WA? 1539 POLICY RESEARCH WORKING PAPER 1599 Economic Implications for Turkey stands to gain from I to 1.5 percent of GDP Turkey of a Customs Union annualy rom the customs with the European Union union arrangement with the with the European Union : European Union. It also stands to lose about 1. 4 Glenn W. Harrison percent of GDP from lost tariff Thomas F. Rutherford revenues. Applying the value- David G. Tarr added tax (VAT) uniformly (instead of just raising it) would allow VAT rates to fall while compensating for the revenue loss from reduced tariffs and increasing the wefare gain from the customs union. The World Bank International Economics Department International Trade Division May 1996 I POLICY RESEARCH WORKING PAPER 1599 Summary findings Turkey and the European Union (EU) have agreed to equilibrium model of Turkey, they estimate that Turkey implement a customs union. This means Turkey will stands to gain between 1 and 1.5 percent of GDP eliminate its tariffs and levies on imports of annually from the customs union arrangement with the manufactured products from the European Union. EU, depending on what complementary policies it Turkey will also apply the EU's "common external tariff" adopts. on imports from third countries. Turkey will be They also estimate that lost tariff revenues will amount obligated by 2001 to provide preferential access to its to 1.4 percent of GDP. For Turkey to avoid worsening markets to all countries to which the EU grants such its fiscal deficit, it must find ways to reduce expenditures access. or increase revenues. Its best choice is to reduce Since Turkey is both eliminating tariffs on EU imports expenditures through accelerating privatization of state- and reducing tariffs on imports from third countries, it owned enterprises which will generate a number of will become a rather open economy in nonagricultural macroeconomic and efficiency benefits in addition to the sectors, with tariffs below 2 percent (zero for imports fiscal benefits. from the EU and slightly over an average 3 percent for If a value-added tax (VAT) is used as a replacement third countries). tax, they estimate that VAT rates must increase 16.2 And since preferential access agreements with third percent in each sector - for example, from 10 percent countries will typically be reciprocal, Turkish exporters to 11.6 percent - to compensate for the revenue losses can expect improved access to those markets. from implementing the full customs union. But uniform According to Harrison, Rutherford, and Tarr, Turkey's application of the VAT would allow the VAT rates to fall biggest gains from the customs union arrangement will while still compensating for the loss from reduced tariffs come from this improved access to third country and would increase the welfare gain from the customs markets. Using a comparative static computable general union. Thispaper- a product of the International Trade Division, International Economics Department- is part of a larger effort in the department to analyze the impact of regional trading arrangements. The study was funded, in part, by the Bank's Research Support Budget under the research project "The Impact of EC92 and Trade Integration on Selected Mediterranean Countries" (RPO 675-64). Copies of this paper are available free from the World Bank, 1818 H Street NW, Washington, DC 20433. Please contact Minerva Patefia, room N5-048, telephone 202-473-9515, fax 202-522-1159, Internet address mpatena@worldbank.org. May 1996. (24 pages plus 25 pages of appendix) The Policy Research Working Paper Series disseminates the findings of work in progress to encourage the exchange of ideas about development issues. An objective of the series is toget the findings out quickly, even if the presentations are less than fully polished. The papers carry the names of the authors and should be used and cited accordingly. The findings, interpretations, and conclusions are the authors' own and should not be attributed to the World Bank, its Executive Board of Directors, or any of its member countries. Produced by the Policy Research Dissemination Center ECONOMIC IMPLICATIONS FOR TURKEY OF A CUSTOMS UNION WITH THE EUROPEAN UNION Glenn W. Harrison Thomas F. Rutherford and David G. Tarr 'University of South Carolina, University of Colorado and The World Bank, respectively. The authors would like to thank: Ismail Arslan from the World Bank Resident Mission in Ankara for his extensive comments and background paper; Jacob Kolster, Samuel Otoo and Costas Michalopoulos of the World Bank, Olivier Bodin and Bertin Martins of DGU and B. Hanbuckers of DGI in the Commission of the European Union; Roberto De Santis and Gazi Ozhan for preparation of the Social Accounting Matrix; Subidey Togan for his background paper and tariff rate calculations; Dnerous individuals in both the private sector and government of Turkey for their helpfil comments; and Minerva Patefia for logistical support. The views expressed are those of the authors and do not necessarily reflect those of the World Bank, the government of Turkey, the European Union or those acknowledged. ECONOMIC IMPLICATIONS FOR TURKEY OF A CUSTOMS UNION WITH THE EUROPEAN UNION: A QUANTITATIVE BASED POLICY ANALYSIS Glenn W. Harrison, Thomas F. Rutherford and David G. Tarr' I. Summary and Overview The Customs Union with the EU contains many elements, and we have developed a computable general equilibrium model to quantify their impacts on Turkish welfare, employment and value-added by sector, revenue implications for the government, real exchange rate effects and other relevant variables. In this section we provide a broad overview of those results and summarize the main themes that emerge from the analysis. It is well known that the customs union with the EU will imply that Turkey will eliminate its tariffs and levies on imports of manufacturing products originating from the EU. In addition, Turkey will apply the "Common External Tariff" (CET) of the EU on imports from third countries. It may be less understood that application of the CET for most products will also involve a substantial reduction of tariffs against imports from third countries. In part this is true because the "most favored nation" (MFN) tariff of the EU is only about 7-8 percent on average. But equally important, application of the EU's CET implies that Turkey will be obligated to provide preferential access to its markets to all countries to whom 'University of South Carolina, Colorado University and The World Bank, respectively. The authors would like to thank: Ismail Arslan for his extensive comments and background paper; Roberto De Santis and Gazi Ozhan for preparation of the Social Accounting Matrix; Subidey Togan for his background paper and tariff calculations; Jacob Kolster and Costas Michalopoulos of the World Bank, Olivier Bodin and Bertin Martins of DGII and B. Hanbuckers of DGI in the Commission of the European Union, and numerous individuals in both the private sector and government of Turkey for their helpful comments; and Minerva Patefia for logistical support. The views expressed are those of the authors and do not necessarily reflect those of the World Bank, the government of Turkey, the European Union or those acknowledged. I the EU grants preferential access.' By the year 2001, it is expected that Turkey will negotiate preferential trade agreements with all countries with whom the EU has a preferential agreement. By the year 2001, based on Turkey's present import shares, the average tariff on non-agricultural imports will be less than 2 percent (zero for imports from the EU and slightly over 3 percent on average for third countries). Since Turkey is complementing its tariff elimination on EU imports with tariff reductions on imports from third countries, Turkey will become a rather open economy in the non-agricultural sectors. This complementary tariff reduction to third countries should be regarded optimistically since it reduces the trade diversion costs of the customs union, and results in additional gains from trade. Moreover, since the preferential access agreements with third countries will typically be negotiated reciprocally, Turkish exporters can anticipate improved access to the markets of the third countries to whom it grants preferential access. According to our estimates, improved access to third country markets results in gains to Turkey that are quantitatively the most important element in the customs union arrangements. This indicates that the government should expedite its negotiations with all countries with whom it will negotiate preferential agreements, analogous to the steps it has already taken with Hungary. Our estimates are that the gains to Turkey of the customs union with the EU are between 1%- 1.5% of its GDP per year depending on the complementary policies adopted by Turkey, as discussed below. These gains are recurring, in the sense that they can be expected each year, and they take into account the costs of imposing higher taxes to compensate for the revenue loss of the tariff. Of course, the results are dependent on the model structure. In particular, the long run dynamic impact on the 'This includes all the Eastern European countries with whom the EU has "Association agreements," the countries in the Mediterranean that are subject to the EU's Mediterranean policy, the African, Caribbean and Pacific countries that are part of the Lome convention, as well as GSP treatment for eligible countries. 2 growth rate of the Turkish economy, however, is not estimated in our model, so the gains from the customs union are likely to be larger than we have estimated.2 At the same time, the movement toward a more open economy presents certain challenges for Turkish policy-makers. One important challenge is the revenue replacement challenge. We estimate that Turkey will lose tariff revenue equal to 1.4% of GDP. Given the crucial importance in Turkey of reducing the fiscal deficit, it is essential that expenditure reduction or revenue increases be found so that the customs union does not increase the fiscal deficit. If the VAT is used as the replacement tax, we estimate that VAT rates will have to increase by 16.2% in each sector to compensate for the revenue loss from implementing the full customs union (for example from 10% to 11.6%). This challenge is complicated by the fact that some tax experts in the government of Turkey believe that the most obvious choice for a revenue replacement tax, the VAT, will generate little revenue due to tax evasion problems. There is a concern that an increase in the VAT rates will increase the relative share of the informal sector in the economy. To the extent that this is a valid concern, subsidy reductions would serve the dual 2'f course, there are some caveats to the estimates due to the specific model structure employed. The estimates may be high to the extent that they ignore the costs of adjustment. There are likely to be short- run costs of adjustment to labor, including temporary unemployment, even though in the medium to long run there is no reason to believe the unemployment rate would change. And Turkish industry will have to incur adjustment costs in order to produce at higher product quality standards. Estimates of the costs of adjustment, however, are typically small in relation to the gains from trade liberalization. (See Tarr and Morkre, 1984.) Moreover, it is possible that some of the funds that the EU has allocated to assist Turkey in its adjustment to the customs union could be used for the purpose of product quality upgrading in Turkish industries as well in retraining and relocating labor. This would reduce the adjustment costs to Turkey. The estimates also assume that the preferential access agreements with third countries are all implemented, something that will be phased in through 2001. Since the full gains will not be realized before 2001, the estimates should be viewed as a comparison between 1993 and 2001 and subsequent years. For years in between only a portion of the gains would be realized. On the other hand, recent models have shown that the dynamic gains from trade liberalization are several times the static gains. (See, Baldwin, 1989; and Rutherford and Tarr, forthcoming.) Incorporating the impact of imperfect competition would also increase the gains, although to a much smaller extent than the dynamic impacts. (See Harrison, Rutherford and Tarr, 1995.) Taking all these caveats into account, the gains to Turkey are likely to be considerably larger than we have estimated. 