationships between the formulation of public policies and their implications for the overall socioeconomic system. We also define what we mean when we use the term public policies, alternatives, scenarios, and uncertainties. We view this as necessary to avoid confusion with other implicit definitions people might have for these terms. <br /><br />This paper finally evaluates the applicability of a particular quantitative modeling methodology &ndash; Generalized Equilibrium Modeling &ndash; to help decision makers in semi-socialized countries anticipate in the intermediate and long run the overall socioeconomic impacts that will result from public policies they might apply. <br /><br />Because we are most intimately familiar with the situation in Argentina, we will frequently use Argentina as an example. While we do not argue that the situation in Argentina can be directly extrapolated to all other countries, there are nonetheless similarities (particularly in South and Central America) that lead us to believe in the validity of such extrapolations.<br /><br />2. <em>Analytical Approach </em><br /><br />This chapter investigates the main behavioral components of a semisocialized economy and proposes the skeleton of an appropriate analytical framework. The proposal is based on the observation that many semisocialized economies in the world today are relatively low-efficiency economies, consuming a large amount of capital to support energy sector investments, and as a result, encountering severe financial problems. Our intent here is to outline a basic analytical approach whose long run objective is to develop a proper set of public policies for semisocialized economies that can perhaps alleviate the present problems in such economies. <br /><br />3. <em>Effects of Existing Energy-Economy Public Policies on Sectoral GDP and Energy Investments</em><br /><br />In the recent past, many semi-socialized economies have experienced low GDP growth together with high energy growth. The apparent contradiction is easily explained by analyzing structural economic changes rather than focusing purely on energy supply-demand problems. This chapter focuses on such structural changes and their relationship to energy supply and demand, implicitly listing a set of economic phenomena that should be considered in quantitative approaches to energy and economic planning. <br /><br />Argentina since 1950 experiences a change in the composition of the GDP. In particular, the importance of traditional activities such as agriculture, cattle breeding, and textiles diminished, while the importance of new activities such as petrochemical, mechanical, and metallurgical manufacturing increased. These changes were driven in large part by public policies, and the induced fundamental changes in the demand patterns for energy and the traditional energy-to-GDP ratio. <br /><br />This chapter focuses on the role of the government in this structural change, attempting to shed light on the role of the government in a semi-socialized economy. In particular, we will examine how government activities might have led to the accelerating pace of energy investments and how internal energy prices were set, <br /><br />4. <em>Quantitative Planning Methods for Semisocialized Economies &ndash; The Generalized Equilibrium Approach </em><br /><br />This section describes the recently completed quantitative energy-economy assessment in Argentina with the cooperation of the United States government. The analytical tools used in that assessment are described, and the rationale &ndash; both theoretical and practical &ndash; for the particular tools used are given. We will focus to the maximum extent possible on the adaptation of those tools to deal with the specific problems of the semisocilaized nature of the Argentine economy. <br /><br />We also describe the network representation of the Argentine economy upon which the assessment was based, the important planning assumptions, and the types of macroeconomic scenarios and energy alternative selected. <br /><br />The section concludes with a brief discussion of the important findings of assessment and their implication for public policy in Argentina. These findings have influenced the direction of public policy in the country since the assessment. <br /><br />5. <em>Application of the Gems to Planning in Semisocialized Economies: Problems Identified and their Potential Consequences</em> <br /><br />This chapter details the operating and theoretical problems found during the Argentine energy-economy assessment. Among the many problems encountered by the Argentine team, several were simply the result of a lack of experience. Such problems were easily solved with help from the American team. However, many problems encountered were due to the specific nature of the Argentine economy and the need for customized modeling capability to represent it. That is, they were due inherently to the nature of the semisocialized economic system in Argentina. Most of these problems resulted from the fact that the more socialized the economy is, the less it tends to response to price incentives. Therefore, model capabilities related to free markets had to be adapted (or abandoned completely) in favor of logic that applied specifically to Argentina. <br /><br />As this section discusses, many of the requisite changes required simple modifications in the network representation of the Argentine economy; still others required assembly of heretofore unavailable data; and still other required fundamental change in model structure and logic. <br /><br />This section surveys a range of problems encountered, what was done to <em>fix</em> them, and what remains to be done in the future to ensure that the GEMS capability transferred to Argentina remains a vigorous ongoing capability. <br /><br />6. <em>Expansion of the GEMS to Solve Energy-Economic Planning Problems in Semisocialized Economies </em><br /><br />This concluding section offers a summary description of the problems identified in applying the GEMS to semisocialized economies related not to input data or to network structure. Specifically, this section describes in some detail the particular issues in semisocialized economies that require structural change in the calculation methods in the GEMS. Again we caution the reader that this section is not intended as an indictment of the GEMS; indeed we feel that GEMS is the best available tool by far. Rather, this section offers specific, concrete suggestions as to how the already good GEMS approach can be made even better for semisocialized economies. Our intent is to communicate at a fundamental level desirable changes in the GEMS to allow it to better represent the nuances of semisocialized environments. <br /><br />The GEMS model can be profitably used in its current state, comparing many different scenarios to infer policy decisions. In particular, the GEMS allows policy makers to determine explicit quantitative values to particular public policies, i.e., how much would a particular public policy cost in economic terms? <br /><br />This concluding chapter provides a summary of a large number of desired changes in the GEMS. These suggested changes are intended as a blueprint to analysts, policymakers, funding agencies, and all other parties to public policy analysis in semisocialized economies. We have attempted to specify the location of the suggested changes in the GEMS as specifically as possible: by sector, type of variable or parameter, optimization function, etc. We also offer several new modeling concepts to measure key phenomena such as overall social benefit, welfare, cash-flow, and so forth. <br /><br />Because we suspect most readers are familiar with free market economies, we will make liberal comparisons and contrasts with the standard free-market economic model. <br /><br />