The Philippine Tariff Reform Program: Is a Policy Reversal on Hand?

Vol. VI No. 5

The

September-October

Philippine

Tariff Is

] b_uProgram (TRP} was launched in 1981 t was temporarily shelved in 1983 ,e to the economic crisis In 1986, the ! wly.installed Aquino" government approved the reimposition of the much. debated import liberalization program as part of the country's long-term strategy for industrialization. tion,Almost varioustwo quarters years have after come its reimposiup with several assessments as to the TRP's effectiveness and relevance. To be sure, difficulties and dislocations have been noted. An interageney interim committee was then created to look into the possible measures and ad/ustments that can be made to mitigate the dOTwulties during the transition period. But rumors are ripe that a reversal of the import liberation policy is in the offing since the ,. _gram has not been, according to some quarters, beneficial to the ma/ority of the Filipino people, How true are these rumors? Does the program really work against the ma/ority of the people? ls a policy reversal th e answer? Will the committee on tariff-setting

1988

ISSN 0115-9097

Reform

a Policy O _

Program.

Reversal

Hand

?

Introduction [i-i--_hen

the Tariff Reform Program

_(TRP) its rationale was launched was made in 1981, clear, It would aim to rid the market of distortions, at least those created by government policies themselves, so that true signals would reach buyers and sellers about the real relative scarcities of goods and resources. Goods and resources would then be allocated optimally and overall welfare would be enhanced.

The Program was scheduled for implementation over a period of five years, until 1985. Halfway through the program, however, in 1983, the country

was hit by its worst post-war econoraic period. crisis, followed Thus, thebyTRP a two-year had to berecession temporarily stopped. In 1986, under a new government, the TRP was once again continued.

As in any program of reform, nonetheless, the Tariff Reform Program needs time for its effects to be seen and felt.

This is especially true for a program of liberalization which, in essence, the TRP is. The adjustment period therefore takes place first, wherein some negative effects are even likely to be felt.

But while there would be both gainers (Please turn to next page)

ALSO IN THIS ISSUE

make a/uaicious decision on this issue?

The main article in this issue, written

SEMINARS:

by Dr, Erlinda M. Medalla, PIDS Research Fellow, looks into these concerns. Her

"Import Liberalization: Industrialization".

conclusion: retain the import liberalization program but make certain ad/ustments for the transition period.

Also in this issue are the reports on the lnstitute's recently launched Resource Speaker's Forum Series and the usual update on the PIDS Program on seminarz

"ASEAN Cooperation in the Context of the Development of Some of its Members"... .................................

II

A Critical .................

Starting

Point for Stable ..................

"Economics of Public Health" .................................

"World Development Report 1988" .............................

"Financial Intermediation in the Rural Sector: Research Results and Policy Issues" ................................... _'Policy Issues in Philippine Fishery Resource-Based Development". ...........................................

. ....

5

Thrusts 5 6 7 8 9

DEVELOPMENT RESEARCH NEWS and losers in this short-run

SEPTEMBER-OCTOBER 1988

adjustment

Before

1981-85

Tariff

Reform

period, the major benefits are sure to come later, i.e., the long run and dynamic benefits which would arise due to a better allocation of resources, Still, given these adjustment costs in the short-run, it would be unwise to ignore the need for some measures which may smoothen the effects of the transition period. One such measure is tariff adjustment. And essentially, the new Tariff Bill is supposed to have addressed this need. But typical perhaps of any policy measure, some sectors have voiced their dissatisfaction on the adequacy of the tariff adjustment contained in this Bill. To 'respond to this, the new Philippine government decided to form an

Background:

What are tariffs and how do they work? What was the need for initiating the 1981-85 Tariff Reform Program in the first place?

Tariffs are schedules or rates of duties imposed by a government on imports for purposes of raising revenues. Tariffs alter prices. For instance, ira 50 percent tariff is imposed on the importation of tires, the price of imported tires would increase by exactly that - 50 percent I. Correspondingly, even prices of lo-

Program was launched, the Philippines had the highest average tariff level among the ASEAN countries, with 29 percent of total tariff headings above 50 percent and 19 percent above 70 percent. The TRP gradually reduced the tariff level over a period of 5 years, with an intermediate goal of reaching a range of 10 to 50 percent, and with an even narrower range envisioned as an ultimate goal.

