I
VOI.XlNO.2
March-April 1993
ISSN0115-9097..J
What are the prospects for the economy for 1993 and beyond? Will it be a brighter year? Should Filipinos expect a slu ggish start?
In this year's roundtable discussion,a panel of economistsgave their prognosis on the economy's growth as modest, citing developments such as the ASEAN FreeTrade Area (AFTA) agreement, the infrastructure projects, and the peace talks as contributory to the improvement in the economic scenario,
both in real terms.The inflation rate,on the other hand, will be down to 7.5 percent, These projeclions, said Dr. Canlas, were received with much reservations, especially by the International Monetary Fund (IMF). According to the IMF, the government's output projec-
On 21 January, Dr. Dante B. tions are very ambitious, while the inCanlas, Deputy Director-General of the flation figure is too conservative, National Economic and Development Authority (NEDA); Mr. Gabriel R. What the IMF failed to see is the Malvar, Economist from the Center for "behind the scenes" factors that had to Research and Communication (CRC); be consideredbefore these figures were Dr. Josef T. Yap, Research Fellow of derived. Dr. Canlas explained that the PIDS;and Dr. Villamor G. Vital, Vice- government does not rely on models President of All-Asia Securities Man- alone in making projections. A combiagement Corporation presented their nation of modelling and projections forecasts in the series' third annual done by other government line agenroundtablediscussion, "ThePhilippine des as well as an examination of the Economy in 1993 and Beyond: New factors thatthegovernmentcancontrol Hopes, Old Dreams." to support its output and inflation targets is being used by the government in Behind the Scenes its projections, According to Dr. Canlas, the GDP and GNP for 1993will leap by four percentandby43percent, respectively,
1993
The output projections can be explained from two sides, namely, pro-
In This Issue..
1 The,=,or_a==_ ._.*theg=n ti= o.==en_. becona., _e_. as g_* a=do._ es=tion _.o,k" of attitude.As such,manyhopethatthe pump priming efforts will lead to a rebuilding, literally and figeurativelyspeakin& of the economy. In fact, "1993: Kindling New
Hopes, RevivingOld Dreams," themain feature presenting forecasts onthe Philippine economy 1993-94, reveals that the panelists of for this year's round table discussion share such sentiment,too. 3 When one speaks of the country,the ASEANas anothersubject for discussion cannot be far behind.Afterall,'tisthe time forregio_nal asreements. Two PIDSResearchers who are alsomembersof theASEAN Secretarlat'sAMOproject, thna,presenttheir forecasts this issue. for the Philippines' neighbors in 6 PIDSResearchFellowDr.V.Bruce]. Tolentino introducestheAPEX,the largest computable
general equilibrium model of
thePhilippine economy, in policy analysis. Alsogiven focus
Dreams
in this issueare the
tollofenvir°nmentaldegradationonthesoil
(p. 4); a study on someof the urbanizacountry's investment incentives (p. 4); and tion, its problems and premises (p, 13). ductionand expenditure. From theproduction side, a number of positive prospects welcome the year. For instance, the Philippine Atmospheric, Geophysical, Astronomical and Scientific Administration (PAGASA) expected fair weather to prevail this year com-
,KindlingNewHopes, • Reviving Old
and its significance
which
will boost rice
and corn production.
pared to last year's, Thus, the agriculturesector is expected to grow by four percent in 1993. ,r To page 2
DEVELOPMENT RESEARCH NEWS
1993:KindlingNew Hol_s... (From page 1)
The National Power Corporation (NAPOCOR)projectslesserbrownouts this year than in 1992 because of the stream of power projects in the first half of 1993. In addition, the duty-free importation of power generators is expected tohelpalleviate thepower shortage problem, The government's vow to speed up infrastructure projects in the first half of 1993 is also a cause for such optimism. Consequently, manufacturing is expected to grow by three percent, construction by 5.9 percent, and utilities by four percent, From the expenditure side of output, the government's objective of smoothingoutconsumptionandspending over the year as well as of spreadingoutthefulluseofexistingresources throughout the whole year (and not just in the last quarter where economic activities are concentrated) are two of the considerations in making projections, The inflation rate, on the other hand, is projected based on a policy of gradual disinflation (which is better than sudden disinflation). As evident from the 1991 and 1992 performances, theeconomydoesnotreactverywellto sudden disinflation. A low inflation rate, then, will mean a money growth target that is relatively low. The recent foreign exchange liberalization will certainly bring more room for monetary accommodation, The monetary growth rate that is implied by both the output and inflation targets for 1993 will be around 14 percent, abigimprovementoverlastyear's 8-9percent. Withstableprices, fluctuationsin the nominal exchange rate will also be avoided, Dr. Canlas strongly recommended a full-time, independent proI _
March-A)ri11993
fessional monetary board that will assess the country's monetary transactions. In the meantime, the Central Bank should be equipped with a contingency plan. However, he also cautioned thatall these domestic monetary factors are just a few of the determinants of output. The actions of central banksinothercountriescanalsocreate fluctuations, The Private Sector's Outlook On the other hand, Mr. Malvar believed that growth in 1993 will at least be modest, with investments taking the lead. He foresaw investments togrowbyashighasl0percent, fueling the increase in national output (GNP) by 2.6 percent. GDP will grow by 2.5 percent, With the Foreign Investments Act in place, the foreign exchange controls lifted and the insurgency problem being addressed in the current peace talks, the investment climate is predicted to improve, notwithstanding the stream of kidnapping incidences. Mr. Malvar said that the government's moves to expand capital will compensate for the low private sector investments brought by the 600 kilowatt power deficiency in the first quarter of 1993. Private investments are expected to bounce back in the second semester when the power situation improves and infrastructure projects begunin the first semester will be cornpleted. Economic activity will pick up before the second semester, and investments in durable equipment will start improving as early as the second quarter of 1993.
cording to Dr. Malvar, must be allowed to depreciate in the dollar's favor if the balance of trade is to be held in check (especially since demand for imports is projected to rise with the pump-priming efforts in place). Just like Malaysia and Thailand, thePhilippinescanalso sustain growth if reforms are genuinely implemented and the economy is stabilized. Mr. Malvar pointed out that while the IMFsponsored Economic Stabilization Program (ESP)in 1991 was a "bitter pill to swallow," the positive effects of low interest and inflation rates cannot be denied. True, the immediate effects of economic restructuring and reform require sacrifices but the potential economic benefits definitely outweighed the immediate costs. The potentials of the economic restructuring efforts,however, can be achieved only if the government will commit itself to continue genuine reforms, to exercise fiscal discipline and to aspire for a manageable growth. Fromthe Government Think-Tank Like Mr. Malvar, Dr. Yap believed that economic activity wilt only grow at a modest pace in 1993. With a more stable macroeconomic and political environment combined with increased governmentspending, thisgrowthwill become robust in 1994.