3 purpose of increasing efficiency directly by reducing distortions, but also would reduce the revenue needs of the state and reduce the indirect distortions imposed by subsidies through the requirement of additional taxes. A second challenge is how to use the trade and tax policies available to Turkey after becoming a member of the customs union so that significant unintended distortions are not introduced into the economy. For example, the customs union will not impose any restrictions on Turkey with respect to its tariffs on agricultural imports. Consequently, agriculture in Turkey will become highly protected relative to manufacturing unless Turkey takes unilateral action to reduce agricultural protection. Similarly, the customs union imposes no restraints on export subsidies to third countries or in agricultural products to any destination.3 Distortions would be created regarding the use of export subsidies, unless proportional reductions in export subsidies are applied to third countries. In addition, the revenue replacement requirements of implementing the customs union will be significantly reduced if export subsidies are reduced in third country and agricultural markets. We estimate that the VAT would have to increase by only 9.1 % (rather than 16.2%) if export subsidy reduction to the rest of the world complemented implementation of the customs union. A third challenge is to develop a stable macroeconomic environment that will encourage foreign direct investment. Many believe that the creation of a customs union with the EU will encourage foreign direct investment in Turkey, and that this will be one of the more important benefits of the customs 3 Turkey is bound by GATTIWTO rules, in addition to any specific agreements with the EU. Our analysis assumes (without investigation) that Turkey is in compliance with its GATT/WTO obligations with respect to export incentives. There are many in Turkey who believe that the Framework Agreement for the customs union between the EU and Turkey imposes comparable restraints as GATT/WTO rules regarding the subsidies and export incentives code. If that interpretation is true, then our simulation of export subsidy reduction to the rest of the world should be considered as part of the gain of the customs union, not as a policy option for Turkey. Our interpretation, however, is based on Articles 30-36 of the Framework Agreement which relate to competition policy within the customs union. These articles restrain a wide range of actions in the area of state aid and competition policy and establish measures for dispute resolution which have the potential of being more binding that GATTIWTO commitments. 4 union. For EU investors, the customs union may reduce the risk of investing in Turkey. For third country investors, the improved access to EU markets may also encourage them to invest in Turkey.4 On the other hand, the crisis in Mexico demonstrates that financial flows can flow out of Turkey if the macroeconomic situation deteriorates. This emphasizes the need to take actions to reduce the fiscal deficit. The customs union will result in Turkish industries being exposed to international competition to a greater extent than has been the case to date. Thus, a fourth important challenge is to develop policies that will help Turkish industries become more competitive in this increasingly competitive environment. World Bank experience with industrial strategy (see Lieberman, 1990) has shown that the key ingredients to a successful national industrial strategy are: creation of a stable macroeconomic environment; development of a competitive markets, both for products and labor; and neutrality of incentives so that firms and entrepreneurs realize that there is more to gain by effectively competing in the market-place as opposed to lobbying the government. The solution to all four of the above challenges point to the same set of policy options: reduction of state subsidies of various types and reduction of the role of the state in production. The need to compensate for the revenue loss from the tariff, given the limitations of the other taxes, suggests that it is may be necessary to find ways of reducing state subsidies to generate revenue. Subsidy reduction meets efficiency goals as well since it will allow Turkey to avoid unintended new distortions and optimize its entry into the customs union. To encourage foreign direct investment, a reduction in state aids will provide two benefits: by reducing the fiscal deficit, the rate of inflation should be reduced. The resulting more stable macroeconomic environment should encourage foreign direct investment. In addition, foreigners will be more likely to invest if they are confident that they will receive equal treatment relative to Turkish firms. In particular, foreign investors will likely have much greater confidence in equal 'There is significant competition from similar economies that have preferential access to the EU market, such as Tunisia. This competition would moderate the increased foreign direct investment. 5 treatment if the sector has little or no state owned enterprises. Finally, an increasingly competitive industrial structure brought on by the customs union will further expose inefficient state owned enterprises. The loss-making state owned enterprises will lose even more, making it increasingly costly to maintain inefficient SOEs. The drain on the state budget and the rest of the economy would likely become even more of a constraint on growth of the Turkish economy. In summary, with participation with the EU in a customs union, Turkey now stands at an historical crossroads. One road it can take at this time is the successful road taken by Spain after it decided to accede to the EU (see box). Spain complemented its accession (and anticipated accession) to the EU with a significant reduction in the role of the state in the domestic economy. On the other hand, despite rapid growth in the 1960s, Greece has made much less progress after its accession to the EU. Although both Greece and Spain adopted the external trade policies of the EU, Greece continued to support its state owned enterprises to a much greater degree. As a result its consolidated fiscal deficit and public sector borrowing requirements rose to a large share of GDP in the 1980s; this crowded out private investment (which plunged) and contributed to stagnant growth. Moreover, even the private sector is highly regulated. Bureaucratic control by state banks is one means of applying public influence in the private sector; and the Greek industrial structure is characterized by numnerous cases of featherbedding and subsidized credit to feeble producers. If, due to financial problems, a company is taken over by a bank, it subsequently obtains a soft budget constraint analogous the state enterprises in Eastern Europe of the 1980s. (See Katseli, 1990; and Bliss and Macedo, 1990) Between 1980 and 1992, Spain grew at over twice the rate of Greece. By 1992, among the four relatively poor members of the EU (Greece, Portugal, Spain and Ireland), Spain had by far the highest per capita income (at $14,000 it was about twice the level of Greece).5 5See The World Bank, World Development Report, 1994, table 1. 6 Although Turkey in 1995 is a more open economy than either Greece or Spain at the start of their accessions to the EU, and the precise form of state intervention in the domestic economies differed, all three economies experienced the problem of excessive state involvement in their domestic economies. In Turkey's case, state owned enterprises are its analogous achilles heal. The example of Greece demonstrates that simply adopting the external trade policy of the EU will not be sufficient to propel the economy forward to much higher growth rates. Bold and dramatic action to reduce the role of the state with respect to subsidies and ownership of production are crucial for a fully effective integration with the EU that will be capable of significantly boosting the growth of the Turkish economy. 7 SPAIN'S SUCCESSFUL ACCESSION TO THE EU After Franco's death in November 1975, Spain was confronted with a mixed economy that was administered and controlled by the state to a much greater extent than it was free market. Business organizations depended on the state and the state bureaucracy was a power of the first order. The industrial structure inherited at this time was obsolete and remained isolated from world markets. Under Franco's autarkical and dirigist objectives, it was highly protected and subsidized. There were similar problems in factor markets. The labor markets were extremely rigid. Interest rates were controlled by the Ministry of Finance, and Spain's dependence on energy was among the highest in Europe. Although's Spain's industrial development of the 1960s and early 1970s was capital intensive, unemployment did not increase owing to a tide of emigration to the EU. After the energy crisis it became difficult for Spanish emigrants to find work and many returned to Spain. This greatly augmented unemployment and social tensions. Thus, at Franco's death, Spaniards found themselves in an economic crisis of enormous proportions for which the Spanish economy was poorly equipped to react. Starting from this extremely weak position, after three decades of economic autarky first and state intervention and regulation later, the new democratic governments elected after 1977 chose in a rational and coherent manner to integrate with Europe, open up the economy, and reduce the role of the state in the domestic economy. While some other Western European governments desired to maintain strong state intervention to correct market failures, in Spain reduction of the role of the state in the economy was regarded the only viable option to release the economic potential of the economy. Thus, despite the Spanish left's traditional fears of capitalism, the Socialist and Communist parties voted unanimously with all other parties to accede to the EU and to declare in the new constitution that Spain is a market economy. Despite the fact that Spain did not become a member of the EU until 1986, liberalization, both external and domestic, began in earnest in 1977 due to anticipated accession to the EU. It was not until 1986, however, that Spain actually became a member of the EU. Despite its difficult starting position, Spain is regarded as the most successful of the "Southern" countries in integrating with Europe. On the negative side, in the mid-1990s Spain was struggling with an excessive unemployment problem. Sources: Dehesa, 1991; Bliss and Macedo, 1990; Vinals, 1990; Blanchard et al. (1995). 8 II. Results for the Customs Union We elaborate the principal elements of the Customs Union as we explain the results of our simulations in Table 1. First we explain the variables that make up the rows of tables 1 and 2. W_AGG is the welfare gain to Turkey in billions of 1990 Turkish lira, while W AGG% is the welfare gain as a percent of GDP. In all of our experiments, we have imposed a constraint that the fiscal deficit of the government of Turkey cannot increase. We implement this constraint by allowing the VAT rate to adjust in all sectors, such that the fiscal deficit is unchanged. The variable "TAU" shows the amount that the VAT must change. For example, a value of 124.6 for TAU in the "TAR" column, means the VAT rate must increase to 124.6% of its original level in all sectors, i.e., a 24.6% increase. We examine below the implications of using other instruments of taxation or expenditure reduction. We report results for the variable PFX% which is the percentage change in the real exchange rate required to keep the balance of trade unchanged. In general, reduction of tariffs induces a depreciation of the real exchange rate. This is because tariff reduction induces an increase in imports, and a real depreciation is then required to increase exports and reduce imports such that the balance of trade is unchanged.6 The percentage change in the eight types of labor and the two types of capital in the model are shown by the variables labelled L_PROF and so forth. The percentage change in the value added of the 54 sectors in the model are shown for each scenario starting with "AGR" for agriculture and animal husbandry (see the appendix for the specific definitions). In the appendix we present the results of our systematic sensitivity analysis. While the overall results for welfare, revenue implications and real exchange rate effects are quite robust, the results for 6This is a "real" model so there is no money or financial asset which is devalued. The real exchange rate is the relative price of tradeable goods to non-tradeable goods. 