A computable general equilibrium model of the southern region of Taiwan: the impact of the Tainan science-based industrial park

The primary modelling tools used to analyse regional economic issues include econometric forecasting models, fixed price input–output (I–O) multi-sector models, social accounting matrix (SAM) and computable general equilibrium (CGE) models. CGE models combine the advantages of econometric, I–O models and SAM, strengthening the theoretical basis of the modelling effort and thus enabling more precise policy analysis. Current CGE literature includes models used to analyse international trade, tax reform, energy and environment issues. However, application of this technique on a regional scale is rare in the scientific literature. In this paper, a small regional computable general equilibrium model is constructed and applied to analyse the economic impact of constructing Tainan science-based industrial park (TSBIP) locating in southern Taiwan. The research results provide a valuable reference for decision-makers in formulating industrial and regional policies, as well as helping business managers with strategic planning.

Impact analysis can be defined as an assessment of change in overall economic activity as a rule of some special change in one or several economic activities (IMPLAN Group, [21]). Impact analysis in a region focuses on interaction between economic policy changes and the implications of these changes for the local economy. In particular, it may reflect local or national concern about the effect of change on a variety of actors or agents within the local economy, such as specific socioeconomic groups, specific sectors, or specific locations. Changes in the level and distribution of local employment, income, sales, and wealth are often the target of analysts in the context of regional planning (Shaffer, [37]). There are several tools available to the analyst to assess regional impacts of programmes. For example, partial equilibrium models (export-base models, benefit–cost analysis and econometric models) and general equilibrium models (I–O model, SAM model, and CGE model) may be used. Partial equilibrium models are limited in their analytical approach because they often focus on specific sectors, thus ignoring the larger economy-wide effects. Unlike partial equilibrium models, general equilibrium models account for the interindustry linkages in an economy and is viewed as a more appropriate framework for conducting economic impact analysis. General equilibrium models can be categorized into fixed-price models (I–O models and SAM models) and flexible price modes (CGE models). It is critical to the relative accuracy of estimates from the above two general equilibrium models. Fixed-price I–O models and SAM models provide an internally consistent representation of regional economic structure. However, this consistency is arguably more realistic and explicit in CGE than in either I–O or SAM.

CGE analysis has been applied to a wide range of policy issues, which include, among others, income distribution (Hanson and Rose, [17]; Yang, [41]), trade policy (Boyd et al., [5]; Tongzon, [40]; Augier and Gasiorek, [4]; Philippidis and Hubbard, [29]; Hosoe, [20]), development strategy (Adams et al., [1]), taxes, long-term growth and structural change (Scattar, 1989; Conrad, [10]; Piazolo, [30]). However, most computable general equilibrium models have been used to capture the effects of policies and economic shocks at the national level. Recently, CGE models have been proposed as an alternative analytical tool for policy analysis on a regional scale (Harrigan and McGregor, [18]; Jones and Whalley, [22]; Koh, [23]; Park, [26]; Hoffman et al., [19]; Partridge and Rickman, [27]; Alavalapati et al., [2]; Schreiner and Marcouiller, [33]; Seung and Kraybill, [35]; Seung et al., [36]; Schwarm and Cutler, [34]; Patriquin et al., [28]; Liu, [25]).

In Taiwan, I–O models are the most common application of general equilibrium techniques used for regional economic impact analysis. Relatively few CGE models have been developed in the Taiwan context (Yang, [42], [41]; Chou et al., [8]). Even fewer have been devoted to enquiring about the economic impact of local important investment on a small regional scale in Taiwan. This study attempts to fill this gap by developing a CGE model of the south Taiwan regional economy. CGE models allow for more flexibility and are more consistent with neoclassical economic theory and, thus, may generate less biased estimates when compared with other modelling techniques (Shoven and Whalley, [38]). The CGE approach permits prices of inputs to vary with respect to changes in output prices and, thus, allows one to capture the behaviour of economic agents. It incorporates a variety of flexible production functions that allow producers to substitute cheaper inputs for more expensive inputs. This approach can also accommodate constraints on the availability of primary inputs and accounts for additional intersectoral linkages. For example, if factors of production are limited in supply, the expansion in some sectors will draw factors of production from other sectors thereby causing a contraction in those industries.

CGE models have been proposed as an alternative analytical tool for policy analysis on a regional scale and are the focus of this paper. Seung et al. ([36]) contend that a regional CGE model is more theoretically grounded than supply-determined I–O models for impact analysis, where the productive capacity of sectors is reduced in a regional economy. They conclude that although supply-determined or mixed endogenous–exogenous SAM models are appropriate for addressing income distribution issues and are relatively easy to implement, they suffer from limited flexibility by assuming fixed prices and ignoring substitution effects in production and consumption. CGE models provide the flexibility necessary for improving analysis of a regional economy by overcoming the restrictive assumptions contained in I–O and SAM models. In a CGE model, prices adjust to clear markets of outputs and factors of production.