Dr. Yap saw some resemblance between the 1993-94 period and the years following the end of the Marcos regime (1986-88), although the recessionin1991waslessseverethantheone in 1984-85. Recovery this time will be coming froma widerbase. Pump-priming efforts will Slow down once the Moreover, the91-daytreasurybill government works within a tighter fisrate for the year will average at 13.2 calbudget.GDPatconstant1985prices percent. The low demand for loans is expected to grow from 2.7 to 3.2 and the reduction of reserve require- percentin1993andaroundfivepercent ments from 25 percent to 22 percent in 1994. Increased remittances from will further push interest rates down- abroad and a reduction in interest ward. Inflation will average at 6.5 paymentsonexternaldebtwill pushup percent despite the government's GNP, althoughexpandingataconstant pump-priming activities. Foreign ex- pace. change will be P26.5/$1, which, ac,r To page14 I III II
I I
all
nil
ii
DEVELOPMENT RESEARCH NEWS
March-A_ri11993
Projections fortheASEANEconomies
How theNeighborsWillFare Although'the
Association
of Southeast
Asian
Nations (ASEAN) has functioned effectively as a political unit, there remain plenty of rooms for its members to expand through economic cooperation, However, rapid changes in world events can constrain the member-countries from realizing their mutual gains from their economic relations and interests--hence, the need to review past measures such as the ASEAN Preferential Trading Arrangement, the ASEAN Industrial Scheme and other cooperative programs. .........
The ASEAN
Macroeconomic
project, one of the tools envisioned to coordinate and review such policies, presented its initial findings on the economic and trade structure of the six ASEAN member-nationsduringthePulongSaliksikanheld at the NEDA sa Makati Bldg. The discussion of its presentors, Dr.Josef T. YapandMr.James Villafuerte, PIDS Research Fellow and Research Associate, respectively, focused on the Project's outlook for 199394." _
For oil-exportingBrunei, economic growth remains plelion of projects over dependent on the prices and the production level of oil, infrastructure constraints and the effective transfer of oil revenues into domestic tivities. Debt repayments activities that will improve the state's other economic and social concerns such as employMajor Economic Indicators merit and community services. Its gross doIndicators IndonesiaMalaysia Singapore ThailandBrunei mestic product (GDP) is projected to grow by 5.1 CDP(%c,_cO and 5.6 percent in 1993 and 1994, respectively. Also, its consumer price index will rise by 2.3 and 2.5 percent during the same periods,
1_0 1oCt 1992 1_ 1_94
7.1 6.6 5.9 6.2 6.5
9.8 8.7 s.5 s.o 7.5
83 6.7 5.2 6.0 6.1
10.4 7.s 7.s 7.9 8.4
5.0 4.1 4.s 5.1 5.6
3.4 3.4 3.0 2.5 2#.
6.0 5.7 5.0 5.3 5.4
2.1 1.6 2.0 2.3 2.5
I,n_non (%ot_c_J Brunei's export sector will increase by 2.7 percent in 1993 and by three percent in 1994. In Indonesia, an improvement in the inflation rate and trade balance is expected, allowing Bank of Indonesia to continue to loosen its credit policy. The tom-
1990 9.5 33 1991 9.5 4.4 1_J2 7.0 4.6 19_ 7.0 5.0 1994 7.5 S.0 TxaoEBALANCE ($MIUJON) 1990 1991 1992 19_
s_ 4.8 5.4 6.2
2.0 -0.2 lJ! 3A
-S.l -4.1 .3.5 4,1
-10.0 -9.7 -9.5 ,19,8
2188.S 2417_. 2438.8 2479.4
1994
6.5
4.7
,,,4,8
-11.9
2513.4
25.1 _,4 40.0 ' 45_
.-
53.0
-
Ex_At DBr ($Dzmo,) ¢rhis write-up excludes the outlook for the Philippines
as thisis given
more in-depth analysisinthemainarticle.-.ed. |1
i
imll
i mll
1990 1991
55,7 57_
153 14,9
1992
59.9
17.0
1993
63.4
16,8
1994 '
65.2
17.4
Outlook (AMO)
i
the period 1993-94 will ease and enhance investment acwill increase substantially in 1993 and, in turn, result 71 in a huge improvement in the current account by 1994. With the recovery of the economies of indus_ializedAnglo-Saxon nations in the first quarter of 1993, and of the other Organisation for Economic Co-operation and Development (OECD) countries by the end of the year, Indonesia's merchandise export will grow by 15 percent in 1993 and 13 percent in 1994. Gross domestic product growth will be 6.2 percent in 1993 and 625percent in 1994. In terms of sectoral performance, agriculture will fully recover from the effects of the drought, growing byaroundthree percent.Theindustrysectot's grow th, on the other hand, will be stirred by both infrastructure projects and continued rise in exports,'settling at lip To page 15 i
DEVELOPMENT RESEARCH NEWS
The Costs Soil Erosion Brings See what environmental darien can do.
degra-
Aside from creating an eyesore, environmentalproblemscanalsodrain people'spockets. For some, it is a lossof their keep. Two of these global problems that directly undermine people's subsistence base are accelerated soil erosion and watershed degradation,
Dividing the total annual off-site cost of P6.7 billion by the estimated gross erosion of 2.3 biUion tons results in an average off-site unit cost of approximately P3.0 per gross eroded ton.
suited in a substantial decrease in its own average annual GDP. Dr. Saastamoinen reiterated the need for nationwide estimates on soil erosion and other environmental costs of development in the Philippines. Otherwise, resources wasted may later be impossible to reclaim..:-
What Are Investment Incenrives For?