When the TRP was implemented, together with the import liberalization program, price signals became less distorted. Now if buyers and sellers perceive such change to be more or less permanent, they will respond accordingly to these less distorted price signals and

Inter-Agency Committee to Review and Create Guidelines for Tariff Setting.

If undertaken in the context of adjustment measures to accompany aliberalization program, such review is probably called for. However, there appears to be a lot of instances which suggest that the interagency committee, in undertaking the review, may succumb to a reversal of policies set forth in the 1981-85 Tariff Reform Program. For example, the use of the word "tariff setting" instead of "tariff adjustment" suggests a possible departure from the basic objectives of the TRP. It'somewhat evokes some hint

catty-produced tires would also go up, perhaps not by the same magnitude, but by some factor depending on the degree of substitutability between the imported and the local tire, i.e., how alike they are 2.

Such is the first visible effect of the tariff. It raises the price of the affected product, thereby increasing the cost to the user or consumer of the product, In other words, a tariff is a tax to the user of the product; a tax for which some justification is clearly required,

so eventually, a better allocation resources may be made possible.

In light of these long-run positive effects, it is then advisable that our policymakers do not waver in their initial decision to go through with the TRP. Given that the short-run period will cost us some adjustments, as it has akeady done (we have akeady gone through most of the adjustments of the TRP and have paid most of the cost of reform), it is perhaps not asking too much if we are now to wait for the positive

of permanence in the tariff changes that would be implemented and not just temporary tariff adjustment to assist

industries during the adjustment period

following the liberalization program.

If such is the case, then this attempt to reverse the policy decisions set forth by the TRP may be considered very inopportune, if not damaging. It is thus hoped that the guidelines that will eventually be recommended by tiffs interagency committee would stay within the objective of providing just temporary measures to accompany the import liberalization scheme brought about by the TRP. The Committee initially came up with a proposed set of guidelines for tariff setting. Before we examine the implications of such guidelines, it is perhaps best to first look into the background and rationale of the Tariff Reform Program.

2

Effects of Tariffs

the

and Rationale of the TRP

"As in any program of reform, the Tariff Reform Program needs time for its effects to be seen and felt."

More important than the price effect, however, is the less visible impact of tariffs on resource allocation. If prices are altered, so would decisions regarding how much to produce and how much to consume: that is, resource allocation would correspondingly be altered. We could therefore end up producing too much of a commodity simply because tariff (or import control) protection makes its resulting prices privately profitable and not because of its real contribution to society. In other words, our scarce resources may not be employed in their best possible use. llllllll L

results of the TRP, a development of which is likely to start coming in the next few years. If our decision-makers waver now in their stand and succumb to the temptation of a policy reversal, then we stand to lose whatever long-run gains have already been put into place by the TRP through the reduction of distorted price signals. In other words, if the government now wavers in seeing through this program, then we may end up as having paid only for the adjustment costs in the short run without reaping the positive results in the long run.

I

DEVELOPMENT

RESEARCH

The Inter-Agency Committee Review and Create Guidelines Tariff Setting and its Proposed of Guidelines

to for Set

To be sure, the Inter-Agency Committee to Review and Create Guidelines for

NEWS

SEPTEMBER-OCTOBER

7) Presence of political/social impact; 8) Stage of growth or development of the indusry - infant or undeveloped industries to receive tariff protection; 9) Capacity utilization; and 10) Tariff structures of other countries,

Tariff Setting was set up to help mitigate

this guideline should not be adopted.

One, the importer of the good coming in at these minimum rates already receives an inlplicit subsidy owing to the

Arguments Against Set of Guidelines

changes are needed adjustment,

Let us examine the proposed guidelines one by one.

First, guidelines no. 1 and 2 (degree of processing and availability of local substitutes). Considering that these two factors have akeady been inputted in the TRP formulation' and are already imbedded in the existing Tariff Code,

percent, respectively, for goods with 5 percent and zero duties. Thus, the good coming in at these minimal rates is artificially cheapened. The result is that more of this good is used at the expense of other inputs. And if the cheapened imported good is a capital good, then its use is done at the expense Of domestic

then they are no longer necessary. Unless, of course, we are thinking of a second phase of the TRP or unless there had been errors in the classification of products as regards these factors,

capital good and labor.

