Impacts of excise tax on unhealthy commodities in vietnam a computable general equibrium approach

VIETNAM NATIONAL UNIVERSITY, HANOIVIETNAM JAPAN UNIVERSITYDANG THI BICH THAO IMPACTS OF EXCISE TAX ON UNHEALTHY COMMODITIES IN VIETNAM: A COMPUTABLE GENERAL EQUIBRIUM APPROACH MAJOR: PUB

VIETNAM NATIONAL UNIVERSITY, HANOIVIETNAM JAPAN UNIVERSITY

DANG THI BICH THAO

IMPACTS OF EXCISE TAX ON

UNHEALTHY COMMODITIES IN VIETNAM: A COMPUTABLE GENERAL

EQUIBRIUM APPROACH

MASTER'S THESIS

Hanoi, 2019

VIETNAM NATIONAL UNIVERSITY, HANOIVIETNAM JAPAN UNIVERSITY

DANG THI BICH THAO

IMPACTS OF EXCISE TAX ON

UNHEALTHY COMMODITIES IN VIETNAM: A COMPUTABLE GENERAL

EQUIBRIUM APPROACH

MAJOR: PUBLIC POLICY

CODE: PILOT

RESEARCH SUPERVISORS:

DR TRAN LAM ANH DUONG

DR NGUYEN TIEN DUNG

Hanoi, 2019

During 2 years studying in the Vietnam - Japan University (VJU), I have not onlyobtained valuable knowledge and skills but also live in the hands of love of VJUand University of Tsukuba’s lecturers as well as my beloved MPP friends

First of all, I would like to express my sincere thankfulness to mysupervisors, Dr Tran Lam Anh Duong, University of Tsukuba and Dr Nguyen TienDung, University of Economics and Business for their useful support during thewhole process of the study Without their guidance, I would have not finished mythesis in time

Secondly, I would like to express my great attitude to MPP program,especially Dr Nguyen Thuy Anh, Dr Vu Hoang Linh, Professor Naohisa Okamotoand Ms Pham Thu Ha Their encouragement and assistance has facilitated me a lotduring the studying process

Thirdly, I greatly appreciate the kind support of Professors HiroichiKawashima, Morito Tsutsumi, Yoshiaki Ohsawa and staff of the Global InitiativeOffice, University of Tsukuba for supporting me during 3 months internship inJapan at the end of 2018 The knowledge obtained during this internship contributedsignificantly for my thesis accomplishment

Finally, the sincere thanks are expressed to my family, especially myhusband, my parents and my kids for always staying besides and supporting meover the past two years The experience in VJU and University of Tsukuba would bethe best memory in my life

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TABLE OF CONTENTS

ACKNOWLEGEMENT i

LIST OF TABLES iv

LIST OF FIGURES v

LIST OF ABBREVIATIONS vi

CHAPTER 1 INTRODUCTION 1

1.1 Research context 1

1.1.1 The consumption of unhealthy commodities in Vietnam and its impacts 1

1.1.2 The role of excise tax in reducing the consumption of unhealthy commodities and history of excise tax in Vietnam 2

1.1.3 The needs to re-structure taxation revenue sources in Vietnam 4

1.2 Research questions, research objectives and methodology 6

1.3 Research structure 8

CHAPTER 2 LITERATURE REVIEW 9

2.1 Literature on the impacts of excise tax on unhealthy commodities 9

2.2 Literature on research methodologies 12

CHAPTER 3 RESEARCH METHODOLOGY 14

3.1 Static standard single CGE model 14

3.1.1 Price block 15

3.1.2 Production block 17

3.1.3 Income block 18

3.1.4 Demand block 20

3.1.5 Demand for exports and imports 21

3.1.6 Equilibrium conditions 22

3.2 Data 23

3.2.1 Vietnam Input-Output table 2012 23

3.2.2 Data on state budget revenue from excise tax 23

3.2.3 Data on cooperate, personal income tax revenue and fund transfers 24

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3.2.4 Elasticity parameters 24

3.3 Simulation scenarios 25

CHAPTER 4 RESEARCH FINDINGS 26

4.1 Impacts of unhealthy commodity excise tax on real GDP 26

4.2 Impacts of unhealthy commodity excise tax on household’s income 26

4.3 Impacts of unhealthy commodity excise tax on state budget revenue 28

4.4 Impact of unhealthy commodity excise tax on consumption 29

4.5 Impacts of unhealthy commodity excise tax on outputs of industries 30

4.6 Discussion on the impacts of unhealthy commodity excise tax on public health32 CHAPTER 5 CONCLUSION, POLICY DISCUSSION, LIMINATION OF THE RESEARCH AND FURTHER STUDY 33

