EXTERNAL SHOCKS, ADJUSTMENT POLICIES AND INVESTMENT IN A DEVELOPING-ECONOMY - ILLUSTRATIONS FROM A FORWARD-LOOKING CGE MODEL OF THE PHILIPPINES

The rapid increase in investment and external debt of middle-income countries like the Philippines during the 1970s was perfectly 'rational' given existing policies. However, these countries could have done better with an appropriate mix of adjustment policies. Using a dynamic general equilibrium framework, the paper examines the sensitivity of investment and growth to external shocks and adjustment policies. It highlights the intertemporal trade-offs of tariff reform, a policy often recommended in the 1980s, emphasizing the need for complementary measures to ease macro imbalances and short-term dislocations of the protected sector.