Two, the proposed minimum means less revenues and given tax collection falls short of targets, the revenue gap means raising taxes other sources.

"...it

would

be

unwise

of

to

k_nore tile lleed for some Incasures tO smoothell tile effects of tile transition

period."

Granting that our earlier misgivings about the Committee (as mentioned earlier in this article) are unfounded, how has the interagency committee, through its proposed set of guidelines, responded to the task of setting adjustment .measures to accompany the liberalization program?

Proposed

With regard to the third factor in the proposed set of guidelines, i.e., reduction in the minimum tariff rate from 10 to 5 percent and in "extremely meritorious" cases, even down to zero percent, there are several reasons why

whatever adverse effects were brought about in the short-run adjustment period of the liberalization program. As such, it has to determine the areas where tariff in this period

the

1988

"...we could end up producing too muchofacommodity simply because tariff protection resulted in prices that are privately profitable and not because of its eontribution to society."

Before considering this question, it is st to enumerate the set of guidelines for tariff setting which the Committee initially proposed. They are: 1) Degree of processing of a product tariff rates escalating with the degree of processing; 2) Availability of local production or substitutes in sufficient quan. tity - higher tariff rate for goods with local substitutes; 3) Minimum tariff rate - the present 10 percent lowered to 5 percent and in "extremely meritorious" cases, even down to zero; 4) Minimum tariff spread between goods--there should be none; 5) Comparative advantage - should take into account marketing inefficiencies; 6) Effective protection rate (EPR); II

However, at first glance, these two factors seem to be reasonable. But it should be noted that these factors were considered after a firm decision to reduce the tariff range to within 10 to 50 percent had already been made. Thus, when these two factors were examined to determine what scheduling in tariff changes would bring about the least adjustment costs, it was akeady done within this range. In other words, given that there are going to be changes leading to a narrower tariff range, taking these two factors into account would hopefully help ease the attendant adjustment to the reform. If these factors, however, are to be considered out of this particular context, i.e., within the 10 to 50 percent range, then the probability of a policy reversal would have been high.

undervaluation of foreign exchange. Assuming a 20 percent premium on foreign exchange, the implicit subsidy is 15 to 20

tariff that then from

And three, the definition of what is a very basic :raw material input that becomes subject to minimum tariffs is quite subjective and susceptible to many interpretations.

Further, in justifying for the reduction of the minimum tariff, the interagency committee cited the policy statement "less reliance on international trade taxes as a major source of government revenues'. But this statement, we believe, should not be construed as an explicit policy of reducing akeady low tariffs.

"Clearly, the first-best policy is the removal of distortions, i.e., a move towards freer trade and a more uniform tariff structure."

Instead, it should be used to emphasize that the higher tariff rates should eventually be reduced. Sad to say, though, a tendency to the contrary - increasing rates above 50 percent - seems to be gaining ground.

(Please turn to nextpage) 3

DEVELOPMENT

RESEARCH

NEWS

SEPTEMBER-OCTOBER'1988

Meanwhile, the proposed policy guidelines_of granting tariff protection on the basis of an industry's stage of developmerit,i.e., infant or undeveloped/underdeveloped, desexes a critical examination, To begin with', just because an industry is still infant does not automatically qualify it for protection. It must, first and foremost, possess a potential cornparative advantage. Even then, it is neither feasible nor advisable to protect all infant industries, even only those with

In terms of the proposed guideline, meanwhile, calling for the consideration of other countries' tariff structures, it still remains unclear whether such pro. posal means adopting what other countries are doing piece by piece. What is clear, though, is that other countries have their own sets of objectives and priorities just as the Philippines has her own. As such, it is not necessary to consider or use as a pattern the tariff structures of other countries.

time, could be built in, depending on the assumptions used. With regard to marketing inefficiencies and poor infrastructure support, these issues need to be addressed by an overall development policy and not by a tariff policy.

potential comparative advantage, because protection tends to become diluted when applied on a large-scale basis and worse, it has a cheapening effect on foreign exchange, Also, if tariff protection is to be given, it has to be time-bound to minimize the negative effect it has on forward linkage. In a related manner, being un/ underdeveloped is not reason enough for protection. Surely, if an industry has stayed too long in its un/underdevelopment stage, the wiser policy recourse is discouragement rather than protection,

After looking at and arguing against most of the proposed set of guidelines prepared bythe interagencycommittee, what do we propose as the more appropilate guidelines to be used in the tariff adjustment?

