Modeling and Policy Impact Analysis

(MPIA) Network

Agricultural Sector Policies and

Poverty in the Philippines:
A CGE Analysis
Erwin Corong
Philippines

A paper presented during the 4th PEP Research Network General Meeting,
June 13-17, 2005, Colombo, Sri Lanka.
 Agriculture Sector Policies and Poverty in the Philippines: A CGE Analysis1

Caesar B. Cororaton and Erwin L. Corong2

Very Preliminary Final Report

Abstract

The Philippines has undertaken substantial trade reform since the 1980s with little
knowledge of the likely poverty impacts. A detailed CGE model is used in the analysis
to estimate and explain these impacts. The actual tariff reduction that occurred between
1994 and 2000 is found to increase poverty, especially among the rural households. This
results from the contraction of the agricultural sector as lower import prices induce
consumers to substitute towards it.

Keywords: Agriculture, International Trade, Poverty, Computable General Equilibrium,

Microsimulation, Philippines

JEL: D58, E27, F13, F14, I32, 013, 015, 024, 053, Q10

1
This work was carried out with the aid of a grant from Poverty and Economic Policy (PEP) Research
Network, financed by the International Development Research Center (IDRC).
2
International Food Policy Research Institute (c.cororaton@cgiar.org) and De La Salle University
(coronge@dlsu.edu.ph). We are grateful to Ismael Fofana, John Cockburn and Bernard Decaluwe. The
usual disclaimer applies.

1
Summary

The Philippines has undertaken substantial trade reform since the 1980s with little
knowledge of the likely poverty impacts. This study employed a detailed CGE
microsimulation model in order to assess the economic and poverty effects of the actual
tariff reduction that occurred between 1994 and 2000.

Simulation results show that the price of agricultural imports fall the most since
its initial import-weighted average tariffs are higher than industry. Agriculture sector
contracts as the substantial decline in import prices induce consumers to substitute
towards it. On the other hand, the lower price of imported inputs reduces the local cost of
production benefiting the outward-oriented-import-dependent industrial sector. Overall,
a freer trade appears to benefit the service sector as wholesale and trading sub-sector
expands.

National poverty headcount marginally decreases. However, both the depth

(poverty gap) and severity (squared poverty gap) worsens implying that the poorest of the
poor become much more immerse in poverty. Poverty stricken rural areas suffer the most
due to a decline in average income (as a result of agricultural contraction), compounded
by an increase in average consumption prices. In contrast, poverty situation improves in
the National Capital Region (NCR) or Metro Manila because of its proximity to major
industries and the expanding service sector.

In conclusion, tariff reduction appears likely to increase poverty especially in the

rural areas and among the rural low educated. The tariff reduction between 1994 and
2000 hurts poor the most. This suggests that the government should consider a regional
complementary policy aimed at addressing regional imbalances. In addition, a human
capital development program must be instituted as simulation results point out that
education and skill are the best ally against poverty.

2
Introduction

The Philippines has undertaken substantial trade reform since the 1980s. Tariff
rates have been reduced, tariff structure simplified, and quantitative restrictions
“tariffied”. However, the impact of all these developments on agriculture and on the poor
is not very clear, thus becoming the subject of an intense policy debate.

What is the impact of tariff reduction on the agricultural sector, and the entire
Philippines? Is trade liberalization favorable or harmful for the poor? What alternative or
accompanying policies may be used in order to ensure a more equitable distribution of
the gains from freer trade? What are the channels through which these changes are most
likely to affect the poor?

This study employs a 35-sector CGE microsimulation model calibrated to

Philippine data to analyze the impacts of tariff reduction in the Philippines. The model
consists of 24,797 Filipino households based on the 1994 Family Income and
Expenditure Survey. Given the macro and micro nature of the study, specific focus is
given on macroeconomic impacts, resource allocation, factor demands and factor prices,
household income, consumer prices and poverty.

Background on Philippine Agriculture

The agriculture sector employs about 35 percent of the labor force and accounts for
roughly 20 percent of GDP. If linkages with all other sectors such as agriculture related
processing and non-farm agriculture inputs are accounted for, agriculture contributes roughly 40
percent of GDP and employs two thirds of the labor force (David, 1997). The sector’s growth
performance is generally weak because of low productivity growth. Growth decelerated
from an annual average of 6.7 percent in the 1970s to 1.1 percent in the first half of the
1980s (Table 1). Although the second half of the 1980s saw some recovery, agriculture
again lost steam in the 1990s to register an annual growth rate of two percent.

Agriculture was the most promising sector in the 1970s. It grew rapidly mainly
due to the Green revolution. However, the inherent policy bias against agriculture,
coupled with the collapse in world commodity prices, halted this growth momentum.
David (2003) concludes that the negative impact of government' s anti-agriculture policy
bias was greater than that of declining world commodity prices. The policy bias towards
import substitution and against agriculture and exports until the 1970s led to market
distortions that promoted rent seeking activities and distorted economic incentives against
investments in agriculture. In particular these biases were: (a) the imposition of
agricultural export taxes to generate government revenue; (b) policy of maintaining an
over-valued exchange rate that resulted to negative protection rates in agriculture thereby
reducing the rates of return to investments; and (c) government intervention in agriculture
that created government marketing agencies that siphoned off the gains from trade, hence
creating to rent-seeking activities.

3
 Table 1: Growth Rates of Agriculture, Fishery and Forestry
1970-75 1975-80 1980-85 1985-90 1990-95 1995-2000
Agriculture 6.7 6.7 1.1 3.1 2.0 2.3
Crops
- Palay 3.8 5.2 3.6 3.6 2.0 4.3
- Corn 7.1 5.0 3.7 5.4 -0.5 0.5
- Sugarcane 7.7 0.1 -3.5 -5.8 1.6 0.5
- Coconut 11.1 11.1 0.0 -8.7 0.9 0.0
- Banana 12.5 20.2 0.8 -4.8 -0.5 6.0
- Other Crops 8.7 6.8 0.5 5.5 1.7 0.9
Livestock 0.0 -1.5 1.3 6.1 3.3 4.7
Poultry 7.4 13.5 3.0 8.0 6.4 5.1
Agricultural Services 0.0 6.7 2.8 8.7 1.0 -0.5
Fishery 4.3 4.2 5.1 1.0 2.6 1.3
Forestry -6.8 -2.6 -11.4 -6.0 -23.3 -9.2
Agriculture, Fishery and Forestry 3.1 4.5 0.4 2.0 1.3 1.9
Source: National Statistical and Coordination Board

In spite all these, the agriculture sector continued to serve as the country’s
backbone in the 1970s. It was a net exporter, contributing two-thirds of total exports and
representing only 20 percent of total imports, thus providing the foreign exchange needed
to support the import dependent manufacturing sector (Intal and Power 1990). However,
the 1990s saw a clear change in agricultural trade patterns as exports stagnated and
imports increased dramatically to the point that the Philippines became a net importer of
agricultural goods. David (2003) attributes this evolution to the country’s fading
comparative advantage and low productivity levels in agriculture. Essentially, this can be
traced to primary agricultural goods where exports have gone from 1400 percent of
imports in 1970 to 50 percent in 1998.