5.1 Conclusion 33

5.2 Policy discussion 34

5.3 Limitation of the research 35

5.4 Further study direction 36

REFERENCE 37

LIST OF PUBLICATION OF THE AUTHOR 43

APPENDIX 44

Appendix 1: List of industries in I-O table 44

Appendix 2: State budget revenue from imported commodities 2012 45

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LIST OF TABLES

Table 1.1: History of excise tax in Vietnam 3Table 2.1: International literature on the impacts of taxation on unhealthycommodities 10Table 2.2: Vietnam literature on the impacts of taxation on unhealthy commodities12Table 3.1: Domestic excise tax revenue 2012 (thousand billion VND) 24Table 4.1 Impact of unhealthy commodity excise tax increase on real GDP 26Table 4.2 Impact of unhealthy commodities excise tax increase on household'sincome 28Table 4.3 Impact of unhealthy commodity excise tax increase on State budget

revenue 29Table 4.4 Impact of unhealthy commodities excise tax increase on consumption 30Table 4.5: Impacts of unhealthy commodity excise tax increase on outputs ofindustries 31

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LIST OF FIGURES

Figure 1.1: Ratio of obesity (BMI≥ 30) among adults in Vietnam, 1976-2016, (%) 2Figure 1.2: Average tax to GDP ratio of Vietnam and other countries, 1990-2016, (%) 4Figure 1.3: Public debt/GDP of Vietnam and emerging markets and developingcountries, 2000-2016, (%) Figure 1.4: Ratio of some sources of state budget revenue/total state budget revenue,2000-2017, (%) 6

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Free Trade AgreementGeneral Statistic OfficeGlobal Trade Analysis ProjectInternational Monetary FundInput-Output

Local Currency UnitMinistry of FinancePersonal Income TaxRisk ratio

Sugar - sweetened beverageValue-added Tax

Vietnam Household’s Living Standard SurveyVietnam Dong

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CHAPTER 1.INTRODUCTION

1.1 Research context

1.1.1.The consumption of unhealthy commodities in Vietnam and its impacts

The excessive consumption of alcohol, tobacco and sugar-sweetened beverage(SSB) causes serious problem for human health The 2018 World HealthOrganization(WHO) reports that alcohol result-ed in approximately 3 million deathsand 132.6 million disability-adjusted life years worldwide in 2016 Tobacco wasblamed for the death of around six million people each year including 600,000whose suspected cause of deaths is second-hand smoking Besides being blamed forill-health, disability and death from non-communicable diseases, tobacco is alsoassociated with the risks of communicable diseases (WHO, 2015) Meanwhile,Malik, Pan, Willett, & Hu (2013) affirmed that SSB promotes weight gain inchildren and adults Alcohol, tobacco and SSB, in this study are referred to asunhealthy commodities

Recently, the consumption of unhealthy commodities in Vietnam is becomingmore serious Data of WHO (2018a) shows that the alcohol per capita consumption

of Vietnam increased steadily since 1991, from only 0.16 liters of pure alcohol1 perperson per year in this year to 3.1 liters in 2016 According to Pham, Tran & Tran(2018), the proportion of adults drinking in Vietnam raised from 46% to 77% amongmen and 2% to 11% among women between 2002 and 2016 In 2017, Vietnameseconsumed 305 million liters of alcohol and 4.1 billion liters of beer, ranking first inSoutheast Asia region and ranked third in Asia, just after Japan and China (WHO,2018b)

The ratio of male smoker in Vietnam is very high (46%) compared to Japan (33.7%) and global average (33.7%)

According to the Vietnam Household’s Living Standard Survey (VHLSS)

2010, 2014 and 2016 of the Vietnam General Statistic Office (GSO), the average

1 Pure alcohol is a common unit to measure the alcohol consumption 25 g pure alcohol is defined as 750

ml beer, 75 g low-alcohol liquor, 50 g hard liquor, and 250 ml wine (Huang, Liu, Li, Xu, & Jia, 2017)

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consumption of SSB per households over 2010-2016 was increasing In 2010, eachhousehold in Vietnam consumed only 151.42 liters of SSB per year, theconsumption increased to 185.38 and 189.14 liters in 2014 and 2016 respectively.Figure 1.1 illustrates the ratio of obesity among adults in Vietnam over 1976-2016which observed a steady increase in recent 10 years From 2006 to 2016, the ratio ofobesity among adults in Vietnam has increased from only 0.6% to 2.1%.

