POLICY ANALYSIS IN A GE FRAMEWORK 593
the foreseeable future. Two thirds of the country’s labor force is employed in agriculture or activities linked to agriculture. Eco-
nomic development will not have a stable base until there is enough food to meet the domestic demand.
The current administration has been trying to stimulate eco- nomic growth through raising agricultural production. It also has
many other objectives, such as raising the income of farm families, improving the balance of payments situation, and protecting the
poor during the process of structural adjustment.
To achieve these goals, the government faces a number of policy conflicts. The first conflict is between the need to stimulate agricul-
tural growth and the need to hasten industrial development Net- tleton, 1992. The second conflict is between the need to improve
food self-sufficiency and the need to increase agricultural exports. Given land and other resource constraints, encouraging agricul-
tural exports by whatever means will depress food security, or vice versa. During the 1970s and the early 1980s, exports were
taxed while food production was subsidized. In recent years, there has been a tendency to shift production from food to export crops.
As a result, the food deficit has increased, especially in rice.
3. THE CGE MODEL
A computable general equilibrium CGE model based on a social accounting matrix SAM is the natural tool to assess policy
impacts on the economy. A CGE model provides a framework in which government policies can be assessed as to how they
will impact on different aspects of the economy, including food production, food consumption, income distribution, government
finances, market prices, and internal and external debts.
3A. The Food System in the Philippines
The food system is divided into three main sections: production, marketing including trade and distribution, and consumption.
The production subsystem determines the quantities of all prod- ucts that are produced. The model contains three production activ-
ities: agricultural production, nonagricultural production, and in- termediate production i.e., trading. It determines the quantities
of three major crops, i.e., rice, maize, and sugar, and the quantities of other agricultural products, nonagricultural products, and inter-
mediate factor inputs.
594 S. Yao and A. Liu
The country is divided into two regions, north and south. Rice is produced in both regions. Sugar is produced by the estate farms
in the north, and maize by small farms in the south. Government enters the production system by imposing a floor price paid to
rice farmers through NFA and taxing agricultural inputs.
The marketing subsystem determines how much of each com- modity is sold and through which channel. As a main staple food,
rice is marketed both by private traders and NFA. The other commodities are solely marketed by private agents.
There are two stages in the distribution system. In the first stage, rice changes hands from producers to private traders or NFA.
The market share of each will depend on the ratio between the floor price offered by NFA and the market price. NFA buys at
the prevailing market price unless this drops below the floor price, in which case it will buy at the floor price. The wholesale market
price is endogenously determined by market clearing between supply and demand at the farm-gate.
In the second stage, rice changes hands from the traders NFA or private traders to final consumers through the retail market.
The market share of each will depend on the ratio between the ceiling price charged by NFA and the market price. NFA sells at
the prevailing market price unless this rises above the ceiling price, in which case it will sell at the ceiling price. The retail market
price is determined by market clearing supply and demand at the retail market. NFA has a monopoly on rice imports and holds a
carry-over stock, which may be maintained at a minimum level as a security stock. The marketing and distribution of other com-
modities is entirely conducted by the private sector. There are no floor or ceiling prices.
Government intervention in the marketing subsystem may in- volve the following methods: floor and ceiling prices for rice, target
rice sales by NFA, rice imports, security stock, sales tax on private traders, and import and export tariffs. Figure 1 demonstrates the
complete commodity chain from production to consumption of agricultural products, incorporating external trade, stock, govern-
ment intervention in the marketing of rice, and in taxation at different market levels.
In the consumption subsystem, consumers are classified by re- gion, ruralurban division, and incomeendowment. The country
has two different consumption centres: north and south. Consum- ers in each region fall into four categories: rural landowners, rural
tenants, urban high income, and urban low income. Government
POLICY ANALYSIS IN A GE FRAMEWORK 595
Figure 1. Commodity chain and government intervention in agriculture.
is also regarded as a consumer who “consumes” all the other commodities except rice, sugar, and maize. Thus, there are nine
distinctive consumer groups. Consumers have income from four different sources: land reve-
nue, labor, profits, and income support from the government. Consumer demand is determined by income and prices. Govern-
ment intervenes in the consumption system through the following means: income tax, income support to the poor, and ceiling price
for rice Figure 2. The income support mechanism is govern- ment’s deliberate policy to alleviate poverty and to improve in-
come distribution.
