The Development of a Computable General Equilibrium Model of the Economic Impact of a Science-Based Industrial Park in Taiwan

Article excerpt

The primary modeling tools used to analyze 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 modeling effort and thus enabling more precise policy analysis. Current CGE literature includes models used to analyze international trade, tax reform, energy and environment issues etc. 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 analyze the economic impact of constructing Tainan Science-Based Industrial Park (TSBIP) locating in the 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.

1. Introduction

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, 1996). 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 group, 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, 1989). There are several tools available to the analyst assess regional impacts of programs. For example, partial equilibrium models (Export-Base models, Benefitcost 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 analytic approach because they are often focus on specific sectors, thus ignoring the larger economy-wide effects. Unlike partial equilibrium models, a general equilibrium models account for the interindustry linkages in an economy and is viewed as 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 internally consistent representation of regional economic structure. However, this consistency is arguably more realistic and explicit in a CGE than in either I-O or SAM.

In Taiwan, I-O models are the most common application of general equilibrium techniques used for regional economic impact analysis. Recently, CGE models have been proposed as an alternative analytical tool for policy analysis on a regional scale (Seungetal., 2000; Alavalapati et al., 1999; Schreiner and Marcouiller, 1999; Partridge and Rickman, 1998; Park, 1995; Harrigan and McGregor, 1989). However, little attention has been devoted to inquiring about the economic impact analyze of importance investment on a regional scale in Taiwan. 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 modeling techniques (Shoven and Whalley 1992). The CGE approach permits prices of inputs to vary with respect to changes in output prices and, thus, allows it to capture the behavior 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. …