Table 2 Contribution of Agriculture to GDP (%)

1993 1997 2003
Agriculture, Fishery, and Forestry 21.7 18.7 14.5
a. Agriculture 17.4 15.8 12.3
Palay 2.9 3.0 2.2
Corn 1.2 0.9 0.6
Coconut including Copra 1.3 1 0.7
Sugarcane 0.7 0.5 0.4
Banana 0.7 0.5 0.5
Other Crops 5.2 4.9 3.9
Livestock 2.7 2.5 1.9
Poultry 1.9 1.5 1.3
Agricultural activities & Services 1 0.9 0.7
b. Fishery 3.9 2.8 2.2
c. Forestry 0.4 0.1 0.1
Industry 32.9 32.2 32.3
Services 45.4 49.1 53.2
GROSS DOMESTIC PRODUCT 100 100 100

4
Source: Economic and Social Statistics Office, National Statistical and Coordination Board
The combined impact of low productivity growth and declining comparative
advantage took its toll on agriculture’s contribution to GDP. Table 2 shows that the
entire agriculture sector (including fishery, and forestry) contribution to GDP declined by
7 percent from 21.7 in 1993 to 14.5 in 2003. Notably, the contribution of Palay, Corn,
and Sugar decreased in the same period as well.

Table 3 shows the structure of agriculture crops in the last 10 years. More than 50
percent of agricultural area is planted with Palay and Corn, while sugar occupies about 3
percent. In terms of the value of production Palay and Corn contributes more than 40
percent. Palay alone contributes 38 percent of the total value of agricultural production
in 2002

Table 3. Agriculture Production (percentage distribution, %)

1993 1997 2002/p
Area Quantity Value Area Quantity Value Area Quantity Value
A. Cereals 51.4 21.7 40.9 51.7 22.8 41.6 50.1 24.2 47.2
Palay 26.2 14.4 28.6 30.3 16.5 31.6 31.5 18.2 37.9
Corn 25.2 7.3 12.3 21.5 6.3 10.0 18.6 5.9 9.3
B. Major Crops 38.4 64.9 41.9 39.0 68.6 44.9 45.9 71.7 45.5
Coconut 24.6 17.3 13.2 24.7 20.1 12.0 31.8 18.8 11.6
Sugarcane 3.1 34.9 5.5 3.0 32.6 5.5 2.9 37.4 7.0
Banana 2.6 4.8 6.0 2.7 6.5 7.0 3.1 7.2 9.4
Pineapple 0.3 2.0 3.1 0.3 2.4 4.0 0.4 2.2 3.3
Mango 0.5 0.6 3.6 1.0 1.4 5.6 1.1 1.3 4.8
Other major crops 7.3 5.4 10.6 7.3 5.6 10.8 6.6 4.7 9.3

Other Crops 10.1 13.4 17.2 9.3 8.6 13.5 3.9 4.1 7.2
Total 100 65,616 175,630 12,694 100 278,170 100 100 100
Source: Philippine Statistical Yearbook
/p: preliminary

Philippine Trade Reform

The first phase of the trade reform program (TRP) started in the early 1980s with
three major components: (a) the 1981-85 tariff reduction; (b) the import liberalization
program (ILP); and (c) the complimentary realignment of the indirect taxes. Maximum
tariff rates were reduced from 100 to 50 percent. During the period 1983–1985 sales
taxes on imports and locally produced goods were equalized. The mark–up applied on the
value of imports (for sales tax valuation) was also reduced and eventually eliminated.

The implementation of ILP however was suspended in the mid–1980s because of

a balance of payments crisis. In fact, some of the items that were deregulated earlier were
re–regulated during the period. When the Aquino government took over the
administration in 1986 the TRP of the early 1980s was resumed, resulting in the

5
reduction of the number of regulated items from 1,802 in 1985 to 609 in 1988. Export
taxes on all products except logs were also abolished.

In 1991 the government launched TRP–II, which was an extension of the previous
program that realigned tariff rates over a five–year period. The realignment involved the
narrowing of the tariff rates through a series of reductions of the number of commodity
lines with high tariffs, and an increase in the commodity lines with low tariffs. In
particular, the program was aimed at clustering of tariff rates within the 10-30 percent
range by 1995. This resulted in a near equalization of protection for agriculture and
manufacturing by the start of the 1990s, reinforced by the introduction of protection to
"sensitive" agricultural products. Despite the programmed narrowing of the tariff rates,
about ten percent of the total number of commodity lines were still subjected to a 0-5
percent tariff or a 50 percent tariff by the end of the program in 1995.

In 1992, a program of converting quantitative restrictions (QRs) into tariff

equivalents was initiated. In the first stage, QRs of 153 commodities were converted into
tariff equivalent rates. In a number of cases, tariff rates were raised over 100 percent,
especially during the initial years of the conversion. However, a built–in program for
reducing tariff rates over a five–year period was also put into effect. QRs were removed
for a further 286 commodities in the succeeding stage. At the end of 1992 only 164
commodities were subjected to QRs. There were some policy reversals along the way
though. In 1993, QRs were re-introduced for 93 items, largely as a result of the Magna
Carta for Small Farmers in 1991.

In 1994, the government started implementing TRP–III at the same time as it was
admitted to the WTO. Tariff rates were successively reduced on: capital equipment and
machinery (January 1, 1994); textiles, garments, and chemical inputs (September 30,
1994); 4,142 manufacturing goods (July 22, 1995) and “non-sensitive” components of the
agricultural sector (January 1, 1996). Through these programs, the number of tariff tiers
was reduced, as were the maximum tariff rates. In particular, the overall program was
aimed at establishing a four-tier tariff schedule: three percent for raw materials and
capital equipment that are not available locally; ten percent for raw materials and capital
equipment that are available from local sources; 20 percent for intermediate goods; and
30 percent for finished goods. This further reduced the anti-agriculture tariff bias with the
EPR for agriculture exceeding that of industry for the first time in 1995 (Habito 1999).
Indeed, EPRs in agriculture and industry went from nine and 44 percent, respectively, in
1979 to 25 and 20 percent in 1999, and to 24 and 15 percent by the year 2000 (Bautista,
Power and Associates 1979; Manasan and Pineda 1999; Habito 2002).

By 1998, TRP IV was undertaken to recalibrate the tariff rate schedules implemented
under previous rounds of TRPs. This was primarily due to the result of a tariff review
process that evaluated the pace of tariff reduction in line with the competitiveness of the
local industry. Initially, EO 465 was implemented on January 22, 1998 to adjust the tariff
rate schedules of twenty-two industries that were identified as globally competitive
(Tariff Commission, 2004). Subsequently, EO 486 was passed on July 10, 1998 to
amend the tariff schedule of residual items as well as reduce the number of tariff lines
subject to quota from 170 under TRP III to 144 under TRP IV. In line with TRP IV

6
moreover, EO 334, which took effect on January 1, 2001 provided for an amended tariff
schedule on all product lines (except sensitive agricultural products) within the years
2001 to 2004. By and large, EO 334 provides for a tariff band of 0 to 5% starting the
year 2004.

