Economic Modeling
Computable General Equilibrium Economic Model for Simulating the Impacts of Productive Development Policies
SUMMARY
The Directorate of Economic Studies for MSEs and Industry (DEMI) developed and designed a Computable General Equilibrium (CGE) model for the Peruvian economy, with the aim of simulating the impacts of productive development policies under alternative scenarios. The model serves as a powerful analytical tool for assessing the effects of economic policy measures, such as changes in taxes or subsidies, as well as autonomous shocks, including changes in international prices and technological changes through increases in productivity and/or quality.
One of the main advantages that justifies the use of the CGE model for policy analysis and recommendations is that these models are built on solid microeconomic foundations, which specify the behavioral rules of all agents, including consumers, producers, government, and the external sector. Another reason is that they take into account the interrelationships among all variables, making it possible to capture both direct and indirect effects. In addition, they ensure internal consistency across all variables by considering macroeconomic equilibria and sectoral supply and demand equilibria. They also provide numerical solutions, rather than merely indicating the direction of change in the variables. In this regard, policy packages can be simulated, since several changes can be applied and evaluated simultaneously, allowing their effects on key economic variables—such as GDP, tax revenue, sectoral value added, household welfare, labor informality, among others—to be measured with precision.
The model uses information from the Social Accounting Matrix (SAM), updated to 2014, which DEMI prepared using various sources of information, including the 2007 Input-Output Matrix, ENAHO, SUNAT, BCRP, MEF, and SIAF. This matrix coherently reflects the circular flow of the economy. It includes a sectoral breakdown of 36 productive activities, 8 types of labor based on combinations of dependent/independent, skilled/unskilled, and formal/informal work, 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 improvements in product quality, as well as progressive increases in productivity. In addition, it assesses the effect of worker formalization by applying the tax rate applicable to 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. It then evaluates the effects of an increase in the supply of technical assistance and training through the Technological Innovation Centers (CITE). With regard to policies for MSMEs, the model assesses the effects of reducing financial costs and providing tax incentives for labor training. Finally, it evaluates the impact of an increase in foreign direct investment in the forestry, aquaculture, and creative industries sectors.