9 specific sectors in many cases are very sensitive to the choice of parameters. In particular, there are some cases where the "standard deviation" of the estimate exceeds the point estimate; this means that some sectors estimated to expand their value-added might be estimated to contract with another very plausible specification of model elasticities. Thus, this model should not be used for the purpose of picking winners and losers (nor should any other model in our view). In the scenario labelled "ACCESS," we estimate the impact of improved access to the EU markets. Turkey already has tariff free access to EU markets in manufactured products, and agriculture is for the most part excluded from the customs union agreement. However, Turkish exporters should obtain improved access in textiles and apparel, steel and to a small extent in agriculture. After an adjustmnent period, Turkish exporters will not be subject to quantitative restraints on textile and apparel exports.' This should be especially helpful in the categories of tee shirts and sweatshirts. In steel, Turkish exports will not be subject to the 6% import tax, and there is some hope of a reduction in other non-tariff barriers that the EU applies against Turkish exports. Finally, although agriculture is essentially out of the agreement, it is expected that some limited improved access to the EU markets will be obtained. Thus, we have assumed that as a result of the Customs Union, the price received by Turkish exporters to the EU will increase by: 5% in textiles; 15% in apparel; 10% in steel; and 1% in agricultural products. We find that the combined affects of this improved access will increase Turkish welfare by 0. 3 % of GDP. In the scenario "STD" we simulate the impact of improved access to EU markets due to harmonization of product quality standards and improvement in testing laboratories in Turkey. It is recognized that additional testing laboratories are necessary for Turkey, and the pressure of increased EU competition in import markets is likely to improve Turkish product quality and the price of Turkish 7 These restrictions derive from voluntary export restraints, and not from the MFA. Although a transition period has been mentioned in some negotiating documents, the current expectation from both sides is that there will in fact be no such transition period. Our simulations assume no transition. 10 products in EU markets. In this scenario we have assumed that the price of Turkish exports will increase by 1% in EU markets. This results in an increase in welfare of 0.1%. In the scenario "TAR" we simulate the impact of Turkey lowering its non-agricultural tariffs against the manufactured products of the EU and implementing the CET of the EU, including the preferential access agreements. We take as our initial equilibrium the situation that prevailed in 1993 (based on actual collections of tariffs, as opposed to MFN rates). By 1993, Turkey has already implemented a large portion of the tariff changes by phasing in the tariff changes over a 12 year or 22 year period, depending on the product. We take as our counterfactual scenario, the tariffs that will prevail in 2001, after preferential agreements have been negotiated with those countries that the EU has preferential agreements.' This scenario results in an improvement of welfare equal to 0.1% of GDP. The benefits from this aspect of the customs union are perhaps smaller than some would anticipate. This follows from a number of reasons: First, in our base year data, although the EU was the major trading partner of Turkey (43.6% of imports and 48.3% of exports), the trade intensity of Turkey was not very high--imports were 18.6% of GDP and exports were 14.6% of GDP. Thus, the total value of all EU imports was only about 9% of GDP, and the tariff reductions induce 'triangles" of consumption efficiency gains that are only a proportion of the value of the imports9. Additional gains come from 8Tariffs in the initial equilibrium are based on actually collected rates, and are taken from Arslan (1995). Tariffs in the counterfactual are taken from data provided by Professor Subidey Togan (see appendix for precise rates). These latter data are based on nominal tariffs expected to prevail in 2001. It is assumed with these latter data that actual and nominal tariffs will be equal. Reasons for differences between collected and nominal rates of tariffs should be significantly reduced if not totally eliminated due to CU regulations. That is, there will be little scope for the investment code and duty drawback exemptions. 9In partial equilibrium, the static consumption deadweight loss from an ad valorem tariff equal to t is: CDWL = 0.5 [t/(1 +t)]2 e V where e is the elasticity of demand, and V is the initial value of imports (see Morkre and Tarr, 1980, chapter 2). That is, the gains from eliminating tariffs are proportional to the value of the imports, where 11 reductions in tariffs against the rest of the world (due to the common external tariff of the EU, from production efficiency gains as well, and from dynamic gains from trade (we do not measure the latter); but static efficiency gains are dependent on trade intensity. Second, because tariff changes required by the customs union were phased in over time and already significantly implemented in our benchmark year of 1993, there already was a low level of tariffs in Turkey in 1993. Thus, the reductions in the tariffs induced by the customs union are not large typically. As explained in the previous footnote, welfare gains from tariff reductions increase more than proportionally with the height of the initial tariff. Third, the tariffs on agricultural products are not reduced, so there are some non-uniformity distortions introduced as the new tariff structure strongly favors agriculture. Finally, there are some trade diversion costs in any customs union. The latter costs should not be high in Turkey's case since third country tariffs will not be high. In the scenario "RECIP" we simulate the impact of Turkey negotiating reciprocal access to the markets of third countries with whom it will grant preferential access to its markets. That is, the EU has negotiated Association Agreements with a number of countries, such as the central European countries, and Free Trade Agreements with others such as Israel and Tunisia. Turkey is obligated to negotiate similar preferential trade agreements with these countries for non-agricultural products. The impact of Turkey reducing its tariffs against these countries is incorporated in the scenario "TAR." But Turkey that proportion increases with the elasticity of demand and increases geometrically with the initial value of the tariff rate. For example, if the elasticity of demand is unity and the tariff rate is 10% (t=0. 1), then the consumption deadweight loss from elimination of the tariff is 4/10 of one percent of the value of the imports. To illustrate the geometric nature of the increase in the consumption deadweight loss with the tariff rate, if t=0.2, the deadweight loss is 3.3 times greater, at 1.4% of the value of imports; if t=0.4, the deadweight loss is 9.9 times greater, at 4.1 % of the value of imports. In our data, the weighted average tariff on non-agricultural imports is being reduced by about 7%, and the value of all Turkish imports is about 21.1 % of Turkish GDP. With a 7% tariff reduction in the above formula, the gain is equal to about 2/10 of one percent of the value of imports. If the tariff reduction were applied on all imports (including agriculture), with unitary elasticity of demand, the gain is small at 5/100 of one percent of GDP. The gains increase proportionally with the elasticities. 12 should obtain improved access to the markets of these countries, since the tariffs of these cantries will be reduced against Turkish exports. We assume that the improved access for Turkish exports in third markets will equal the improved access that Turkey will offer third country imports. This implies that improved access will increase the price Turkish exporters can obtain on exports to third countries by 4.2%.10 Improved access to these markets results in a gain in Turkish welfare of 0.5%, which is the largest gain of all the components." In the scenario labelled "XSB" we simulate elimination of the remaining export incenives program for exports of non-agricultural products destined to the EU only.'2 Compared with more general reduction of export subsidies with respect to all countries (which appears to be the more likely policy choice), this does not affect Turkish welfare significantly (there is a negligible reduction in welfare). The reason is that with removal of export subsidies only to the EU, exporters have the incentive to switch export markets away from the EU so they continue to receive export subsidies. Thus, the distortion costs of the export subsidy program are not reduced significantly, unless they are reduced to all export markets. (More general reduction in export subsidies is discussed below.) In the scenario labelled "TRD" we simulate the impact of reduction in the costs of trading between the EU and Turkey. As a result of the customs union, closer relations with the EU will likely bring with it a possible reduction in costs of clearing goods at the frontier. This is an effect similar to that of the single market program of the EU. In the case of the EU this effect was assumed to reduce the "The difference between the EU's most favored nation CET and Turkey's third country tariff tking into account preferences (and weighted by Turkey's trade weights) is 4.2%. This may be an underestimate of the improved access Turkey wil receive in third markets since Turkish external tariffs under the common external tariff of the EU are lower on average than the MFN rates of developing countries receiving preferential access to the EU. "Improved access, by improving the prices received by Turkish exporters, results in both 'rectangles' of gains on all previous sales in these export markets, plus triangles of gains on new sales. "2The rate of export subsidies by sector is taken from Arslan (1995); see the appendix for the precise rates per sector. 13 costs of trading by 1 .5%-2% The impact should be quantitatively less important for Turkey so we assume that there will be a 0.3 % reduction in the costs of goods imported from the EU and the costs of exporting to the EU will also decline by 0.3%. This results in an improvement in Turkish welfare of 0.1%. In the scenario "FULL" we combine all of the above elements. The overall gain in Turkish welfare is equal to 1.1 % of GDP. These are annual gains in the sense that they can be expected to recur each year. Since our model is a static model, we ignore the dynamic gains from trade which would be expected to increase the benefits of trade liberalization, i.e., produce larger benefits. The variable TAU shows that it will be necessary to increase the rate of VAT taxation by 16.2% in order to keep the fiscal deficit unchanged. This is a proportional increase in the rate of VAT for each sector, starting from the initial collected VAT rates. The variable PFX% shows that the real exchange rate must depreciate by 0.5% in order to hold the balance of trade constant. This is a modest real depreciation and reflects a number of considerations: (1) the tariff change is not large; (2) there is some limited improved access to the markets of the EU, which has the effect of appreciating the real exchange rate; and (3) improved access to the markets of third countries under reciprocal free trade agreements will also appreciate the real exchange rate."3 III. Revenue Replacement Given the importance of the fiscal deficit in Turkey, it is important that steps are taken to avoid an increase in the fiscal deficit as a result of the tariff reductions engendered by the customs union. We estimate that Turkey will lose about 1.4% of GDP from tariff reductions, although Turkish government revenue will increase by 0.3% from reduction in export subsidies to the EU. 'Of course, since there is no money in the model, we are not referring to the nominal exchange rate. If Turkish inflation continues, significant nominal depreciation would be required to keep the real exchange rate from appreciating. 