Government Revenue

Between 1994 and 2000, the overall weighted nominal tariff declined by 66.9
percent (Table 4). The decline in the industry tariff (-65.3 percent) was much greater than
in agriculture (-48.8 percent). The largest drop in tariff rates was in mining (-88.9
percent) while the smallest decline was in "other agriculture" (-19.9 percent). In terms of
the average sectoral tariff rate level in 2000, food manufacturing still had the highest rate
of 16.6 percent, whereas other agriculture had the lowest tariff rate of 0.2 percent.

Table 4: Nominal Tariff Rates

1994 2000 Percent change
Crops 15.9 8.7 -45.6
Livestock 0.7 0.3 -57.6
Fishing 34.1 80 -76.4
Other Agriculture 0.3 0.2 -19.9
AGRICULTURE 8.8 4.5 -48.8
Mining 44.1 4.9 -88.9
Food manufacturing 37.3 16.6 -55.4
Non-food manufacturing 21.1 7.6 -64.0
INDUSTRY 24.1 8.4 -65.3
TOTAL 23.9 7.9 -66.9
Sources of data for calculation: Various issues of Foreign Trade Statistics, and Manasan and
Querubin (1997).

Table 5. Sources of Revenue and Balances of National Government

1990 1995 2000 2004*
Tax Revenue 83.9 85.7 89.1 85.6
Taxes on Net Income and Profits 27.3 30.7 38.6 39.8
Excise and Sales Taxes 27.2 23.4 28.1 24.0
Import Duties and Other Import taxes 26.4 27.7 19.3 17.5
Other Taxes 3 3.9 3.1 4.2
Non_Tax Revenue 14.8 14 10.6 14.4
Grants 1.3 0.3 0.3 0.01
Total 100 100 100 100
Total Revenue (P Billion) 180.9 362.2 507.1 699.8
Total Expenditure (P Billion) 218.1 350.1 641.8 886.8
(Deficit)/Surplus (P Billion) (37.2) 12.1 (134.7) (187.1)
(Deficit)/Surplus (% of GNP) (3.5) 0.6 (3.9) (3.6)
Source: Selected Philippine Economic Indicators (BSP) and Yearly Statistics (Bureau of Treasury)

7
 Revenue from import tariff is one of the major sources of government funds. In
1990, the share of revenue from import duties and taxes to the total revenue was 26.4
percent (Table 5). It increased marginally to 27.7 percent in 1995, but dropped sharply to
17.5% percent in 2004, largely due to the tariff reduction program. The reduction in the
share of tariff revenue was compensated primarily by an increase in the share of income
and profit taxes from 27.3 percent in 1990 to 39.8 percent in 2004. Conversely, the share
of excise and sales taxes dropped from 27.2 percent in 1990 to 23.4 percent in 1995,
recovered slightly to 28.1 percent in 2000, but faltered once again with a 24 percent share
in 2004.

Poverty Profile

Figure 1 presents the evolution of the poverty headcount index and the Gini
coefficient from 1985 to 2000. The poverty headcount index dropped continuously from
49.2 percent in 1985 to 36.9 percent in 1997, but then rebounded to 39.5 percent in 2000
as a result of the 1998 El Nino and the Asian Crisis. El Nino resulted in a 30 percent
contraction in agriculture, the greatest drop in more than 30 years. On the hand, income
inequality has steadily increased over this period, as the Gini coefficient climbs from 0.42
in 1985 to 0.51 in 2000.

Figure 1: Income Distribution and Poverty: The Philippines

(1985 - 2000) Gini

Headcount 60 0.52
0.5
40 0.48
0.46
0.44
20 0.42
0.4
0 0.38
1985 1988 1991 1994 1997 2000
Headcount 49.2 45.4 45.2 40.6 36.9 39.5
Gini 0.42 0.46 0.48 0.46 0.51 0.51
Source: FIES 1985, 1988, 1991, 1994, 1997, 2000

Table 6 shows the poverty indices at the base. In 1994, about 45 percent of the
population of 67 million was below the poverty threshold. NCR or Metro Manila, where
majority of the industries are located had the lowest poverty with headcount, gap and
severity of 10.40, 2.01, and 0.60 respectively. While, rural areas have the highest poverty
level.

8
 Three important facts can be inferred from table 7. First, poverty is influenced
by spatial factors. Rural households, which represent roughly half of the population, are
substantially poorer than urban households3. In the same vein, households residing in
NCR or Metro Manila are less prone to poverty compared to other urban dwellers.
Second, the degree of poverty depends on human capital. Household heads with at least
a high school diploma (skilled workers), regardless of gender are less susceptible to
poverty having better opportunities and options for employment. Third, Gender. Male-
headed households are relatively worse off, and much more vulnerable to poverty than
their female counterparts.

! "

# $

% %
! " "
" "
# $ % % & !
% % & & ! ! '
% % & !

& & !

3
Although Balisacan (2003) suggest that this arises from the “systematic differences in levels of human
capital between low and high income groups within a geographic area which translate to considerable
difference in earning opportunities…, thus disparity in income and human achievement is the major
problem not disparity between regions”

9
The Model

Basic Structure. The model was calibrated to the 1994 SAM of the Philippine
Economy and has 35 production sectors composed of 13 Agriculture, Fishing and
Forestry; 19 Industry; and 3 Services--which include government services. It
distinguishes capital, land, and four types of labor inputs namely: skilled (high school
diploma) and unskilled agricultural labor, as well as skilled and unskilled production
workers. The production structure of the model assuming constant returns to scale is
presented in figure 2. Gross output is determined through a linear aggregation of
intermediate inputs and Value added. Intermediate input is determined using a fixed
Leontief coefficient, whereas value added is a Cobb-Douglas (CD) function of labor and
capital. Sectoral capital is fixed.

Figure 2. Production Structure

Output
Leontief

Intermediate Inputs Land-Labor-Land

CD

Land Labor Capital

CD

Skilled Unskilled

The salient feature of the model stems from the way land and labor inputs are
treated in agriculture. Land together with skilled and unskilled agriculture labor are
agriculture specific, hence can only be employed in the sector. However, production
workers employed in agriculture can move in and out of the sector. On the other hand,
non-agricultural sectors, except government (which only utilize skilled production labor)
employ skilled and unskilled production labor.

Figure 3 illustrates the basic price relationships in the model. Output price, px,
affects export price, pe, and local prices, pl. Indirect taxes are added to the local price to
determine domestic prices, pd, which together with import price, pm, will determine the
composite price, pq. The composite price is the price paid by the consumers. Import
price, pm, is in domestic currency, which is affected by the world price of imports,
exchange rate, er, tariff rate, tm, and indirect tax rate, itx. All prices adjust to clear the
factor and product markets. An Armington-CES (constant elasticity substitution) function
allocates the demand between local and imported goods, while a CET (constant elasticity
of transformation) function determines the allocation of domestic production between

10
export supply and local sales. The demand side assumes cost minimization while the
supply side assumes profit maximization. In turn, both their first order conditions
generate the necessary: import and domestic demand functions, as well as the necessary
supply and input demand functions.

Figure 3: Basic Price Relationship in the Model

Export
price (pe)
Output
price (px)
Local price Import
(pl) price (pm)
Composite
+ price (pq)
Indirect Domestic
taxes (itx) price (pd)

The model integrates the entire Family Income and Expenditure Survey (FIES)
with 24,797 households. Consumer demand is derived from CD utility functions.

