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Author: Alvarado, Audrey R. × Subject: Government expenditures ×

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    On shadow pricing and trade liberalization: the role of the re-estimation of the shadow exchange rate for effective project evaluation and public investment in the Philippines
    (2003-03) Alvarado, Audrey R.; Pascual, Criselda Patricia B.; Alburo, Florian
    The Shadow Exchange Rate (SER) is a tool used in project evaluation to take into consideration the real economic costs and benefits of a project to society. This reflects the real cost of foreign exchange after adjusting for distortions caused by tariffs and subsidies. The current SER estimate of 20% being used in project evaluation still dates back to the early 1990's. This estimate fails to account for recent changes in the economy specifically changes in the tariff structures of the Philippines. It also fails to consider empirical estimates for import demand and export supply elasticities used in the SER equation. This study re-estimates the SER to correct for these changes. This study is patterned after the National Economic and Development Authority's (NEDA) SER framework. Multiple regression analysis on Schwalbenberg's model for Philippine import demand and studies made by Romeo Bautista for an estimate of the Philippine export supply function are conducted to obtain import demand and export supply elasticities. Based from the results, the SER is stabilizing around 14% to 15% for the forecasted periods of 2002 to 2005 using the obtained import demand and export supply elasticies of -1.197359 and 0.5739347 respectively. Hence, the appropriate SER value that the government should use in project evaluation is 15%. Continuing to use the overvalued SER estimate of 20% tends to favor projects producing non-tradable outputs using tradable inputs over projects producing tradable outputs using non-tradable inputs. This results in a misallocation of resources. Recent SER estimates obtained in this study are also found to possess higher values as compared to those of the post-war period. This shows that despite the decline of the SER since the implementation of the first Tariff Reform Program (TRP) changes in the economy specifically the shift from external trade tariffs to internal indirect taxes appears to be more distortionary. Therefore, although the government should to continue its efforts in reducing protection polices to improve the competitiveness of the Philippines in the global trade market, a more efficient collection system for internal indirect taxes is needed rather than further increases in Value-Added tax to offset revenue losses from the decrease in tariff revenues. Furthermore, the government should also exploit the full potential of direct taxation through income taxes. Direct taxes if properly collected have the advantage of being able to reach high concentrations of income and wealth as opposed to indirect taxes.