For purposes of tariff adjustment, the most critical criterion in providing guidelines which we propose is the concept of comparative advantage. Cornparative advantage is used to determine whether or not an industry is contributingpositively to society.

In the context of determining taft adjustment, what must be done is to find out if the economic activity in question is really saving foreign exchange and saving it efficiently. If it does, then socie, ty benefits from it and some support could be justified. Otherwise, there is no justification for it especially if, as in some cases, the. activity even causes the draining of foreign exchange from the country.

And because our basic assumption for the task of determining guidelines for tariff adjustment is that they are only to provide temporary protection to indus-

The Appropriate Guidelines: Comparative Advantage and Effective Protection Rate (EPR) In our book, two factors alone would suffice comparative advantage and effective protection rate (EPR). These

".,.if the government now wavers ill seeing through ihis program, we May end up as having paid only for the adjustment costs in the shorl-rtm without reaping the positive resulls in tile long-run."

A Measure Advantage Conditions

of Comparative Under Temporary

tries which are experiencing or may experience by import adjustment liberalization, problems and that caused af_ -

The same can be said about the other policy guideline being proposed by the Committee, that of capacity utilization, By itself, capacity utilization should not be considered as a factor for protection.

If an activity does not contribute positively to society, no matter what the level of its capacity utilization is, then it does not deserve protection. (However, because of the out-of-the.ordinary cir. cumstances the Philippine economy went through - a crippling economic crisis and more than two years of recession there-

two were included in the interagency committee list. It should have stopped there. To ensure that no excessive protection is granted, it is prudent to moni'tor the EPR levels. To ensure that protection is not wasted, the industry being or to be protected must pass the test of comparative advantage, In short, comparative advantage and EPR are enough measures to consider when dealing with the issue of tariff adjustment. Political and social impact, both difficult to quantify, should best

the transition period has been complet_ the long-set policy decision of adopting a 10 - 50 percent tariff range would be implemented, the measure of comparatire advantage that we will then propose is not a full-blown social cost-benefit analysis. Rather, it is reflective of temporary conditions. In cases of future projects and other existing activities, however, it is always advisable to undertake a fullblown comparative advantage analysis if data are available. Moreover, even for such cases, it should be emphasized that tariff protection should be limited to a few at any one time and only for a previouslyrspecified period. Along these

after, resulting in massive unemployment and unutilized capacity - the factor of capacity utilization was considered during the recovery period.)

be left to the "highest level of decisionmaking. Other' factors like protection for "socially desirable" infant industries, capacity utilization, etc., in the mean-

lines, such an analysis should not be considered, in itself, as guidelines for tariff setting.

(Please turn to page ]lj

4

lllllIll111111111 II II

DEVELOPMENT RESEARCH NEWS II II_lll&

I

_lmll

[[ UA 'qliilW

SEPTEMBER-OCTOBER 1988

Billing

I

| i

RESOURCE

i

•

,

SPEAKERS' FORUM SERIES

n ]me with its efforts to keep

that

i

sEMINARS _

_ _

I

"|

I_,_

are important

to their respective

tile interaction lines of communication and open between its staff and acknowledged experts in various areas of concern affecting the country's economy and overall develop-

lines of work. intended as a purely inOriginally house activity, the Forum Series' attendance had to be expanded to include representatives from other agencies/insti-

Speakers' Forum Series during the third quarter of the year. its TheResource Forum ment, the PIDS launched Series feature resource speakers on various topics and the main objective is to help deepen the PII)S staffs insights and broaden their understanding on issues

cussions, especially those in areas with implications policy tutions who for might also decisions. benefit in the disThree sessions were held for the months of September and October.

They are:

to do with the maximum utilization

"Import" " Liberalization:

A Critical

of

o..-_vtart_ng

limited resources. 0rtaliz said that with the inflow of imported items, local entrepreneurs would be forced to use

This is the first seminar under the PIDS Resource Speakers' Forum Series.

