(DP 1992-03) General Equilibrium Effects of Investment Incentives in the Philippines

Abstract

A general equilibrium of the Philippine economy is to developed to analyzes the effects of investment incentives in the Philippines. The incentives consist of tax rebates and duty drawbacks on imported machineries of firms belonging to industries declared by the government as priority sectors. Three policy experiments are conducted with the model. In the first experiment, the tax incentives are withdrawn but the investment subsidies continue to be provided. In the second, investment subsidies are provided on a uniform rate basis. In the third experiment, both these experiments are simultaneously conducted. As expected, the user cost of the capital falls because of investment incentives. Investments fall the first and third policy experiments but fall in the second policy experiment. Equivalent income variations associated with these changes indicate that the incentives improve overall welfare. The study however cautions that the correct evaluation of the welfare impacts of investment incentives would have to be done in a dynamic rather than static framework as in this paper.