Model Closure. Nominal government consumption is equal to exogenous real

government consumption multiplied by its (endogenous) price. Fixing real government
spending neutralizes any possible welfare/poverty effects of variations in government
spending. Total government income is held fixed. Any reduction in government income
from tariff reduction is compensated endogenously by the introduction of an additional
uniform sales or income tax. Thus, the government' s budget balance (public savings) is
endogenously determined, although the only variations are due to changes in the nominal
price of government consumption.

Total nominal investment is equal to exogenous total real investment multiplied

by its price. Total real investment is held fixed in order to abstract from inter-temporal
welfare/poverty effects. The price of total real investment is endogenous. The current
account balance (foreign savings) is held fixed and the nominal exchange rate is the
model' s numéraire. The foreign trade sector is effectively cleared by changes in the real
exchange rate, which is the ratio of the nominal exchange rate multiplied by the world
export prices, divided by the domestic price index. The propensities to save of the various
household groups in the model adjust proportionately to accommodate the fixed total real
investment assumption. This is done through a factor in the household saving function
that adjusts endogenously.

Economic Structure. Table 7 presents the economic structure based on the SAM.
The sectoral CES and CET elasticities in the model are derived as one-half of the
Armington elasticities for the Philippines in GTAP (Hertel et al 2004). In general, the
pattern of trade points out the dominance of the industrial sector. Indeed, it accounts for

11
roughly 60 percent of exports outperforming the services and agricultural sectors with 34
and 6 percent share respectively. Nonetheless, total agriculture exports contributed about
15 percent when all agricultural related food processing are accounted for. The principal
industrial exports are semi-conductor and textile and garments followed by all processed
food exports with a combined 9 percent share. Furthermore, semi-conductor, Coconut
processing, Banana, textile and garments, and mining are the most export intensive
sectors.

Similarly, 99 percent of total imports accrue to the industrial sector with the
remainder going to the agricultural sector. This enormous share stems from the low
valued-added-import-intensive-assembly type operation in the manufacturing sector
(particularly in the semi-conductor and textile and garment sub-sectors). Motor
vehicles4, has the highest import share followed by semi-conductors. The highly import-
intensive sectors are mining (72.03 percent; mainly due to crude oil imports), semi-
conductors, machinery, and fertilizer5.

In terms of value added, the agricultural sector generally has highest ratio
compared to industry, although its contribution to the overall value added is relatively
small. Agriculture contributes about 20 percent of domestic value added (GDP),
compared to 31.5 for industry and 48.5 for services. Labor intensity is uniformly higher
in the agricultural sectors, with the exception of fishing and "other livestock"

4
All vehicles are assembled using Completely Knocked Down (CKD) imported parts
5
The Philippines does not produce all items in the semi-conductor sector, but instead imports these items.
For example, it does not have the facilities to produce wafers (motherboards) and monitors, which are
major parts of computers. Domestic production focuses on hard disks, disk drives, processors, and some
chips. Thus, while there is substantial domestic production and exports in the semi-conductor sector, there
are also substantial imports.

12
 &'
Foreign Trade Production
VA Lab-
SECTORS Trade Elasticities*** Exports,% * Imports,% * Share Cap
(VAi / Ratio
Armington CET Share Intensities Share Intensities (VA/X)i VA) *, **
Irrigated Palay 5.05 5.05 - - 0.001 0.01 73.88 1.97 0.95
Non_irrigated Palay 5.05 5.05 - - - 0.00 92.98 0.84 2.09
Corn 1.30 1.30 0.01 0.23 0.15 3.15 79.73 1.11 2.21
Banana 1.85 1.85 1.26 56.18 - 0.00 62.94 0.46 2.96
Fruits 1.85 1.85 0.77 12.38 0.22 3.60 75.86 1.54 1.66
Coconut 1.85 1.85 0.37 9.85 - - 86.53 1.05 2.94
Sugarcane 2.70 2.70 - - - - 71.87 0.57 1.18
Other agricultural crops 3.25 3.25 0.67 6.08 0.13 1.18 78.36 2.81 1.47
Hog 2.00 2.00 - - 0.34 3.42 56.05 1.65 1.16
Chicken_egg and other poultry products 2.00 2.00 0.00 0.04 0.04 0.37 55.57 1.84 0.98
Other livestock 1.53 1.53 0.02 0.37 0.03 0.45 74.03 1.41 0.51
Fishing 1.25 1.25 3.36 20.83 0.03 0.21 71.74 3.75 0.56
Other Agriculture 3.38 3.38 - - 0.15 3.40 77.00 0.99 2.29
AGRICULTURE 6.46 7.49 1.08 1.26 19.98 1.12
Mining 6.34 6.34 2.45 43.07 8.87 72.03 54.96 1.01 0.87
Meat Processing 4.17 4.17 0.08 0.51 0.45 2.58 28.46 1.47 0.33
Canning and preserving of fruits and vegetables 2.00 2.00 1.41 28.76 0.13 3.49 36.90 0.59 0.84
Fish canning and processing 4.40 4.40 2.07 39.58 0.02 0.68 24.51 0.42 0.72
Coconut processing 2.00 2.00 3.03 62.01 0.33 14.32 22.33 0.35 0.87
Rice and corn milling 2.60 2.60 0.04 0.15 0.24 0.97 32.32 2.46 0.30
Sugar milling and refining 2.70 2.70 0.40 8.92 0.22 4.77 30.11 0.44 0.90
Beverages_sugar_confectionery and related products 1.42 1.42 0.22 3.83 0.22 3.60 45.72 0.84 0.54
Other food manufacturing 2.40 2.40 1.34 5.57 4.37 15.31 29.25 2.29 0.86
Textile and garments 3.79 3.79 10.75 47.42 6.90 35.27 36.32 2.67 0.71
Wood_paper products 3.16 3.16 3.55 27.46 5.02 33.49 34.76 1.46 0.64
Fertilizer 3.30 3.30 0.53 42.98 1.47 66.13 33.47 0.13 0.40
Other chemicals 3.30 3.30 1.77 11.81 10.79 43.42 40.74 1.98 0.37
Petroleum_related products 2.10 2.10 1.12 5.59 4.14 17.05 20.19 1.31 0.48
Metal and related products 3.63 3.63 5.86 43.96 8.65 52.14 23.73 1.03 0.44
Semi_conductors and other electronic products 4.40 4.40 13.33 70.61 12.52 67.98 24.85 1.52 0.58
Motor vehicles and other machineries 3.70 3.70 5.97 34.66 27.50 69.69 19.79 1.11 0.73
Other manufacturing 3.42 3.42 5.32 30.05 7.08 35.00 37.61 2.16 0.90
Construction and utilities 2.34 2.34 0.46 0.95 - - 52.86 8.34 0.60
INDUSTRY 59.71 21.17 98.92 29.51 31.57 0.59
Wholesale trade 1.90 1.90 14.31 20.88 - - 64.06 14.23 0.51
Other service 1.90 1.90 19.51 14.63 - - 61.44 26.56 0.37
Government services 1.90 1.90 - - - - 69.02 7.66 -
SERVICES 33.83 14.32 - - 48.46 0.68
TOTAL 100 16.54 100 15.72 100.00 0.72
* Based on the 1994 SAM
** Lab-Cap is labor-capital ratio
*** Based on GTAP (Hertel, 2004)

13
Household Income

Table 8 presents the sources of household income. Income generated from labor
was the major source for the entire population with 45.5 percent followed by 35.7 percent
from capital. Income earned by laborers in the industrial sector and returns to capital in
the service sector has the highest share within the labor and capital income block.