Held on September 9, 1988 at the Operations Room of the NEDA sa Makati Building, this seminar had Wilhelm Ortaliz, Executive DirectorofthePhilippine Council for Foreign Relations, Inc. as the discussion leader, Ortaliz explained why the country should adopt the import liberalization epolicy as a first step towards industrialiF,tion. According to him, the country "should allow a freer entry of imported goods into the country for two reasons,

capital - a scarce resource - to its maximum. In other words, capital will now be used where the country has a comparative advantage. This, Ortaliz said, would lead to the production of worldcompetitive goods at reasonable prices which are not only favorable to the Filipino consumer but could also be exported abroad to earn the much-needed foreign exchange capital.

Representatives from the Congress of the Philippines, the Tariff Commission, Department of Trade and Industry (I)TI), and National Economic and I)evelopment Authority (NEDA), among others, attended the seminar. []

Point for Stable Industrialization"

l

I

One, in order to pressure local entrepreneurs to produce high-quality goods at reasonable prices and two, to make investments of local producers selective, Regarding the first reason, local entrepreneurs have the capability to develop high quality products, only, they are not given the chance to do so.

Ortaliz argued that with the presence of high-qualify imported goods, however, domestic entrepreneurs would be impelled to develop high-quality goods at reasonable prices in order to be competitive. The second reason has something

II

The second the PII)S Speakers' Forumof series was Resource held on September 14, NEDA 1988 atsa the Operations Room of the Makati Building. It was a continuation of the first session's topic with Wilhelm Or'taliz, Executive Director of the Philippine Council for Foreign Relations, Inc., again, as the discussion leader, Ortaliz presented the development thrusts of the Philippines and other ASEAN member-countries.

According to him, the Philippine development plan does not seem to integrate the concept of regional cooperation into its planning process; rather, it simply con-

"ASEAN of

the of

Cooperation in the Context Development Thrusts Some

of

cerns itself with recording what has been transpiring in ASEAN as far as regional cooperation is concerned. Ortaliz then suggested that the development plan should be geared towards integrating within the planning process the ASEAN goal of cooperation, Ortaliz further noted the role of the Preferential Trading Arrangement (PTA) with its instrument, the Margin

its

Members" of Preference (MOP), in the experience of ASEAN cooperation. He stated that the PTA is ideal in the early stages when ASEAN members are preparing to takeoff. In due time, however, as theASEAN economies gear towards the world market, preferentiality is no longer needed as the products of ASEAN become world-competitive. The goal of ASEAN {Please turn to page 7)

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5

DEVELOPMENT RESEARCH NEWS

RESOURCE SPEAKERS FOR

U

M

S E R i ES The third session of the PIDS Resource Speakers' Forum Series was held on October II, 1988 focusing on the topic "Economics of Public Health".

Tile resource speaker was Dr. Metodio Palaypay, Senior Clinic Physician at the University of the Philippin.es' Health Services and a Consultative Volunteer on matters of health to the Chairman of the Committee on Health at the Congress of the Philippines.

Dr. Palaypay took up tile issues of social inequity in the delivery of social services and the scarce health budget.

According to him, the government should prioritize its goals, especially

SEPTEMBER-OCTOBER 1988

"Economics regarding

health.

of Public Health"

What does it really

waot -- a specialization

consistent with the socio-cultural norms,

Western-originated super(e.g_ Heart Center, Lung Center, Kidney Center) or a simple community health care system?, he

traditions and ,eligious beliefs in each region. This set-up could make use of indigenous resources such as herbal medicine which is more economical

asked. Given the government's limited budget, he believes that it is the latter which the country needsmore, The decentralization of the country's health care system was high on the list of Dr. Palaypay's suggestions to inrprove the existing shealth delivery system. With this decentralization, be argued that funds will also be decentralized and in turn, could minimize graft and corruption among officials holding the huge funds, With. the decentralization idea, Dr. Palaypay also suggested that the government could establish an alternative situational health technology which is

and, thus, more affordable especially to the people in the rural areas. As a starter, the people in the community could be educated and trained not only in the curative but in the preventire ways of health care such as proper environ.mental sanitation. In this regard,.

