Economic Modeling
Computable General Equilibrium Economic Model to simulate the impacts of Productive Development Policies
SUMMARY
The Directorate of Economic Studies for SMEs and Industry (DEMI) developed and designed a computable general equilibrium model (CGEM) for the Peruvian economy. This model aims to simulate the impacts of productive development policies under various alternative scenarios. It serves as a powerful analytical tool for evaluating the effects of economic policies (such as tax changes, subsidies, etc.) and autonomous shocks (such as changes in international prices, technological advancements through increased productivity and/or quality, etc.).
One of the main advantages that justify the use of the CGEM model for analysis and policy recommendations is that these models are built on solid microeconomic foundations that specify the behavior rules for all agents (consumers, producers, government, and the external sector). Another reason is that they consider the interrelationships between all variables, allowing for the capture of both direct and indirect effects. Additionally, they ensure internal consistency among all variables by considering macroeconomic and sectoral supply and demand equilibriums. Moreover, they provide numerical solutions rather than merely indicating the direction of change in the variables. In this context, policy packages can be simulated, as it is possible to implement and evaluate several changes simultaneously and precisely observe their effects on key economic variables such as GDP, tax revenue, sectoral value added, household welfare, and labor informality, among others.
The model employs information from the Social Accounting Matrix (SAM) updated to 2014, which DEMI developed using various sources, including the 2007 Input-Output Matrix, ENAHO, SUNAT, BCRP, MEF, and SIAF. This matrix coherently reflects the circular flow of the economy. It features a detailed breakdown of 36 productive activities, 8 types of labor (categorized by dependent-independent, skilled-unskilled, formal-informal combinations), 2 types of capital (mobile and fixed), and 10 types of households, with rural and urban households each divided into 5 income quintiles.
The model evaluates the effects of providing tax incentives in the form of a 49% income tax deduction for research and development expenditures. For the manufacturing sector, it simulates an increase in product quality as well as progressive improvements in productivity. Additionally, it assesses the impact of formalizing workers by applying the tax rate of formal workers to informal workers. The model also evaluates the effects of a 10% reduction in international mineral export prices. Furthermore, it analyzes the general equilibrium effects of increased efficiency in the use of road infrastructure through the implementation of industrial parks. The effects of increased technical assistance and training supply through Technological Innovation Centers (CITE) are also evaluated. For MSEs policies, the model assesses the impact of reducing financial costs and providing tax incentives for workforce training. Finally, it evaluates the impact of increased foreign direct investment in the Forestry, Aquaculture, and Creative Industries sectors.