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Micro-macro linkage

Research articles · Jun 30, 2010

Scaling up infrastructure spending in the philippines: A cge top-down bottom-up microsimulation approach

Luc Savard

GREDI, Faculté d’administration, Université de Sherbrooke, Canada

Volume 3(1) Spring 2010

Cite as: L. Savard; 2010; Scaling up infrastructure spending in the philippines: A cge top-down bottom-up microsimulation approach; International Journal of Microsimulation; 3(1); 43–59. doi: 10.34196/ijm.00024

Abstract

In this paper we use a top-down bottom-up CGE microsimulation model with endogenous labour supply and unemployment to explore the impact of scaling up infrastructure spending in the Philippines. In the current debate on the importance of scaling up infrastructure to stimulate growth, some analysts raise concerns about potential negative macroeconomic impacts (Dutch disease). This study aims to provide some insight into this debate by extending the analysis to include distributional analysis. We draw from the infrastructure productivity literature to postulate positive productive externalities of new infrastructure and from Fay and Yepes (2003) to include operating and maintenance costs associated with new infrastructure. We investigate two fiscal tools and foreign aid as mechanisms to fund the new infrastructure and associated costs. The distributional analysis is performed with FGT indices and growth incidence curves. Our results reveal that infrastructure spending reduces poverty. Foreign aid is shown to be the most equitable funding mechanism, whereas a value added tax provides the strongest poverty reduction.

This article contains 5 figures and 8 tables.

Figures

Figure 1. Labour market representation.
Figure 2. Resolution procedure of the TD/BU approach.
Figure 3. Income growth curve: VAT-funded productive infrastructure.
Figure 4. Income growth curve: income tax funded productive infrastructure.
Figure 5. Income growth curve: foreign-aid funded productive infrastructure.

Tables

Table 1. Macroeconomic results (% variations).
Value added tax Income tax Foreign Aid
Definition Base Non productive investment Productive investment Non productive investment Productive investment Non productive investment Productive investment
Household income 86,476.9 0.15 0.74 0.17 0.75 0.14 0.73
Household savings 9,651.8 −2.20 −3.24 −1.98 −2.99 −3.41 −4.21
Informal Wage Government 0.5 0.43 0.98 0.49 1.05 0.39 0.94
income 20,367 3.94 3.94 3.94 3.94 3.94 3.94
Firms’ income Government 26,172.9 −0.14 0.52 −0.17 0.49 −0.17 0.51
savings Government 13,369 30.00 30.00 30.00 30.00 30.00 30.00
expenditure Private 16,818.8 2.38 2.38 2.38 2.38 2.38 2.38
investment 23,161.2 −1.23 −0.54 −1.86 −1.07 −1.54 −0.82
Firms’ savings 7,810.5 0,00 0.95 −0.31 0.90 −0.30 0.92
Unemployment rate 16.8 −1.05 −1.95 −1.14 −1.95 −0.9 −1.84
Nominal exchange rate 1 0.69 0.39 0.06 −0.13 −1.20 −1.18
Gross domestic product 1,04,510.7 0.16 0.79 0.17 0.80 0.15 0.79

Source: Values computed by the author.

Table 2. Sectoral results: rental rate of capital (% variation).
Value added tax Income tax Foreign Aid
Variables branches Reference Non productive investment Productive investment Non productive investment Productive investment Non productive investment Productive investment
r (rental rate of capital) Palay & corn 1 −0.76 2.13 −0.49 2.36 −0.16 2.66
Fruit & vegetable 1 −1.24 0.17 −1.16 0.24 −0.34 0.94
Coconut 1 −0.45 1.68 −0.34 1.79 −1.05 1.16
Livestock 1 −0.71 1.66 −0.87 1.49 0.79 2.92
Fishing 1 −0.5 0.92 −0.57 0.84 −0.33 1.07
Other agriculture 1 −0.11 0.79 −0.29 0.65 −1.15 −0.09
Logging & timber 1 1.3 4.33 0.79 3.9 1.03 4.09
Mining 1 0.33 1.14 −0.06 0.81 −2.49 −1.25
Manufacturing 1 −0.1 −0.26 −0.04 −0.2 −1.46 −1.4
Rice manufacturing 1 −0.26 0.86 −0.05 1.03 0.09 1.15
Meat industry 1 −0.01 −0.32 −0.19 −0.49 1.12 0.62
Food manufacturing 1 −1.41 −1.82 −1.2 −1.64 −0.87 −1.38
Electricity, gas & water 1 0.32 −0.39 0.49 −0.27 0.65 −0.11
Construction 1 2.03 2.62 1.96 2.56 2.9 3.34
Commerce 1 −0.18 0.67 −0.14 0.7 −1,00 −0.02
Trans. & comm. 1 0.55 0.98 0.16 0.67 0.82 1.22
Finance 1 0.5 1.3 0.72 1.48 0.07 0.94
Real estate 1 −0.48 −0.55 −1.33 −1.31 0.34 0.14
Services 1 0.07 0.14 0.51 0.52 0.09 0.17