Dr. Palaypay:' introctuced his conce] of environmental waste management' system based on the so-called six-F scheme. (This concept will be discussed lengthily in the November-December issue of the DRN.) []

FORTHCOMING TOPIC/SPEAKER/s

SEMINARS

SPONSOR/s/TYPE OF SEMINAR

DATE/VENUE

COMPLETE GENERAL EQUILIBRIUM MODEL

by Dr. Romeo Bautista, International Food Policy Research. Institute, Washington, D.C., U.S.A.

PIDS In-House Staff Seminar

November 4; Rm. 21 i, NEDA sa Makati Building

THE ECONOMICS OF PRIMARY HEALTH CARE

by Dr. Ralph Andreano, Professor of Economics, University of Wisconsin

PIDS Resource Speakers' Forum Series - Fourth of a Series

November 10; Operations Room, NEDA sa Makati Building

SAS TRAINING

by Mr. Alvin Au Technical Support Manager SAS Institute Hongkong

PIDS and SAS Institute (Hongkong)

November 21-24; Rooms 211 and 405, NEDA sa Makati Building

RdB (RELATIONAL DATABASE) MANAGEMENT

PIDS and Decision Systems Training Centre (DSTC)

December 12-14; DSTC, Singapore Airlines Building, Horacio de la Costa, S.J. St., Salcedo Village, Makati

EMPLOYMENT IMPACTING POLICY ISSUES

by Dr. Rosario G. Manasan and Dr:Edna A. Reyes, Research Fellows, PIDS

PIDS Two-Part Seminar

November 15 and 28, Room 21 I, NEDA sa Makati Building

6 ........

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1

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DEVELOPMENT

RESEARCH NEWS

The Philippine Economic Society (PES), in cooperation with the PIDS, sponsored a seminar on the World Bank's "World Development Report 1988" on October 14, 1988 at the Operations Room of the NEDA saMakatiBuilding.

Dr. Johannes Linn, Senior Economic Adviser of the Development Staff at

P [D S JOINT

SEMINAR

WORKSHOPS

In his summary, Dr. Linn briefly reviewed recent developments in the the World Bank, including presented thetheemergence Report. world economy, of severe macroeconomic imbalances among industrial countries and the effect of these imbalances on the developing world. Then he wenf on to discuss the special focus of the 1988 Report - public finance in developing countries.

-World

Ba

SEPTEMBER-OCTOBER

I

_

1_r----,,------

,,

n k 's

1988

revenue gathering. However, since administrative constraints limit the scope for speedy decentralization, the involvement of the private sector in providing public services must be explored e) Well-designed public finance policies can be powerful tools for reFollowing Dr. Linn's summary report, two panelists commented on the Report. poverty.included Dr. Cayetano Thelieving panelists Paderanga, Jr., Associate Professor, School of Economics, University of the Philippines, and Dr. Thomas Aquino, Director, Business Economics Program, Center for Research and C-ommunication.

One observation noted about the Report is that it offers a menu of options rather a rigid, clear-cutin policy for eachthan country to consider, accordance with its own culture, socio-eco-

"World Development Report 1988" Dr. Linn emphasized that the Report tried to look at the issue of public finance broadly. Thus, instead of just focusing on one area like tax policies, for instance, it also looked, among others, at the impact of macroeconomic policies on fiscal policies, other revenue mobilization means like user charges, local governnt finances, and public corporations, Five broad conclusions, according to Dr. IAnn, emerged from the Report, namely: a) Prudent and stable macroeconomic fiscal management is far better than successive phases of extreme fiscal expansion and contraction. Here, it was emphasized that for the Philippines, sound fiscal management must be accompanied by structural reforms

c) Clear priorities and concentration on quality are important and needed to ensure efficient and effective public spending. Dr. Linn mentioned that even if revenue efforts improved, if government spending, however, is done indiscriminately as in cases of the construction of, say, white elephants, then such efforts will be nil. He likewise said that the component of operations maintenance for infrastructure should be given attention to ensure quality service to the public.

The Report recommends that, in the desire to effect an improvement in the government machinery, the variable to look into is the number of personnel in government and not

nomic level and development phase.

In the case of the Philippines, it was noted that one would have expected that the country would, at least, be given a preferential treatment by the World Bank in its debt problem and negotiations, considering the circumstances behind its present situation as well as the fact that the country has been following World Bank prescriptions for a long time.