14 In our principal scenarios we have used a VAT as the means of generating government revenue. Taking into account general equilibrium effects, we have found that VAT rates will have to increase by 16.2% in order to compensate for the revenue loss of the tariff. More generally, we would expect that improving collection rates in the VAT which would make it more uniform, should reduce the economic distortions of the VAT as well as increase its revenue potential; that would allow lowering of the average VAT rate.'4 There are, however, other mechanisms available. We have estimated the gains (or losses) to Turkey of implementing the customs union while using other taxes as the "replacement" tax. In all cases we consider the scenario FULL, and ask what is the scaler multiple of the existing tax that would be required such that the fiscal deficit would not be increased. One alternate replacement tax that we have evaluated is a broad based uniform consumption tax. We have found that the welfare increase from the customs union, with a uniform consumption tax is 1.0% of GDP, only a 0.1 % reduction relative to the use of the VAT as the replacement tax. Given its uniform nature, the consumption tax is almost as efficient as the VAT. Another tax which has received limited discussion in Turkey is a special consumption tax on a limited range of products: notably, autos, fuels, alcohol and tobacco products. The problem with a special consumption tax is that by imposing a tax on only a limited range of products, the tax base is narrow. Then considerable distortions are created, since the rate of taxation on these specific products must be very high to generate adequate revenue which induces resources to move out of the highly taxed sectors. "4A similar conclusion was drawn in the report by Krueger et al. (1995, pp. 61, 62). They estimated that Turkey will lose 3.52% of its GDP as a result of tariff and special fund reduction, but that increases in the VAT rate and alignment of the VAT across all sectors as in the EU will result in compensation of revenue loss from the tariff. Their report (p. 62) notes: insofar as tariffs are removed and no measures are taken to increase VAT revenues, entry into the customs union will be marked by a fall in government revenues. If, however, the Turkish authorities take advantage of the opportunity to align VAT rates and maintain or increase collection rates [emphasis added], the revenue consequences of entry should be positive. 15 In fact, with plausible elasticities a narrow consumption tax is not a feasible option for replacement of revenue. That is, the tax base is too small to generate adequate income to replace the revenue lost. The higher tax discourages consumption of the product, and thus cannot generate unlimited revenue. The value of Turkish income spent on these commodities is simply not large enough to generate the required revenue, given normal assumptions about elasticities.'5 In summary, the government will need to factor into its fiscal program possible revenue shortfall arising from implementation of the customs union. We show below, that uniform taxation aggressively enforced is the best way to proceed with goods market taxation. If the VAT could be applied uniformly, welfare would be increased and the rate of VAT could be reduced without reducing revenues. In addition, as mentioned above, subsidy reduction and the reduction of the role of the state in production are important elements in reducing the need for taxation and help to relieve fiscal pressures. IV. Additional Unilateral Measures The changes required by the customs union may in some cases introduce distortions in the incentive structure in Turkey that are unintended by the government. In this section we examine the consequences of Turkey taking additional unilateral steps that are not required by the EU to implement the customs union that will allow Turkey to make a more effective and efficient transition to the customs union. Reduction in Agricultural Tariffs Since agricultural tariff changes are not required by the customs union agreement, without unilateral policy action by the Turkish government the level of agricultural tariff protection will increase substantially relative to manufacturing. That is, the customs union requires the imposition of zero tariffs "5In fact, some discussion of the special consumption tax indicates that it is not intended as a replacement tax for lost revenues from the customs union. Rather several taxes in the named sectors would simply be aggregated into a single tax in each sector for the purpose of tax reform or simplicity. 16 on manufacturing products from the EU and the EU's CET oin third country imports of these same products, while no changes in agricultural protection are required. Without further unilateral measures on the part of Turkey beyond the customs union, the relative protection of agriculture will increase substantially. In the scenario labelled "AGLIB," we simulate the impact of Turkey lowering its tariffs on agricultural imports from all regions by 50 percent, in addition to the changes entailed in the customs union. This results in some improvement in Turkish welfare as measured in Turkish lira (relative to "FULL"), but the percentage impact on GDP is small. The reason for the small gains from the marginal reduction in agricultural tariffs is that export subsidies in agriculture remain to all destinations. The reduction in import tariffs in agriculture reduces the incentive to produce in the domestic market relative to exports. The increase in exports, induced by the tariff reductions, is an inefficient increase due to the export subsidies, and results in only very small gains from this piecemeal policy change. What is required for more significant gains is simultaneous removal or reduction of both the import tariff and the export subsidy. 6 Removal of Export Subsidies to Third Countries Even though the customs union might only require elimination of export subsidies on exports going to the EU on non-agricultural products, considerable additional efficiency gains would accrue to Turkey if export subsidies were eliminated more widely. This is because if export subsidies are eliminated on EU exports and not on exports to the rest of the world, exporters will divert exports to the rest of the world where the export subsidies remain. The diversion of exports substantially reduces the efficiency gains from discriminatory export subsidy reduction. Consequently, it is only with non-discriminatory elimination of export subsidies that we observe a welfare increase from the elimination of export '6Morkre and Tarr (1995) have shown that the welfare impact of piecemeal tariff reduction in a sector with an export subsidy is equal to a triangle of gain in reduced import distortions less the rectangle of increased export subsidies. They show, also using a general equilibrium model, that simultaneous removal of the import tariff and the export subsidy yields much larger benefits. 17 subsidies. We therefore simulate the elimination of export subsidies on a non-discriminatory basis in addition to all the changes entailed in the customs union; this scenario is labelled "XSBO." It results in a gain in welfare equal to 1.2% of GDP, or an increase in 0.1% of GDP relative to the gains derived from implementation of the "FULL" customs union without additional action on export subsidy reduction to the rest of the world. The marginal 0.1 % of GDP improvement is comparable to the gains received from discriminatory tariff reduction discussed above, and reflects the fact that the exports to GDP ratio of Turkey (14.6%) is not high in our base data. The revenue impact of this scenario is also quite important, and we observe that the variable TAU increases by only 9.1 % in XSBO, compared to an increase of 16.2% in FULL. This means that due to the reduction in expenditures on export subsidies there is less of a need to raise revenues through an increase in the VAT. To the extent that there are limitations on the ability of the VAT to effectively collect revenues, this advantage of reducing export subsidies generally in parallel with implementation of the customs union could be crucial to avoid damaging fiscal deficits. Removal of all Subsidies and Taxes except the VAT In the scenario labelled "SECOND" we eliminate all tariffs, subsidies and taxes present in the base model except for the VAT, and allow the VAT in each sector to adjust proportionally to compensate for any changes in the fiscal deficit. These changes are implemented in addition to the changes that are part of the customs union. We observe that welfare increases by 1.4% of GDP (or 0.3% more than in the case of implementation of the customs union alone), but the rate of VAT taxation must increase by 74% in order for the fiscal deficit to remain unchanged. Many subsidies that apply to specific industries do not appear in the 1990 input-output table. With improved data and measurement of these distortions, the estimated benefits of wider subsidy reduction would likely be larger. 18 In the scenario labelled "FIRST" we implement the same elimination of all distortions and use only a uniform VAT as the replacement tax. Welfare increases by 1.5% of GDP. Interestingly, the rate of VAT that would apply for all sectors is only 12.8 percent. This rate of VAT is lower than the legal rate in most sectors. The reason that a low rate of VAT can coexist with the reduction of all taxes and subsidies is that it is applied uniformly; this means that in this scenario we assume that we eliminate exemptions and well as different rates of collection across sectors. (Other things equal, the scenario "SECOND" shows that the VAT must increase by 74% of its base rate in each sector if exemptions and evasions are not reduced.) Implementation of a uniform rate across all sectors may be difficult to achieve in reality, but if it can be implemented, the scenario shows that considerable reduction in the rate of VAT taxation can be achieved. 19 REFERENCES Arslan, Ismail, "Turkey: the Customs Union and Beyond," Background paper for the Country Economic Memoranda, The World Bank: Ankara, January 25, 1995, mimeo. Baldwin, Richard, -The Growth Effects of 1992," Economic Policy, October 1989. Blanchard, Olivier et al., Spanish Unemployment: Is There a Solution? London: Centre for European Policy Research, 1995. Bliss, Christopher and Jorge Brage de Macedo, "Introduction," in C. Bliss and J. B. de Macedo (eds.) Unity with Diversity in the European Economy: The Commnunity's Southerr. Frontier, Cambridge: Cambridge University Press for CEPR, 1990. Dehesa, Guillermo de la, "Spain," in Paul Marer and Salvatore Zecchini (eds.), The Transition to a Market Economy, Paris: OECD, 1991. Harrison, Glenn W., Thomas F. Rutherford and David G. Tarr, "Piecemeal Trade Reform in the Partially Liberalized Economy of Turkey", World Bank Economic Review, 7, May 1993, 191- 217. Harrison, Glenn W., Thomas F. Rutherford and David G. Tarr, "Product Standards, Imperfect Competition, and the Completion of the Market in the European Community", Policy Research Working Paper 1293, International Economics Department, International Trade Division, The World Bank, April 1994. Harrison, Glenn W., Thomas F. Rutherford and David G. Tarr, "Quantifying the Uruguay," Round, in W. Martin and L. Alan Winters, The Uruguay Round and the Developing Countries, World Bank Discussion Paper No. 307, 1995. 20 Harrison, Glenn W., and H.D. Vinod, "The Sensitivity Analysis of Applied General Equilibrium Models: Completely Randomized Factorial Sampling Designs", The Review of Economics and Statistics, 74, May 1992, 357-362. Katseli, Louka, "Economic Integration in the Enlarged European Community: structural adjustment of the Greek economy," in Bliss and Macedo, eds., 1990. Krueger, Anne O., Okan Aktan, Peter Dohiman, Caglar Ozden and John Whalley, Industrial and Fiscal Impact on Turkey of Customs Union with the European Union, Ankara: Treasury May 1995, mimeo. Leiberman, Ira, Industrial Restructuring: Policy and Practice, Policy and Research Series No. 9, Washington D.C.: The World Bank, 1990. Melo, Jaime de, and Tarr, David, General Equilibrium Analysis of U.S. Foreign Trade Policy (Cambridge, MA: MIT Press, 1992). Morkre, Morris and David Tarr, "Reforming Hungarian Agricultural Trade Policy, " Wekwirtschaftliches Archiv, 131, 106-131, 1995. Morkre, Morris and David Tarr, Effects of Restrictions on United States Imports: Five Case Studies and 7Theory, Washington D.C.: United States Government Printing Office, 1980. Rutherford, Thomas F., "General Equilibrium Modelling With MPS/GE", Unpublished Monograph, Department of Economics, University of Western Ontario, April 1989. Rutherford, Thomas F., "Extensions of GAMS For Complementarity and Variational Problems Arising in Applied Economics", Economics Working Paper 92-9, Department of Economics, University of Colorado at Boulder, 1992. Rutherford, Thomas F., E. Rutstrom, and David G. Tarr, "L'Accord de Libre Echange entre le Maroc et la CEE: Une Evaluation Quantitative, " Revue d'Economie du Developpement, L 1994, 97-133. 