Impact of trade liberalization on the Philippine economy : a CGE [computable general equilibrium] modeling approach

Varying levels of trade restrictiveness and alternative biases in trade protection are simulated in a computable general equilibrium (CGE) model calibrated to the 1983 structure of the Philippine economy. The model disaggregates the economy into 17 production sectors and 9 types of households. There are three types of productive factors: labor, mobile capital, and fixed capital. The model adopts a Walrasian closure that allows it to address issues of trade policy and resource allocation efficiency. The analysis includes a dynamic extension of the static CGE model in which repeated solutions are linked by capital stock updates. The effects of trade liberalization on growth are traced over a ten-year period. The influence of government behavior on policy performance is examined under two specifications of government spending behavior. In one version, government consumption is assumed to adjust fully to changes in government revenue. In the other, the government maintains a fixed real level of government consumption. All simulations are implemented using the transactions value approach (TV) in a GAMS/HERCULES software system. The simulations lead to the following findings. First, there are only modest gains in GDP level and growth from the improved allocation of factors that results from the removal of trade distortions. This suggests that to obtain the impressive aggregate income growth rates empirically associated with successful trade liberalization experiences, the government must do more than get prices right. Second, the most powerful impact of liberalized tariff policy is the shift of income from the government to the households. The implication for policy is that trade liberalization must be accompanied by a corresponding reduction in government consumption expenditure and policies to encourage increased private savings. Third, a trade protection structure biased in favor of industrial sectors does poorly in comparison with one that is biased in favor of food and agricultural sectors. The government should therefore reverse its policy of liberalizing much faster food and agricultural imports in comparison to the liberalization of industrial imports. Fourth, income distribution effects are not pronounced between households. This finding must be treated with caution, however, since this is the result of the model"s relatively high level of household and factor aggregation. Fifth, comparative advantage in agriculture declines as the Philippine economy grows. This is due to the higher dependency of agricultural production on fixed factors, i.e., natural resources. The viability of agricultural communities over the long run will require substantial investments in human capital and agricultural technology. (Author abstract)