III-B III. AGE analysis of trade, policy reform and environment A. Core concepts and structura l features of AGE models B. Coun try c ase studies (OEE Ch. 6, 7 ) 1 III-B 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. 2 III-B 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. 3 III-B Table 6.1: Erosion rates by land u se: Phili ppines Land U se Und isturbed forest Second grow th forests Erosion rates (t/ha/yr) 0.1- 0.4 1-7 Rice paddies 0.2-10 Plantations (dep. on age and specie s) 2.4-75 Grasslands 1.5-3 Overgrazed lands 90-270 Shifting culti vation (no con servation 90-240 measures) Annua l cash crops (up la nds ) Sour ce of basic data: NRAP (1991). 30-180 4 III-B 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. 5 III-B 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) 6 III-B 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? 7 III-B 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. 8 III-B Production structure: industry Output (Fixed proportions) Composite primary factor Intermediates (Flexible function) (CES) Labor Variable K Fixed K Imported Domestic Skilled Unskilled 9 III-B 10 III-B 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 11 III-B 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% 12 III-B 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) 13 III-B Table 6.4: Macroecono mi c effects of trade li beralization (per cent change s) Manufa cturing All tarif fs reduc ed sectors only Real GDP -0.04 -0.02 Gov ’t tariff revenue -22.14 -24.00 -0.06 -0.04 Wages: un skill ed labour 0.66 0.56 Wages: skill ed labour 1.26 1.36 Return to variable capit al 1.14 1.19 Real hou seho ld consumption 14 III-B Table 6.5: Sectoral effects of trade li berali zation (per cent change s) Irrigated Rice Manufa cturing tariff reduc tion Pric e Output .37 -.16 Across-the-board tariff reduc tion Pric e Output -.38 -.75 Rainfed Rice .37 -.18 -.38 -.61 Corn .11 -.45 .00 -.44 Coconut .45 -.21 .33 -.04 Suga r .22 -.22 .22 -.17 Forestry .90 .84 .90 .87 15 III-B Table 6.5: Sectoral effects of trade li berali zation (per cent change s) Textile Garments Manufa cturing tariff reduc tion Pric e Output -.58 -1.01 Across-the-board tariff reduc tion Pric e Output -.67 -.97 .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 Semi conduc tors -.31 1.95 -.31 1.97 Metal Products -2.51 -.36 -2.68 -.31 Elect. Machin ery -.96 -.41 -1.00 -.42 Transport Equip t -1.15 -.47 -1.21 -.47 Mis c. Mfg -.71 -.88 -.72 -.87 16 III-B Table 6.6: Land use chang es due to trade liberali zation in non -agric sectors Indus try Luzon Visayas Mindanao Manuf . All Manuf . All Manuf . All tariffs tariffs tariffs tariffs tariffs tariffs Irrigated rice .08 -.60 -.09 -.64 -.18 -.71 Rainfed ric e .06 -.49 -.01 -.34 -.27 -.61 -.04 -.31 -.16 -.12 -.44 -.37 .14 .11 .02 .00 -.25 .08 Suga r -.03 -.03 -.19 -.14 -.28 -.15 Fall ow land -.04 .26 .08 .17 .29 .33 Erosion -.03 -.30 -.14 -.13 -.42 -.38 Corn Coconut 17 III-B Table 6.12: Changes in hou seho ld inco me s, by source Househo ld group Labour Agricult ura l l and Manufa cturing tariff Across-the-board reduc tion tariff reduc tion .77 to 1.09 .71 to 1.15 -.05 -.26 Agricult ura l capit al .44 .13 Non-agric. capit al .99 1.05 1.14 1.19 Variable capit al 18 III-B Table 6.11: Changes in real househo ld consu mption expend it ures by quintil e Hou seho ld group Manufa cturing tariff Across-the-board reduc tion tariff reduc tion Poorest 20% -.22 -.21 Second -.16 -.15 Third -.12 -.11 Four th -.09 -.08 .02 .05 Richest 20% 19 III-B 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 20 III-B 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 21