21 Rutherford, Thomas and David Tarr, "Blueprints, Spillovers and the Dynamic Gains from Trade Liberalization in a Small Open Economy," in Richard Baldwin and Joseph Francois (eds.), Dynamic Issues in Applied Commercial Policy Analysis, Cambridge University Press, forthcoming. Tarr, David and Morris Morkre, Azgregate Costs to the United States of Tariffs and Ouotas on Impiorts, Washington: U.S. Federal Trade Commission, 1984. Vinals, Jose, "Spain and the EC cum 1992 shock," in Bliss and Macedo, eds., 1990. c:\turkey\cem6.doc March 20, 1996 22 Table 1: Impact of the Customs Union with the European Union on Turkey: Full and Decomposed Effects ACCESS STD TAR RECIP XSB FULL TRD W AGG 904.3 272.9 286.4 1203.0 -75.4 2861.3 182.0 W.AGG% 0.3 0.1 0.1 0.5 1.1 0.1 TWU% 98.7 99.4 124.6 97.7 97.6 116.2 99.8 PFX% -3.0 -0.5 3.0 -1.8 1.4 0.5 -0.1 L PROF 1.1 0.1 -0.6 0.4 -0.5 0.4 0.1 L ADMN 1.7 0.2 -0.7 0.6 -0.8 0.4 0.1 LTCLER 0.7 0.1 -0.4 0.5 -0.2 0.7 0.1 L RETL 0.1 0.1 -0.4 0.5 0.4 0.9 0.1 L SRVC 0.5 0.1 -0.5 0.4 0.6 0.1 L AGRC -0.4 0.1 0.6 0.4 0.4 1.4 L PROD 1.3 0.2 -0.9 0.7 -0.7 0.3 0.1 L OTHR 1.5 0.2 -1.0 0.5 -0.8 0.1 K HOM 1.7 0.2 -0.5 0.5 -0.8 0.6 0.1 K AGRC -0.4 0.1 0.4 0.4 0.4 1.2 AGR 0.1 0.1 FRS -1.4 -0.1 -0.6 -0.4 0.6 -1.2 -0.1 FIS 0.1 -1.0 -0.2 0.1 -0.9 COL -0.9 -0.1 -0.6 0.5 0.6 -0.1 CRU -0.2 -1.4 0.3 -1.0 MIN -4.5 -0.6 0.8 2.5 2.2 2.3 -0.2 STO -0.5 0.2 -0.2 MEA 3.8 0.1 1.5 -0.1 -1.4 2.2 CAN -25.6 1.7 45.3 -4.9 27.1 47.7 0.5 VEG -4.2 -0.4 1.6 1.7 2.2 2.7 -0.1 GRN -1.6 -0.4 0.3 1.0 0.2 SUG -1.5 -0.1 -0.7 -0.2 1.0 -0.8 -0.1 OFP -2.2 0.1 0.9 0.1 1.5 1.6 ALC -5.8 -9.3 1.1 2.8 -8.3 BEV -3.0 -4.5 0.8 2.3 -3.2 TOB -1.4 -6.6 0.7 1.4 -4.9 TXT 11.7 0.6 6.6 -2.5 -10.0 2.2 0.2 WAP 57.9 1.1 9.4 -3.5 -19.1 18.6 0.3 LEA 22.3 0.3 8.1 -1.8 -11.4 6.9 SHO -2.1 -0.1 -0.5 0.8 0.3 -0.6 WOO -0.8 -0.8 0.1 0.4 -0.9 FRN -1.1 -0.8 0.2 0.5 -0.7 PAP -2.1 -0.1 -2.1 0.2 1.0 -2.3 PRN -0.9 0.1 -1.5 0.5 0.8 -0.3 FRT -2.4 -0.2 4.0 -0.3 -0.7 1.5 DRG -3.3 -0.3 0.6 0.5 1.7 0.5 -0.1 OCP -3.8 -0.2 -0.7 0.4 -0.1 -2.5 -0.1 REF -0.2 0.1 -2.6 0.4 0.1 -1.7 PET -0.9 -0.9 0.4 0.4 -0.4 RBR -1.3 -0.1 -0.8 0.2 0.4 -0.9 PLA -1.6 0.1 0.8 0.6 0.7 1.2 0.1 GLA -5.1 2.2 0.6 -0.8 -1.0 CEM -0.5 0.1 0.2 NMM -2.0 -0.1 -3.7 -0.3 0.2 -5.0 -0.1 IRO -4.3 -0.6 0.6 3.4 2.1 3.0 -0.2 NFM -3.4 -0.1 -0.5 1.2 -1.6 -2.6 FAB -1.6 -1.5 0.7 0.4 -1.3 MAC -1.2 -0.1 0.4 0.5 0.1 0.4 AGM -0.3 -0.5 0.1 -0.5 ELM -2.6 -2.0 0.2 -1.4 -4.3 SHP -5.5 -0.5 4.2 1.6 0.9 2.8 -0.1 RRE -0.4 -0.1 -0.1 0.2 -0.2 VEH -2.8 -0.2 -13.0 -0.2 1.5 -13.2 -0.1 OTE -2.2 -0.2 0.3 -0.7 0.3 -1.4 -0.1 OMN 0.3 0.3 -3.4 1.5 -0.2 -1.3 0.2 ELE -0.1 0.2 -0.3 -0.1 GAS -0.5 0.1 0.3 0.1 CON 0.1 -0.1 0.1 0.1 TRD -1.0 -0.1 -0.2 0.8 -0.1 RES -4.3 -0.1 0.9 0.3 2.6 1.1 TRN -0.5 0.2 0.3 0.3 COM -0.6 -1.6 0.2 0.7 -1.0 FIN 0.1 0.1 0.1 SRV -0.6 -0.1 -0.1 0.3 -0.3 Source: Model Estimates 23 Table 2: Impact of Unilateral Turkish Policy Choices to Optimize Customs Union Implementation FULL AGLIB XSB0 SECOND FIRST W AGG 2861.3 2958.7 3246.6 3639.7 4027.7 W AGG% 1.1 1.1 1.2 1.4 1.5 TAU% 116.2 118.4 109.1 174.9 12.8 PFX% 0.5 0.8 2.8 2.3 4.2 L_PROF 0.4 0.4 0.7 -4.2 -3.9 LJADMN 0.4 0.5 -0.2 -7.6 -4.7 L CLER 0.7 0.7 1.0 -5.2 -4.3 L RETL 0.9 1.0 2.5 -6.2 -5.4 L-SRVC 0.6 0.6 1.4 -4.9 -5.1 LJAGRC 1.4 1.4 0.8 -3.9 -13.5 LPROD 0.3 0.4 -0.6 -8.7 -4.6 LOTHR 0.1 -0.5 -7.4 -4.6 K HOM 0.6 0.7 0.6 -6.3 -4.6 KCAGRC 1.2 1.2 0.7 -3.8 -12.4 AGR 0.1 0.1 -0.2 -0.4 FRS -1.2 -1.3 -0.4 3.5 0.9 FIS -0.9 -0.9 -0.3 4.8 4.4 COL -0.1 -0.2 -2.1 -3.3 -2.4 CRU -1.0 -1.2 -1.5 -3.6 2.4 MIN 2.3 2.2 -11.0 -12.2 -7.7 STO -0.2 -0.2 -0.5 -0.3 -0.3 MEA 2.2 3.6 -1.5 5.8 0.3 CAN 47.7 57.0 -26.1 -17.0 -18.8 VEG 2.7 3.1 -2.0 4.7 -4.0 GRN 0.2 0.5 0.9 3.6 2.1 SUG -0.8 -2.2 0.8 -18.5 -17.1 OFP 1.6 3.1 2.2 8.8 3.4 ALC -8.3 -9.0 -4.9 -51.1 -25.1 BEV -3.2 -3.1 -3.3 -7.8 16.8 TOB -4.9 -5.5 -2.7 -52.5 -29.5 TXT 2.2 2.7 4.0 14.9 9.1 WAP 18.6 19.8 20.7 45.3 28.0 LEA 6.9 8.2 3.3 18.9 6.7 SHO -0.6 -0.6 -2.5 1.0 -4.2 WOO -0.9 -1.0 -0.9 1.5 -1.8 FRN -0.7 -0.9 -0.6 1.4 -0.4 PAP -2.3 -2.4 -3.7 -5.3 -2.6 PRN -0.3 -0.8 0.4 -1.9 11.5 FRT 1.5 1.6 -2.0 -3.3 -4.2 DRG 0.5 0.3 -0.5 5.9 -4.8 OCP -2.5 -2.6 -6.7 -5.2 -7.9 REF -1.7 -1.9 -2.2 -7.3 2.9 PET -0.4 -0.5 -0.3 -3.1 -1.4 RBR -0.9 -1.0 -1.1 0.8 -2.3 PLA 1.2 1.2 -1.2 0.3 0.8 GLA -1.0 -1.1 -4.8 -1.8 -7.1 CEM -0.3 -1.0 -0.2 NMM -5.0 -5.1 -4.6 -4.7 -3.9 IRO 3.0 2.9 -12.8 -14.3 -9.4 NFM -2.6 -2.8 -8.8 -10.4 -0.7 FAB -1.3 -1.4 -3.1 -0.9 -2.9 MAC 0.4 0.3 -1.3 -0.4 -1.8 AGM -0.5 -0.5 -0.7 -1.5 -0.6 ELM -4.3 -4.5 -5.6 -6.8 0.6 SHP 2.8 2.9 -2.3 1.2 -3.1 RRE -0.2 -0.2 -0.5 -0.4 VEH -13.2 -13.5 -11.4 -19.2 8.7 OTE -1.4 -1.4 -0.5 -2.2 3.9 OMN -1.3 -1.8 -1.5 -6.7 19.2 ELE -0.1 -0.1 -1.4 -1.4 0.3 GAS 0.1 0.1 0.5 2.2 -1.2 CON 0.1 0.1 0.1 -0.9 0.3 TRD -0.1 -0.2 0.9 -1.0 -2.3 RES 1.1 1.4 4.4 6.5 5.4 TRN 0.3 0.3 0.7 1.0 COM -1.0 -1.3 -1.9 8.9 FIN 0.1 0.1 0.1 -0.4 0.7 SRV -0.3 -0.3 0.2 2.4 0.5 Source: Model Estimates 24 Appendix: Model Documentation 1. General Model Structure Our Small Open Economy (SOE) model is designed for trade policy analysis with a large number of sectors. The model is a "generic" general equilibrium model of a single economy along the lines of de Melo and Tarr [1992], Harrison, Rutherford and Tarr [1993] and Rutherford, Rutstr6m and Tarr [1994]. We describe here the general features of the base model, adding details about the 1990 version for Turkey later. Goods are produced using primary factors and intermediate inputs. Primary factors include eight types of labor and five types of capital.' It is common to assume in the "short run" that factors are likely to be sector-specific, and in the "long-run" that factors tend to be mobile across sectors. We would expect a short run model of his kind to generate smaller welfare gains from liberalization, since resources are constrained in their ability to reallocate to more productive uses. On the other hand, we would expect the short run model to exhibit less extreme changes in production structure since the sector-specificity of factors generates less elastic supply schedules. We also recognize that some factors are likely to be specific to one or other sectors even in the long run. An obvious example might be the natural resources used in mining. Production exhibits constant returns to scale and individual firms behave competitively, selecting output levels such that marginal cost at those output levels equals the given market price. Output is differentiated between goods destined for the domestic and export markets. Exports are further distinguished according to whether they are destined for the EU or the Rest The specific types are discussed below. A-1 Of the World (ROW). This relationship is characterized by a two-level constant elasticity of transformation frontier. Composite output is an aggregate of domestic output and composite exports; composite exports are aggregates of exports for the EU and ROW markets. Final demand by private households arises from nested constant elasticity of substitution (CES) utility functions. This allows consumer decision-making to occur in the form of multi- stage budgeting. At the top level goods from different sectors compete subject to the budget constraint of the consumer, and all income elasticities are unity. In the second stage the consumer decides how much to spend on domestic or imported goods in each sector, subject to income allocated to spending in that sector in the first stage. Finally, having decided how much to spend on imports as a whole, the consumer allocates this expenditure on EU and ROW imports. Each allocation decision is modelled as a CES function. The model allows tariff rates to differ depending on whether the imports are from the EU or the ROW. Exports can be sold at different prices depending on whether they are destined for EU or ROW markets. The same is possible on the import side. These distinctions allow us to study policy options from Turkey's trade negotiations with the EU that result in improved market access for Turkish exporters or for EU exporters to Turkey. Government expenditures and investment demand are exogenous. Funding of government expenditures is provided by tax revenues and tariff revenues. In addition to tariffs, the government also derives income from indirect taxes (net of subsidies). These are modelled as Value Added Taxes (VAT). We also allow for a special tax to be levied on the consumption of a specified set of consumer goods. In early debates over the need to replace lost revenues, this consumer tax was A-2 proposed by the Turkish authorities as the device to be used to ensure that there is no net revenue impact from the CU. Since the expectation is that tariff revenues will decline, all other things being equal we would expect this tax to have to be positive to ensure revenue neutrality. Our model solves explicitly for the level of this tax required for this to be so, taking into account changes in "all other things". Since private consumption equals the income from primary factors plus net transfers to the consumer by the government (from domestic and foreign trade taxes), Walras law is satisfied. Public consumption is balanced with revenue. World market import and export prices are fixed, so there are no endogenous changes in the terms of trade. In other words, import supplies and export demands are infinitely elastic at given world prices. The current account balances the value of exports and imports taking into account exogenously-fixed capital inflows. Our model allows for changes in these fixed world prices, such as might be expected to occur after the Uruguay Round reforms have been implemented (see Harrison, Rutherford and Tarr [1995]). 2. Empirical Implementation for Turkey We employ a 1990 Social Accounting Matrix (SAM) for Turkey, due to De Santis and Ozhan [1994], which distinguishes 54 production sectors, 8 types of labor, 5 types of capital, and 40 households differentiated by rural or urban residence and income level. This SAM provides a consistent set of relationships showing intermediate, final demand, value added and foreign transactions. A-3 We also employ some ancillary data on production subsidies from the 1990 Input-Output (IO) table provided by the State Institute of Statistics [19941.2 Import tariffs and export subsidies are calibrated to collected rates in 1993, the most recent year for which we have consistent data. We also use estimates of collected VAT rates for 1990. Table Al lists the names of our 54 production sectors, along with a 3-letter acronym that we will use throughout. This level of disaggregation provides excellent detail on the effects of tax and subsidy distortions, although there is some aggregation in the area of transportation sectors (TRN) which would be useful to have given the level and variation of SOE activity.3 Table A2 lists the names of the primary factors of production identified in the SAM, along with the acronym to be used for each. Some of the occupational distinctions (e.g., L_PROF and L_ADMN) are likely to be important for understanding the impacts of reforms on the distribution of welfare across household types to the extent that we expect some correlation between household income levels and occupation. In Table A2b, we list the percent of value- added in the sector that is accounted for by the specific labor type. If we sum across a row in Table A2a, we have the percent of value-added due to all labor types. The decomposition of labor's share into labor type is derived from De Santis and Ozhan (1994, Table B8). In addition to the Household Labor Force Survey, De Santis and Ozhan used the Census of Population (which provides data on the population according to economic activity and occupation), and the 2 The SAM only report net indirect taxes, whereas the IO table breaks out production subsidies and indirect taxes by sector. I This aggregation is relative to the 64 sectors available in the 10 table. The IO sectors are Railway Transport (#56), Other Land Transport (#57), Water Transport (#58) and Air Transport (#59). By far the largest of these in terms of value added in 1990 was Other Land Transport, with a Gross Value Added (at purchasers prices) of 42.5 billion TKL. Water Transport is next largest, with a value added of only 3.4 billion TKL. On the other hand, Railway Transport receives the largest direct production subsidy of 331 million TKL on a value added of only 457 million TKL. A-4 Table Al: Production Sectors AGR Agriculture and animal husbandry FRS Forestry FIS Fisheries COL Coal mining CRU Crude petroleum and natural gas production MIN Iron ore mining STO Non-ferrous ore & non-metallic mineral mining & stone quarrying MEA Slaughtering preparing & preparing & preserving meat CAN Canning and preserving of fruits and vegetables VEG Manufacture of vegetable and animal oils and fats GRN Grain mill products SUG Sugar OFP Manufacture of other food products ALC Alcoholic beverages BEV Soft drinks and carbonated water industries TOB Tobacco manufactures TXT Textiles (inc. ginning) WAP Wearing apparel LEA Leather and fur products SHO Footwear WOO Wood and wood products FRN Furniture and fixtures PAP Paper and paper products PRN Printing & publishing & paper products FRT Fertilizers DRG Drugs and medicine OCP Other chemical products REF Petroleun refineries PET Petroleum and coal products RBR Rubber products PLA Plastic products GLA Glass and glass products CEM Cement NMM Non-metallic mineral products IRO Iron and steel NFM Non-ferrous metal FAB Fabricated metal products MAC Machinery except electrical AGM Agricultural machinery and equipment ELM Electrical machinery SHP Shipbuilding and repairing RRE Railroad equipment VEH Land transport vehicles and equipment OTE Other transport equipment OMN Other manufacturing industries ELE Electricity GAS Gas manufacture and waterworks CON Building construction and other construction TRD Wholesale and retail trade RES Restaurants and hotels TRN Railway transport & other land & water & air transport COM Communications FIN Financial institutions and insurance SRV Private & public services & ownership of dwellings A-5 Table A2: Factors of Production Labor Types L PROF Scientific, technical, professional and related workers. LADMN Administrative, executive and managerial workers. LCLER CLerical and related workers. LRETL Sales workers. LSRVC Service workers. L AGRC Agricultural, animal husbandry and forestry workers, fisherman and hunters. L PROD Non-agricultural production & related workers, transport equipment operators & laborers. L OTHR Workers not classifiable by occupation. Capital Types K RENT Rent. K_AGRC Operating surplus in agriculture. K PROD Operating surplus in non-agriculture. K_TRAD Operating surplus in trade. K SERV Operating surplus in services. Manufacturing Industry Statistics which indicates the number of people in each manufacturing activity. In Table A2b, we list the percent of value-added by capital type. Some of these types are not very useful for our purposes, since they largely identify factors that are specific to certain groups of sectors. Thus, we aggregate K_RENT, K_PROD, K_TRAD and K_SERV into one homogeneous capital factor which can move across sectors. The factor K_AGRC is free to move across the agricultural sectors in which it is used in the base year, but not to any other sectors. Some explanation may be required for the fact that the Turkish input-output table classifies 91 percent of value-added in agriculture to capital. The reason is that the returns to individuals who operate their own farms are classfied in the Turkish input-output table as a return to the owner as a capitalist, rather than to the owner as a worker. We chose not to alter the input-output data. But since we have classified both capital and labor in agriculture as sector A-6 Table A2a: Percent of Value Added by Labor Type and Sector Sector L PROF L ADMN LCLER LRETL L SRVC L AGRC L PROD L OTHR AGR 1 8 FRS 5 8 1 9 FIS 1 11 COL 9 1 6 3 53 CRU 1 4 MIN 8 1 6 3 50 STO 2 2 1 14 MEA 1 2 1 1 19 CAN 1 2 1 1 19 VEG 1 2 1 1 18 GRN 2 3 2 1 24 SUG 6 8 6 3 75 2 OFP 2 3 2 1 24 1 ALC 2 3 2 1 23 1 BEV 3 4 3 2 37 1 TOB 3 4 3 1 33 1 TXT 1 2 1 1 17 WAP 1 2 1 1 16 LEA 4 SHO 2 2 2 1 21 WOO 1 1 1 9 FRN 1 2 1 1 18 PAP 2 3 2 1 24 1 PRN 2 3 2 1 29 1 FRT 2 4 3 2 34 1 DRG 1 2 1 1 17 OCP 2 2 2 1 20 REF 4 PET 1 2 1 1 19 RBR 2 3 2 1 29 1 PLA 2 2 2 1 20 GLA 2 3 2 1 24 CEM 1 2 1 1 17 NMM 2 3 2 1 25 1 IRO 3 4 3 2 39 1 NFM 1 2 2 1 20 FAB 1 2 1 1 19 MAC 1 2 2 1 20 AGM 2 2 1 1 19 ELM 2 3 2 1 26 1 SHP 3 5 3 2 45 1 RRE 5 7 5 3 66 2 VEH 3 4 3 2 39 1 OTE 3 5 3 2 36 2 OMN 2 3 2 1 27 1 ELE 9 1 13 3 14 GAS 6 1 9 2 10 CON 3 5 2 1 43 TRD 2 3 6 9 2 RES 2 4 10 14 3 TRW 1 2 6 COM 3 2 10 2 35 1 FIN 22 8 29 1 3 2 SRV 28 3 9 9 9 1 Source: CaLculated from De Santis and Ozhan (1994, Table 68). A-7 Table A2b: Value Added by Sector and by Capital Type within Sectors VaLue Added Percent of Value Added by Capital Type Sector Billions of Turkish Lira % K RENT K_AGRC K PROD K_TRAD K SERV AGR 60 17 91 FRS 3 1 77 FIS 2 1 88 COL 2 1 28 CRU 1 95 MIN 32 STO 2 1 81 MEA 1 75 CAN 1 75 VEG 1 76 GRN 1 68 OFP 4 1 68 ALC 2 69 BEV 1 51 TOB 3 1 56 TXT 8 2 77 WAP 3 1 78 LEA 1 94 SHO 72 WOO 3 1 88 FRN 1 76 PAP 2 68 PRN 1 61 FRT 1 55 DRG 2 77 OCP 4 1 73 REF 4 1 95 PET 1 75 RBR 1 61 PLA 1 74 GLA 1 68 CEM 2 1 77 NMM 2 66 IRO 3 1 48 NFM 1 73 FAB 4 1 75 KAC 3 1 74 AGM 1 75 ELM 3 1 66 SHP 41 RRE 12 VEH 4 1 49 OTE 50 OMN 1 64 ELE 7 2 59 GAS 2 71 CON 23 7 45 TRD 58 16 77 RES 9 3 66 TRN 47 13 91 COM 4 1 47 FIN 11 3 35 SRV 54 15 21 20 TOTAL 100 Source: Calculated from De Santis and Ozhan (1994, Table B8). A-8 specific, the impact on our results of a probably excessive share of value-added attributed to capital in agriculture should be minimal. For example, an adverse impact on agricultural sectors will induce a reduction in the price of both labor and capital in agriculture, without a shift of either to non-agricultural sectors. We should, however, be skeptical in interpreting results regarding the relative price of labor and capital in the agricultural sectors. Although the SAM identifies a large number of households, distinguished by income level and location of residence, we choose to aggregate these into one representative household. For the immediate applications of the model, such an aggregation greatly facilitates understanding and exposition of the basic results. The key tax instruments are import tariffs and the value added tax. The key subsidy instruments are export subsidies and production subsidies. These are all represented in the model as fixed ad valorem distortions. One of the challenges of assembling our model was to determine appropriate values for these items. The rates we employ are listed in percentage form, on a net basis, in Table A3. Import tariffs should provide the least difficulty in estimation. Unfortunately, there are major discrepancies between statutory rates on imports and collected rates. This discrepancy is relatively common amongst less developed countries (see Pritchett and Sethi [1994]). However, it is particularly severe in the case of Turkey because of the pervasive use of complex transfer pricing arrangements for SOE imports, as well as the use of duty drawback schemes to provide investment and export incentives. We employ pre-CU tariff rates based on 1993 collections and 1991 import weights. These differ considerably from (unweighted) statutory rates. Our post-CU tariff rates on non-EU A-9 Table A3: Percentage Tax and Subsidy Rates in the Base Model (Net Basis) 1993 Post-CU Import Tariffs 1993 1990 Import ------------------------------- Export 1990 Production Sector Tariffs MFN GSP Average subsidy VAT+ConsTax Subsidy AGR 21 21 21 21 3 1 2 FRS -1 2 FIS 39 39 39 39 5 1 COL 4 2 7 8 3 CRU 17 15 MIN 1 4 STO 3 1 1 1 9 5 MEA 24 24 24 24 13 1 CAN 45 45 45 45 8 3 VEG 4 4 4 4 9 2 GRN 39 39 39 39 5 11 SUG 18 18 18 18 9 15 OFP 52 52 52 52 2 2 ALC 62 11 7 9 6 32 32 BEV 107 15 7 5 37 TOB 81 9 5 11 35 35 TXT 10 21 21 21 8 7 WAP 28 30 30 30 11 4 LEA 2 10 3 7 14 4 SHO 30 23 9 16 9 4 woo 19 2 1 10 2 FRN 22 6 3 5 7 PAP 19 3 1 25 4 PRN 14 5 2 5 28 FRT 1 8 4 24 8 DRG 1 5 3 9 3 OCP 11 9 4 15 2 REF 9 2 1 16 162 PET 4 5 2 29 1 3 RBR 18 6 3 10 1 PLA 24 10 5 5 9 GLA 23 6 3 10 4 CEM 2 3 2 8 3 NMM 18 5 3 9 6 IRO 1 6 3 4 21 9 NFM 4 3 1 2 19 2 FAB 14 6 3 8 4 MAC 6 4 2 8 2 AGM 17 4 2 9 3 ELM 11 8 4 13 16 SHP 3 1 8 2 RRE 5 4 2 1 VEH 27 9 5 7 43 OTE 2 1 14 16 OMN 10 3 1 4 51 ELE 18 1 GAS 1 CON 4 TRD 6 4 RES 6 TRN 2 1 COM 24 FIN 16 SRV 6 Sources: 1993 Import Tariffs are based on collected revenues, estimated by the State Planning Organization (SPO); Post-CU Import Tariffs are estimated by Togan C1996J; 1993 Export Subsidies are World Bank estimates; 1990 VAT rates plus consumption tax rates are based on collected indirect tax revenues, estimated by SPO; 1990 Production Subsidy rates are based on collections reported in the 10 table. countries are based on estimates from Togan [1996], recognizing differences between MFN rates A-10 and GSP rates that Turkey will be required to apply. We take a simple average of the GSP and MFN rates in each sector, reflecting the aggregate share of each group of countries in Turkish imports in recent years. Note that agricultural import tariffs do not change after the CU. Export subsidies are notoriously difficult to estimate in Turkey, because of the complex way in which they are implemented as reductions in other tax obligations. We employ World Bank estimates of these rates for 1993 (see Arslan [19951), although subsequent government decisions indicate that these rates will be much lower in 1995. The VAT rates reported in Table A3 reflect actual collections, using data for 1993 obtained from the State Planning Organization (SPO). There are several reasons for these rates to vary more than one would expect after the CU. Turkey has only employed a VAT for a few years, and administrative problems in uniformly implementing and enforcing the statutory rates cause collection rates to vary across sectors even if statutory rates do not. Some sectors are easier to audit than others, by the nature of their activities (e.g., urban-based versus rural-based, large invoiced transactions versus smaller cash-based transactions, more computerized accounting systems versus more traditional accounting systems). Production subsidies are calculated using data from the 1990 10 table. For tobacco and alcoholic beverages we assume a production subsidy equal to the benchmark consumption tax4 applies. We compute these subsidies as ad valorem rates from the 10 data and transfer these rates to our SAM, re-balancing domestic supply in each sector so as to ensure zero profits. This re-balancing also takes into account our use of data on tariffs, VAT rates and export subsidies from "outside" the original, balanced SAM. 4These taxes are embodied in our benchmark VAT rates. A-11 Estimates of elasticities of substitution must be assumed for primary factor substitution, value added and intermediate input substitution, import demand, detailed import component, import source, and domestic demand; elasticities of transformation must also be assumed for the allocation of domestic supply into domestic and exported markets, the allocation of exports into detailed export components, and the allocation of exports to destination. Despite our literature search, there are many elasticities about which there is considerable uncertainty. Our solution for that problem is to undertake a systematic sensitivity analysis with respect to key elasticities. Harrison and Vinod [1992] and Harrison, Rutherford, and Tarr [1993] demonstrate the role of systematic sensitivity analysis of models such as these with respect to plausible ranges of uncertainty about key elasticities. The base model assumptions with respect to key elasticities are listed in Table A4. These elasticities refer to: * The elasticity of substitution between capital and labor in each sector, ESUB_KL, for which we employ point estimates from Harrison, Rutherford, and Tarr [19931. * Elasticities of substitution between intermediate inputs and the value added composite in each sector, ESUB_10, assumed to be 0 in all sectors reflecting the Leontief tradition for intermediate input substitutability. * Elasticities of substitution between domestic production and an imports composite in each sector, ESUB_DM. In Harrison, Rutherford, and Tarr [1993] we employed a common value of 2 across all sectors. Here we assume elasticity values documented in Harrison, Jones, Kimbell and Wigle [1992] and Harrison, Rutherford and Wooton [1991]. A-12 Table A4: Base Model Elasticities for Each Sector Sector ESUB KL ESUBIO ESUB_DM ESUB G ESUB MM ETRN DX ETRN G ETRN_XX AGR 0.94 0.0 2.00 2.00 5.00 2.90 2.00 5.00 FRS 0.94 0.0 2.00 2.00 5.00 2.90 2.00 5.00 FIS 0.94 0.0 2.00 2.00 5.00 2.90 2.00 5.00 CFL 0.43 0.0 0.50 2.00 5.00 2.90 2.00 5.00 CRU 0.43 0.0 2.00 5.00 2.90 2.00 5.00 CRN 0.43 0.0 0.50 2.00 5.00 2.90 2.00 5.00 STO 0.43 0.0 2.00 2.00 5.00 2.90 2.00 5.00 MEA 0.94 0.0 0.50 2.00 5.00 2.90 2.00 5.00 CAN 0.94 0.0 1.10 2.00 5.00 2.90 2.00 5.00 YEG 0.94 0.0 1.70 2.00 5.00 2.90 2.00 5.00 GRN 0.94 0.0 2.10 2.00 5.00 2.90 2.00 5.00 SUG 0.94 0.0 2.00 2.00 5.00 2.90 2.00 5.00 OFP 0.94 0.0 0.50 2.00 5.00 2.90 2.00 5.00 ALC 0.94 0.0 2.10 2.00 5.00 2.90 2.00 5.00 BEV 0.94 0.0 2.00 2.00 5.00 2.90 2.00 5.00 TOB 0.84 0.0 2.00 2.00 5.00 2.90 2.00 5.00 TXT 0.93 0.0 2.00 2.00 5.00 2.90 2.00 5.00 WAP 0.93 0.0 3.40 2.00 5.00 2.90 2.00 5.00 LEA 0.75 0.0 2.00 2.00 5.00 2.90 2.00 5.00 SHO 0.93 0.0 6.80 2.00 5.00 2.90 2.00 5.00 WOO 0.74 0.0 2.00 2.00 5.00 2.90 2.00 5.00 FRN 0.74 0.0 1.90 2.00 5.00 2.90 2.00 5.00 PAP 1.09 0.0 1.10 2.00 5.00 2.90 2.00 5.00 PRU 1.09 0.0 2.00 2.00 5.00 2.90 2.00 5.00 FRT 1.01 0.0 1.40 2.00 5.00 2.90 2.00 5.00 FRG 1.01 0.0 2.00 2.00 5.00 2.90 2.00 5.00 OCP 1.01 0.0 1.80 2.00 5.00 2.90 2.00 5.00 REF 0.29 0.0 0.34 2.00 5.00 2.90 2.00 5.00 PET 0.29 0.0 0.34 2.00 5.00 2.90 2.00 5.00 RBR 0.97 0.0 1.30 2.00 5.00 2.90 2.00 5.00 PLA 0.97 0.0 