The basic structure of the model is circular. Economic activities produce commodities as a result of the consumption of factors
land, labor, and capital. Commodities are supplied to consumers through the markets. Consumers own factors that they sell to the
productive activities through the factor markets. This gives them incomes to buy commodities. The government enters the system
by imposing many intervention methods mentioned above. Like
596 S. Yao and A. Liu
Figure 2. The consumption system and income support mechanism.
other consumer groups, government has its own income and ex- penditure pattern.
3B. The Social Accounting Matrix SAM
According to the food system presented in 3A, a SAM is con- structed to show the major revenue and expenditure transactions
among production activities, markets, factors of production, con- sumption, and exogenous accounts i.e., Government Stock, and
the Rest of the World. The SAM is a 54 3 54 matrix. A simplified matrix is shown schematically in Table 2.
Like other conventional SAMs, the SAM in Table 2 contains the blocks of activities, factors, consumers, government, stocks,
and the rest of the world ROW. The only difference is that it contains a separate block of markets. Therefore, the products of
activities flow into markets instead of final consumers. Farm-gate prices are formulated at the entrance of markets whereas retail
prices are formulated at the exit.
In row 1, producers sell products to the markets at the farm- gate price. The difference between production and sale is absorbed
by the stock. The government may subsidize or tax producers for
POLICY ANALYSIS
IN A
GE
F RAMEWORK
597
Table 2: Simplified Structure of SAM for the CGE Model
Expenditure Income
Activities Markets
Factors Consumers
Government Stock
ROW
Activities Sale
Production Clearing
subsidies stock
Markets Intermediate demand
Consumer demand Government
Commodity demand
exports Factors
Labor demand Factor
exports Consumers
revenue from investment Labor income
Income Transfers
or profit support
Government Indirect taxes,
Factor income Income taxes
Loanaid Investment revenue,
Stock Opening stock
Saving Saving
ROW Investment revenue
Commodity Factors
Transfers Debt service
imports imports
Notes: ROW 5 Rest of the world.
598 S. Yao and A. Liu
their activities. Producers have to buy materials from the markets, pay to labor, consumers as factor owners, the government as a
tax collector and factor owner, and ROW in column 1. The opening stock is carried over from the previous period. In row 2, the
markets have to meet the demands of intermediate inputs, con- sumers, the government, and exports. To satisfy these demands,
the markets absorb sales from activities and imports from abroad in column 2. In row 3, factors receive income from activities and
ROW. Factor income is distributed to consumers, the government and ROW in column 3. Consumers in row 4 receive incomes from
activities, labor income from factors, income support from the government, and income transferred from ROW. They buy com-
modities from the markets, pay taxes to the government, save in the stock, and sent money abroad in column 4. In row 5, the
government receives income from activities, factors, income taxes from consumers, and loans and grants from ROW. It subsidizes
production, buys commodities from the markets, provides income support to the poor, saves, and pay debts to ROW in column 5.
In row 6, total stock comes from three sources: opening stock, savings from consumers and the government. It is cleared in col-
umn 6 under activities. In row 7, ROW receives incomes from activities, markets material imports, and factors factor imports,
consumers income transfers out, and debt services. ROW in column 7 injects money into the economy through the markets
exports, factors exports, consumers income transfers in, and the government loans and grants.
The CGE model explicitly represents seven commodities, six primary producers, two intermediate agents, nine consumer
groups, and nine factor inputs for production.
3C. Major Equation Systems
The basic model is made up of 250 equations. The variables in the model can be categorized into three groups: 1 policy vari-
ables , which represent government intervention in the economy;
2 exogenous variables, which are outside the control of govern- ment such as rainfall and world prices; and 3 outcome or endoge-
nous variables , which measure the effects of policy changes.
All the production, sale, consumption, and factor demand equa- tions are derived with the assumptions of profit maximization for
producers and traders, utility maximization for consumers and
POLICY ANALYSIS IN A GE FRAMEWORK 599
government, and constant elasticities of substitution CES be- tween any pair of competitive prices or markets. In this section,
only the core behavioral equations are listed and described, the entire equation system, including many identities or accounting
equations are discussed in Greener and Liu, 1993, Appendix B.