The above descriptive data portrays the serious situation of the consumption

of unhealthy commodities and its serious consequences in Vietnam in recent years

It urgently requires the society and government to review its policies to directVietnamese consumers toward a healthier consumption habit

1.1.2 The role of excise tax in reducing the consumption of unhealthy

commodities and history of excise tax in Vietnam

Among many measures to control the consumption of unhealthy commodities,taxation policies are considered strongly effective Many previous studies havealready proved the effectiveness of unhealthy commodity taxation Koski, Sirén,Vuori, & Poikolaine (2007) and J.Cook & Moore (1994) affirmed that alcohol taxhad significant impact in reducing drinking prevalence, traffic fatalities, robberyrate and increasing college graduation among the youth Zhang, Cohen, & Ferrence(2006) and Keeler, Barnett, & Manning (1993) said that tobacco tax supported toreduce tobacco consumption and number of smokers Meanwhile, Andreyava,Chaloupka, & D.Brownell (2011) and Wang, Coxson, Shen, Goldman, & Bibblins-

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Domingo (2012) stated that SSB taxation would support to reduce consumption,

improve SSB-related diseases, reduce medical cost and generate state budget

revenue

The tax on unhealthy commodities is usually brought in to excise tax laws

due to the fact that one of the key objectives of this tax is to direct consumer’s

behavior towards heathier lifestyle

In Vietnam, taxation on tobacco and alcohol was first imposed when the

Excise Tax Law was implemented in 2008 In 2014, the tax rates for these 2

commodities were increased In 2017, in the frameworks of the Government’s

program to re-structure the state budget revenue, the Ministry of Finance (MOF)

proposed to bring SSB to the list of taxable commodities and increase the tax rate

for tobacco Many social activists from Oxfam, Health Bridge and WHO suggested

to not only impose new tax on SSB and increase tobacco tax rate but also increase

tax rate on alcohol Table 1.1 bellow summarizes the history of excise tax in

Source: compiled by the author

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1.1.3.The needs to re-structure taxation revenue sources in Vietnam

MOF proposed to revise the Excise Tax Law together with other five tax lawsnamely (i) Value-added (VAT), (ii) Corporate Income (CIT), (iii) Personal Income(PIT), (iv) Natural Resource and (v) Import-Export Tax The master plan revisingmany tax laws aimed at re-structuring the revenue sources in the context of reducingtax to GDP ratio, increasing public debt and reducing traditional sources of revenuesuch as crude oil and trade taxes

Recently, the tax to GDP ratio in Vietnam is decreasing This ratio peaked 27%

in 2010, since then, it continuously reduced to 23% in 2012, 2013 and 22% in 2014

As shown in figure 1.2, the tax to GDP ratio of Vietnam is higher than that ofother countries within ASEAN-5 and low-income group, yet lower than the average

of the countries with similar levels of development The high-income groupmaintained an average tax to GDP rate of approximately 40% GDP over the years.Upper middle-income countries increased their average tax to GDP rate over time,from 25% in 1990 to about 33% in 2016 Meanwhile, the tax to GDP rate of thelower middle-income group, after a period of rising to nearly 30%, fell to 25% in

1990 Low-income countries truly struggled with revenue mobilization as the ratedropped to below 15% GDP several times, and only increased up to 20% in recentyears Vietnam in particular and the whole ASEAN-5 group even had a lowermobilization rate than the average of the low-income group

50 40 30 20

10 1990 High-income group

At the same time, public debt in Vietnam is becoming more serious over thepast two decades In 2001, the ratio of public debt over GDP is only 39.9 % After

15 years, this ratio increased to 58.25 %

In comparison with other countries, Vietnam's public debt has been growing

at a much faster rate compared with other emerging and developing economies Inthe 2000-2016 period, the country's public debt to GDP ratio rose sharply from thelowest level among these countries to reach the top in 2016 (Figure 1.3)

Emerging market and developing economies Emerging and developing Asia

ASEAN-5

Latin America and the Caribbean

Sub-Saharan Africa Vietnam

Figure 1.3: Public debt/GDP of Vietnam and emerging markets and developing

countries, 2000-2016, (%)

Source: IMF (2019)

The reduction tax to GDP ratio and pressure of public debt urged theGovernment of Vietnam to boost state budget collection In addition, in recent years,the traditional budget sources such as crude oil and trade taxes are declining sharply.Due to the joining of Vietnam into many free trade agreements (FTA), the budgetrevenue from customs, import-export and excise tax for imported commoditiesdecreased sharply over the past decade The reduction

exhaustion of crude oil also caused the reduction of revenue from this type ofnatural resources Meanwhile, the increase of revenue from PIT was very slow(figure 1.4)

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Revenue from PIT

Revenue from crude oil

Revenue from customs

Revenue from Import-export tax, excise tax for imported commodities

Figure 1.4: Ratio

of some sources of state budget revenue/total state budget revenue, 2000-2017, (%) Source: GSO (2019)