Source: Values computed by the author.

Table 3. Sectoral results: market prices (% variation).
Value added tax Income tax Foreign Aid
Variables branches Reference Non productive investment Productive investment Non productive investment Productive investment Non productive investment Productive investment
Pq (market price) Palay & corn 1.01 −0.09 1.65 −0.24 1.52 −0.21 1.55
Fruit & vegetable 1.02 0.25 0.77 −0.55 0.1 −0.19 0.4
Coconut 1.02 0.62 1.61 0.01 1.11 −0.45 0.71
Livestock 1.01 0.45 1.33 −0.31 0.68 0.17 1.09
Fishing 1.01 0.19 0.81 −0.24 0.43 −0.16 0.51
Other agriculture 1.03 0.57 0.76 0.06 0.33 −0.6 −0.23
Logging & timber 1.01 1.12 2.38 0.46 1.83 0.32 1.71
Mining 1.01 0.69 0.42 0.08 −0.09 −1.07 −1.06
Manufacturing 1.08 0.83 0.4 0.07 −0.23 −0.61 −0.8
Rice manufacturing 1,000 0.16 1.27 −0.11 1.04 −0.2 0.97
Meat industry 1.01 0.7 0.91 −0.15 0.19 0.21 0.5
Food manufacturing 1.03 0.47 0.47 −0.24 −0.12 −0.37 −0.24
Electricity, gas & w ater 1.01 0.97 −0.02 0.25 −0.63 0.05 −0.79
Construction 1.01 1.13 0.82 0.52 0.31 0.33 0.15
Commerce 1.05 1.02 0.8 0.06 −0.01 −0.39 −0.38
Trans. & comm. 1.01 1.08 0.68 0.18 −0.07 −0.03 −0.25
Finance 1.05 2.2 1.92 0.35 0.37 −0.18 −0.08
Real estate 1,000 0.03 −0.68 −0.61 −1.23 0.19 −0.54
Services 1.04 2.1 1.4 0.2 −0.18 0.32 −0.09
Public services 1,000 0.51 0.5 0.17 0.23 0.05 0.12

Source: Values computed by the author.

Table 4. Poverty index results (% variation).
Value added tax Income tax Foreign Aid
Poverty index Code-education Base Non productive investment Productive investment Non productive investment Productive investment Non productive investment Productive investment
FGT-0 National 0.311 −0.26 −0.86 0.67 −0.19 0.49 −0.41
FGT-1 National 0.096 −0.27 −1.29 1.05 −0.20 0.68 −0.52
FGT-2 National 0.04 −0.30 −1.57 1.33 −0.22 0.88 −0.6
FGT-0 0 0.564 −0.36 −1.08 0.51 0.07 0.71 0.2
1 0.501 −0.37 −0.89 0.31 −0.26 0.27 −0.61
2 0.384 −0.29 −0.8 0.70 −0.26 0.3 −0.42
3 0.317 0.35 −0.71 1.52 0.27 1.38 −0.30
4 0.184 −0.34 −0.94 0.85 −0.33 0.2 −0.54
5 0.092 −0.47 −0.83 1.58 −0.35 1.35 0.40
6 0.021 −0.42 −0.42 −0.42 −0.42 3.54 −0.42
FGT-1 0 0.185 −0.19 −0.99 0.96 −0.05 0.92 −0.09
1 0.168 −0.24 −1.19 0.94 −0.20 0.61 −0.50
2 0.116 −0.30 −1.36 1.05 −0.23 0.62 −0.61
3 0.090 −0.32 −1.37 1.15 −0.17 0.79 −0.51
4 0.048 −0.31 −1.56 1.29 −0.22 0.71 −0.71
5 0.022 −0.26 −1.65 1.60 −0.11 1.05 −0.57
6 0.005 −0.49 −1.87 1.43 −0.24 1.51 −0.20
FGT-2 0 0.08 −0.25 −1.32 1.25 −0.09 1.14 −0.18
1 0.075 −0.27 −1.48 1.23 −0.23 0.82 −0.58
2 0.048 −0.32 −1.64 1.34 −0.26 0.82 −0.70
3 0.035 −0.36 −1.66 1.41 −0.20 0.95 −0.64
4 0.018 −0.31 −1.78 1.57 −0.23 0.93 −0.76
5 0.007 −0.28 −2.01 1.92 −0.19 1.22 −0.78
6 0.002 −0.38 −1.83 1.83 0.00 2.12 0.24