All the equations are in the form of proportional changes, repre- sented by the symbol d. This means that quantities such as balances
that are simple sums when expressed in levels become more com- plex expressions when expressed in proportional changes. The
model variables are represented by capital letters. Wherever a variable name appears without a d in front of it, it represents the
previous year’s value. Model parameters are represented by Greek letters in all equations e.g., a, b. Exogenous and policy variables
are all underlined in the equations e.g., ER for the exchange rate. The model contains a total of 37 blocks of equations, each
of which may be repeated a number of times to cover the range of the subscripts to which it refers. Subscripts are used to denote
the disaggregation of the variables into model accounts as follows: 1 activities, a 5 1, 2, . . . , 7; 2 market, m 5 1, 2; 3 factors,
f 5
1, 2, . . . , 9; and 4 consumers, c 5 1, 2, . . . , 9. The production function, Eq. 1:
d QP
a
5
o
f
W
c fa
· dF
fa
2 g
a
· dCL, 1
where QP
a
is production of activity a; W
c fa
is the ratio of factor cost to output value; F
fa
is factor demand by activity a of factor f
; g
a
is climate elasticity of activity a; CL is climate index. Propor- tional change in production is the sum of the changes in factor
demand, weighted by cost shares. The final term simulates the effect of a change in climate.
Sales to markets, Eq. 2:
d SA
am
5 d QP
a
1 s
s a
dP
m
2 d P
a
, 2
where SA
am
is sales by activity a to market m, s
s a
is elasticity of substitution between markets, P
m
is price in market m, P
a
is average selling price of activity a. The change in sales is determined by
the change in production and a price term governing substitution between markets.
Average selling price, Eq. 3:
d P
a
5
o
m
W
s am
d P
m
, 3
where W
s am
is the quantity share of sales by activity a to market
600 S. Yao and A. Liu
m . This equation calculates the average selling price of a product
as the weighted sum of the prices in different markets. Retail price index, Eq. 4:
d P
c
5
o
m
W
d mc
d P
m
, 4
where W
d mc
is values share of purchases by consumer c from market m
. This equation calculates the average buying price of the retail markets.
Average buying price, Eq. 5:
d BP
a
5
o
m
W
d am
d P
m
, 5
where BP
a
is the average buying price of activity a, W
d am
is the quantity share of purchases by activity a from market m.
Intermediate demand, Eq. 6:
d ID
ma
5 d Q
a
2 s
d a
dP
m
2 d BP
a
, 6
where ID
ma
is intermediate demand by activity a from market m, s
d a
is elasticity of demand substitution between markets. The change in intermediate demand is given by the change in quantity
produced or purchased assuming all quantity elasticities are equal to 1, and a price term that governs the strength of substitution
between markets. This equation applies under the simplifying assumption that all the possible substitutions between markets
have the same elasticity.
Consumer income, Eq. 7:
d Y
c
5
o
a
W
p
ca
· dP
a
1
o
f
W
fi cf
· dFS
f
1 d P
f
1 W
su c
· dCSUB
c
7
where Y
c
is income of consumer c, W
p
ca
is value share of profit income from activity a, FS
f
is supply of factor f, W
fi cf
is value share of income from factor f, CSUB is consumer subsidy, and W
su c
is the value share of subsidy.
Consumer expenditure, Eq. 8:
d E
c
5 Y
c
· dY
c
2 ITX
c
· dITX
c
E
c
8
Consumer expenditure, or disposable income, E
c
, is the difference between income and taxation, ITX
c
. Consumer demand, Eq. 9:
d CD
mc
5 b
d mc
dE
c
2 d P
m
2 s
d c
dP
m
2 d P
c
9
where b
d mc
is income elasticity of demand and s
d c
is elasticity of
POLICY ANALYSIS IN A GE FRAMEWORK 601
demand substitution between markets. The proportional change in consumer demand is expressed as the sum of an income effect
and a price effect. Government demand, Eq. 10:
d GD 5 d
GCE 2 dP
ro
. 10
Government demand, GD, is calculated from the exogenously specified government consumption expenditure, GCE, corrected
by the endogenous change in price, P
ro
, in the market from which government demands for “retail others.”