1.30 2.00 5.00 2.90 2.00 5.00 GLA 0.96 0.0 1.40 2.00 5.00 2.90 2.00 5.00 CEM 0.96 0.0 0.80 2.00 5.00 2.90 2.00 5.00 NMM 0.43 0.0 2.00 2.00 5.00 2.90 2.00 5.00 IRO 0.91 0.0 0.50 2.00 5.00 2.90 2.00 5.00 NFM 0.91 0.0 0.50 2.00 5.00 2.90 2.00 5.00 FAB 0.91 0.0 1.50 2.00 5.00 2.90 2.00 5.00 MAC 1.20 0.0 0.50 2.00 5.00 2.90 2.00 5.00 MACM 1.20 0.0 0.50 2.00 5.00 2.90 2.00 5.00 ELM 0.98 0.0 1.30 2.00 5.00 2.90 2.00 5.00 SHP 1.88 0.0 0.50 2.00 5.00 2.90 2.00 5.00 RRE 1.88 0.0 0.50 2.00 5.00 2.90 2.00 5.00 VEH 1.88 0.0 2.00 2.00 5.00 2.90 2.00 5.00 OTE 1.88 0.0 0.50 2.00 5.00 2.90 2.00 5.00 ONN 1.19 0.0 1.20 2.00 5.00 2.90 2.00 5.00 ELE 1.88 0.0 2.00 2.00 5.00 2.90 2.00 5.00 GAS 1.88 0.0 2.00 2.00 5.00 2.90 2.00 5.00 CON 1.99 0.0 2.00 2.00 5.00 2.90 2.00 5.00 TRO 1.28 0.0 2.00 2.00 5.00 2.90 2.00 5.00 RES 3.12 0.0 2.00 2.00 5.00 2.90 2.00 5.00 TRN 1.88 0.0 2.00 2.00 5.00 2.90 2.00 5.00 CON 1.99 0.0 2.00 2.00 5.00 2.90 2.00 5.00 FIN 2.05 0.0 2.00 2.00 5.00 2.90 2.00 5.00 SRV 1.99 0.0 2.00 2.00 5.00 2.90 2.00 5.00 A-13 * The elasticity of substitution between detailed import components, ESUB_G, assumed to be 2. * The elasticity of substitution for detailed imports distinguished by source, ESUB_MM, assumed to be 5 across all sectors. * The elasticity of substitution between the domestic consumption of each good, ESUBC, assumed to approximately 1.5. * The elasticity of transformation of domestic production into domestic uses and export, ETRN_DX, assumed to be 2.9 across all sectors following the estimates for Turkey by Faini [1988]. - The elasticity of transformation between detailed export components, ETRN G, assumed to be 2. ? The elasticity of transformation between regional destinations, ETRN_XX, assumed to be 5 across all sectors. These elasticity values reflect our best guesses based on past experience and the available data. Our sensitivity analysis with respect to these elasticities employs a number of assumptions as to their likely range of variation. These assumptions are based partly on available econometric estimates of standard errors, and largely on a priori judgement. Specifically, we assume: * ESUB_KL is distributed normally, with a mean equal to the point estimate assumed in the base model and a standard deviation from Harrison, Rutherford, and Tarr [1993]. * ESUB_10 is distributed uniformly between 0 and 0.5 in all sectors. * ESUB_DM is distributed uniformly, with a range equal to the point estimate assumed above plus or minus 50% of that point estimate. A-14 * ESUB_G is distributed uniformly between 1 and 3. * ESUB_MM is distributed uniformly between 4 and 6. * ESUBC is distributed uniformly, with a range equal to the point estimate assumed above plus or minus 50% of that point estimate. * ETRN_DX is distributed normally, with a mean equal to the point estimate assumed in the base model (2.9) and a standard deviation of 1.3 from Faini [1988]. * ETRN_G is distributed uniformly between 1 and 3. * ETRN_XX is distributed uniformly between 4 and 6. In all cases we assume that elasticities generated by random perturbation must be non-negative, resulting in some truncation at zero for those generated assuming a normal distribution. Additional tables of basic data employed in the model or calculated from our benchmark data are presented at the end of this appendix. The SOE model is generated with the GAMS/MPSGE software developed by Brooke, Kendrick and Meeraus [1992] and Rutherford [1992a][1992b]. It is then solved using the MILES algorithm developed by Rutherford [1993]. 3. Systematic Sensitivity Analysis To calibrate our model estimates of elasticities must be assembled for primary factor substitution, import demand, import source, and domestic demand, amongst the more important for our purposes. In the base model all elasticity values are assigned a priori to values which we believe are plausible central tendency estimates. Since elasticity estimates are subject to a margin of error, our "remedy" for this problem, which is endemic to any large-scale model of this kind, is to undertake systematic sensitivity analyses of our major results with respect to A-15 plausible bounds on these elasticities. Even if we are unable to specify a point estimate with any precision, our priors over the likely bounds that these elasticities could take are quite strong. To the extent that our major conclusions are robust to perturbations over these bounds, we do not see our uncertainty over specific values of these elasticities as a weakness of the model.5 Our sensitivity analysis employs the procedures developed by Harrison and Vinod [19921. Essentially these procedures amount to a Monte Carlo simulation exercise in which a wide range of elasticities are independently and simultaneously perturbed from their benchmark values. These perturbations follow prescribed distributions, such as a t distribution with a specified standard deviation and degrees of freedom, or a uniform distribution over a specified range. For each Monte Carlo run we solve the counter-factual policy with the selected set of elasticities. This process is repeated until we arrive at the desired sample size, in our case 1000. The results are then tabulated as a distribution, with equal weight being given (by construction) to each Monte Carlo run. The upshot is a probability distribution defined over the endogenous variables of interest. In our case we focus solely on the welfare impacts of the FULL CU scenario. TIhe sensitivity analysis we undertake reflects a diffuse set of priors over the plausible elasticity values. The specific assumptions made are set out in an appendix. If we find that these 5 These rmarlks should not be interpreted as denying the value of any new empirical work on generating such elasticities. On the contrary, any effort that could generate better bounds on these point estimates is useful in generating policy conclusions that carry greater credibility, even if those conclusions will still be probabilistic in nature. Moreover, we do not consider sensitivity analysis with respect to more general functional forms, even though we share concerns with the restrictiveness of some of the popular forms we employ. A-16 wide ranges result in fragile inferences about welfare or revenue effects, then the next step would be to employ data-based priors about plausible ranges.6 The results for the FULL scenario, in which the VAT is used as a replacement tax, are reported in Table A5 after 5000 Monte Carlo runs. The variables reported, apart from the percent welfare effect and summary variables for the tax change and exchange rate, include the percentage change in value added in each sector. These results indicate that the overall conclusions we have drawn are not fragile to the assumptions made about underlying elasticities, although some of the sectoral impacts are. Welfare impacts range from 0.8% up to 1.2%, and the change in the replacement tax ranges from 13 % up to 20%. These do not appear to be large variations, relative to the main theme of our analysis. Given that there is some variation in the individual sectoral impacts, and relatively little variation in the overall welfare or revenue impacts, these results also indicate some caution in using a model such as this one to predict specific "winners" and "losers". Despite this uncertainty, the basic conclusions as to welfare and revenue effects are robust. 6 This data-based method was employed, for example, in Harrison, Rutherford and Tarr [1993]. Harrison, Jones, Kimbell and Wigle [19931 advocated it as a means of minimizin the chance of overly fragile results from such sensidvity analyses. A-17 Table AS: Results of Sensitivity Analysis Measure Mean Std. Dev. Skew. Kurt. Miniunu Maximun Cases W AGG 2614.3 201.12 -0.023 2.165 2070. 3132. 5000 W AGGX 0.99720 0.81814E-01 -0.021 2.209 0.8000 1.200 5000 TAUX 115.38 0.69745 0.245 3.407 113.3 120.3 5000 PFX% -0.95140E-01 0.36141 0.299 3.132 -1.300 1.700 5000 AGR 0.10340 0.33417E-01 0.605 8.740 0.0000 0.2000 5000 FRS -1.4767 0.40126 -0.190 2.876 -3.100 -0.2000 5000 FIS 0.87138 0.25102 -4.201 43.360 -3.200 1.500 5000 COL 0.96494 0.38366 0.106 3.395 -1.100 2.400 5000 CRU -0.24440E-01 0.16025 -0.511 3.715 -0.9000 0.5000 5000 MIN 2.2560 1.5492 0.211 2.994 -2.200 8.200 5000 STO -0.79240E-01 0.75034E-01 -0.260 3.257 -0.4000 0.2000 5000 MEA 2.1384 0.65966 -0.007 2.917 -0.2000 4.500 5000 CAN 23.163 11.941 1.058 6.875 -0.6000 142.6 5000 VEG 3.2869 1.0868 0.493 3.361 0.5000 8.600 5000 GRN 1.7521 0.46402 -0.340 7.714 -3.500 3.400 5000 SUG 0.40598 0.55279 -0.243 4.052 -4.400 2.200 5000 OFP 2.3623 0.60378 0.372 3.436 -1.100 4.800 5000 ALC -9.4629 3.9955 -0.242 1.934 -18.60 -2.200 5000 BEV -4.4299 2.7239 -0.377 2.022 -10.90 0.5000 5000 TOB -33.654 10.943 0.248 2.845 -52.50 45.40 5000 TXT 1.8865 1.2233 0.074 2.854 -2.000 6.100 5000 WAP 9.8477 6.2739 0.003 2.871 -7.900 36.30 5000 LEA 2.5946 2.8435 0.077 2.921 -6.200 14.90 5000 SHO -0.88300 0.82398 -0.079 2.124 -2.800 1.400 5000 WOO -0.30728 0.36078 -0.057 2.490 -2.100 0.7000 5000 FRN -0.45072 0.40409 -0.179 2.508 -3.200 0.5000 5000 PAP -3.9090 1.2668 0.038 2.288 -7.100 0.8000 5000 PRN -0.84486 0.55648 -0.048 2.479 -3.300 0.6000 5000 FRT 2.1185 0.83111 0.248 2.912 -0.3000 5.200 5000 DRG 1.9487 0.58888 0.230 5.249 -3.400 5.000 5000 OCP -5.3812 2.0774 -0.004 2.166 -10.60 4.000 5000 REF -2.1000 0.75504 -0.316 3.672 -8.400 -0.2000 5000 PET 1.1451 0.35965 -0.529 8.252 -3.000 2.400 5000 RBR -1.3091 0.92979 -0.084 2.216 -3.900 1.200 5000 PLA -2.3164 1.2241 0.212 3.034 -5.400 5.400 5000 GLA -2.9574 1.2523 -0.055 2.374 -7.100 1.200 5000 CEM 0.16964 0.13782 0.481 3.391 -0.2000 0.8000 5000 NMM -4.6632 1.6472 -0.095 1.904 -8.400 -1.300 5000 IRO 2.9949 2.1176 0.166 2.876 -2.500 10.60 5000 NFM -2.8915 0.70456 0.023 2.997 -5.300 0.0000 5000 FAB -2.3216 0.85136 -0.070 2.103 -4.500 0.1000 5000 MAC -0.51118 0.48827 0.086 2.815 -1.900 1.400 5000 AGN -0.35402 0.26375 -0.049 2.497 -1.300 0.4000 5000 ELM -5.3718 1.4792 -0.026 2.108 -9.400 -1.700 5000 SHP 4.5309 2.2082 0.629 3.618 -0.4000 15.40 5000 RRE 0.39572 0.17126 -0.023 3.093 -0.5000 1.000 5000 VEH -15.763 4.5986 0.019 1.861 -25.00 -2.600 5000 OTE -0.80694 0.38975 -0.283 3.113 -2.600 0.5000 5000 OMN -3.7645 1.2664 -0.066 2.230 -7.100 0.0000 5000 ELE -0.24380E-01 0.19959 0.159 2.997 -0.7000 0.8000 5000 GAS 0.70026 0.10229 -0.896 9.405 -0.3000 1.000 5000 CON 0.21296 0.53559E-01 -0.178 5.199 -0.2000 0.4000 5000 TRD 1.1038 0.23436 -1.054 11.169 -1.600 2.100 5000 RES 2.2249 0.67432 0.405 3.273 -0.4000 5.100 5000 TRN 0.66956 0.12665 0.031 3.946 -0.1000 1.100 5000 COM 0.38418 0.25133 -5.723 97.936 -5.700 0.9000 5000 FIN 0.25342 0.10693 -0.217 3.741 -0.3000 0.6000 5000 SRV 0.51508 0.12464 -2.665 35.120 -1.700 0.9000 5000 A-18 TABLE A6: THE COST STRUCTURE OF DOMESTIC PRODUCTION OUTPUT : TOTAL PRODUCTION -- BILLIONS OF TL (1990) INTERM : INTERMEDIATE INPUTS -- BILLIONS OF TL (1990) LABOR TOTAL PAYMENTS -- BILLIONS OF TL (1990) CAPITAL TOTAL PAYMENTS -- BILLIONS OF TL (1990) K/L RATIO OF CAPITAL EARNINGS TO LABOR EARNINGS K/VA RATIO OF CAPITAL PAYMENTS TO VALUE ADDED --X VA/GDP RATIO OF VALUE ADDED TO ECONOMY-WIDE GDP -- X OUTPUT INTERM LABOR CAPITAL K/L K/VA VA/GDP AGR 89.0 30.0 5.8 55.1 9.5 90.5 16.9 FRS 3.4 0.5 0.7 2.3 3.4 77.3 0.8 FIS 2.6 0.5 0.2 1.9 7.7 88.5 0.6 COL 2.8 0.8 1.5 0.6 0.4 27.7 0.5 CRU 1.9 0.3 0.1 1.5 18.5 94.9 0.4 MIN 0.2 0.1 0.1 0.0 0.5 31.6 0.0 STO 3.1 0.6 0.5 2.0 4.3 81.0 0.7 MEA 3.3 2.6 0.2 0.5 3.0 75.3 0.2 CAN 2.1 1.5 0.2 0.5 3.0 75.1 0.2 VEG 4.0 2.9 0.3 0.8 3.2 76.3 0.3 GRN 6.1 5.2 0.3 0.6 2.2 68.5 0.2 SUG 2.8 2.7 0.5 0.1 OFP 17.9 13.6 1.4 2.9 2.1 67.9 1.2 ALC 2.8 0.7 0.7 1.4 2.2 68.9 0.4 BEV 1.5 0.7 0.4 0.4 1.0 50.8 0.2 TOB 5.9 2.5 1.5 1.9 1.2 55.5 0.7 TXT 27.6 18.6 2.1 6.9 3.4 77.1 2.4 WAP 10.6 7.5 0.7 2.5 3.6 78.4 0.8 LEA 2.4 1.5 0.1 0.8 15.6 94.0 0.2 SHO 1.7 1.2 0.1 0.3 2.6 72.3 0.1 WOO 8.2 5.3 0.4 2.6 7.3 87.9 0.8 FRN 2.3 1.6 0.2 0.5 3.2 75.9 0.2 PAP 5.0 3.3 0.5 1.1 2.1 67.8 0.5 PRN 3.3 2.1 0.5 0.7 1.6 61.5 0.3 FRT 2.0 1.5 0.3 0.3 1.2 55.1 0.1 DRG 3.8 2.1 0.4 1.3 3.3 76.8 0.4 OCP 12.6 8.0 1.2 3.3 2.7 72.9 1.3 REF 22.5 11.0 0.6 10.9 19.6 95.1 1.2 PET 2.1 1.6 0.2 0.5 3.0 74.7 0.2 RBR 4.9 3.5 0.6 0.9 1.6 61.0 0.4 PLA 2.8 2.0 0.2 0.6 2.8 73.9 0.2 GLA 2.3 1.1 0.4 0.9 2.1 67.7 0.3 CEM 4.7 2.2 0.6 1.9 3.4 77.4 0.7 NMM 3.7 1.8 0.6 1.2 1.9 66.1 0.5 IRO 16.1 12.8 1.7 1.6 0.9 48.1 0.8 NFM 4.8 3.2 0.4 1.1 2.8 73.4 0.4 FAB 9.6 5.9 1.0 2.8 3.0 74.9 1.0 MAC 7.5 4.3 0.8 2.3 2.8 73.8 0.9 AGM 1.9 1.3 0.2 0.5 3.0 75.2 0.2 ELM 9.5 5.8 1.3 2.4 1.9 65.7 0.9 SHP 0.5 0.3 0.1 0.1 0.7 41.0 0.1 RRE 0.3 0.1 0.2 0.0 0.1 11.9 0.0 VEH 12.5 7.3 2.6 2.5 1.0 48.8 1.0 OTE 0.1 0.0 0.0 0.0 1.0 50.0 0.0 OMN 5.4 3.5 0.7 1.2 1.8 64.4 0.4 ELE 10.7 2.9 3.2 4.7 1.5 59.2 1.9 GAS 2.4 0.8 0.5 1.2 2.5 71.3 0.5 CON 57.0 32.7 13.4 10.9 0.8 44.9 6.5 TRD 72.8 15.0 13.9 47.2 3.4 77.3 16.1 