Table 11 provides an overview of the alternative factor market closures and elasticity
configurations considered here. The main scenario presented in sections 4 and 5 is
labelled as simulation run R0. This scenario allows for unemployment of skilled and
unskilled labour as well as for underutilization of capital in response to adverse demand
shocks in non-OECD countries by assuming rigid real factor prices, while these factors
are mobile across sectors: fixed wages and unemployment (UEM closure). Natural
resources, which enter the production of value added in the Agfood, Fuels and Other
Primary sectors only, and land, which is only used in Agfood, are treated as sectorspecific
factors, i.e. these factors are immobile across sectors. The supply of these factors
is inelastic and sector-specific factor prices adjust flexibly to exogenous shocks: full
employment but sectorally immobile factors (FES closure). For natural resources and
land, the FES closure is maintained across all sensitivity simulations considered here.
Simulation runs R1 and R2 extend the FES closure to capital markets and then to labour
markets. Note that closure configuration R2 treats all primary factors as sector-specific,
and hence effectively freezes the factor allocation and production in non-OECD regions
at initial levels. As shown in Table 12, real absorption losses are significantly stronger
under the UEM closure, while average world market prices for all goods except Agfood
drop more pronouncedly under the FES closure (Table 13).
18 This is particularly the case
for fuels and other primary commodities, and therefore the net fuel exporters experience
stronger adverse terms-of-trade shocks under scenario R2 compared to R0 (Table 14).
However, the assumption under scenario R2 that all factors remain fully employed in
developing countries after the crisis shock certainly stretches the imagination, and we consider the factor market closure employed in the main scenario to be more appropriate
in the present context.