Price margin, Eq. 11:
d M
a
5 P
a
· dP
a
2 BP
a
· dBP
a
2 P
a
· PTXR
a
· dP
a
1 d PTXR
a
M
a
. 11
This equation calculates the proportional change of the price mar- gin, M
a
, for all activities, by subtracting the buying price BP
a
from the selling price P
a
, and subtracting the production tax calculated by the change in tax rate, PTXR
a
. Factor demand, Eq. 12:
d F
fa
5 s
o a
W
o a
dP
a
2 d P
f
1 s
i a
o
f
9
W
i f
9
a
dP
f
9
2 d P
f
. 12
The proportional change in factor demand, F
fa
, is expressed as the sum of an output effect and a price substitution effect. The
output effect is obtained by multiplying the input–output substitu- tion elasticity, s
o a
, by the share of output to profit, W
o a
, and the difference between the proportional changes in output price and
the factor price. The price effect is obtained as the sum over possible factors of the input–output substitution elasticity, s
i a
, multiplied by the share of factor demand to profit, W
i fa
, and the difference between the proportional changes in price between
factors where substitution takes place. Profit, Eq. 13:
dP
a
5 W
o a
· dQP
a
1 d P
a
1 W
su a
· dPSU
a
2
o
f
W
fd fa
· dF
fa
2 W
tx a
· dPTX
a
2 W
os a
· dP
a
, 13
where P
a
is profit of activity a, PSU
a
is production subsidy, PTX
a
is production tax, W
o a
is share of output value to profit, W
su a
is share of subsidy value to profit, W
fd fa
is share of factor demand value to profit, W
tx a
is share of tax value to profit, W
os a
is share of opening stock value to profit. The proportional change in profit is defined
602 S. Yao and A. Liu
by the combination of five terms: output value, producer subsidies, factor costs, indirect tax, and value of opening stock.
Government income, Eq. 14:
d GY 5
o
a
W
p
a
· dP
a
1
o
f
W
fi f
· dFS
f
1 d P
f
1 W
ti
· dTI 1 W
gl
· dGL 1 dER, 14
where GY denotes government income, W
p
a
value share of profit income, W
fi f
value share of factor income, W
ti
value share of tax income, GL grants and loans from the rest of the world. ER
exchange rate, and W
gl
value share of grants and loans income. Government income consists of four terms: profit, factor income,
tax income, grants and loans from the rest of the world. Government expenditure, Eq. 15:
d GE 5 W
gce
· dGCE 1
o
a
W
ps
· dPSU
a
1
o
c
W
cs
· dCSU
c
1 W
ds
· dDS 1 dER, 15
where GE is government expenditure, W
gce
is expenditure share of government consumption, W
ps
is expenditure share of producer subsidies, DS is debt servicing, W
cs
is expenditure share of con- sumer subsidies, W
ds
is expenditure share of debt servicing, ER is exchange rate, and PSU
a
is subsidy to activity a. The proportional change of total government expenditure is defined as the sum of
four exogenous terms: government consumption, producer subsid- ies, consumer subsidies, and debt servicing.
External balance, Eq. 16:
d EB 5
EX · dEX 1 GL · dGL 2 IM · dIM 2 DS · dDS
EB .
16
External balance, EB is defined by adding the value of exports, EX
, and external grants and loans, GL, and subtracting the value of imports, IM, and debt servicing payments, DS.
Floor price, Eq. 17:
P
wr
1 1 dP
wr
FLOOR
wr
. 17
The price paid by NFA in the wholesale rice market, P
wr
is greater than or equal to the exogenous floor rice price, FLOOR
wr
. Ceiling price, Eq. 18:
POLICY ANALYSIS IN A GE FRAMEWORK 603
P
rr
1 2 dP
rr
CEILING
rr
. 18
The price charged by NFA in the retail rice market, P
rr
is less than or equal to the exogenous ceiling rice price, CEILING
rr
. 4. DATA AND POLICY SIMULATIONS
The data required to establish the CGE model consists of two main components. One is the SAM, which formulates the base
scenario of the economic system and provides an initial condition for simulation. The other is a set of parameters that determines
model behavior.
The SAM is constructed based on 1987 data from the 1991 Philippines Statistical Yearbook 1991. Data from other sources
are also used, including the World Development Report World Bank, World Trade World Bank, Debt Table World Bank,
and the Asian Development Statistics Asia Development Bank, and many country studies relevant to the Philippines.
Apart from a large amount of original data, many parameters are also used in the model. These include the supply and demand
elasticities for commodities, production elasticities of factors, trade substitute elasticities of commodities, etc. These parameters
are sets of coefficients, which are related to technological aspects of the model. Some of them are estimated using traditional statistical
inference; some are collected from the existing literature; some have to be guessed, because there is no detailed information avail-
able. All parameters, however, have been calibrated to be consis- tent with existing trends over 1987–91.