On 24 February, PIDS Research
FocusSoilErosion Investmentincentives
Soil erosion also accompanies deforestation. Through the years, the elfect of such activities had gone from bad to worse. The estimated deforestation rate of 17million ha for the period 1981-90 was much higher than the 1976-80 rate. Watersheds, too, have to contend with shifting cultivation, overgrazing and poorly managed pastures, uncontrolled forest fires, and indiscriminate cutting of trees both for home consumption and for commercial purposes. Deteriorating watersheds again contribute to soil erosion, Dr. Olli Saastamoinen, PIDS Vis•iting Research Fellow, delved on these costs of soil erosion in the Philippines during thePulongSaliksikan held on 10 February 1993. Presented were the methodology and results of a preliminaryassessment of both theon-site and off-site monetary costs of soil erosion and watershed degradation. Dr. Saastamoinen's results show that the annual on-site cost of soil erosion and watershed degradation is iiiii
approximately P4.9 billion. The offsite cost is P6.7 billion. Altogether, onsiteandoff-sitecostsreachP11.6billion yearly--roughly 1.4percent of theGDP.
Pulong-SaliksikanSedes
Land degradation brings a continuous decline in productivity as a tion ofofthedeple-. vegetative result cover. The soil experiences reduction of its organic and nutrient content. Its structure and capacity to hold water deteriorate.
March-April1993
• •
Sumulongpresented Associate Lea R. the initial findings of the study, "A Review of Investment IncentivesUnderthe 1987 Omnibus Investments Code" at the NEDA sa Makati Bldg. _
Theestimateillustratesthe severity of erosion and watershed degradation costs to the Philippine economy. However, since the costsoferosion and watershed degradation in each of the sectors such as agriculture, fisheries and forestry can be determined, the extent of off-site costs can then be considered for policy derisions. Rehabilitativeprograms' funds should accordingly be allocated based on these costs per sector,
The paper, one of the studies under the Development Incentives Assessment (DIA) research program that started in 1991, addressed the questionsofwhatinvestmentincentivesare for and what their economic justifications are. It also identified the ideal form of investment incentives and set the appropriate guidelines and principies for the granting of such.
What then are the implications? As it is, policymakers who allocare funds for agricultural, forestryand fishery development and for environmental protection are often not informed of the real costs of soil erosion, soil nutrient mining, forest destruction and marine pollution, or of the national income and foreign exchange savings thatcanbegeneratedthroughtheadoption of sustainable agricultural pracrices, Indonesia, on the other hand, has taken steps to redress its own issues. It has reflected resource depletion in timber, petroleum and soil in its national accounts. This depletion, in turn, rei ii
i
Ms.Sumulong'spresentationwas divided into five parts: (1) an introduction on the rationale of the investment incentives; (2) an evaluation of the impact of theBoard of Investments' (BOI) fiscalincentivesona hypothetical firm's internal rate of return; (3) the analysis of the impact of relative incentives amongdifferentsectorsintheeconomy; (4)areviewoftheinvestmentpriorities plan (IPP) list; and (5) a cost-benefit analysis of the granting of the incenLives. In the first part, it was demonstrated that the rationale for investment incentives is the presence of market failures and distortions that inhibit ii
i
i i
tered firm availing of incen. :i;i : :::: rive (3):will tlaVe:a: four per,: :i:iicent increase in itslRK Sub-;: : i sidyratesduetotlaepresence::: i : fiscal:incentiVes were likeQ; i :wise Computed and pre: :
thatasmuch
asa i;
......... __mparison of:thecharacter.ii i:;
;tics:between::iPP and nora IPP: listed _ndustries would: ::iii ::be intereS ring; insufficiency of : i :::::i:datadidnotallowanalysisof iiii iiii: thatsorti Thegeneralclassifi, :i i i:ii:i::: cationnsed by the:BOIbe-: i: :: Came astandard :in identifying charac, ii:: teristicsbased on(!)Capital and labor ......:...... intensity, (2) foreign eĂ—change depend, ence; (3)export orientation, (4) regional:: dispersal, and (5) size of firm .........
:
i:iii MS:Sumrilong fi-ten esfimated_ tiae: : benefi ts the goVevnment would receive i:i: in granting inveStment:inCentiveS and i ii: compared it with tl_e COstsof their im;: :: plementafion,
:......
ii
SPECIAL
APEX--acrolzym for Agricztltztral Policy Experinzents--is the first computable general equilibriunl (CGE) model of the Harberger and Johansen class applied to the Philippines. Moreso, it is the largest CGE model of the country's economy.