Table 8. Sources of Household Income (At the Base)

( ) * * ( * )
% % +,
% % # ,
(
% +,
% # ,
% %
%
+
(
-
.
.

Policy Experiments

Two policy experiments were undertaken in the study.

Exp_1 Actual tariff reduction that occurred between 1994 and 2000 (based on
table 5).

Exp_2 Full tariff elimination

Both experiments entailed the use of a compensatory tax on direct income applied
uniformly to all households who are paying income taxes. Thus, those who are tax
exempt are not burdened by this tax. The justification for this is the consistently
increasing share of taxes on net income and profits discussed in Table 6. The additional
tax is imposed in the following manner

dyh h = y h × (1 − dtxrh × [1 + ntaxr ])

where dyhh is disposable of household h, yh is income, dtxrh is direct income tax rate at
the base, and ntaxr is the endogenously determined compensatory tax. This is
implemented only for households with dtxrh > 0,

14
Simulation Results

/* '

SIM_1 SIM_2
Change in overall nominal tariff rate, % -66.9 -100
Change in Prices, %:
Import prices in local currency -8.02 -11.85
Consumer prices -2.25 -3.82
Local cost of production -3.67 -6.10
Real exchange rate change, % 4.24 7.02
Change in import volume, % 10.63 17.28
Change in export volume, % 9.55 15.50
Change in domestic production for local sales, % -2.22 -3.73
Change in consumption (composite) goods, % 0.30 0.32
Change in overall output, % -0.10 -0.21

Macro Effects: The macro effects for both policy experiments are identical with
relatively higher values under the full tariff elimination scenario. The actual tariff
reduction (Sim_1) leads to an 8.02 percent decrease in local import prices. Consumer
prices decrease by 2.25 percent resulting to a 0.30 percent increase in consumption.
Similarly, the decrease in tariff reduces the price of imported inputs, leading to a 3.67
percent decline in domestic cost of production. Real exchange rate depreciates as a result
(by 4.24 percent). With this, producers reallocate towards the international market as
domestic sales go down by 2.22 percent while exports increase by 9.55 percent.

However, imports outpace exports owing from a much deeper decline in import
prices. Effectively, import crowds out locally produced goods as consumers substitute
towards it. Hence, overall output decreases though marginally by 0.10 percent.

15
 Table 10a. Effects on Prices and Volumes (SIM_1)
Price Changes (%) Volume Changes (%)
SECTORS δpmi δpdi δpqi δpxi δpli δmi δei δdi δqi δxi
Irrigated Palay -14.61 -4.41 -4.41 -6.16 -6.16 69.20 - -1.73 -1.72 -1.73
Non_irrigated Palay - -4.83 -4.83 -6.58 -6.58 - - -1.40 -1.40 -1.40
Corn -15.99 -4.10 -4.67 -5.85 -5.87 14.75 5.97 -2.52 -1.78 -2.50
Banana - -4.83 -4.83 -2.78 -6.58 - 15.71 0.77 0.77 8.48
Fruits -18.72 -3.51 -4.47 -4.60 -5.29 34.27 9.93 -1.39 0.44 -0.07
Coconut - -3.63 -3.63 -4.84 -5.40 - 13.71 1.46 1.46 2.57
Sugarcane - -4.91 -4.91 -6.66 -6.66 - - -3.87 -3.87 -3.87
Other agricultural crops -7.51 -3.55 -3.60 -4.97 -5.32 11.11 19.36 -1.56 -1.39 -0.37
Hog -15.46 -3.58 -4.50 -5.36 -5.36 25.96 - -2.51 -0.63 -2.51
Chicken_egg and other poultry products -5.46 -3.04 -3.06 -4.82 -4.82 2.71 10.29 -1.16 -1.12 -1.15
Other livestock -11.29 -3.36 -3.43 -5.12 -5.14 12.78 8.65 -0.49 -0.38 -0.45
Fishing -4.40 -2.61 -2.62 -3.46 -4.40 1.49 5.80 -0.44 -0.42 0.78
Other Agriculture 1.97 -2.99 -2.83 -4.77 -4.77 -17.20 - -0.77 -1.29 -0.77
AGRICULTURE -12.05 -3.93 -4.11 -5.34 -5.79 16.56 10.10 -1.39 -1.05 -0.51
Mining -4.82 -3.54 -6.29 -2.80 -5.31 3.67 14.81 -16.72 0.06 -1.66
Meat Processing -22.92 -3.30 -4.18 -5.05 -5.08 139.16 24.28 -3.09 0.68 -2.97
Canning and preserving of fruits and vegetables -17.42 -2.15 -2.80 -2.78 -3.95 35.85 6.82 -2.19 -0.86 0.21
Fish canning and processing -19.74 -0.95 -1.17 -1.63 -2.77 139.37 10.11 -3.69 -2.74 1.38
Coconut processing -19.80 -4.19 -6.81 -2.18 -5.96 31.24 8.42 -5.10 0.31 2.68
Rice and corn milling -20.77 -2.79 -3.04 -4.57 -4.58 65.11 12.42 -1.70 -1.04 -1.68
Sugar milling and refining -26.91 -3.21 -5.17 -4.51 -4.99 95.26 10.03 -5.32 0.08 -4.04
Beverages_sugar_confectionery and related
products -10.53 -2.06 -2.35 -3.70 -3.86 11.09 4.74 -1.67 -1.25 -1.44
Other food manufacturing -11.27 -2.32 -3.65 -3.87 -4.11 18.77 7.50 -3.78 -0.57 -3.21
Textile and garments -15.77 -6.14 -10.36 -3.83 -7.87 29.44 20.78 -12.42 4.24 3.04
Wood_paper products -11.21 -4.43 -7.01 -4.36 -6.19 14.70 13.57 -7.94 0.37 -2.15
Fertilizer 1.65 0.69 1.26 -0.66 -1.16 -1.13 4.89 1.64 -0.25 3.37
Other chemicals -7.55 -4.15 -5.64 -5.15 -5.91 6.11 17.60 -4.81 0.26 -2.24
Petroleum_related products -1.31 -1.67 -1.60 -3.28 -3.48 -0.14 5.11 -0.50 -0.65 -0.06
Metal and related products -7.73 -3.40 -5.71 -2.78 -5.17 8.26 12.18 -7.49 1.04 1.30
Semi_conductors and other electronic products -6.14 -2.39 -4.92 -1.15 -4.19 8.00 11.36 -8.30 2.90 5.19
Motor vehicles and other machineries -5.33 -3.07 -4.55 -3.07 -4.85 3.77 16.09 -4.20 1.43 2.62
Other manufacturing -17.51 -6.79 -11.54 -5.67 -8.50 27.53 16.97 -14.22 2.58 -4.78
Construction and utilities 0.00 -1.52 -1.52 -3.30 -3.33 - 7.34 -1.21 -1.21 -1.13
INDUSTRY -7.97 -3.16 -4.91 -3.89 -5.04 10.56 13.96 -4.65 0.48 -0.62
Wholesale trade - 5.17 5.17 2.58 3.24 - -2.06 3.89 3.89 2.64
Other service - -0.67 -0.67 -2.13 -2.50 - 4.41 -0.96 -0.96 -0.24
Government services - - - -0.72 - - - - - -
SERVICES - 1.11 1.11 -0.69 -0.84 - 1.67 0.60 0.74 0.79

