III-B

1

III. AGE analysis of trade, policy reform and environment

A. Core concepts and structural features of AGE models

B. Country case studies (OEE Ch. 6, 7)

III-B

2

Protection, food policies and the environment: Philippines

• After several decades of fitful growth, heavy reliance on NR for incomes continues.– Structural change has been slow– Additions to the labor force work mainly in

agric/services– Poverty (esp. in rural areas) remains high

• While problems of urban pollution and infrastructure are severe, degradation of natural resource base (soils, forests, watershed services and fisheries) is the major problem.

III-B

3

Protection, food policies and the environment: Philippines

• Forest cover has fallen from >50% to <20% since 1950

• Deforestation continues in spite of huge decline in commercial timber harvesting – Upland population doubled 1960-90, to >18m.– Upland agricultural area increased about sixfold.– Most upland agriculture is cereals, mainly corn.– Intensification and expansion are also associated with

rapid land degradation plus off-site damages.

III-B

4

Table 6.1: Erosion rates by land use: Philippines

Land Use Erosion rates (t/ha/yr)

Undisturbed forest 0.1- 0.4

Second growth forests 1-7

Rice paddies 0.2-10

Plantations (dep. on age and species) 2.4-75

Grasslands 1.5-3

Overgrazed lands 90-270

Shifting cultivation (no conservation

measures)

90-240

Annual cash crops (uplands) 30-180

Source of basic data: NRAP (1991).

III-B

5

Spatial dimensions

• Population growth in cities and at cultivated frontier (forest margin)

• In rural areas, most rapid growth in uplands, where land is ‘freely’ available

• The main regions (island groups) are heterogeneous in terms of climate, soils, econ. conditions, etc.

III-B

6

Policy legacies and linkages

• ISI as development strategy– Maintained longer than ASEAN neighbors– Protection for capital-intensive mfg; this discouraged

agricultural investment and production.– Low labor demand growth in mfg kept real wages low– Persistent poverty and income inequality

• Ag. development policy (inc. Green Revolution) benefited mainly lowland ag.

• Food policy protected cereals relative to other ag. – Decline of traditional upland crops (e.g. coffee)

III-B

7

Recent policy trends

• Reductions in manufacturing protectionism

• Relaxation of quantitative restrictions on agricultural trade (WTO compliance)– But QRs mainly replaced by prohibitive tariffs,

esp in rice and corn.– Thus cereals excluded from trade liberalization

agenda.– What environmental and welfare implications?

III-B

8

The APEX model

• Johansen-style AGE model• Main features:

– 50 sectors, including 12 agriculture– Ag. production in 3 regions (specific factors)– 5 types of household (by income quintile), with unique

asset ownership & consumption patterns– 2 types of labor (skilled and unskilled)– Data are sourced from Philippine Social Accounting

Matrix and econometric estimates (for all elasticities)– Includes wide range of taxes and subsidies.

III-B

9

Production structure: industry

Output

(Fixed proportions)

Composite primary factor Intermediates

(Flexible function) (CES)

Labor Variable K Fixed K Imported Domestic

Skilled Unskilled

III-B

10

III-B

11

Environmental stories

• Soil erosion depends mainly on corn area planted

• Deforestation for ag. land implied by changes in land and labor prices

• Industrial emissions calculated using AHTI

III-B

12

Policy experiments

• Except rice and corn, most highly protected sectors are in heavy industry (Table 6.3).– These are also the least L-intensive– And contain the biggest polluters

• Experiment 1: reduce non-agricultural tariffs by 25%

• Experiment 2: reduce all tariffs by 25%

III-B

13

Closure

• Macro closure:– G budget and current account assumed to balance;– Savings and investment fixed;– So burden of adjustment falls on households– This yields a measure of welfare change (marketed

goods) based on household expenditures

• Micro closure:– Ag. land area is endogenous (allows for expansion,

fallow)

