Experiences with Ex-ante Poverty Impact Assessments of Macroeconomic Adjustments Policies: The Case of the Philippines Caesar B. Cororaton

Objectives of the Paper To review results of economic models developed in the Philippines used in ex-ante analysis of poverty effects of macroeconomic adjustment policies To draw lessons from the exercise

Outline of Presentation Philippine Macroeconomic Trends Adjustment Policies Poverty and Distribution Trends Framework of Analysis and Models Used Some Results Some Insights

Philippine Macroeconomic Trend I

Philippine Macroeconomic Trend 2

Adjustment Policies are Necessary Because of weak economic fundamentals: Growth is unsustained Price instability Therefore, adjustment policies are extremely necessary

Adjustment Policies Stabilization policies (intended to reduce aggregate demand and inflationary pressures - usually implemented with IMF conditionalities) –Examples in the Philippine case: Cap on reserve money; cuts in government spending Structural Adjustment Policies (intended to increase aggregate supply - usually implemented thru various World Bank structural adjustment loans, in some cases unilateral policy reform of government) –Examples in the Philippines case: tariff and other tax reforms, privatization, exchange rate deregulation, etc

Poverty and Distribution

Poverty Headcount: Urban-Rural

Framework of Analysis and Models Used

Macro policy changes

Framework of Analysis and Models Used Macro policy changes Models: Macroeconometric models, CGE models, SAM analysis, Partial equilibrium models: sectoral and commodity

Framework of Analysis and Models Used Macro policy changes Models: Macroeconometric models, CGE models, SAM analysis, Partial equilibrium models: sectoral and commodity Results: Growth, productivity, reallocation/efficiency, factor prices and employment, commodity prices, household income, etc

Framework of Analysis and Models Used Macro policy changes Models: Macroeconometric models, CGE models, SAM analysis, Partial equilibrium models: sectoral and commodity Results: Growth, productivity, reallocation/efficiency, factor prices and employment, commodity prices, household income, etc Household econometric models Micro-simulation analysis using household survey data

Framework of Analysis and Models Used Macro policy changes Models: Macroeconometric models, CGE models, SAM analysis, Partial equilibrium models: sectoral and commodity Results: Growth, productivity, reallocation/efficiency, factor prices and employment, commodity prices, household income, etc Household econometric models Micro-simulation analysis using household survey data Household effects: Welfare, distribution, poverty Household effects: nutrition, health, and education

Transmission Channels Factor Prices and employment Household income Commodity prices and inflation Government budget allocation

Some Results Tariff reduction leads to: (food effects) lower prices of food items; progressive effects on income; higher demand for food items Increased availability of calorie and protein in households (health effects) Households in lower income quintile will use less hospital outpatient and independent private clinics and will depend more on home care and public and charity clinics Households in high income bracket will use hospital outpatient and independent private clinics, despite higher prices for these services. –Implication: progressive income effects of tariff reduction is insufficient to counteract the expected price increase in health care in hospital outpatient and independent private clinics

Some Results Impact of globalization - While factor returns show improvement over , unskilled labor inputs are found to have lower returns relative to other inputs. Owners of capital get the highest return, followed by skilled labor. Using a CGE microsimulation, tariff cuts in are poverty- reducing due to fall in consumer prices and increase in direct tax that compensates the lost in tariff revenue. Experiments where lost tariff revenue is compensated by increased sales taxes would have larger negative poverty implications.

Some Results The impact of the Doha-only scenario on the Philippines is very small, yet biased against agriculture. Philippine trade reform (elimination of all tariffs and rice quotas) magnifies the anti- agricultural bias and increases poverty. Rural households are hit in terms of increased poverty, whereas urban households see poverty rates decline.

Ex-ante Analysis Policy Formulation (Few examples) Passing of WTO Bill in Senate in 1994 and Philippine signing of WTO Agreements in January 1995 Approval of Central Banking Act in Congress and Senate in 1992 Series of policy discussions and debate on trade reform and the implementation of unilateral trade reform program in late 1980s and early 1990s in manufacturing sector –Reduction in tariff rates –Simplification of tariff structure

Ex-ante analysis Policy Formulation (yes in some cases)

Ex-ante analysis Policy Formulation (yes in some cases) Poverty and distributional impacts (?, or not very clear)

Why?

Possible reasons No coherent and long-lasting poverty alleviation measures No continuity. Poverty alleviation action plans tend to be coterminous with the administration that developed it. Incumbent administration scraps old programs and specifies new ones that may not be consistent with previous programs Poverty targeting is poor because of lack of good data at the community level