Source: Values computed by the author.

Notes: See Table A.2 for educational codes.

Table A.1. Externality elasticities by sector.
branches ξ value
Palay & corn 0.01
Fruit & vegetable 0.015
Coconut 0.019
Livestock 0.011
Fishing 0.012
Other agriculture 0.018
Logging & timber 0,003
Mining 0.027
Manufacturing 0.038
Rice manufacturing 0.01
Meat industry 0.025
Food manufacturing 0.025
Electricity, gas & w ater 0.039
Construction 0.021
Commerce 0.022
Trans. & comm. 0.018
Finance 0.013
Real estate 0.027
Services 0.01
Table A.2. Educational code definition.
Education Code Level of education
1 Elementary (not graduated)
2 Elementary graduate
3 1st to 3rd Year High school
4 High School Graduate
5 College Undergraduate
6 At least College graduate
0 Not reported or no grade
Table A.3. Funding mechanisms variations.
Value added tax Income tax Foreign Aid
Non productive investment Productive investment Non productive investment Productive investment Non productive investment Productive investment
Level Base 2.45% 2.45% 2.19% 2.19% 2,272 2,272
Level After simulation 3.28% 3.16% 3.17% 3.00% 11,142 9,909
Variation Variation 33.80% 28.80% 43.80% 37.17% 390.40% 336.14%
Table A.4. Sectoral results: Value added (% variation)
Value added tax Income tax Foreign Aid
Variables branches Reference Non productive investment Productive investment Non productive investment Productive investment Non productive investment Productive investment
Va (value added) Palay & corn 5,197.9 −0.17 0.25 −0.14 0.27 −0.08 0.33
Fruit & vegetable 4,210.7 −0.26 0.06 −0.26 0.07 −0.11 0.19
Coconut 1,789.5 −0.35 0.42 −0.33 0.43 −0.57 0.23
Livestock 4,473.5 −0.24 0.27 −0.29 0.22 0.1 0.55
Fishing 3,996.8 −0.17 0.23 −0.19 0.2 −0.13 0.27
Other agriculture 1,845.8 −0.22 0.09 −0.31 0.01 −0.62 −0.25
Logging & timber 856.5 0.19 0.82 0.07 0.71 0.14 0.77
Mining 1,604.3 0.01 0.91 −0.18 0.74 −1.23 −0.14
Manufacturing 13,112.5 −0.16 0.9 −0.14 0.91 −0.82 0.34
Rice manufacturing 2,022.9 −0.17 0.27 −0.13 0.3 −0.07 0.36
Meat industry 2,081.2 −0.12 0.55 −0.19 0.48 0.25 0.87
Food manufacturing 3,696.2 −0.54 0.06 −0.49 0.1 −0.36 0.21
Electricity, gas & water 2,341.3 0.06 0.85 0.1 0.88 0.15 0.93
Construction 6,848.2 1.01 1.81 0.93 1.74 1.56 2.27
Commerce 15,149.5 −0.18 0.66 −0.17 0.67 −0.54 0.36
Trans. & comm. 5,206.4 0.07 0.79 −0.12 0.62 0.22 0.91
Finance 3,580.5 0.13 0.7 0.2 0.76 −0.02 0.57
Real estate 7,314.2 −0.2 0.48 −0.55 0.16 0.14 0.76
Services 6,960 −0.12 0.72 0.11 0.91 −0.09 0.75
Public services 12,222.8 1.86 1.87 2.2 2.15 2.33 2.26

Source: Values computed by the author.