Representatives from the government and private sectors as well as from international agencies were present during the seminar. []

in trade and industry. In other words, stabilization alone is not sufficient; it must likewise be accompanied by structural reforms to lead to longterm growth, b) Greater reliance on user charges

the restrictions in the real wages of public servants. Also, the Report recommends that there must be discipline in the allocation of public expenditures for the military sector, d) Autonomous and accountable de-

(Continuedffom

and simplified restructured general tax systems can increase public revenue and reduce economic distortions,

centralized public entities, including subnational levels of government and state-owned enterprises, can improve the efficiency of both spending and

ASEkN

Cooperaliono

.

page .5)

cooperation, therefore, should no longer ,be preference on access to market but should instead be access to market.

Ortaliz recommended, among others, the possibility of binding of tariffs and improvement of infrastructure, []

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DEVELOPMENT Tariff

Reform

RESEARCH NEWS

Program...

SEPTEMBER-OCTOBER

1988

(Continued from page4}

potential comparative advantage of varying levels of capacity utilization. A fullblown comparative advantage analysis

In other words, the distortionary protection policy of uneven tariffs and import controls necessitate in the first

For the purpose of tariff adjustment, therefore, the criterion for measuring comparative advantage should be that: the net foreign exchange saved by the economic activity in question, as adjusted by a certain amount of premium that the government puts on foreign exchange, must be greater than the costs of the domestic resources incurred in carrying out that economic activity, Once the above criterion is met, then the next step is to detelmine the appropriate amount of tariff adjustment to be granted. This is done by determining the level of the critical price, below which

can also be applicable in determining whether infant industries or other industries at various stages of growth possess potential comparative advantage or not.

Again, however, we emphasize limited and time-bound applicability of tariff protection as a tool for promoting industry. Recent developments show that the Committee has more or less agreed to the adoption of the comparative advantage criterion as suggested above.

There ale indications, however, that this criterion is now being meant to serve not only as guidelines for tariff adjustment but the tariff setting itself. Such a move

place the determination of the real comparative advantage of industries.

This is to determine or justify tlhe need for tariff adjustment. As such, the situation is just like going around in circles.

Clearly, then, the first-best policy is the removal of distortions, i.e., a move towards freer trade and a more uniform tariff structure. []

_

firm will have to shut down. The usted tariff should then be the excess of this critical price over the border price of the good in. question provided that it

implies an even more serious trend for policy reversal and could lead to a sweeping upheaval of tariff policy. It losestrack of the rationale and the policy direction

11/; for some reason, the country has some monopsony power (that is, it is a large buyer), then it could affect prices by controlling the volume imports.

Thus, prices need not up by asof much as the tariff.

However, thisgois

does not exceed the new tariff rate requested by the firm or does not fall below the current tariff rate (at least not automatically), The criterion stated above can be used to measure potential comparative advantage by using information/data applicable to possible future developments (e.g., price projections) and future economic conditions (projected supply and demand situations and related

that the trade reform efforts have painstakingly set forth.

To clarify further, if the market were free of distortions, the most prevalent of which comes from uneven tariffs and import controls, there would be no need for such test of comparative advantage, Investment and resources would flow to areas where the country has real comparative advantage. That is, if an activity passes the test, it would follow

highly

changes). It can take into account effects of temporary adverse economic condi_'_ as on capacity utilization and measure

that such an activity could compete with imports at prevailing prices and no tariff adjustment is necessary.

AN N OU N CEME N T duplicates. More specific guidelines may be obtained from the Editorial Staff.

with policy implication on Philippine development and must fall under the general topics on "Natural Resources" for the first semester and "Foreign Economic Relations" for the second

quiries may be sent to the: Editorial Staff Journal of Philippine Development Philippine Institute tbr Development Studies

semester. Each paper must be between 25-30 pages including tables and annexes, typed double-spaced and submitted in

NEDA sa Makati Bldg., 106 Amorsolo St. Legaspi Village, Makati 1200 Tel. 86-57-05/88-40-59

I

II

Deadline is on April 15 and May 30, 1989, respectively. Manuscipts and in-

I

urdikely.