Before conducting any policy simulations, it is essential to iden- tify the main problems faced by the country. Any policies that
have large effects on such problems are deemed to be important and should be closely examined. In the Philippines, the most
serious problems are food security for the poor, skewed income distribution, heavy internal and external debts, and unstable eco-
nomic growth. The policies identified to have sizeable effects on these problems based on the CGE model can be classified into
three groups: supply side policies, demand side policies, and trade policies.
For convenience of discussion, the policy changes included for simulations are presented in Table 3, which provides the policy
codes and their explanations. Table 4 presents the simulation results from the changes. The first column in Table 4 records the
base-run results for 1987 in level terms. The rest of the table
604 S. Yao and A. Liu
Table 3: Changes of Policies in Simulations
Policy codes Changes of policy and main objectives
Supply side policies NFA rice sales increase by 50 percent from 864 to 1300
Scenario I thousand tons. The main objective is to stabilize
the market price of rice. Floor price of rice is raised up to the market level from 4530 to 6198 pesos
ton. NFA has to bear all the marketing costs from the farm-gate to the market. The main objective is
to raise domestic rice production.
Demand side policies Income supports to rural tenants and urban poor double
Scenario II from 120 to 240 pesos per head. The main objective
is to reduce poverty. Rural income tax rate at 1.5 percent is eliminated. Urban poor income tax rate
is halved from 3.5 to 1.75 percent. Urban rich income tax rate is doubled from 8.6 to 17.2 percent. The
main objectives are to raise government revenue and to redistribute incomes to the advantage of the
poor. The NFA ceiling price of rice sales is reduced by 5 percent from 6510 to 6185 pesoston.
Exchange rate policy Devaluation of the peso from 24.2 to 27. The main
Scenario III objective is to stimulate agricultural production and
exports. Demand and exchange rate
Combination of Scenarios II and III. policy Scenario IV
records the percentage changes over the base-run results except the two rows for government budgetary deficits and balance of
payments, which are recorded in level terms under all policy sce- narios.
The results in Table 4 can be interpreted as follows. The main objective of scenario I is to encourage rice production by doubling
NFA rice sales and by raising the floor price of rice. Increasing rice sales by NFA depresses market prices and farm incomes.
Raising the floor price has an opposite effect. Overall, the value of agricultural production rises because of higher prices. Household
incomes of all groups decline because the negative price effect is greater than the income effect of increased rice production.
Government subsidies to NFA rise by 125 percent, and the budget- ary deficit rises from 0.63 to 1.64 billion pesos. The trade deficit
also increases due to a shortfall of sugar production.
The main objective of scenario II is to improve income distribu- tion through tax reforms and more provision of income support
to the poor. In the Philippines, per capita income of the rich
POLICY ANALYSIS
IN A
GE
F RAMEWORK
605
Table 4: Policy Simulations—Percentage Changes from the Base-Run Results in 1987
Base-run Policy simulation scenarios change over base
Results Activities
in 1987 I
II III
IV
1. Value of production bil peso Rice_North
28.0 5.71
2 1.43
13.86 12.50
Rice_South 16.4
6.10 2
1.22 14.02
12.80 Maize_South
20.3 0.49
2 1.77
13.79 12.12
Sugar_North 10.0
2 0.40
0.30 15.00
15.30 Other_Agriculture_North
102.3 0.39
2 3.13
13.98 11.39
Other_Agriculture_South 105.5
0.47 2
3.13 14.03
11.41 Total
282.5 1.27
2 2.65
14.05 11.81
2. Crop-output 1000 ton Rice_North
5871 0.97
0.12 2
0.07 0.07
Rice_South 3448
1.07 0.12
2 0.06
0.06 Maize_South
4852 2
0.23 0.06
2 0.10
2 0.06
Sugar_North 16991
2 0.78
2 0.02
2 0.26
0.08 3. Income pesohead
Landowner_North 13383
2 0.28
2 1.23
0.16 2
0.66 Tenant_North
7600 2
0.39 0.37
2 0.16
0.39 Urban rich_North
92211 2
1.57 2
1.48 0.70
2 0.49
Urban poor_North 10357
2 1.56
2 0.27
0.56 0.42
Landowner_South 13382
2 0.60
2 1.28
0.01 2
0.87 Tenant_South
7600 2
0.68 0.41
2 0.20
0.38 Urban rich_South
92211 2
1.57 2
1.47 0.70
2 0.49
Urban poor_South 10357
2 1.56
2 0.27
0.56 0.42
Continued
606
S. Yao
and A.
