External shocks, adjustment policies and investment in a developing economy: Illustrations from a forward-looking CGE model of the Philippines

Abstract

The rapid increase in investment and external debt of middle-income countries like the Philippines during the 1970s was perfectly ‘rational’ given existing policies. However, these countries could have done better with an appropriate mix of adjustment policies. Using a dynamic general equilibrium framework, the paper examines the sensitivity of investment and growth to external shocks and adjustment policies. It highlights the intertemporal trade-offs of tariff reform, a policy often recommended in the 1980s, emphasizing the need for complementary measures to ease macro imbalances and short-term dislocations of the protected sector.