The concept of opportunity cost is also captured, supporting the idea that everything received by one sector is sourced from another and entails acost for every benefit. CGE modelling has grown side by side with computer hardware development. Being data- and computation-intensive, CGE models require computing hardware of large capacity and speed, as well as software that processes data and results and iterates
heAPEXCGEModel of .thePhilippineEconomy D_. V. BRLICE J. TOLENTINO PIDS
RESEARCH FELLOW Computable/Applied General Equilibrium (CGE) models have become popular as tools for policy analysis in recent years. These models were first introduced into policy analysis in the late 1970s, beginning with Adelman and Robinson's pioneering application to Korea in 1978. Since then, the field has grown rapidly in response to the large demand for economy-wide analyses of policy actions. CGE modeiling's popularity is due to its ability to determine and analyze the impact of events and policies both on the general economy and on its specific areas. CGE models can specify demand and supply interrelationships in all markets and formalize the analysis of the interdependencies within the economy. This feature forces policymakers to consider the context as well as the spill-over effects and externalities of their decisions,
DEVELOPMENT RESEARCH NEWS
6
them a large number of times (thus, the term"computable'). The APEX Model The APEX model was developed by a team of Philippine and Australian economists for the Department of Agriculture (DA) and the National Economic and Development Authority (NEDA), with financial support from the Australian Centre for International Agricultural Research (ACIAR). The model's structure follows the Harberger (1962) and Johansen (1960) class of CGE models in which the percentage changesintheequilibriumvalues of the economic variables caused by policy "shocks" are computed using linear algebra. This model is consistent with what the Australians had initiated, particularly the ORANI model
j
FEATURE
TABLE1 CORRESPONDENCE OFTIIE50-SEC'rORAPEX MODEL TOTHE1985 lNptrr-OtrrptrrSECTORCODES
APEX Sectors Code
Description
1
_r,ahy
2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21. 22
Nm-trdSated palay Com Coconut Suf,arcane Bananaand oth_ bulls and nuts Vesetables Rootc_ps Othercommecdalcrops EIoss Cklekenand,poetryprndu_ Other livestock Agriculturalservices Marinefishing Inlandfishing Foreseryand loggin8 Q'ude oil, coal andnaturalps Othermining Riceandcornmilling SuSarmilling and refining Milkand dairyproducts Oilsand fats
23 Me,tandm_tproduct, 24. 25 26 27 28 29 30
RourmUling Animal feeds Otherfoods Beveragesand tobacco Textileand k_itfingmills Othermade-up textile_ Garments, footwear,leather,rubberfootwear
31 Woodp_ 32 Paperproducts a_ vertiU_r
1985 I0 Code (428 x 428) :
1
2 3 4-5 6 7-12 13-17 18-19 20-28 31 35-38 29-30,S2-34 39-40 41-42 4346 47-50 58-59,64 51-57,60-63 94-96 104-106 69-75 89-93
9799 114 76-88,100-103,107-113,115-122 123-130 131-138 139-146 147-158, 222-223
_ ls9-174 175-!85 192
Oth_ rub.,plast., chem.prod.,exc.,rubberftwear. 186-191,193-206,219-221,224-233 Products_ coalandpelroleUm 207-218 Nc_-ferousbasic metal prnducts 259-264
37 38 39 40 41,
Cem.ent,basicmela_ non-metallicmineralprod, Seml.conductors Metal products& non-electricalmachineries Electricalmachinery,equipment& parts Transportequipment .
2 44 _I_ 46
l_scella_eous manufacturing cons_rucUon i_ectricity,gas andwater Transportand communicationservices _.r_de_storagea_d warehous_ andnon.banks
J[._.] :_..,,_.d:_:,_,:_,_
6S_
34 35 36
,_ ! _
...........
234-258 '303 265-292 293-302,304-315 316-328 329-343 ' 344"347 348-350 353-364, 366-369,375-379 351-352,365, 370-374
".'_ " "' 3,": ..!..:[tod(,].!i£_:3_. t:':O:t',,
:orai:e:
:!;0
]? ..... ,2',()]]]_1[_["_ ('} _i 'i[li:.!J__l_,!'_-i;
'pI'oClu.,l::;_aD,I!i_ i:12._4::i.. '" -::_'_.,_u_,._."_ _ 'L,.__, _,'_-_.4 ,_..:_..,. ,:.-, .__¢, ;iiL]I:2t._!t,. _]_8.S :: f-i"_-r,:,-_.,_ ,I-,..,7,: _t_i-" _2 LL-_ _,:JtJ, '(--%-_-' ,%: ._:,,,_..._j ._ _I'1.__ _l'l Sl][t['l"_i:_'""' ........ ._'O&_ _]_(].
fJ_T",_.t:i,__0]_]__._. ,I,.
I_}[O]{.C]_i' "[Jl_P'.(-}']_[] _): . ...... ,12'._.8.S S F:.!=,i,
380-382
,,s,r_ce, .' ,2S427 _0'_'_i'_a .. 390-424 .......................................... ..... L ...................................................................... =.:_:.:£,:;=:=_! ..................................................... March- April1993
SPECIAL institutionalized in policymakingsystem, •
..
APEX is framework
a for
both short-run and long-run policy simulations,
Australia's
The percentage change approach of the ORANI class of CGE models contrasts that of the Shoven-Whalley (1992; 1972) type. In the latter model, economic variables" equilibrium levels are calculated employing algorithms for non-linear equation systems such as theMPS/GE algorithmofRutherford (1988). Existing CGE models of the Philippine economy are of this type. Thus, the APEX model is the first CGE model of its kind applied to the Philip-
Households in the model are presumedtosaveapartoftheirdisposable incomes, and their savings determine the warranted capital formation in the economy in a given time period. Given these investmentsin the current period and an assumed growth of the labor force, the endowment of resources in the model is updated at the end of each period. Theupdatedlevelsofresources
pines,
are thenin introduced as aexogenous changes the model, and new counterfactual equilibrium is computed. Thus, the modelcannowconductlongrun policy simulations under a recur: sive-dynamic setting.
Today, the APEX model is so far the largest CGE model of the Philippine economy. It incorporates 50 cornmoditiesproducedin41industries(Tahie 1) and has seven types of consumer goods and five household income classes. Itshighleve!ofdisaggregation, thus, makes it quite useful for policy purposes. Specifically, • The model is designed to analyze the effects of policies on Philippine agriculturein particular and the whole economy in general. The range of economic policies that can be analyzed includes those pertaining to technology improvement, trade, tax, pricing, and investment, • APEX has also incorporated various household income classes to capture the impact of economic policy reforms on the country's income distribution. Likewise, it is capable of calculating the impact on production, prices, resource allocation, and economic efficiency.
DEVELOPMENT RESEARCH NEWS
profit restrictions are imposed inall production technologies as part of the model's general equilibrium conditions.