Liu
Table 4: Continued
Base-run Policy simulation scenarios change over base
Results Activities
in 1987 I
II III
IV
4. Rice Consumption kghead Landowner_North
176.1 2
1.19 2
0.11 0.00
0.06 Tenant_North
166.2 2
1.38 0.42
2 0.18
0.06 Urban rich_North
156.5 2
1.28 2
3.39 2
2.11 2
3.32 Urban poor_North
134.8 2
2.37 0.89
0.22 1.04
Landowner_South 146.7
2 1.30
2 0.07
2 0.07
0.00 Tenant_South
141.8 2
1.55 0.42
2 0.28
0.00 Urban rich_South
127.1 2
1.26 2
3.30 2
0.16 2
3.23 Urban poor_South
111.7 2
2.33 0.90
0.18 1.07
4A. Maize consumption kghead Landowner_North
68.0 0.15
2 0.29
0.00 2
0.15 Tenant_North
63.0 0.00
0.32 2
0.16 0.00
Urban rich_North 82.0
2 0.24
2 1.46
2 0.24
2 1.59
Urban poor_North 63.0
0.16 1.27
0.79 1.27
Landowner_South 98.0
0.00 2
0.31 0.00
2 0.10
Tenant_South 93.0
2 0.11
0.32 2
0.22 0.00
Urban rich_South 122.0
2 8.36
2 9.51
2 8.36
2 9.67
Urban poor_South 93.5
2 0.64
0.43 2
0.11 0.43
5. Farm-gate prices pesoston Rice_North
4769 3.54
2 1.72
13.92 12.56
Rice_South 4769
3.48 2
1.72 13.92
12.56 Maize_South
4190 0.72
2 1.98
13.75 12.12
Maize_North 4190
0.72 2
1.98 13.75
12.12 Continued
POLICY ANALYSIS
IN A
GE
F RAMEWORK
607
Table 4: Continued
Base-run Policy simulation scenarios change over base
Results Activities
in 1987 I
II III
IV
6. Retail prices Pesoton Rice rural_North
6198 2.27
2 1.50
13.89 12.65
Rice urban_North 6197
1.86 2
1.63 14.02
12.67 Rice rural_South
6198 2.21
2 1.50
13.88 12.63
Rice urban_South 6197
1.89 2
1.61 14.01
12.67 Maize rural_North
5445 0.59
2 1.74
13.77 12.25
Maize urban_North 5445
0.31 2
1.80 13.81
12.27 8. Government finances bil peso
Subsidies to NFA 0.72
125.00 2.78
83.33 115.28
Incomes 378.50
0.13 9.09
3.48 11.73
Expenditures 379.10
0.42 1.50
0.33 1.71
Deficits 2
0.63 2
1.64 28.19
11.32 37.37
Balance of payments Mil. 2
26.00 2
68.00 1148.00
407.00 1340.00
9. National outputs GDPhead peso
18632 0.23
2 2.42
13.17 10.92
Notes: Deficitsurplus and balance of payments are all in level terms, 2 signifies deficit and 1 signifies surplus. The base-run results are
also in level terms. The rest of the table records percentage changes over the base-run results. Policy changes in scenarios I to IV are explained in Table 4.
608 S. Yao and A. Liu
groups was more than 10 times that of the poor groups. Eliminating income tax on the poor and raising taxes on the rich could lead
to a significant improvement in government finances and income distribution. However, reforming income taxes alone does not
help redistribute income from the rich to the poor. It needs to be supported by a direct income support to the targeted groups, rural
tenants, and urban poor. The positive effects of such policy reforms are marginal in terms of income distribution, although government
finances, and the balance of payments improve significantly. There is a small increase in per capita income of the tenant groups.
One major negative effect is that per capita GDP shrinks by 2.42 percent. Agricultural production also declines as a result of
depressed market prices.
Currency devaluation in scenario III produces some powerful impacts on the economy. The most obvious positive impact is a
substantial improvement on the balance of payments and govern- ment budget, which are critical for the country to reduce its huge
internal and external debts. The improvement on GDP, and the increased values of production and personal incomes, however,
are largely due to inflated domestic prices rather than real produc- tion as a result of currency devaluation. Combining scenarios II
and III produces the most desirable result on income distribution. The low income groups, rural tenants, and urban poor all benefit
from this mixture of policies. The negative effects of tax reforms on production are eliminated. The positive effects on government
budget and on the balance of payments reinforce each other.
5. CONCLUSIONS