Zlf, for example,

local and imported tires etc., then the price of the local tire would also go up by 50 If theythen dif)_er quality, e.g., local tirespercent_ are in/erior, the in increasein the price of the local tire need not be by as much. Prices need not even go up at all. Instead, local producers could take advantage of the higher prices of imported tires and opt for an increase in their marketshare. are exactly

alike in terms of quality,

NOW OFF-THE-PRESS

The Journal of Philippine Development is now accepting articles for publication for its First and Second Semester 1989issues.

The article must be research-based,

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The third volume of the PIDS Survey of Philippine Development Research (SPDR Ill)is now available. This 141page volume compiles the state-ofthe-art papers on health writtenbynoted academicians and researchers namely: Dr. Alejandro N. Herrin and Maricar Ginson Bautista (in one paper), Victoria A. Bautista, Panfila Ching and Ma. Concepcion P. Alfiler. The book is available at Room 304, Research Staff, at P66.50 per copy.

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DEVELOPMENT RESEARCH NEWS

gEPTEMBER-OCTOBER 1988

1988 PIDS woRKING W.P._/'8801 A

General Assessment of

W.P.-_/:8807 The ManufacturingSector and

Foreign Trade Barriersto Philippine Exports. Erlinda M. Medalla

the Informal Credit Markets: The Case of Trade Credits in the Footwear Industry. Mario B. Lamberte and Anita Abad Jose

W.P.-/_8802 Economicsof Upland Resource Depletion: Shifting Cultivation in the Philippines, Marian S.

W.P.:/_8808 Japan's Aid to ASEAN. Present Realities and Future ChaIlenges.Fi/o/ogo Pante, Jr.

delos Angeles W.P,:h_8803 The Size, Financing and ImPublic Sector

W.P.d_8809 The Effect of an Exchange Rate Devaluation on a Sma{I

Deficit, 1975-1984. Rosario G. Manasan

Open Economy with an External Debt Overhang.Josef 7",

An Analysis of the Role of

Yap

pact of

W.P._8804

the

Pawnshops in the Financial System.Marie B. Lamberte W.P,#8805

PAPERS

W.P._8810

The Financial Marketsin LowIncome Urban Communities:

Financing the Budget Deficit in a Small Open Economy: The Case of the Philippines, 1981-86, Ma. Socorro S. Gochoco

The Case of Sapang Palay.

Marie B. Lamberte

W.P.4_/;8811The On-site and Dowmtream Costs of Soil Erosion. Wilfri,

W.P.4_8806 Informal Savings and Credit Institutions in the Urban Areas: The Case of Cooperative Credit Unions. Marie B, Lamberte and Joven Z, Ba/bosa

do D. Cruz/Herminia A, Fran, cisco/Zenaida Tapawan=Conway W.P.=f/P8812A Reviewof PoliciesImpinging on the Informal Credit Markets. Meliza H. Agabin

DEVELOPMENT RESEARCH NEWS is a bi.monthly publication of the PHILIPPINE INSTITUTE FOR DEVELOPMENT STUDIES (PIDS). It highlights findings and recommendations culled from PIDS-sponsored research or related studies done by other institutions. PIDS seminars, publications, and ongoing and forthcoming projects which are of interest to policymakers, planners, administrators and researchers are also announced.

I PIDS is a nonstock and nonprofit government research institutionengaged in long-term policy-oriented resear0h. This publication is part of the Institute's program to disseminate information in order to promote _e utilization of research findings.

The viewsand opinions published herearethoseof theauthors and do notnecessarily reflect thoseof theIn_tute.

Inquiries regarding any ofthestudies contained in thispublication, or any of thePIDS papers, aswellasany=aggestions or comments on the publications are welcome. Please address all related correspondence or inquiries to: RESEARCH INFORMATION STAFF (RIS) PHILIPPINE INSTITUTE FOR DEVELOPMENT STUDIES (PIDS) ROOM 307, NEDA SA MAKATI BUHH)ING 106 AMORSOLO STREET, LEGASPI VILLAGE MAKATI 1200, METRO MANILA Re.entered as second class mail at the Makati Central Post Office on April 27, 1987. Private firms and individuals are charged at an annual rate ofP60.00. Students, libraries, academic and research institutions are charged at an annual rate of PS0.O0. For foreign subscribers, the annual rate is $16.00. All rates are inclusive of mailing and handling costs.

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