• APEX is a framework for both short-run and long-run policy simulations. In the short-run setting, there are sector-specific fixed capital inputs. Since production technologies are non-increasing returns to scale, one can impute non-nega riveshadow prices to these fixed primary inputs. Zero8
111®Johonson Approooh of CGE Modelling The general equilibriumconditions of the APEX model maybeexpressed with the vector-valued function, F(X), as follows: Y_=-AiZB_ For step i=1,2,...,n. Johansen's appreach is a one-step Euler procedure, i.e., t=l. APEX uses GEMPACK, a computer algorithm for Johansen-type CGE models. The algorithm can be applied to minimize linearization errors. The Model end Its Assumptions Three of the model's 50 producer goods and services are multi-output regional industries producing 12 agricultural goods. These agricultural industriesarelocatedineachofthecountry's three main islands. All three produce identical sets of the 12 products. Each of the remaining 38 industries produce aspecific non-agricultural producer good or service (Figure 1).
FEATURE The industries in the model are classified as either export-oriented or import-competing. The model also has three primary factors which are mobile among the various non-agricultural industries, These are var/ablecapital, skilledand unskilled labor.Variable capital includes non-agricultural land and structures which are not necessarily devoted to any particular line of production activity, e.g., buildings and related fixed structures. Unskilled labor is also freely mobile between the non-agricultural and agricultural parts of the economy, On the other hand, skilled labor and variable capital are not used in agriculture. That is, these factors are mobile only among the non-agriculrural industries in the model, Furthermore, there are two sets of fixed primary factors: agricultural land and sector-specific capital. Region- and sector-specific primary capital resources consist of physical capital assets devoted to a particular line of production activity. There are 41 of these
sector-specific factors, one for each n_gion and non-agricultural industry. Changes in relative prices do not cause any reallocation of such capital input in theshort-runsinceamovementtoother sectors is assumed to require sufficient re-toolingcosts to render suchreallocation economically unviable. In the long-run, the amounts available to each of these region- and sectorspecific capital resources will adjust because of the investments made during each period in the model. In its present state and development, however, APEXis not capable of allocating among itsvariousindustrieswhatever fiXed capital formation there is for a given period. Agriculture The stock of irrigation capital facilities in a given time period is an example of such sector-specific capital in agriculture. These facilities are both (1) devoted to agricultural production activities, particularly paddy rice, and (2) obviously specific to a region. Irrigation investments made either by the private or public sector increase the available stock of irrigation capital.
Figure•1 AgriculturalProduction in Each Region !_
F_
• IJIZON • WSAYA3 • MINDANAO
_
I_iomd Indml(ry.
•ImpOged _ • I_nesdc
OB_p.tR
Coconw-_
_ C_:o,,au
Sugarcane
I_ Sugarcan_
Pr_mar/Faetor_
• Labour
_
--
C_e _lk'_ Al[tlclll_n_I_
_ B ......... d other,_______b_B_n .... dmher froitg _,ld nuts frt Sand nuts " ' "
.... Ferdhzer • ImpO_*d .. _ • Dor_s_ic _
non-ir_ga[ed
_tggtega[e _
corn
........ Sratllhold_r aggo_gal¢ --
9
rootcrops _. paddy vegetables ,__hogs chicken & poula3_ o_hcrlivestock
March- April1993
FEATURE world markets. The rest of the world absorbs all exports which the country supplies if it cannot influence the world prices of such goods. There is, therefore, a necessary market clearing of exportable producer goods at their going world prices. In order for this to take place, each domestic price of the exportablesinthemodelhastobeequal
the difference between taxes on sales and taxes on intermediate input purchases.
to the given world by price of theofcornmodify multiplied the price foreign exchange,
sector-specific factors.Personal taxes are imposed on each of income its five types of households. This and payroll
Consumers and Final Demands There are five households classifled in the personal income distribution.place Householdsarenotdistinguished by of residence, e.g., urban and rural, or regional location. Each is assumed to have its own respective endowments in the model's primary factors. The resulting disposable incomes are allocated by each householdinto current consumption and sayings.
The corporate income tax incorporated in the model are assessed based ontheprofitgeneratedfromeachofthe non-agricultural industries or, equivalently, on the returns to the model's
Attempts to apply the APEX taxes (e.g.,social security contributions model to actual and medical insurance premiums) as well as several low-yielding tax measpolicy issues in ures and fees are treated as lump-sum tax measures in the model. Transfers the Philippines amonghouseholds, and betweenhouseholds and governments are regarded as exogenous. lhe Model's GE Datoset Computing thegeneralequilibrium changes in endogenous variables in the APEX model requires (1) the production activities"input cost shares, and (2) product expenditure shares of the different agents in the economy. Also, 1989--the most recent year where a relatively complete dataset is found-is used as the benchmark year. The 1985input-outputtableoftheeconomy is also used.
In the model, there are seven consumer goods and services which are directly consumed by the various households.Theamountsconsumed of eachofthesecommoditiesandservices are used as bases of the various households'underlyingutilityfunctions. Unlike producer goods, consumer good production requires only intermediate goods as inputs, and not primary factors.
Other major sources of data used toconstructthebenchmarkequilibrium for the model are:
Household savings determine the total savings available for investments,
o National Income Accounts for 1989fromtheNationalStatisticalCoordination Board (NSCB);
Government Sector The three most important indirect taxes in the Philippine economy are import tariffs, excise taxes, and valueadded taxes. Each of these taxes is incorporated explicitly in the model, Value-added taxes, introduced only in 1988, are collected using the credit method. That is, these taxes are simply
have begun,
o The 1991 Philippine Statistical Yearbook of the NSCB; o The Report of the 1988 Family Income and Expenditures Survey of the National Statistics Office (NSO); and o The 1989 Foreign TradeStatistics of the Philippines, also by the NSO. 11
March- April1993
S P E C I A
F E A T U R E
Theseventypesot_goods embedded in the APEX model are:
pines have already begun. In 1992, Tolentino and Balisacan performed policy experiments on fertilizer subsidies. Clarete and dela Pena (1992) examined the effects of several tariff reform scenarios. Warr and Coxhead (1992)analyzed theimplications of technical change in agriculture on the economy and on welfare. Other experiments in process involve policies related to food, public investments and tax reforms.
