Impacts and Adaptation
Starting from the ICES core model, we develop an extension called ICES-XPS to specifically consider the public actor. Indeed, in the core model the government is part of a regional household but it hasn’t its own budget and its representation is limited to only consuming a fraction of regional disposable income (see figure B, Core model). In this extension, instead, we split the regional household into the two main actors in the economy, i.e. the private household and the government.
Figure: the income generation and uses in ICES-XPS
In ICES-XPS, the regional income is split into:
- Private household income which consists of revenues from primary factors (capital, labor, natural resources);
- Government income which is equal to the total tax revenues both from private household and productive sectors.
A series of international transactions among governments (foreign aid and grants) are collected by a fictitious international pool which redistribute them among receiving countries.
Transactions between the government and the private household consider flows inside the regional economy:
- Net Social transfers;
- Interest payment on public debt to residents.
and flows among governments and foreign private households such as:
- Interest payment on public debt to non-residents. Similarly to what happens to foreign aid and grants there is a collecting international pool which reallocates among countries according to its own rule.
Both the government and the private household consume a part of their income choosing between a bundle of domestic and foreign commodities. The latter originate from different countries according to an elasticity of substitution (the so-called Armington assumption).
The government income not spent is saved, and the sum of public and private savings determines the regional disposable saving which enters the Global Bank as in the core ICES model.
The ICES model has been developed in two regionalized versions:
- One with the disaggregation of the 20 Italian regions,
- And another with a disaggregation of the European Mediterranean area into 70 NUTS
The figure below summarizes the interlinked structure of the regionalized ICES model. The trade structure now involves trade flows to other regions inside the country, to regions outside the country and to other countries.
Figure: trade flows in the regionalized model
To determine these trade flows, the two versions of the model differ in their methodology:
- The Italian regionalized version disaggregates trade flows among regions using RAS procedure to balance economic and transport data;
- The EU Mediterranean regionalized version applies the gravitational approach.
Then, some assumptions on substitution parameters in trade among sub-regions and countries and in factor mobility are made. The Armington elasticities are higher for trade among regions than among countries to consider the so-called border effect, and to avid unrealistic full specialization at the sub-national level.
Regarding the primary factor mobility:
- Counties’ primary factor mobility doesn’t change with respect to the core ICES model;
- Land and natural resources are immobile across regions;
- Labor (both skilled and unskilled) and capital supplies are sluggish among regions and immobile with respect to the Rest of the World.