RES 21.2 11.2 3.4 6.6 1.9 65.8 2.6 TRN 76.1 28.6 4.5 43.8 9.8 90.7 13.3 COM 6.8 1.9 2.6 2.3 0.9 47.1 1.1 FIN 16.1 3.1 8.5 4.5 0.5 34.7 3.1 SRV 67.0 9.6 33.6 23.7 0.7 41.3 15.1 A-19 TABLE A7: PRODUCTION AND TRADE OUTPUT TOTAL PRODUCTION -- BILLIONS OF TL (1990) DOMEST PRODUCTION FOR DOMESTIC MARKET -- BILLIONS OF TL (1990) EXPORT PRODUCTION FOR EXPORT MARKETS -- BILLIONS OF TL (1990) IMPORT TOTAL VALUE OF IMPORTS -- BILLIONS OF TL (1990) M/(M+D) : IMPORT SHARE OF DOMESTIC DEMAND -- X X/(X+D) : EXPORT SHARE OF DOMESTIC OUTPUT -- % OUTPUT DONEST EXPORT IMPORT M/(M+D) X/(X+D) AGR 89.0 86.5 2.5 2.6 2.9 2.8 FRS 3.4 3.4 0.0 0.5 12.4 0.8 FIS 2.6 2.5 0.1 0.0 0.5 3.7 COL 2.8 2.8 0.0 0.8 23.1 0.0 CRU 1.9 1.9 0.0 9.9 84.3 0.3 MIN 0.2 0.2 0.2 51.9 STO 3.1 2.5 0.6 0.3 10.9 18.0 MEA 3.3 3.0 0.3 0.5 15.0 8.9 CAN 2.1 0.5 1.6 0.1 10.1 76.5 VEG 4.0 3.5 0.5 0.8 19.0 12.0 GRN 6.1 5.9 0.2 0.2 3.5 2.9 SUG 2.8 2.8 0.0 0.9 23.7 0.3 OFP 17.9 15.6 2.3 0.8 4.8 12.7 ALC 2.8 2.4 0.3 0.2 6.5 12.1 BEV 1.5 1.4 0.1 0.0 2.6 7.0 TOB 5.9 5.8 0.1 1.9 24.6 2.1 TXT 27.6 20.9 6.7 2.4 10.4 24.3 WAP 10.6 5.3 5.3 0.6 10.0 50.2 LEA 2.4 1.9 0.5 0.5 20.7 19.0 SHO 1.7 1.6 0.1 0.1 4.0 5.7 WOO 8.2 8.1 0.1 0.2 2.0 0.9 FRN 2.3 2.2 0.1 0.1 2.4 2.7 PAP 5.0 4.8 0.1 1.0 17.5 3.0 PRN 3.3 3.2 0.1 0.1 3.9 1.6 FRT 2.0 1.8 0.2 0.8 30.1 10.1 DRG 3.8 3.6 0.2 0.9 20.0 4.8 OCP 12.6 11.2 1.4 8.8 44.2 11.5 REF 22.5 21.6 0.9 3.4 13.7 3.9 PET 2.1 2.1 0.0 0.2 10.1 0.9 RBR 4.9 4.8 0.2 0.6 11.5 3.5 PLA 2.8 2.7 0.1 0.4 12.2 4.3 GLA 2.3 1.9 0.5 0.2 11.6 19.4 CEM 4.7 4.5 0.2 0.1 2.8 3.6 NMM 3.7 3.5 0.2 0.6 14.5 6.1 IRO 16.1 12.8 3.3 4.9 27.6 20.7 NFM 4.8 4.1 0.7 5.4 57.1 14.0 FAB 9.6 9.2 0.4 1.4 13.3 4.4 MAC 7.5 7.0 0.4 10.6 60.2 6.0 AGM 1.9 1.9 0.0 0.2 8.0 1.3 ELM 9.5 8.5 0.9 5.6 39.8 9.9 SHP 0.5 0.3 0.1 0.6 63.0 29.3 RRE 0.3 0.3 0.1 17.5 VEH 12.5 12.0 0.5 5.4 31.1 3.8 OTE 0.1 0.1 0.0 0.9 89.7 4.3 ONN 5.4 5.1 0.4 2.5 32.9 7.0 ELE 10.7 10.6 0.1 0.0 0.1 0.8 GAS 2.4 2.4 0.0 0.0 0.0 1.2 CON 57.0 57.0 TRD 72.8 67.4 5.4 7.4 RES 21.2 17.6 3.5 1.2 6.5 16.7 TRN 76.1 63.6 12.5 2.1 3.2 16.4 CON 6.8 6.8 0.1 0.1 1.1 0.9 FIN 16.1 16.0 0.1 0.0 0.0 0.8 SRV 67.0 65.8 1.1 0.7 1.0 1.7 A-20 TABLE A8: IMPORTS VOLUMES, SHARES AND RATES OF PROTECTION IMPORT TOTAL IMPORTS -- BILLIONS OF TL (1990) M(I)/M COMMCDITY IMPORT SHARE -- X MEU/M(I) EU IMPORT SHARE -- % EU TAR TARIFF RATE ON EU IMPORTS -- % EFTA TAR TARIFF RATE ON EFTA IMPORTS -- % ROW TAR TARIFF RATE ON REST OF WORLD IMPORTS -- % IMPORT M(I)/M MSHR_EU EU_TAR EFTA-TAR ROW TAR AGR 2.1 2.8 25.0 15.7 18.1 23.1 FRS 0.5 0.6 16.5 0.3 0.3 0.5 FIS 0.0 0.0 30.5 37.6 37.6 40.2 COL 0.8 1.1 0.3 0.2 0.4 CRU 9.9 13.2 0.0 0.0 0.0 MIN 0.2 0.3 0.6 STO 0.3 0.4 32.2 4.2 3.0 1.9 MEA 0.4 0.6 35.8 27.7 27.7 22.6 CAN 0.0 0.1 47.3 40.4 40.4 48.2 VEG 0.8 1.0 7.7 4.1 4.1 3.7 GRN 0.2 0.2 3.6 36.5 38.7 SUG 0.7 1.0 93.5 18.4 18.4 18.2 OFP 0.5 0.7 75.5 51.7 51.7 53.1 ALC 0.1 0.1 81.4 63.8 51.5 BEV 0.0 0.0 66.7 103.3 114.3 TOB 1.1 1.4 3.5 20.3 20.3 82.7 TXT 2.2 2.9 26.6 11.6 10.5 8.9 WAP 0.5 0.6 70.2 26.0 26.0 32.7 LEA 0.5 0.7 68.6 1.7 1.7 2.3 SHO 0.0 0.1 25.7 24.4 32.2 WOO 0.1 0.2 41.6 17.9 17.9 19.4 FRN 0.0 0.1 87.9 22.1 22.1 25.0 PAP 0.9 1.1 35.2 17.7 17.7 19.1 PRN 0.1 0.2 72.9 12.7 12.7 17.1 FRT 0.8 1.0 8.7 0.5 0.5 0.8 DRG 0.9 1.2 59.6 1.1 1.1 1.2 OCP 8.0 10.6 63.0 9.8 9.8 11.8 REF 3.1 4.2 63.5 8.3 8.3 9.2 PET 0.2 0.3 24.8 4.9 4.4 3.7 RBR 0.5 0.7 64.1 16.6 16.6 20.0 PLA 0.3 0.4 75.1 22.9 22.9 28.9 GLA 0.2 0.3 64.1 21.4 21.4 27.2 CEM 0.1 0.2 13.6 1.9 2.2 NMM 0.5 0.7 71.4 17.5 17.5 20.1 IRO 4.8 6.4 48.9 1.3 1.3 1.5 NFM 5.3 7.0 38.4 3.7 3.7 3.4 FAB 1.2 1.7 77.4 13.3 13.3 17.6 MAC 10.1 13.3 62.4 5.2 5.2 6.4 AGM 0.1 0.2 78.7 15.7 15.7 21.1 ELM 5.1 6.8 55.7 9.4 9.4 12.7 SHP 0.6 0.7 21.4 2.3 2.3 3.1 RRE 0.1 0.1 10.8 4.7 4.7 5.3 VEH 4.2 5.6 53.0 24.4 24.4 30.9 OTE 0.9 1.2 31.2 0.3 0.6 OMN 2.3 3.0 56.7 8.3 8.3 12.4 ELE 0.0 0.0 43.90814 GAS 0.0 0.0 43.90814 CON TRD RES 1.2 1.6 43.90814 TRN 2.1 2.8 43.90814 COM 0.1 0.1 43.90814 FIN 0.0 0.0 43.90814 SRV 0.7 0.9 43.90814 A-21 TABLE A9: EXPORT VOLUMES, SHARES AND RATES OF SUBSIDY EXPORT TOTAL EXPORTS -- BILLIONS OF TL (1990) E(I)/E COMMODITY EXPORT SHARE -- % XS E EXPORT SUBSIDY RATE -- % XSHR_EU EU SHARE OF TOTAL EXPORT DEMAND -- % EXPORT E(I)/E XS_E XSHR_EU AGR 2.4 4.6 3.2 21.7 FRS 0.0 0.0 -0.8 56.1 FIS 0.1 0.2 4.9 82.7 COL 0.0 0.0 6.6 47.5 CRU 0.0 0.0 17.0 50.0 MIN STO 0.5 1.0 9.2 43.8 MEA 0.3 0.5 12.6 52.9 CAN 1.5 2.8 8.4 66.0 VEG 0.4 0.8 8.7 5.1 GRN 0.2 0.3 5.4 4.6 SUG 0.0 0.0 0.2 10.1 OFP 2.2 4.3 2.2 60.4 ALC 0.3 0.6 5.6 42.0 BEV 0.1 0.2 4.6 12.3 TOB 0.1 0.2 11.3 28.5 TXT 6.2 11.9 8.0 69.3 WAP 4.8 9.2 11.0 71.8 LEA 0.4 0.8 13.5 46.4 SHO 0.1 0.2 8.9 17.6 WOO 0.1 0.1 9.9 23.0 FRN 0.1 0.1 5.0 24.1 PAP 0.1 0.2 24.9 22.2 PRN 0.0 0.1 4.6 44.5 FRT 0.2 0.3 24.1 36.4 DRG 0.2 0.3 9.1 9.2 OCP 1.3 2.4 14.8 30.5 REF 0.7 1.4 16.0 41.5 PET 0.0 0.0 28.8 69.0 RBR 0.2 0.3 9.5 30.0 PLA 0.1 0.2 4.9 37.1 GLA 0.4 0.8 10.2 46.1 CEM 0.2 0.3 8.3 34.2 NMM 0.2 0.4 9.0 56.3 IRO 2.7 5.3 21.0 3.6 NFM 0.6 1.1 19.3 34.7 FAB 0.4 0.8 8.0 40.9 MAC 0.4 0.8 8.2 32.0 AGM 0.0 0.0 8.8 37.1 ELM 0.8 1.6 13.2 60.4 SHP 0.1 0.2 7.6 24.7 RRE VEH 0.4 0.8 6.7 42.3 OTE 0.0 0.0 13.9 60.0 OMN 0.4 0.7 4.2 48.0 ELE 0.1 0.2 47.5 GAS 0.0 0.1 47.5 CON TRD 5.4 10.4 47.5 RES 3.5 6.8 47.5 TRN 12.5 24.0 47.5 CON 0.1 0.1 47.5 FIN 0.1 0.2 47.5 SRV 1.1 2.2 47.5 A-22 TABLE AI0: THE COMPOSITION OF DOMESTIC DEMAND DOMEST : DOMESTIC SUPPLY TO DOMESTIC MARKET -- BILLIONS OF TL (1990) IMPORT : IMPORT SUPPLY TO DOMESTIC MARKET -- BILLIONS OF TL (1990) INTERMX : INTERMEDIATE DEMAND -- X OF TOTAL D HOUSEX: DOMESTIC HOUSEHOLD DEMAND -- % OF TOTAL D GOVTX GOVERNMENT DENAND -- % OF TOTAL INVESTX INVESTMENT DEMAND -- X OF TOTAL STOCKX STOCK CHANGE -- X OF TOTAL DOMEST IMPORT INTERM% D HOUSE% D_GOVTX INVEST% STOCK% AGR 86.5 2.6 41.3 56.5 0.4 1.9 1.8 FRS 3.4 0.5 78.3 25.9 4.7 -8.9 -8.9 FIS 2.5 0.0 9.4 90.9 -0.3 -0.3 COL 2.8 0.8 58.5 32.1 8.0 1.4 1.4 CRU 1.9 9.9 95.1 4.9 4.9 MIN 0.2 0.2 102.7 -2.7 -2.7 STO 2.5 0.3 72.4 27.6 27.6 MEA 3.0 0.5 31.2 52.0 15.9 0.9 0.9 CAN 0.5 0.1 44.1 39.7 18.1 -1.9 -1.9 VEG 3.5 0.8 44.4 61.5 1.2 -7.1 -7.1 GRN 5.9 0.2 52.5 56.3 1.0 -9.8 -9.8 SUG 2.8 0.9 30.5 59.1 1.2 9.3 9.3 OFP 15.6 0.8 30.4 65.0 1.8 2.7 2.7 ALC 2.4 0.2 22.5 58.1 19.4 19.4 BEV 1.4 0.0 32.5 46.2 0.5 20.8 20.8 TOB 5.8 1.9 1.1 85.1 13.8 13.8 TXT 20.9 2.4 56.6 41.4 0.3 1.7 1.3 WAP 5.3 0.6 3.0 89.8 6.9 0.3 0.1 LEA 1.9 0.5 78.6 13.5 0.0 7.9 7.9 SHO 1.6 0.1 5.7 73.2 10.7 10.4 10.4 Woo 8.1 0.2 74.0 27.8 0.2 -2.0 -2.0 FRN 2.2 0.1 39.2 48.0 12.8 0.8 PAP 4.8 1.0 79.6 15.7 2.3 2.4 2.4 PRN 3.2 0.1 24.1 71.0 0.9 4.1 4.1 FRT 1.8 0.8 100.2 -0.2 -0.2 DRG 3.6 0.9 34.8 63.7 1.6 -0.2 -0.2 OCP 11.2 8.8 60.8 40.1 0.5 -1.4 -1.4 REF 21.6 3.4 88.5 21.8 5.5 -15.8 -15.8 PET 2.1 0.2 91.2 31.3 5.3 -27.8 -27.8 RBR 4.8 0.6 65.3 34.6 0.7 -0.5 -0.5 PLA 2.7 0.4 58.0 41.4 0.3 0.3 0.3 GLA 1.9 0.2 45.6 55.4 1.7 -2.7 -2.7 CEM 4.5 0.1 100.2 0.6 -0.8 -0.8 NMM 3.5 0.6 94.2 14.0 1.0 -9.3 -9.3 IRO 12.8 4.9 98.3 0.1 1.6 1.6 NFM 4.1 5.4 84.0 0.0 16.0 16.0 FAB 9.2 1.4 36.7 50.0 0.7 12.6 3.1 MAC 7.0 10.6 14.6 19.2 3.3 62.9 2.1 AGN 1.9 0.2 31.5 68.5 10.7 ELM 8.5 5.6 39.5 27.3 1.4 31.7 9.1 SHP 0.3 0.6 28.9 71.1 9.5 RRE 0.3 0.1 30.3 69.7 -33.9 VEH 12.0 5.4 37.2 21.3 0.2 41.3 10.1 OTE 0.1 0.9 9.3 90.7 -2.6 OMN 5.1 2.5 12.6 58.2 1.3 27.9 4.8 ELE 10.6 0.0 73.8 12.0 3.8 10.4 10.4 GAS 2.4 0.0 51.7 33.9 14.2 0.2 0.2 CON 57.0 0.4 99.6 -0.9 TRD 67.4 38.6 47.7 1.6 12.1 3.7 RES 17.6 1.2 7.4 90.3 1.5 0.8 0.8 TRN 63.6 2.1 38.6 54.7 1.7 5.0 2.6 COM 6.8 0.1 53.1 31.2 6.6 9.1 9.1 FIN 16.0 0.0 84.2 3.0 4.0 8.8 8.8 SRV 65.8 0.7 20.4 33.2 49.6 -3.2 -3.2 A-23 References Arsian, Ismail, "Export Subsidy Notes", Unpublished Manuscript, World Bank Resident Mission, Ankara, 1995. Brooke, Anthony; Kendrick, David, and Meeraus, Alexander, GAMS: A User's Guide, Release 2.25 (Danvers, MA.: Boyd & Fraser, 1992). De Santis, Roberto A., and Ozhan, H. Gazi, "A Social Accounting Matrix for Turkey 1990", Working Paper, Department of Economics, University of Warwick, 1994. Faini, Ricardo, "Elasticities of Supply: Some Estimates for Morocco and Turkey", Unpublished Manuscript, Trade Policy Division, Country Economics Department, World Bank, 1988. Harrison, Glenn W.; Jones, Richard; Kimbell, Larry J., and Wigle, Randall, "How Robust Is Applied General Equilibrium Analysis?", Journal of Policy Modelling, 15(1), 1993, 99-115. Harrison, Glenn W.; Rutherford, Thomas F., and Tarr, David, "Piecemeal Trade Reform in the Partially Liberalized Economy of Turkey", World Bank Economic Review, 7, May 1993, 191-217. Harrison, Glenn W.; Rutherford, Thomas F., and Tarr, David G., "Product Standards, Imperfect Competition, and the Completion of the Market in the European Community", Policy Research Working Paper 1293, International Economics Department, International Trade Division, The World Bank, April 1994. Harrison, Glenn W.; Rutherford, Thomas F., and Tarr, David G., "Quantifying the Uruguay Round", Policy Research Working Paper, International Economics Department, International Trade Division, World Bank, 1995. Harrison, Glenn W.; Rutherford, Thomas F., and Wooton, Ian, 'An Empirical Database for a General Equilibrium Model of the European Communities", Empirical Economics, 16, 1991, 95-120 Harrison, Glenn W., and Vinod, H.D., "The Sensitivity Analysis of Applied General Equilibrium Models: Completely Randomized Factorial Sampling Designs", The Review of Economics and Statistics, 74, May 1992, 357-362. Melo, Jaime de, and Tarr, David, General Equilibrium Analysis of U.S. Foreign Trade Policy (Cambridge, MA: MIT Press, 1992). A-24 Pritchett, Lant, and Sethi, Geeta, "Tariff Rates, Tariff Revenue, and Tariff Reform: Some New Facts", World Bank Economic Review, 8(1), January 1994, 1-16. Rutherford, Thomas F., "Extensions of GAMS For Complementarity and Variational Problems Arising in Applied Economics", Economics Working Paper 92-9, Department of Economics, University of Colorado at Boulder, 1992a. Rutherford, Thomas F., "Applied General Equilibrium Modeling With MPSGE as a GAMS Subsystem", Economics Working Paper 92-15, Department of Economics, University of Colorado at Boulder, 1992b. Rutherford, Thomas F., "MILES: a Mixed Inequality and nonLinear Equation Solver", Economics Working Paper, Department of Economics, University of Colorado at Boulder, August 1993. Rutherford, Thomas F., Rutstr6m, E. Elisabet, and Tarr, David G., "L'Accord de Libre Echange entre le Maroc et la CEE: Une Evaluation Quantitative," Revue d'Economie du Developpement, 2, 1994, 97-133. State Institute of Statistics, Republic of Turkey, The Input-Output Structure of the Turkish Economty: 1990 (Ankara: State Institute of Statistics Publication No. 1693, June 1994). Togan, Subiday, "Table on Tariff Rates in Turkey", Unpublished Manuscript, Ankara, Turkey, 1995. A-25 Policy Research Working Paper Series Contact Title Author Date for paper WPS1585 Public Finances and Economic Luca Barbone March 1996 C. Pelegrin Transition Hana Polackova 85087 WPS1586 Did External Barriers Cause the Azita Amjadi March 1996 S. Lipscomb Marginalization of Sub-Saharan Ulrich Reinke 33718 Africa in World Trade? Alexander Yeats WPS1587 Payments and Finance Problems Constantine April 1996 M. de la Puente in the Commonwealth of Michalopoulos 31206 Independent States WPS1588 Social Insurance in the Transition Deborah Mabbett April 1996 L. Biely to a Market Economy: Theoretical 36280 Issues with Application to Moldova WPS1 589 The Analysis of Emerging Policy Sudarshan Gooptu April 1996 R. Vo Issues in Development Finance 31047 WPS1590 The Latvian Banking Crisis: Alex Fleming April 1996 S. Coffey Lessons Learned Samuel Talley 32535 WPS1591 Competition in Network Industries Michael Klein April 1996 S. Vivas 82809 WPS1592 The Stockmarkets as a Source of Cherian Samuel April 1996 C. Samuel Finance: A Comparison of U.S and 30802 Indian Firms WPS1593 Rural Finance for Growth and Poverty Saeed Qureshi April 1996 C. Anbiah Alleviation ljaz Nabi 81275 Rashid Faruqee WPS1594 Why Have Some Indian States Done Gaurav Datt April 1996 P. Sader Better Than Others at Reducing Martin Ravallion 33902 Rural Poverty? WPS1595 In Search of Owners: Lessons of Cheryl W. Gray April 1996 M. Geller Experience with Privatization and 31393 Corporate Governance in Transition Economies WPS1596 Agrarian Structure in Poland: The Johan van Zyl April 1996 M. Williams Myth of Large-Farm Superiority Bill R. Miller 87297 Andrew Parker WPS1597 Egypt and the Uruguay Round Bernard Hoekman May 1996 F. Hatab Arvind Subramanian 35835 WPS1598 Logistical Constraints on Francois Amiot May 1996 L. Lewis International Trade in the Maghreb Ovadia Salama 37369 Policy Research Working Paper Series Contact Title Author Date for paper WPS1599 Economic Implications for Turkey Glenn W. Harrison May 1996 M. Patena of a Customs Union with the Thomas F. Rutherford 39515 European Union David G. Tarr