•
cereals, roots, fruits and vegetables; • meat, dairy and marine products; • beverages, tobacco and other foods; • fuel, light, water, transportand communications; • housing and furniture; • clothing,other wearables, personal care and effects; and • other expenditures,
The APEX model is now being fio nalized for operation in the Department of Agriculture (DA) and in the School of Economics at the University of the Philippines. In August last year, the DA, Philippine Economic Society and the ACIAR held a large workshop for potential users of the APEX model. These potential users are now being assisted to acquire both the hardware and the software necessary to run the model.
Furtherdisaggregationoftheabove set into more commodities is ongoing, A Social AccountingMatrix (SAM) was constructed to show the flows-offunds between the various National Income Accounts of the economy. The SAM helps compute the various share parameters needed by the model, Initial Applications
Activities to train more users and analysts in the execution and interpretation of the model are under way, particularly at NEDA and PIDS.o:.
AttemptstoapplytheAI_EXmodel ,to actual policy •issues in the PhilipIH p i ,lira ....
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DEVELOPMENT RESEARCH NEWS
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March-April1993
DEVELOPMENT RESEARCH NEWS
March-A:_n11993
A Lookat theUrbanProblems, theMythsandPremises
ExpertPresents Framework ofUrbanProblematique Study To many_ urbanization carries with it numerous social concerns. In Metro Manila, for instance, city planners grapple with issues related to in-migration, urban poverty and overpopulation. Still, while these issues remain unresolved, many people flock to the metropolis for all its sweet promises.
Dr. Alexander B. Leman, Study Director of the Toronto-based Leman Group, Inc, suggested a way of viewingurbanization.Inpresenting theconceptual framework of the report, "Urban Problematique and Philippine National Development," on 28 January at the NEDA sa Makati Bldg., Dr. Leman explained how development and urbanization can exist hand-in-hand,
Making ThisA Better Place
sicpartofman'sdevelopment.Itsenormous potentials have to be optimized while mitigating its potential human and economic costs. To Dr. Leman, the premisethat"urbanization should and can be stopped" is untrue. On the contrary, urbanizationisinescapableanda desirable manifestation of developmerit,
Embryonic-.-orthemorederogatory term,"squatter"--settlements, are one of the pervasive problems in the Third World. However, to Dr. Leman, individuals in these settlements are entifled to the same rights, social services and respect as those in the mainstream. They flock to urban centers because of the multiplicity of options offered: better education, sodal servicesand career prospects. Thus, acknowledging that these marginals share the same hopes as the rest of the society is the first step toward changing the way of seeing their role in urbanization. That is, they should be recognized as participants in the development process and even as creatars, albeit indirectly, of wealth.
How Big Should the City Be? Urbanization Ain't Bad Leman's framework in the urban problematique study begins with his group's definition of culture as a "cumulative whole of mutually shared experiences by a community of people--whetherafamily, tribe, nationorgroup ofnations--that, inturn, generatecommoniy shared views, attitude, beliefs, etc." Such individuals or groups pursue aspirations and over time, make intuitive arrangements that they think will optimize their goals and needs, Finally, they find themselves in increasingly larger, more complex, more diverse settlements. In short, they have become urbanized, The challenge to urban planners is not to control, minimize or negate but to accept urbanization as an intrin-
Concomitantiy,theapplicationof theoptimal citysizeconcepthasproven to be ineffective and counterproducfive. That is, seeing urban planning in terms of its physical orientation (e.g., establishing optimal city size, depending on land-use maps) does not address existing problems. Focus, according to Dr. Leman, should be on the more important component: what he called the spatial and operational atrangements---activities made to optimizethepursuitofneedsandgoals,
The issue, thus, is how to change these individuals' spatial and operational arrangements such that theybegin to support themselves rather than be wholly dependent on the government for their survival. The end goal of such arrangements, thus, is to make theseindividualsparticipateina"productive, rewarding, dignity-generating process." 4.
,Also, there is in reali ty no definitive barriers between the rural-urban dichotomy; they are essentially two facets of the same phenomenon and interact symbiotically. Neither is one viewed in isolation from the other. They are inextricably integrated," he said.
Photo credit:. Philippine I Ill
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National Bank 1983 Annual Report.
1993:KindlingNew Hopes... (From page 2) Like Mr. Malvar, Dr. Yap also projected that gross capital formation in 1993 will dominateexpenditures due to existing infrastructure projects. Total investment will grow by 8-10 percent compared to totalconsumption's 4-4.5 percent. A similar scenario is expected to unfold in 1994 with total consumption growing faster at five percent while investments, by 12-15 percent. With lower inflation and interest rates, the private sector will lead the way in the early stages, Pump-priming activities will be conducted in the latter part of 1993. Like the preceding projections, Dr. Yap saw an investment-led growth which will expand by three percent in 1993 and by 7-9 percent in 1994. The services sector is expected to grow by 3.4 percent in 1993 and by 4.5 percent in1994. Dr. Yap, however, warned that people should not be lulled into cornplacency by the upward trend in the output rates. Preliminary estimates usingthePIDS-NEDA Macroeconometric Model showed that after another year of 5.5-6 percent growth, the economy will experience BOP difficulties as the tradebalancerapidlydeteriorates. This brings to fore the importance of exports in sustained growth. By developing exports, said Dr. Yap, the economy can figuratively kill two birds with one stone; it will overcomethe foreign exchange constraint and increase output growth,
investments come in. Total domestic liquidity will grow at 18 percent in 1993, keeping inflation to around eight percent.In1994,domesticliquiditywill expand by 19 percent while inflation will continue to level off at seven percent. A higher output growth and a more stable macroeconomy will account for greater price stability. Cash outlays, however, will increase, aggravating the budget deficit expected following the transfer of CB liabilities to the national government and delayed release of funds from foreign sources for calamity-stricken areas.
