General Equilibrium

This study explores the long-term impact of population ageing on labour supply and human capital investment in Canada, as well as the induced effects on productive capacity. The analysis is conducted with a dynamic computable overlapping generations model where ...

Economic methodologists most often study the relations between models and reality
while focusing on the issues of the model’s epistemic relevance in terms of its relation
to the ‘real world’ and representing the real world in a model. We complement the
discussion by bringing the model’s constructive mechanisms or self-implementing
technologies in play. By this, we mean the elements of the economic model that are
aimed at ‘implementing’ it by envisaging the ways to change the reality in order to
bring it more in line with the model. We are thus concerned mainly not with the ways to
change the model to ‘fit’ the reality, but rather with the model’s own armature that is
supposed to transform the world along theoretical lines. The case we study is Arrow–
Debreu–McKenzie general equilibrium model. In particular, we show the following:
gradient methods and stability could be regarded as constructive mechanisms of
general equilibrium modeling in the context of market socialism debates; the obsession
of general equilibrium theorists with these concepts can be partly explained by the fact
that they hoped not to be faithful to reality, but rather to adjust it to fit the theoretical
model; mechanism design theory initiated by the stability theorist Leonid Hurwicz
could be seen as a successor of this position. We conclude by showing the relevance of
this analysis for epistemic culture of much of contemporary economics and hence,
claim that it is an important complement to the traditional philosophy of economic
modeling.

A number of countries have recently discovered and are developing oil and gas reserves. Policy makers in such countries are anxious to obtain the greatest benefits for their economies from the extraction of these exhaustible resources by designing appropriate policies to achieve desired goals. One important theme of such policies is the so-called local content created by the sector—the extent to which the output of the extractive industry sector generates further benefits to the economy beyond the direct contribution of its value-added, through its links to other sectors. The use of industrial policy in the petroleum sector to support broad-based economic growth is hardly a new trend in the oil and gas sector. Local content policies (LCPs) were first introduced in the North Sea in the early 1970s and ranged from restrictions on imports to direct state intervention in the oil sector. Over time the aim of LCPs has evolved from creating backward links (that is, supplying input to the local economy through transfer of technology, the generation of value-added in domestic supply sectors, the creation of local employment opportunities, and increasing local ownership and control) to creating forward links link (that is, processing the sector’s output prior to export through, for example, the establishment of refineries, petrochemical industry, and the production of fertilizers). While LCPs have the potential to stimulate broad-based economic development, which is necessary to alleviate poverty and achieve the United Nation’s Millennium Development Goals (MDGs), their application in petroleum-rich countries has achieved mixed results. The use of specialized inputs and the technological complexity of the petroleum sector often limit the possibility of developing backward and forward links into the local economy. An economy that is very limited can hardly be expected to quickly supply services (let alone build forward links). A fast-growing petroleum sector coupled with too ambitious local content targets may exacerbate supply bottlenecks arising from increased aggregate final demand. This would ultimately affect employment and output trends in other sectors of the economy, create distortions and inefficiencies, and in some cases even promote corruption. Furthermore, the size and location of petroleum projects also affect the type of potential links, and the speed at which they can efficiently develop. The use of LCPs raises a number of questions:

What exactly is “local content”?
What is the extent of local content in the oil and gas sectors?
Why is increasing local content good for development?
What types of policies can be used to encourage an increase in local content?
What are the costs and benefits of introducing such policies?
How can the implementation of such policies be monitored and how can their impacts be measured?
What are the lessons to be learned from oil- and gas-producing countries that have implemented policies to increase local content?
This study serves to introduce the topic by describing policies and practices meant to foster the development of economic links from the petroleum sector, as adopted by a number of petroleum-producing countries both in and outside the Organisation for Economic Co-operation and Development (OECD).