Clemente Polo

An evaluation of the performance of an applied general equilibrium model of the Spanish economy

SummaryIn 1985–86 the authors were members of a team that constructed a static applied general equilibrium model that was used to analyze the impact on the Spanish economy of the 1986 fiscal reform, which accompanied Spains entry into the European Community. This paper compares the results obtained to recently published data for 1985–87; we find that the model performed well in predicting the changes in relative prices and resource allocation that actually occurred, particularly if we incorporate exogenous shocks that affected the Spanish economy in 1986. We also analyze the sensitivity of the results to alternative specifications of the labor market and macroeconomic closure rules; we find that the central results are robust.

A general equilibrium analysis of the 1986 tax reform in Spain

Spain’s recent entry into the European Economic Community (EEC) has been accompanied by a number of economic reforms needed to comply with requirements imposed on a11 member countries. A key ingredient of these reforms has been the introduction on I January 1986 of a vaiue-added tax (VAT) on consumption as a substitute for a complex range of indirect taxes, including a turnover tax applied at every stage of the production process. The fiscal reform has posed a number of interesting policy questions. For instance, one common criticism of the new tax system is that its rates have been chosen too high and will further depress the economy, whose oflicial unemployment rate was 22% in 1985. Government officials are very concerned, however, with the effect of the new tax system on public revenues and, in turn, on the substantial deficit of the public sector, which was 8% of GDP in 1985. Another current debate centers on whether the new tax system has a detrimental impact on the capital-labor ratio due to the retention of social security taxes, which are taxes on the use of labor. In this paper we use an applied general equilibrium model of the Spanish economy to analyze the impacts of the indirect tax reform on relative prices, resource allocation, and income distribution, using the information contained in the social accounting matrix constructed by Kehoe et al. (1985). In the next section we describe the model, placing emphasis on its novel features. In

A General Equilibrium Assessment of the Impact of a Fall in Tourism Under Alternative Closure Rules: the Case of the Balearic Islands

A look at the 1997 input-output table shows the Balearic Islands as a service-oriented economy, highly specialized in the production of services for tourists. The main goal of this article is to evaluate with alternative multisectoral models the impact on the Balearic Islands economy of a 10 percent permanent fall in tourism demand. First, we estimate the impact of the reduction in nonresident consumption using a rather standard input-output model. Then, we estimate its effects using an extended general linear model implemented with a social accounting matrix elaborated by the authors. Finally, we use an applied (computable) general equilibrium model using alternative closure rules to those encountered in other regional studies.

An assessment of the impact of tourism in the Balearic Islands.

According to the official Institute of Tourist Studies, the Balearic Islands, a Spanish region with just over one million inhabitants, received 9.6 million international arrivals in 2005 out of 55.8 million for the entire country. Although a rather impressive figure, it is 8.2% below the 10.5 million recorded in 1999, which might partially explain why the Balearic Islands has recorded the worst growth performance of all 17 autonomous Spanish regions since 2000. A look at the 1997 regional input–output table confirms the Balearic Islands as a service-oriented economy highly specialized in the production of services for tourists. The main purpose of this paper is to provide the first assessment of the impact of tourism in the Balearic Islands using input–output techniques and several alternative assumptions on endogeneity of final demand components. The paper also estimates, under the same assumptions, the effects on the economy of a 10% fall in tourist flows. Finally, the results are compared with those obtained with a social accounting matrix model.

An analysis of Spain's integration in the EEC

Abstract Spains recent entry into the European Economic Community (EEC) provides a good opportunity to study the impact of economic integration on a relatively small country. The EEC goal to become a single market by the end of 1992 requires, on the one hand, the elimination of all barriers to the movement of goods, services, labor, and capital within the community boundaries and, on the other, a certain harmonization of the legal setting in which economic activity takes place. The paper studies the impact on the Spanish economy of policies undertaken, or still under consideration, by the community in its attempt to complete the internal market. More specifically, we examine the effects of (1) the elimination of barriers to trade; (2) the liberalization of the financial sector and capital flows; and (3) the fiscal harmonization of indirect taxes.

Trade Liberalization and Industrial Structure in Spain: An Applied General Equilibrium Analysis

We empirically evaluate the aggregate welfare effects and structural adjustment for the Spanish economy that would follow from trade liberalization with the European Economic Community. Recent theory suggests that the classical gains form more liberal trade relations could be amplified substantially if EEC liberalization permits Spanish industries to realize economies of scale. These effects depend upon the extent of trade creation and trade diversion resulting from preferential liberalization, which in turn depend on the existing patterns of Spanish resource allocation, trade, and comparative advantage. The estimated results are derived from disaggregated microeconomic model of the Spanish economy. We find that increasing returns can actually be beneficial or detrimental, depending upon the interactions between trade and policy toward domestic industry.

The potential effects of a change in the distribution of tourism expenditure on employment

Many mature tourist destinations are considering replacing low category hotel beds with high category beds. This study estimates the potential effects that these proposals will have on employment, assuming that labour is homogeneous. The methodology used is based on the input–output model and the social accounting matrix, which allow direct, indirect and induced effects to be taken into account. In addition to conventional employment and output multipliers, the paper presents projections for different bed replacement scenarios and analyses the replacement ratios which would allow aggregate gross value added or employment to remain constant. Finally, the analysis extends to include the change of tourist expenditure distribution on complementary tourism facilities.

REDUCE EMPLOYERS' SOCIAL SECURITY CONTRIBUTIONS AND CONTROL LABOR FRAUD: REMEDIES FOR SPAIN'S AILING ECONOMY?

The aim of this paper is to quantify the impact of the reduction on social security contributions (SSCs) of employers recently claimed by the Spanish enterprisers’ organizations on the main macroeconomic variables. The effects of this tax reform are evaluated with a Computable General Equilibrium model with the neoclassical closure rule. The model is calibrated with a Social Accounting Matrix for the year 2000 (SAMES-00) elaborated by the authors. Results show that lower SSCs of employers raise employment, households’ welfare and real gross domestic product (GDP) but also increase the public deficit. These positive effects remain when the reduction is compensated with personal income taxes to keep the public deficit/GDP ratio constant and also when the compensating variable is value-added tax (VAT). Unlike in previous studies, the most positive effects are obtained when the lower public revenues are compensated via lower coverage of unemployment benefits.

ON THE ACCURACY OF CGE FORECASTS IN EXPANSION AND RECESSION: SPAIN 1990–1997

A recursive dynamic disaggregated computable general equilibrium model of the Spanish economy is used to compare the model predictions of endogenous variables with their observed values over the period 1991–1997. It includes 12 producers, 12 households, government and 2 external sectors. There are four types of labour and real wages that depend on unemployment rates. Private investment is determined by private savings and public and external surpluses. Domestic products and imports are imperfect substitutes. All exogenous variables and tax parameters are updated every year with the best available information. The model provides rather accurate predictions in 1991, a normal year, but it underestimates the intensity of the 1992–1993 recession. It also predicts dramatic reversals of trade balances in response to devaluations. These results suggest both that investment savings-driven models provide useful insights in the medium term but underestimate the consequences of downturns, and that Armingtons elascitities typically assumed may be too large.