Where qi : composite commodity pxi : output prices

mi : imports xi : total output pli : local prices
ei : exports pmi : import (local) prices pqi : composite commodity prices
di : domestic sales pdi : domestic prices δ : change

16
 Table 10b. Effects on Prices and Volumes (SIM_2)
Price Changes (%) Volume Changes (%)
SECTORS δpmi δpdi δpqi δpxi δpli δmi δei δdi δqi δxi
Irrigated Palay -31.08 -8.54 -8.55 -11.52 -11.52 303.63 - -3.34 -3.29 -3.34
Non_irrigated Palay - -9.34 -9.34 -12.30 -12.30 - - -2.56 -2.56 -2.56
Corn -33.93 -8.20 -9.72 -11.17 -11.20 44.99 10.33 -5.45 -3.38 -5.42
Banana - -9.40 -9.40 -5.05 -12.36 - 29.81 1.70 1.70 17.94
Fruits -39.61 -7.31 -10.10 -8.94 -10.34 113.03 18.01 -3.56 2.06 -0.76
Coconut - -7.04 -7.04 -8.99 -10.07 - 26.01 3.54 3.54 5.86
Sugarcane - -9.83 -9.83 -12.77 -12.77 - - -8.36 -8.36 -8.36
Other agricultural crops -16.32 -6.94 -7.11 -9.27 -9.98 36.98 36.52 -2.96 -2.41 -0.43
Hog -32.85 -7.26 -9.05 -10.29 -10.29 80.80 - -5.21 -1.44 -5.21
Chicken_egg and other poultry products -12.06 -6.22 -6.24 -9.28 -9.28 10.94 18.52 -2.46 -2.41 -2.45
Other livestock -24.17 -6.23 -6.36 -9.26 -9.29 37.54 15.39 -0.60 -0.38 -0.53
Fishing -9.87 -5.14 -5.15 -6.45 -8.24 5.64 10.34 -0.90 -0.89 1.52
Other Agriculture 3.38 -5.97 -5.69 -9.04 -9.04 -28.64 - -1.69 -2.65 -1.69
AGRICULTURE -25.76 -6.96 -7.47 -9.20 -10.00 56.52 18.69 -2.62 -1.64 -0.97
Mining -6.91 -3.09 -6.01 -3.24 -6.25 5.23 22.77 -18.50 -1.01 -0.40
Meat Processing -34.34 -7.68 -9.84 -10.63 -10.70 285.41 49.06 -7.04 2.60 -6.74
Canning and preserving of fruits and vegetables -26.01 -5.00 -6.28 -5.63 -8.10 58.64 13.95 -3.76 -1.12 1.49
Fish canning and processing -29.53 -2.21 -2.79 -3.11 -5.41 291.00 18.11 -7.51 -5.05 2.80
Coconut processing -29.61 -8.52 -13.62 -4.05 -11.51 52.59 15.35 -9.67 1.32 6.20
Rice and corn milling -31.08 -5.81 -6.36 -8.87 -8.89 117.89 23.21 -3.28 -1.81 -3.24
Sugar milling and refining -40.39 -7.13 -11.72 -9.13 -10.17 192.53 18.04 -11.63 1.32 -8.85
Beverages_sugar_confectionery and related
products -15.57 -4.31 -4.84 -7.13 -7.43 15.90 8.26 -2.97 -2.20 -2.53
Other food manufacturing -16.69 -4.76 -7.25 -7.39 -7.87 27.90 12.96 -7.22 -1.14 -6.05
Textile and garments -23.52 -9.86 -16.71 -5.91 -12.80 47.94 33.38 -20.66 7.06 5.88
Wood_paper products -16.59 -7.02 -11.09 -6.94 -10.06 22.83 21.80 -12.85 0.40 -2.96
Fertilizer 2.88 1.77 2.50 -0.88 -1.56 -1.71 7.29 1.88 -0.50 4.21
Other chemicals -11.05 -6.48 -8.73 -8.23 -9.54 8.77 28.31 -7.82 -0.10 -3.35
Petroleum_related products -1.59 -0.92 -1.04 -3.92 -4.16 -0.39 7.36 -1.80 -1.55 -1.28
Metal and related products -11.33 -4.91 -8.70 -4.19 -8.02 12.70 18.45 -12.56 1.36 1.39
Semi_conductors and other electronic products -8.92 -3.47 -7.46 -1.75 -6.62 11.86 17.05 -13.41 4.30 8.31
Motor vehicles and other machineries -7.68 -4.48 -6.83 -4.71 -7.60 5.53 24.62 -6.98 1.99 4.26
Other manufacturing -26.14 -10.95 -18.69 -8.90 -13.86 44.99 27.43 -23.47 4.39 -7.35
Construction and utilities 0.00 -2.31 -2.31 -5.44 -5.50 - 11.77 -2.08 -2.08 -1.94
INDUSTRY -11.69 -4.98 -7.56 -6.16 -8.08 16.85 22.16 -7.52 0.58 -1.01
Wholesale trade - 8.79 8.79 4.19 5.24 - -3.26 6.60 6.60 4.59
Other service - -1.70 -1.70 -4.16 -4.91 - 7.80 -2.03 -2.03 -0.56
Government services - - - -1.47 - - - - - -
SERVICES - 1.69 1.69 -1.33 -1.63 - 3.12 0.76 1.10 1.19

Where qi : composite commodity pxi : output prices

mi : imports xi : total output pli : local prices
ei : exports pmi : import (local) prices pqi : composite commodity prices
di : domestic sales pdi : domestic prices δ : change

17
Sectoral Trade, Output and Consumption: It seems that tariff reduction results to a
reallocation from the inward oriented agricultural sector into the outward oriented
industrial sector, and the services sector. Table 10a and 10b presents the sectoral impacts
for SIM_1 and SIM2 respectively.

Agriculture: The decline in local agriculture import prices induces consumers to

substitute towards it. In particular, irrigated palay and fruit imports increase by 69.20 and
34.27 percent6. Overall, total agricultural imports rise by 16.56 resulting to a 0.51
percent dip in agricultural output. In spite of this, Banana stands to benefit from tariff
reduction as both its output and exports expand by 9.32 and 15.71 percent.

Industry: Tariff reduction generally favors the import-dependent-outward-

oriented industrial sector as the cost of inputs go down resulting to a 10.56 surge in
import demand. Nevertheless, export increases by 13.96 percent arising from a decline in
local production cost. Semi-conductor, textile and garments, and coconut processing
emerge as the biggest gainers realizing a hefty increase in both output and export
volumes. However, the entire industrial output contracts by 0.62 percent.

Service: The service sector appears likely to benefit the most from tariff
reduction. The decline in composite prices for both agriculture and industry increases
trading activity in the wholesale and retail trade sub-sector. With this, the entire sector’s
output expands leading to an increase in value added demand by 0.817 percent (Table
12a). This suggests that resource reallocation will flow from the contracting agriculture
and industrial sectors towards the expanding service sector.

