Impact Assessment of National andRegional Policies:An Application of the Philippine RegionalGeneral Equilibrium Model (PRGEM)

Roehl BrionesSenior Research Fellow, PIDSWith:

Ella Antonio (Brain Trust Inc.)Grace Borja Kristine Villarino, Matthew Sibayan, OrvhilCardenas (National Economic Development Authority)

6th CBMS Philippines National ConferenceDecember 8-10, 2009 Manila Diamond Hotel

What to expect

Overview of the issuesModel structure and dataScenarios and resultsImplications

Overview

Per capita realGDP index

Povertyincidence ofpopulation

(2006)

Agricultureshare in GDP in

% (2008)

Philippines 100 26.9 18NCR 251 7.1 0CAR 130 28.8 14Region X - Northern Mindanao 111 36.1 31Region VII - Central Visayas 99 30.3 10Region XI - Davao 96 30.6 26Region IVB - MIMAROPA 95 43.7 38Region VI - Western Visayas 94 31.1 25Region IVA - CALABARZON 91 16.7 19Region XII -SOCCSKSARGEN 81 33.8 43Region III - Central Luzon 76 16.8 24Region IX - ZamboangaPeninsula 70 40.2 49Region I - Ilocos 58 26.2 42Region II - Cagayan Valley 58 20.5 50CARAGA 51 45.5 34Region V - Bicol 48 41.8 31Region VIII - Eastern Visayas 48 40.7 34ARMM 19 55.3 58

Some regionalindicators

Development: regional dimension

Welfare disparities across regions Regions with lower income tend to

have higher poverty Economic structure varies across

regions Government moving towards

decentralization

Overview

Development: regional dimension

Geography raises marketing costsand inefficiency

Better infrastructure - faster growth Economywide policy:

Liberalization promotes dispersal ofmanufacturing

Remaining protection now skewedtowards domestic agriculture (rice, corn,sugar, meat)

Sources: Ordoñez and Associates (2005); Llanto (2007); Tecson(2007); David et al (2009)

Overview

Policy concerns

Decentralization and regionalization(“Super-regions”)

Need for agricultural modernization Trade liberalization Distribution of investments

(concentrate or disperse?) “Level playing field” by investing in

competitiveness

Objectives

Examine various scenarios oneconomywide and regional policies,related to: Removal of agricultural protection Investments in market integration

across regions

Discuss implications for the nationaland regional development strategy

Overview

Regional CGEs

Extends usual CGE to regionaloutcomes and regional shocks

Two approaches:- Top-down: ad hoc disaggregation –most

common- Bottom-up: better, but data-intensive

o PRGEM is bottom-up

Overview

Sectors

Cereals Livestock and Poultry Fisheries Other agriculture Agro-processing Other industry Trade, Transport and Storage Services Other services

Model structure and data

Regions

Leading region: Metro Luzon: NCR,Southern Tagalog, Central Luzon

Lagging regions: Other Luzon – rest of Luzon Visayas Mindanao

Model structure and data

Production

Gross output is a CES combination oflabor and capital

Intermediate input requirementsbased on Leontieff technology

Productivity shock incorporated byeffective price parameter

Model structure and data

Institutions and factors of production

Households – one per region Fixed savings Consumption - LES

Derives income from: Fixed factor endowment Transfers (government, foreign)

Factors are labor and capital Factor markets at equilibrium Factors immobile across regions

Model structure and data

Institutions

Government – one per region Collects taxes (income, sales, imports) Fixed budget and spending shares Provides (receives) transfers

Firms – one per sector and region Intermediate input demand Investment demand (Dervis et al ‘82)

Total savings from HH, G, Foreign

Model structure and data

Interregional and international trade

,G RQD

, ,G RJ R

RJ

QDRR!

,G RQDT

,G RQDH

,G RQDRF

CES

,G RQDR

,G RQDF

, ,G R RJQDRR

, ,G R RJQDRR

CES

CES

Interregional and international trade

,G RQS

, ,G RJ R

RJ

QDRR!

,G RQST

,G RQSH

,G RQSF

CET

Model structure and data

PRGEM incorporates unittransaction costs in movinggoods across regions

Closure

Flexible exchange rate Factor endowment = factor demand By region: internal supply = internal

demand Normalized prices (fixed value of

CPI by region)

Model structure and data

Regional data set

1. National social accounting matrix(SAM)

2. Regional accounts3. Regional foreign trade and trade taxes4. Disaggregate GVA by sector and region5. Decompose GVA into factors and

indirect taxes6. Interregional trade data set

Model structure and data

Regional data

7. Aggregate regional SAM8. Step 8: regional SAM

Transaction cost computed fromunit ratios

Share allocation for initial sectordisaggregation by region

Balancing of SAM by adjustingintermediate inputs via RAS

Model structure and data

Scenarios

1. Reform: reduce agriculture sectortariffs to 5%

Catch-up: the following are appliedonly in lagging regions Shock unit transaction costs of

importing (-20%) Shock productivity in Trans (5%)

Scenarios and results

Scenarios

3. Concentration: apply the sameshocks in Catch-up, but only to theleading region

4. Reform with catch-up: combineCatch-up with Reform scenarios

Scenarios and results

Scenarios and results

Scenarios and results

Results: Reform

Reform is beneficial across regions There is a trade-off between size and

distribution of welfare gain Concentration most beneficial Catch-up spreads benefits around

No additional welfare benefitsfrom combining investment withreform

Scenarios and results

Scenarios and results

Scenarios and results

Scenarios and results

Scenarios and results

Scenarios and results

Scenarios and results

Scenarios and results

Scenarios and results

Scenarios and results

Results

Reform: import expansion, esp. in agriculture Decline in import-competing sectors

Investment: Output of Trans responds most Other sectors mixed; even Concentration

can raise output outside Metro Luzon(some sectors)

Reform + catch-up additively combinesindividual scenarios

Scenarios and results

Implications

Proceed with tariff reform given householdbenefits, even for the lagging regions.However, the scope for further welfareimprovement is limited.

Given considerable scope for welfare gain,promote improvements in productivity andmarket integration.

Confront the trade-off between size anddistribution of gains is a big issue intargeting investments.

Implications

Implications

Can mitigate contractionary impacts fromtariff reform by expansionary effects frominvestment in productivity and integration.

But - no welfare “synergies” from doingboth reform and investment.

Reform need not be delayed by of absenceof sector or regional competitivenessinvestments – unless distributional impactsare paramount

Implications