Reestimation of shadow prices for the Philippines

Abstract

context of project evaluation. Early contributions to the literature formulated methodologies and framework for estimating social opportunity costs of goods and resources, with an underlying objective of maximizing income, regardless of its distributional impact. These earlier contributions constitute what is now referred to as the "traditional approach." Well-known proponents of this approach include Arnold Harberger and Edward Mishan. Since then, a lot of contributions have been added to the literature. New approaches were developed, which, in contrast with the traditional view, sought to value differentially a project's distributional impact and its impact between saving and consumption. The most widely cited contributions to the new approach include Dasgupta, Marglin and Sen (1972), Little and Mirrlees (1968 and 1974) and Squire and van der Tak (1975).1 There are also studies on shadow prices in the Philippine context. The first and most complete set of estimates of shadow prices for the Philippines based on empirical data and analytically deduced formulas, can be found in Bautista, Power and Associates (1979). It provides estimates of shadow prices of foreign exchange ( using 1974 data), labor (using 1977 data), and capital (based on 1974 data). The estimates were updated and methodologies were improved in Medalla and Power (1984). After years of debate, the subject of cost-benefit analysis, particularly the concept of using distribution weights, remains controversial. This study would not attempt to end the debate. It does not intend to resolve all the controversial issues in cost-benefit analysis. Rather, its objectives are much more modest. It is primarily addressed to actual practitioners of project evaluation and is thus designed to be practical. The main objectives of the study are : 1. to provide the most recent estimates of the basic parameters in shadow pricing, namely, the shadow exchange rate, the marginal productivity of capital, and the opportunity cost of labor; 2. to spell out procedures for estimating these parameters to enable convenient and consistent reestimation in the future; and 3. to clarify the differences between approaches and trace their impact on the parameters used in order to easily shift from one approach to another. The study is divided into six parts. Part 1 gives a brief background on the topic while part II provides an overview of the concept of shadow pricing and the basic approaches to cost- benefit analysis. The succeeding parts discuss how to estimate shadow prices. In particular, part in shows how to estimate the shadow exchange rate, part IV the marginal productivity of capital and part V, the shadow wage rate. Finally, part VI discusses how to estimate accounting price ratios for frequently used (nontraded) inputs such as electricity and transportation services.