The organization of the paper is as follows. In the next section the computable general equilibrium model is briefly described. Thereafter, the data sources and simulation results are presented and discussed. The final section gives a summary and conclusions.

In recent years, a growing number of researchers have begun to use the computable general equilibrium models to analyse the impacts of regional policies. Therefore, in analysing the impacts of constructing TSBIP locating in southern Taiwan, a computable general equilibrium approach is generally considered an appropriate tool. In the southern Taiwan CGE (STCGE) model, there are two economic regions, southern Taiwan and the rest of the word, which includes Taiwan and all other countries. Economic agents operating in the two regions consist of producers, private households, local government and central government.

The computable general equilibrium model used is a static model, which follows closely the Dervis et al. ([11]) tradition. Modifications include alternative function forms for production technology and disaggregate household groups. In the computable general equilibrium model, the Taiwan economy is divided into 14 sectors: (1) agriculture (i.e. agriculture, forestry and fishing), (2) mining, (3) processed food, (4) other chemical products, (5) petroleum refineries, (6) iron and steel, (7) electrical and electronic machinery, (8) precision instruments, (9) other manufacturing, (10) construction, (11) electricity, gas and water (12) transport, (13) trade and eating-drinking places, and (14) finance, services and others. Five equal divisions of household are specified, using the classifications from The Report on the Survey of Family Income and Expenditure in Taiwan Area (DGBAS, [12]). A disaggregate social accounting matrix given in Table 1 is designed to reflect the circular flow of the southern Taiwan economy that is embodied in southern Taiwan's computable general equilibrium model is outlined below. The model is composed of production and factor markets, expenditure and income, foreign exchange market, prices, market equilibrium and macro close rule. The following paragraphs provide a general description of southern Taiwan's computable general equilibrium model. The production process is assumed to be a two-stage process. In the first stage, producers select optimal quantities of capital and labour, using a Cobb–Douglas (C–D) production function (Shoven and Whalley, [38]). In the second stage, firms choose intermediate inputs in combination with primary inputs using a fixed-proportion Leontief production technology. Other production technologies may be used at this stage. However, in most regional applications, the Leontief production technology is the preferred choice (Rickman, [31]). Factor demands are derived from first-order conditions, using a conventional profit maximization approach. Labour and capital factors are perfectly mobile between economic sectors and are fully employed in the base year. The model has five household groups; for each household group there is a representative consumer who determines his consumption behaviour from utility maximization. The consumer preferences are characterized by a Cobb–Douglas utility function for each representative consumer; this allows for different marginal budget shares for the five household groups. The household budget account constitutes income revenue and expenditure. The main sources of household income revenue include labour income, distributed profits, government transfer and net transfer from abroad. Each household expenditure is allocated to private consumption, direct taxes and private saving. The two levels of government accounted for in the model are local and central government. Government actions have a significant influence on the economy through its income revenue and spending changes. The main sources of government revenues include indirect taxes, tariffs, enterprise taxes and direct taxes. Government spending constitutes government consumption, transfer to enterprise, transfer to household and government saving. Our model assumes government income revenue equal to income spending. The enterprise in this model includes private companies, public companies and nonprofit enterprise, using the aggregate catalogue of National Income in Taiwan Area (DGBAS, [12]). The main sources of enterprise revenues include capital income, government transfer and net transfer from abroad. Main enterprise outlays include distributed profits, enterprise taxes and retained earnings. It is also assumed that enterprise income revenues equal to outlays. In this model, small-open-economy assumptions are made, implying that southern Taiwan cannot affect world price with its exports and imports. The model assumes a floating exchange rate mechanism and contains a balance-of-trade constraint. The value of total exports includes export trade, net labour income from abroad, net capital income from abroad, net transfer from abroad to enterprise and net transfer from abroad to household. The value of total imports consists of import trade and net foreign borrowing. The model assumes imperfect substitution between imports and domestic goods, using the Armington constant elasticity of substitution function form (Armington, [3]). Thus, the import demand for a specific sector becomes derived demand. On the export side, the export demand for a specific commodity depends on the world price of exported goods measured in foreign exchange units relative to the price level of domestic goods. In a market equilibrium condition, we assume that the total supply of commodities equals the total demand for commodities. As stated previously, total supply of composite commodities is a CES combination of domestic goods and imports. Total demand consists of intermediate inputs, private consumption, government consumption and investment. Finally, according to Rickman ([31]), the results of neoclassical closure in a regional context often are more consistent with econometric models. Hence, the neoclassical closure is adapted in the STCGE. In the computable general equilibrium model, the system can only determine relative prices, and solve for prices relative to a numeraire. Because the STCGE is a regional model, the exchange rate is used as the numeraire good, following Sullivan et al. ([39]).