Factor Remuneration: Table 11a and 11b presents the factor market impacts. Returns to
factor decrease as return to capital and over-all wage decreases by 1.9 and 2.1 percent
respectively. The much higher decline in wage relative to capital triggers a substitution
towards labor, hence increasing labor utilization by 2.876 percent.

The contraction in both agriculture and industrial sectors results to a decline in

their value added price and demand. However, the decline experienced by the agriculture
sector is much higher than that of the industry. In spite of this, a reallocation towards
Banana in agriculture, Semi-conductor and textile and garments in industry occur as both
sub-sectors expand. In contrast, the value added price and demand in the service sector
increases resulting to a resource reallocation towards it.

6
The share of Palay imports at the base is almost nil

18
 00 ' * , !+ * 0"
Value Added
Changes (%) δri, % Change (%) in Labor Demand
SECTORS δvai δpvai L* L1** L2** L3** L4**
Irrigated Palay -1.728 -7.644 -9.241 -3.324 -3.108 -3.108 -9.175 -7.586
Non_irrigated Palay -1.401 -6.91 -8.214 -2.231 -2.012 -2.012 -8.148 -6.541
Corn -2.504 -6.804 -9.138 -3.889 -2.998 -2.998 -9.072 -7.481
Banana 8.476 -3.219 4.984 10.924 12.078 12.078 5.06 6.898
Fruits -0.069 -5.512 -5.577 -0.235 0.803 0.803 -5.509 -3.856
Coconut 2.565 -5.369 -2.942 2.74 3.616 3.616 -2.871 -1.172
Sugarcane -3.873 -8.824 -12.356 -6.799 -6.434 -6.434 -12.292 -10.758
Other agricultural crops -0.367 -5.794 -6.14 -0.829 0.202 0.202 -6.072 -4.429
Hog -2.507 -7.221 -9.548 -4.615 -3.436 -3.436 -9.482 -7.898
Chicken_egg and other poultry products -1.153 -6.375 -7.454 -2.318 -1.201 -1.201 -7.387 -5.767
Other livestock -0.454 -6.096 -6.522 -1.338 -0.206 -0.206 -6.454 -4.818
Fishing 0.778 -3.781 -3.032 2.19 3.52 3.52 -2.961 -1.264
Other Agriculture -0.769 -5.578 -6.303 -1.102 0.028 0.028 -6.235 -4.595
AGRICULTURE -0.469 -6.391 -6.628 -0.93
Mining -1.659 -2.827 -4.439 -3.529 - - -4.37 -2.697
Meat Processing -2.967 -9.57 -12.253 -11.387 - - -12.189 -10.653
Canning and preserving of fruits and vegetables 0.207 -0.7 -0.494 0.454 - - -0.422 1.32
Fish canning and processing 1.376 1.154 2.546 3.318 - - 2.62 4.415
Coconut processing 2.683 1.998 4.735 5.864 - - 4.811 6.644
Rice and corn milling -1.682 -6.481 -8.054 -7.143 - - -7.987 -6.378
Sugar milling and refining -4.037 -5.382 -9.201 -8.354 - - -9.135 -7.546
Beverages_sugar_confectionery and related products -1.444 -3.585 -4.978 -4.084 - - -4.909 -3.245
Other food manufacturing -3.205 -4.632 -7.688 -6.806 - - -7.621 -6.005
Textile and garments 3.043 3.225 6.366 7.472 - - 6.443 8.306
Wood_paper products -2.153 -4.351 -6.41 -5.443 - - -6.343 -4.704
Fertilizer 3.366 7.45 11.066 12.183 - - 11.147 13.091
Other chemicals -2.236 -6.588 -8.677 -7.984 - - -8.61 -7.011
Petroleum_related products -0.062 -0.902 -0.964 -0.191 - - -0.892 0.842
Metal and related products 1.298 2.001 3.324 4.335 - - 3.399 5.208
Semi_conductors and other electronic products 5.193 8.081 13.694 14.806 - - 13.777 15.767
Motor vehicles and other machineries 2.616 2.621 5.306 6.335 - - 5.382 7.226
Other manufacturing -4.784 -6.239 -10.725 -9.844 - - -10.66 -9.097
Construction and utilities -1.133 -2.672 -3.775 -2.991 - - -3.705 -2.02
INDUSTRY -0.878 -2.882 -3.8 -2.191
Wholesale trade 2.637 4.716 7.477 7.966 - - 7.555 9.436
Other service -0.237 -1.91 -2.143 -0.879 - - -2.072 -0.358
Government services -0.072 - - - -
SERVICES 0.817 0.249 0.886 2.876
. ( -0.04 -2.1 -1.9
1 $2 334 -2.1 -6.9 -6.9 -0.3 -2.1
where li : labor ri: rate of return to capital
vai : value added *L aggregate labor δi : change
pvai : value added prices **L1, L2, L3, & L4: Labor type 1, 2, 3, & 4

19
 00 ' * , !+ * 5"
Value Added
Changes (%) δri, % Change (%) in Labor Demand
SECTORS δvai δpvai L* L1** L2** L3** L4**
Irrigated Palay -3.337 -14.27 -17.131 -6.312 -5.915 -5.915 -16.736 -14.051
Non_irrigated Palay -2.561 -12.909 -15.139 -4.059 -3.652 -3.652 -14.734 -11.984
Corn -5.415 -12.947 -17.661 -8.136 -6.516 -6.516 -17.269 -14.6
Banana 17.942 -5.98 10.89 23.454 25.899 25.899 11.418 15.012
Fruits -0.755 -10.772 -11.446 -1.413 0.54 0.54 -11.024 -8.155
Coconut 5.864 -9.976 -4.697 6.473 8.202 8.202 -4.243 -1.155
Sugarcane -8.362 -17.063 -23.998 -14.348 -13.711 -13.711 -23.636 -21.173
Other agricultural crops -0.434 -10.816 -11.202 -1.141 0.817 0.817 -10.779 -7.901
Hog -5.205 -13.898 -18.379 -9.466 -7.331 -7.331 -17.99 -15.345
Chicken_egg and other poultry products -2.451 -12.256 -14.406 -4.893 -2.821 -2.821 -13.998 -11.224
Other livestock -0.533 -10.934 -11.409 -1.571 0.582 0.582 -10.987 -8.116
Fishing 1.519 -7.257 -5.848 4.304 6.896 6.896 -5.399 -2.348
Other Agriculture -1.691 -10.673 -12.183 -2.419 -0.296 -0.296 -11.764 -8.918
AGRICULTURE -0.868 -11.103 -11.503 -1.677
Mining -0.395 -2.5 -2.885 -0.847 - - -2.422 0.725
Meat Processing -6.738 -20.675 -26.02 -24.421 - - -25.668 -23.27
Canning and preserving of fruits and vegetables 1.489 -0.314 1.17 3.296 - - 1.652 4.931
Fish canning and processing 2.802 2.146 5.008 6.827 - - 5.509 8.912
Coconut processing 6.195 4.73 11.217 13.812 - - 11.747 15.351
Rice and corn milling -3.237 -12.394 -15.23 -13.39 - - -14.826 -12.079
Sugar milling and refining -8.848 -11.655 -19.471 -17.81 - - -19.088 -16.478
Beverages_sugar_confectionery and related products -2.525 -6.6 -8.958 -7.066 - - -8.524 -5.574
Other food manufacturing -6.051 -8.926 -14.437 -12.636 - - -14.029 -11.257
Textile and garments 5.878 5.952 12.179 14.715 - - 12.714 16.349
Wood_paper products -2.956 -6.703 -9.461 -7.423 - - -9.029 -6.095
Fertilizer 4.214 8.364 12.93 15.412 - - 13.468 17.127
Other chemicals -3.347 -10.278 -13.281 -11.772 - - -12.868 -10.057
Petroleum_related products -1.275 -4.34 -5.56 -3.878 - - -5.109 -2.049
Metal and related products 1.394 1.053 2.462 4.661 - - 2.95 6.271
Semi_conductors and other electronic products 8.307 12.366 21.7 24.312 - - 22.28 26.224
Motor vehicles and other machineries 4.258 3.69 8.105 10.425 - - 8.62 12.124
Other manufacturing -7.346 -10.093 -16.697 -14.895 - - -16.3 -13.601
Construction and utilities -1.941 -4.964 -6.808 -5.09 - - -6.364 -3.344
INDUSTRY -1.377 -4.755 -6.125 -3.255
Wholesale trade 4.585 7.839 12.784 14.116 - - 13.322 16.977
Other service -0.558 -4.122 -4.656 -2.056 - - -4.202 -1.112
Government services -0.474 - - - -
SERVICES 1.237 0.052 1.034 4.466

