Analyzing the impact of Philippine tariff reform on unemployment, distribution and poverty using CGE-microsimulation approach

Analyzing the impact of Philippine tariff reform on unemployment, distribution and poverty using CGE-microsimulation approach

Tariff reduction leads to higher imports and exports. Although domestic production for the local market declines, the overall production improves. These are due to the substitution and scale effects of tariff reduction.

This paper examines the effects of the reduction in tariff rates in the Philippines from 1994 to 2000 on unemployment, distribution and poverty using a CGE-microsimulation approach wherein the representative household assumption in the traditional CGE modeling is replaced with individual households. The approach allows one to model the link between trade reforms and individual household responses, and their feedback to the general equilibrium of the economy. The present paper incorporates the entire 24,797 households of the 1994 Family Income and Expenditure Survey.

Production reallocation and resource movements as a result of the reduction in tariff favor the non-food manufacturing sector. Agriculture contracts, while industry expands. The decline in the former leads to higher unemployment rate in agriculture labor, lower agriculture wage, and lower rate of return to capital in agriculture. All these have negative effects on income of rural households. However, the expansion in the latter, particularly in the non-food manufacturing sector, results in lower unemployment rate in production workers, higher wages, and higher rate of return to capital in industry and services. These translate into favorable income effects for households in urban centers, particularly the National Capital Region (NCR). As a result, the problem of income inequality deteriorates.

The effects on poverty are generally favorable. The improvement is largely due to the drop in consumer prices. The poverty effects, however, vary considerably across households. Female-headed households with high education in the NCR and in other urban centers benefit the most in terms of poverty reduction. This effect is due to the expansion in the non-food manufacturing sector, which is located mainly in urban centers. Although rural households are also affected favorably, the impact is minimal as compared to the effects on urban households. This effect is attributable largely to the contraction in agriculture.

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