III-B

14

Table 6.4: Macroeconomic effects of trade liberalization (per cent changes)Manufacturing

sectors onlyAll tariffs reduced

Real GDP -0.04 -0.02

Gov’t tariff revenue -22.14 -24.00

Real household consumption -0.06 -0.04

Wages: unskilled labour 0.66 0.56

Wages: skilled labour 1.26 1.36

Return to variable capital 1.14 1.19

III-B

15

Table 6.5: Sectoral effects of trade liberalization (per cent changes)

Manufacturing tariffreduction

Across-the-board tariffreduction

Price Output Price OutputIrrigated Rice .37 -.16 -.38 -.75

Rainfed Rice .37 -.18 -.38 -.61

Corn .11 -.45 .00 -.44

Coconut .45 -.21 .33 -.04

Sugar .22 -.22 .22 -.17

Forestry .90 .84 .90 .87

III-B

16

Table 6.5: Sectoral effects of trade liberalization (per cent changes)

Manufacturing tariffreduction

Across-the-board tariffreduction

Price Output Price OutputTextile -.58 -1.01 -.67 -.97

Garments .10 -.73 .09 -.68

Wood Products -.34 2.08 -.36 2.19

Paper Products -.48 -.53 -.52 -.52

Fertilizer -.05 .18 -.08 .07

Other Rubber Prod. -.95 -.07 -.99 -.10

Basic/Non-ferr Met .06 -.43 .06 -.44

Cement -.81 -.48 -.86 -.47

Semiconductors -.31 1.95 -.31 1.97

Metal Products -2.51 -.36 -2.68 -.31

Elect. Machinery -.96 -.41 -1.00 -.42

Transport Equipt -1.15 -.47 -1.21 -.47

Misc. Mfg -.71 -.88 -.72 -.87

III-B

17

Table 6.6: Land use changes due to trade liberalization in non-agric sectors

Industry Luzon Visayas Mindanao

Manuf.

tariffs

All

tariffs

Manuf.

tariffs

All

tariffs

Manuf.

tariffs

All

tariffs

Irrigated rice .08 -.60 -.09 -.64 -.18 -.71

Rainfed rice .06 -.49 -.01 -.34 -.27 -.61

Corn -.04 -.31 -.16 -.12 -.44 -.37

Coconut .14 .11 .02 .00 -.25 .08

Sugar -.03 -.03 -.19 -.14 -.28 -.15

Fallow land -.04 .26 .08 .17 .29 .33

Erosion -.03 -.30 -.14 -.13 -.42 -.38

III-B

18

Table 6.12: Changes in household incomes, by source

Household group Manufacturing tariff

reduction

Across-the-board

tariff reduction

Labour .77 to 1.09 .71 to 1.15

Agricultural land -.05 -.26

Agricultural capital .44 .13

Non-agric. capital .99 1.05

Variable capital 1.14 1.19

III-B

19

Table 6.11: Changes in real household consumption expenditures by quintile

Household group Manufacturing tariff

reduction

Across-the-board

tariff reduction

Poorest 20% -.22 -.21

Second -.16 -.15

Third -.12 -.11

Fourth -.09 -.08

Richest 20% .02 .05

III-B

20

Trade liberalization : summary

• Scale effect: very small, as expected• Composition effect: liberalization reduces

pressures on NR base, has mixed effects in industry

• Real h’hold expenditures on goods: almost no change

• Income distribution worsens• Clear env. benefits in agriculture, and reduced

pressures for deforestation by farmers

III-B

21

Ongoing policy issues

• Philippine poverty and income inequality have deep historical roots– Trade reform alone is not sufficient

• Major environmental problems stem from poverty, low non-ag labor absorption, and open access– Trade reforms have indirect environmental benefits, but

more is needed– EKC may be ‘too high’ regardless of trade policy; direct

environmental policies are also needed– Protecting corn sector (food policy) cancels effects of

environmental policies