A plea for greater attention to data in policy analysis

Abstract

The technical difficulties associated with building and solving applied general equilibrium (GE) models seem to have distracted our attention from the data. In this article, we forcefully stress that whatever the sophistication of the GE analysis, it is only worth the quality of the supporting data it utilizes. We first highlight an example of a flagrant flaw in officially published input-output data (factor-income shares) by an LDC (Turkey), which many researchers use without question. We then make use of an applied GE model to evaluate the dynamic gains for Turkey from currently debated trade policy options and compare the predictions using conservatively adjusted, rather than official, data on factor shares. We show that the predicted welfare gains are not only of a different order of magnitude, but in some cases, of a different sign; hence, suggesting contradictory policy recommendations.