Table 1. Structure of a social accounting matrix for Southern region in Taiwan, 1999 (million NT)

The southern region of Taiwan is composed of eight distinct counties or cities: Chiayi city, Chiayi county, Tainan city, Tainan county, Kaohsiung city, Kaohsiung county, Pingtung County and Penghu County. This model is calibrated for the 1999 base year data set. The data on the Taiwan economy are organized into a social accounting matrix. A disaggregate social accounting matrix combines the input–output table (DGBAS, [12]) with the national income accounting. Therefore, disaggregate social accounting matrix is based on the national income accounting, and input–output data is adjusted for consistency. In addition to the data in the input–output table and national income accounting, the database for our computable general equilibrium model includes labour, capital, income distribution matrix, various elasticities, and other parameters. The labour and capital data are from the Year Book of Manpower Statistics (DGBAS, [15]) and Trends in Multifactor Productivity (DGBAS, [14]. A multisector income distribution matrix is transformed income flows between industry and the five equal divisions of household. This matrix is from The Report of Survey of Family Income and Expenditure (DGBAS, [16]). In order to model production technology, composite commodities and the export demand function, we need a variety of elasticities. Elasticities of production technology are constructed on the basis of the elasticities used in Burniaux et al. ([7]) and Lin ([24]). Following Chu ([9]) we set the elasticity between domestic and imported goods and elasticity of export demand function. Calibrating against a benchmark equilibrium data set derived from the above considerations numerically specifies other parameters in this model. Simulation results are generated using the GAMS program (Brook et al., [6]).

Analysing the impact of the establishment of TSBIP on the southern region in Taiwan's economy is performed in two stages. The first stage simulates the economic impact of the TSBIP construction phase. The second looks at the economy of the TSBIP when it is up and running. The construction planning of TSBIP is to be implemented in two stages: the first stage was from July 1996 to December 2003, and the development area was 405.88 hectares; the second stage runs from January 2002 to December 2009 with a further 232.53 hectares of development area. The total area developed covers 638.42 hectares. The anticipated construction cost of TSBIP is 39.86 billion NT dollars, and the majority of the cost is in land costs, planning application fees, construction costs, and maintenance and operation costs. The sales by TSBIP in 1999 were 1580 million NT dollars. It is estimated that in 2010 the sales will reach 990 billion NT dollars, and 1584.7 billion NT dollars by 2021. Scenario 1, output effects reveal that the most impacted industries in southern Taiwan are iron and steel, other manufacturing industries, and service industries, which account for 53% of the total output variation in southern Taiwan. Industries having the strongest employment effects in southern Taiwan are the iron and steel industry, other manufacturing industry, wholesale and retail industry, and the food service industry, which claim 50% of the total employment effect in southern Taiwan. The industries having the greatest income effects in southern Taiwan are the iron and steel industry, other manufacturing industry, and the service industry, which explains 46% of total income effect in southern Taiwan.

Scenario 2, output effects reveal that the industries having the largest output effect in southern Taiwan are the power industry, electronics and mechanical equipment manufacturing industry (IC, computers and peripheral equipment Mfg, and telecommunications), precision machinery manufacturing industry, and the iron and steel industry, which account for 82% of the total output effect in southern Taiwan. Employment effects in southern Taiwan are mainly observed in the power industry, electronics and mechanical equipment manufacturing industry (IC, computer and peripheral equipment Mfg, and telecommunications), and the precision machinery manufacturing industry which are induced by TSBIP, and then in the commerce and service industry. Industries subject to the greatest income effect in southern Taiwan are the same as those subject to the employment effect.

A regional computable general equilibrium model is constructed and is applied to analyse the economic impact of the establishment of TSBIP on the southern region in Taiwan's economy. Construction of the model required the following steps. Reviewing the current literature on regional impact models, describing the model in detail, and collecting and reconciling data to fit the model, and completing the simulation analysis. The limitations to this model concern the assumptions about the functional form of the behaviour of economic agents in consumption, production, and so on; additional research is needed to relax these assumptions. Therefore, this study's simulation results are only a first step in policy making. Further results need more detailed calculations and judgments.

The author would like to thank the National Science Council of the Republic of China for financially supporting this research under Contract No. NSC89-2146-H-309-012-SSS.