Abstract
Previous studies on the effects of fossil fuel subsidy reform, energy taxes, and environmental taxes on competitiveness and innovation remain contradictory and lack economywide perspectives. A deconstruction of industrial competitiveness effects on output performance and cost effectiveness using an economywide model can reveal the underlying causes and effects of fossil fuel subsidy reform and suggest strategies for alleviating loss of competitiveness in affected industries. The study reveals that all industries lose competitiveness in the short run following fuel subsidy reforms. Two-thirds of this loss derives from poorer output performance and one-third from lower cost effectiveness. Energy, intra-industry, and import industries can improve competitive advantage by fully and efficiently leveraging labor in the short run. Conversely, as exports, margins, and non-traded industries practically reach the limit of labor deployment in the short run, to further improve competitive advantage, these industries need to explore new investment and production frontiers in the middle to long run. The study also finds that backward linkage index, diesel intensity, and shares of labor in total costs have a positive relationship with the effects of fossil fuel subsidy reform, whereas forward linkage index and relative supply-to-demand elasticities have a negative relationship with the effects of reform.
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Notes
A concept of industrial competitiveness used in this study is adapted from the industrial competitiveness model proposed by Oral (1986).
This observation is consistent with Coxhead et al. (2013) who point out that while non-tradable industries pass the tax burden forward to consumers; tradable industries pass the tax burden backward to factor owners.
A system of equations in this study conforms to the following differentiation rules explained in Chapter 18 (Linearizing Levels Equations) of the GEMPACK manual (Horridge, et. al. 2019). Denote p(X) as the percentage change in X. An addition Z = X + Y becomes Z*p(Z) = X*p(X) + Y*p(Y). A subtraction Z = X – Y becomes Z*p(Z) = X*p(X) – Y*p(Y). A multiplication Z = X*Y becomes p(Z) = p(X) + p(Y). A division Z = X/Y becomes p(Z) = p(X) – p(Y).
Linearization implies that the original equation systems, including CES and CET equations, are all presented in the form of percentage changes (or logarithmic changes) of variables from their base values (i.e., without reform). This linearized approach can be implemented and solved directly and simply using the GEMPACK software used in this study. The required coefficients of the linearized system can easily be obtained from simple functions of database values.
SAM is highly time-intensive to assemble. Typically, SAM is constructed every five years or more, and each SAM construction might take years to finish. Each SAM construction serves different purposes, e.g., international trade policies, poverty and inequality alleviation measures, natural resources and the environmental issues, financial investment, etc. The EPPO’s SAM of 2010 is the most updated SAM database that specially serves energy policy and planning for Thailand. Thus, it is the most suitable for the objective of this study as it focuses on the effects of fossil fuel subsidy reform. This SAM was updated to 2017 by estimating the relative size of every account as a share of GDP in 2010, and applying the same share of GDP of 2010 for updating the number in the account to 2017 using GDP of 2017. For example, if household consumption accounts in 2010 were 52 percent of GDP, then an updated household consumption accounts would be adjusted to 52 percent of GDP of 2017.
The middle run is 3–5 years and the long run is more than 5 years (Tsikata et al. 2009).
Elasticities of substitution between labor and capital factors from GTAP database (Jomini et al. 1991) are: diesel (0.20), energy (0.20), export (1.19), import (0.81), intra-industry (1.25), margins (1.68), and non-traded (0.90).
Grimalda (2016) explores the effects of high and low labor market rigidity on labor efficiency. Doulos et al. (2020) point out that the competitiveness of industrial exports depends not only on unit labor costs but also other costs, particularly energy costs, domestic industrial goods prices, and financing costs.
The government is another prominent stakeholder that is affected during the tax reform transition. The effects of tax reform transition on fiscal space in develo** countries are also investigated in Gnangnon and Brun (2020).
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Wattanakuljarus, A. Diverse effects of fossil fuel subsidy reform on industrial competitiveness in Thailand. Eurasian Econ Rev 11, 489–517 (2021). https://doi.org/10.1007/s40822-021-00175-4
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DOI: https://doi.org/10.1007/s40822-021-00175-4
Keywords
- Industrial competitiveness
- Cost effectiveness
- Output performance
- Economywide
- General equilibrium
- Fossil fuel subsidy reform