The government's vow to speed up infrastructure projects will deftnitely narrow the savings and investment gap when more direct foreign
Dr. Yap recommended that policymakers take fulladvantage of the stabilized macroeconomic conditions. The best way to do this, said Dr. Yap, is totakemoreconcretestepsinliberalizing the economic policies and promotingahealthierbusinessclimate. Strong leadership and political will are necessary to implement and institutionalize the needed reforms. Capitc._liTi_:_on Cepital
Morl<ets
From the capital markets sector, A more realistic exchange rate Dr. Vital forecasted a growth in 1993 of will bolster merchandise exports by 4.2 percent, which will come largely almost 11 percent, a figure that ap- fromdomesticcapitalformationof12.5 proximates its average for the past two percent (Table 1). Exports (9.7%)and decades. Importswillgrow ........................................................................................................................... _-_ ......_ ..................... ata fasterpace. Table1 : As a result, Maeroeconomiclndieators II
trade balance will deteriorate to around $4.8 billion in 1993, compared to the estimated
$4.1
billionin 1992. In 1994, exports willreceive further increase due to previous investment in the trade secfor. Merchandise
Meanwhile, unemploymentwillremain at eight percent in 1993. The increase in jobs available will lag behind the number of job-seekers. It will take timebeforesomeinvestmentsreach their employment potential. However, higher growth in 1994 will improve employment by 7.6 percent,
and inflows of foreign direct investment. The BOP position is predicted to remain stable at a $1.6 billion surplus.
exports
will grow by 11 percent while imports will rise by 13 percent..The trade balance will be wider at $5.6 billion. Again, thisgap will be adequately filled in by overseas remittances
,,,
(%perannumunlessotherwiseindicated)!_ , 1990 1991 1992 1993
Growth by expenditure type Consumption 5.4 Domestic capital formation 5.7 Government consumption 9.3
Exports 13 Imports 10.0 GNP 3.9 Growthby industrial origin Asriculture.... 0.4 Industry 8.0 Mining and quarrying -2.6 Manufacturing 2.0 Utilities oa Construction 0.0 service 4.0 GDP
2.4
2.2
-14.0 -6.1
3.9
4.5
8.2 -3.5
12.5 1.7
4.6 -3.1 -0.0
8.8 12.7 1.7
9.7 11.4 4.2
0.7 -3,3 -2.9 -0.9 0.9 -15.7 0.0!
0.0 0;9 2.0 1.3 -1.9 -0.5 0.6
2.1 3.1 2.5 4.1 4.6 8.5 2.6
-1.0:
0.6
2.7
costsof doing business T-biIlrate
24.7
22.5
17.4
16.6
Nominal loan rate Exchange rate (P/S) inflation rate
24.1 24.3 12.7
22.7 27.5 17.7
18.7 25.3 8.6
25.5 9.2
18.3
i::Othersindlcato, "rradebalanee(mUlionUS$)
BalanCe ofpayments '' (millionusO
-4,020
-187
-3,3i0
i,34o
Groes international reserves
.: .
.: :(millionUS$)
, Importcoverage (months) ' Reservemoney Source: Corporate
Planning
-3,853
' _,7
4,461
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'!.,993' 4,000 2.0 4.0 29.6 Department,
24,4
4,a10 4.1
5,520 4.4
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15.0 '
AllAsiaCapital.
m
imports (11.4%) present a better picture than last year's 8.8 percent and 12.7 percent, respectively. Among the industries, utilities (4.6 %) and construction (8.5%)are opportunity areas that should be prioritized. The mining and quarryingsector, meanwhile, continues to show some improvement after the West Linapacan oil discovery. Other indicators, however, are negative. Given the existing regime of exportsandimports, Dr.Vitalexpected trade balance to deteriorate to around US$4 billion. This, however, remains manageable considering that gross internationalreserves, expected to reach US$5 billion, will cover imports in 1993. The Philippines has to take advantage of the ASEAN Free Trade Area (AFTA) accord. Amongitsindustries that will be favorably affected by AFTA are vegetable oil, cement and chemicals (Table 2). Dr. Vital stressed
the importance of making the industries competitive in the international market. In this regard, foreign exchange liberalization has shown some positive impact on international reserves and has stimulated investors' interests, In 1992, the country's market capitalizationof28.6percentofGNP is considered as relatively underdeveloped. In contrast, developed markets like those in Singapore and Hongkong are almost 100percent of GNP. The Philippines, thus, has a long way to go in terms of developing its market; its capitalization should reach 32 percent of GNP in 1993 and up to 46 percent in 1994. Howmuchcapitalcanberaised by industries?
Based on previous market and value turnover forecasts, Dr. Vital projectedacapital of US$255 bilTable2 lion for 1993and Rfteen PhilippineIndustriesl0 be Affectedby AF'I'A US$575 billion for 1994.
It_lttstty/Pcocluct
Cot_oo_
Vegetable oll
Cement Chemicals Industrial chemical Exportable Importable Pharmaceuticals Fertilizers Plastics Rubberproducts Leather products Pulp
Book Rate (,_)s
EPR(_)2
1991
1992
1993
20 40 10
to 35 to
0
0
50 3O 20 11 0
10 0
to to
20 5
10-30 20-50
10-20
3-30 3
3-20 3
Textiles
Silk Wool Cotton Other fibers Knittedvegetable or crocheted Ceramics and glass Gemsand glass
cathodes Electronics (including semi-conductor) Copper
Wood and rattan furnitures
3-40 3-40 10-40 3-40
3-20 3-20 5-30 3-30
10-50
10-50
3-50 3 10-50 50
3 40
2 0 11-18 0 18 35 25 65
20-30 3
1985
3-30 3 10-30 30
65 0 12 42-100
Howthe NeighborsWillFare... (Frompage3) around 11 percent. The projection is slightlybelow the double-digit average recorded from 1988 to 1991. The services sector will be domihated by activities in tourism and by financial transactions, with growthrate predicted to lie between 6.4 to 6.6 percent in both 1993 and 1994. Meanwhile, given Malaysia's slower growth in the second half of 1992, that for 1993 is predicted to be around eight percent. In the face of the decreasingrateof foreigndirectinvestment, curtailment of private and public consumption due to rising inflation and anticipated sluggish upturn in world expansion, a growth of 7.5 percent is likely in 1994. Inflationary pressures in Malaysia will remain strong in 1993 and 1994. The recent rise in wages for civil servantsand the existing tight labor market conditions may further increase wages in 1993 and
Dr. Vital believed that these amounts can be realized, There are many strategiestoconsider. One is to 1oak beyond the country and go world class, o:o
The gross national capital formation requirement of the Malaysian economyisexpected toincreaseby 11.6 percent (to $57.6 billion) in 1993, compared with the 9.7 percent growth in 1992. Exports are expected to increase by 12.3 percent in 1993 and by 15 percent in 1994. Imports will likewise continue tOrise; 1993 and 1994 figures are pegged at around 12 percent and 13.5 percent, respectively. Because of its tight labor market, Singapore's manufacturing sector has been overtaken by the financial and business sector in terms of shares to
31-38
total output
n.a. 0
remains firm on making manufacturing the catalyst for the development of the economy, emphasizing higher value-added activities. This sector is likely to grow at 5.3 percent in 1993 and 6.5 percent in 1994.