. ( -0.10 -3.7 -3.4

1 $2 334 -3.7 -11.9 -11.9 -0.5 -3.6

where li : labor ri: rate of return to capital
vai : value added *L aggregate labor δi : change
pvai : value added prices **L1, L2, L3, & L4: Labor type 1, 2, 3, & 4

20
 Household Income: Factor income from for all households decline as a result of
agricultural contraction (Table 13a and 13b). Evidently, human capital proves important
as only income from skilled industrial labor increase by an average of 1.2 percent.
Return to capital in the service sector increase as a result of output expansion and
resource reallocation effects.

Table 12a Sources of Household Income (% Changes) (SIM_1)

( ( ) ( ) * ( ) + ( , ( , * ( , +
( ! !
-. / / / / /
( ! !
0 . / / / / /
*2
1 !
-. /
1 !
0 . / / / /
( ! ! / / / / / / /
1 ! / / / / / / /
3
-
* / / / / / / /
5 4
1 5

Table 12b Sources of Household Income (% Changes) (SIM_2)

( ( ) ( ) * ( ) + ( , ( , * ( , +
( ! !
-. / / / / /
( ! !
0 . / / / / /
*2
1 !
-. /
1 !
0 . / / / /
( ! ! / / / / / / /
1 ! / / / / / / /
3 -
/
* / / / / / /
5 4
1 5

21
 Poverty: In the FGT calculation, poverty effects come from two sources: (i) from
the change in household income; and (ii) from the change in consumer prices, which
affects the nominal value of the poverty line. The results of the calculations for the three
poverty indices, headcount, gap, and severity, are presented in Table 14a and 14b. Recall
that poverty in the Philippines is likely to be influenced by: Spatial factors, human capital
or educational attainment, and Gender of household head. The poverty results for SIM_1
and SIM_2 will be discussed separately below.

SIM_1. Overall, Poverty headcount seems to decrease marginally as a result of

tariff reduction. However, both the gap and severity increases implying that the poorest
of the poor become much more immerse in poverty. Urban areas (which exclude NCR)
mimic the trend in national poverty.

06 !+ * 0"

/ / / / / /
/ / /
/ /
! "
/ / / / / / /
/ / / / / / /
/ / / / / / /
#
/ / / / / /
/ / / /
/ / / /
%
/ / /
/
/
% %
! /
/

Spatial Consideration: Clearly, rural households are worse off than urban
households. In particular, rural households who depend on agriculture experience an
increase in all measures of poverty. Households residing in the NCR fare better
compared to other urban dwellers’ due to proximity to major industries and the
expanding service sector.

Human Capital: Highly educated household heads benefit from tariff

reduction having the ability to move towards sectors offering higher returns. Indeed, all

22
poverty indices for highly educated male and female household heads decline. For
instance, poverty headcount decreases by 3.88 and 2.14 respectively for both. Once
again, highly educated households residing in NCR gain the most. However, highly
educated males in the rural areas experience a decline in poverty as skilled wages and
return to capital in agriculture drop by 6.9 and 6.6 percent.

Gender: It appears that female-headed households are more receptive to trade

liberalization than their male counterparts. The main driving force behind this is because
of the expansion: of semi-conductors, textile and garments, and wholesale and retail trade
sub-sectors which mainly employ female workers.

Female household head’s poverty headcount decrease marginally by 0.78

compared to 0.03 for males. In contrast, poverty gap decreases by 0.33 for females
whereas males experience a 1.23 increase. Poverty severity increases for both, with a
substantial increase among male-headed households.

06

/ / / / /
/ / /
/ /
! "
/ / / / / / /
/ / / / / / /
/ / / / / / /
#
/ / / / / /
/ / / /
/ / / /
%
/ / / /
/
/
% %
! /
/

23
SIM_2. The decline in the national poverty headcount is much less under the full tariff
elimination scenario. In particular, both the gap and severity worsens by 2.17 and 3.59
compared to 1.11 and 1.84 under the actual tariff reduction. Households residing in rural
areas experience an increase in poverty as their labor and capital income from agriculture
decrease substantially. This stems from the rise in consumption prices coupled with a
decline in average nominal income. Only households living in NCR benefit NCR
because of its proximity to major industries and the expanding service sector.

Conclusion

The two policy experiments conducted in this paper generate quite identical
outcome. Tariff reduction results to a decline in over-all output as agriculture and
industry contracts. The contraction in agriculture is higher than that of the industry.
Nonetheless, sub-sectors such as Banana in agriculture, Semi-conductor and Textile and
Garments in industry expand arising from substantial output and export growth.

The service sector appears likely to benefit the most from tariff reduction. The
decline in composite prices for both agriculture and industry increases trading activity in
the wholesale and retail trade sub-sector. With this, the entire sector’s output expands
encouraging resource reallocation.

Tariff reduction results to consumer substitution towards cheaper imports. On the

other hand, the lower prices imported inputs reduce the local cost of production
benefiting the outward-oriented-import-dependent industrial.

National poverty headcount decreases marginally as a result of tariff reduction.

However, both the gap and severity worsens implying that the poorest of the poor
become much more immerse in poverty. Poverty stricken rural areas suffer the most as
all poverty indices increase. This stems from a decline in average income (as a result of
agricultural contraction), compounded by an increase in average consumption prices.
Poverty in NCR decreases considerably because of its proximity to major industries and
the expanding service sector.

In conclusion, tariff reduction appears likely to increase poverty especially in the

rural areas and among the rural low educated. The tariff reduction between 1994 and
2000 hurts poor the most. This suggests that the government should consider a regional
complementary policy aimed at addressing regional imbalances. In addition, a human
capital development program must be instituted as simulation results point out that
education and skill are the best ally against poverty.

24
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