88 3-12
1. From the Tariff and Customs Code of the Philippines, August 1991. 2. From ErlL_daM. Medalla, "An Assessment of Trade and industrial Policy, 1986-1988 (PIDS Working Paper Series No. 90-07_ January 1990); EPR stands for Effective Proteetlon Rate. ii
i
i
1994.
since
1985. Nonetheless,
at- To page 16 iii i
i
it
How theNeighborsWill Fare... (Frompage 15)
PIDS Book Looks at Poverty V/s.a.Vis Policy Decisions
Unlesstherisingbusinessoperating costs and shortage of management skills are addressed, growth in the financial and business sector will be around three to four percent throughout most of the 1990s.
PIDS has a new book entitled Poverty, Growth and theFiscal Crisis. A result of a joint study by academidane and economists, the book explores why the country's fiscal problem has become the most crucial obstacle topovertyalleviation.
A slow growth in the manufacluring, financial and business sectors may result in a low labor productivity of4.4percentin 1993and4.7percentin 1994.
Lastly, a robust gain in merchandise exports and a faster increase in domestic demand will pushThailand's II
Poverty, Growth and the Fiscal Crisis is a project of the 13-man "Crisisof Poverty" Team headed by Dr. Emmanuel de Dies of the University of the Philippines School of Economics. Copies of the 300-page book are available at the PIDS at
The book consists of an integralive report that details the relation among: slow, erratic economic growth, financialbind, and poverty,
The GDP is likely to grow by six percent in 1993 and 6.1 percent in 1994. Inflation is projected at 2.5 percent in 1993 and 2.2 percent in 1994, stabilizing thereafter at two percent in the medium-term if cost factors such as a tight labor market and non-wage costs of business become favorable,
IIIII
cialreforms, industrialandtxadepolicies, agriculture, debt management, taxation, pollution control and infrastructure, transport and energy.
Other chapters contain individual indepth studies on banking and finan_ .......
P125.00 each (bookpaper). For inquiries, please call 88-40-59/86-57-05.
GDP growth rate to 7.9 percent in 1993. Agriculturaloutputisexpectedtogrow by three percent in 1993 and 3.5 percent in 1994. Investment is expected to expand by 10 percent in 1993, and by 10.8 percent a year thereafter--a big leap compared to the 1992 rate of four percent. After the recovery of investments in both private and public sac-
tars and the return of consumers' confidence, the industry sector shall level off at 11 and 11.8 percent growth for 1993 and 1994, respectively. A starting rate of 1994, it
stronger domestic demand 1993 will result in an inflation 5.3 percent for the year. For will be 5.4 percent. _. am|
I
m..lll,
i
..H|H
PhilippineInstitutefor DevelopmentStudies(PIDS) NEDAsa Makati Bldg.,106 AmorsoloSL, LegaspiVillage 1229 Makati,MetroManila
DEVELOPMENT RESEARCH NEWS isa bi-monthly publication ofthePHILIPPINE INSTITUTE FOR DEVELOPMENT STUDIES (PIDS).Ithighlights findings andrecommendations ofPIDSresearch andimportant policy issues discussed during PIDSseminars. Vol.XI No.2 March- April1993 PIDSis a nonstock, nonprofit government research institution engaged inlong-term, policy-oriented research. Thispublication is partoftheInstitute's program todisseminate information inorder topromote theuse Editorial Board: Dr.Ponciano Intal,.rr., President; ofresearch findings. Dr.MariaZ,mnberte, Vice-President;Ms. JTenaifer Theviews andopinions publish_l hereare those of theauthors anddonotnecessarily reflect those Ugawn, Director forRe,arch]aformazioo; Mr. OftheInstitute. inquiries regarding anyofthestudies contained in thispublication, oranyofthePIDSpapers, Isaac Pa_/il, Director forOpcratioas andFinance; Mr. Cre$cencio Jovellanos, Director forManage- aswellasanysuggestions orcommentsonthepublicationarewelcome. Please addressall related con'espondence meatlaromzatioo andinquiries to: Research Information Staff(RIS) staff: ]enn_erLiguton.Editor-ia-CSief; Suzy PhilippineInstitute forDevelopment SLuc:ie_ ,IFIDS) .Am=Taparaa,Issue Editor;Corazoa Desuazido, Room304,NEDA saMakatiBuilding_,10F, .Arnol_,m_ St;_et Me.LoardesSalcedo.AnnleUamoso. andFranci_ Legaspl Village, 1229Makati, MetroMarlil,_ Egeniat,Contributhtg F_,ditor=; A,Llaraoza, Layout Telephone Nos.884059 and8657'05; T_lef_blc.I_532) 816109_ .nODesiga;1.4ilaGarcia,Subscrlption; Necila Re-entered assecond dass mallattheMakati Central Post Office onApril27,1987. Annual subscription Aquino, Delia Romero, GalicanoGodexand ratesare: PO0.0Ofor private firms andindividuals; P80.00 forstudents,libraries, academic andresearch institutions; FedericoUlzome, Cbculatioa; Valenliaa Tolenlino and$16.00 forforeign subscribers. Allrates areIndusive ofmailing andhandling oosts. Prices may change without andAnneCleofa$,Exch_mge. prior notice. i
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