The pressure of publicdebt and reduction oftraditional state budget

revenuesources urged VietnamGovernment to re-structure the taxationpolicies to generatemore revenue from newtax such as property tax

or increasing current tax

rates ofVAT, environment protection and excise tax on unhealthy commodities

1.2 Research questions, research objectives and methodology

The excessiveconsumption of

alcohol, tobacco and SSB creates bad impact tohealth and causes other serious socio-economicproblems Unfortunately, the consumption of theseunhealthy commodities in Vietnam is becoming moreserious by the time Among many methods to restrictthe excessive consumption of unhealthycommodities, the taxation policies are proved to beefficient in not only reducing the consumption,improve the health of the people but also support togenerate state budget revenue to meet the demand ofgenerating more state budget revenue in the context

of reducing traditional revenue sources andincreasing public debt

The excise tax on alcohol and tobacco inVietnam was first imposed in Excise Tax Law

2008 Up to now, after the revision of the Law in

2014, the tax rates for unhealthy commodities inVietnam were still considered too low in compared

to international practice The recent proposal ofMOF suggested to increase the tax rate on tobaccoand impose new excise tax on SSB However, thereare still very limited research providing evidencefor policy discussion on the best

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policy option on taxation policies for unhealthy commodities Paper of Dao (2018)and Truong & Pham (2017) employed partial-equilibrium model which did notdiscuss the inter-relations between different industries in the economy These twopapers also did not provide the forecast on the impact of tax policy to GDP andhousehold’s income Meanwhile, Nguyen (2014) utilized general equilibrium modelbut did not analyze the consumption and public health impacts of the policy Inaddition, while paper of Dao (2018) just analyzed tobacco tax, Truong & Pham(2017) and Nguyen (2014) concentrated into only soft-drink industry This thesiswould fill-in this research gap through exploring:

- What are the macroeconomic effects of imposing/increasing excise tax on unhealthy commodities in Vietnam?

- What are the policy recommendations on imposing/increasing excise tax on unhealthy commodities?

This study employed the Computable General Equilibrium Model (CGE)which is constructed based on the Static Standard Single CGE model developed byDervis, Melo, & Robinson (1982) and Lofgren, Thomas, & El-said (2002) Themodel simulated the whole Vietnam economy with 36 sectors and 4 key institutions:firms, households, government and rest of the world The model was built based onthe Input-Output table (I-O) 2012 and excise tax data collected from the GeneralDepartment of Taxation and UN Comtrade database while data on the other taxrevenue and fund transfer between different institutions in the economy were takenfrom State Bank of Vietnam and VHLSS 2012 Elasticity parameters were from theGlobal Trade Analysis Project (GTAP) The study measured the impact of excise taxrate revision following four scenarios in which the first two scenarios were theproposals of MOF in 2017: impose 10% tax on SSB and increase tobacco tax from75% currently to 85% (scenario 1); impose 20% tax on SSB and increase tobaccotax to 85% (scenario 2) In scenario 3, the author suggested a higher tax rate option

in which tobacco and alcohol tax rate supposed to increase 1.2 times and 20% taxrate was imposed for SSB As a non-addictive commodities, the impacts of SSB taxwas much different from other addictive commodities like

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alcohol and tobacco, thus scenario 4 measured the impact of only imposing tax onSSB with the rate of 20%.

The research results portrayed that the imposing and/or increasing excise taxrates on unhealthy commodities did not create much impacts on real GDP The taxincrease resulted in increased state budget revenue from 9.048 (scenario 1) to15.573 VND (price of 2012) (scenario 3) Even the household’s income slightlydecreased, excise tax had significant positive impact on consumption of unhealthycommodities Especially, the impact on consumption of non-addictive good likeSSB is much bigger than addictive goods In addition, the cross-industrial impactwas not significant

In the context of increasing public debt, the imposing/increasing of tax rates

on unhealthy commodities, especially SSB was considered as a good option aiming

at both targets: (i) directing consumer’s behavior towards better health and (ii)generating state budget revenue

1.3.Research structure

The research includes 5 chapters Chapter 1 provides information on researchcontext, introduce research objectives, questions, research methodology and keyfindings Chapter 2 reviews current literature addressing the same researchquestions Chapter 3 describes research methodology and data Chapter 4 analyzesthe research findings while chapter 5 discusses policy implications, limitation of theresearch as well as further research directions

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CHAPTER 2.LITERATURE REVIEW

2.1 Literature on the impacts of excise tax on unhealthy commodities

Seven international and four Vietnamese literature were reviewed to explore thefindings and research methodologies used to assess the impact of excise tax onunhealthy commodities

Table 2.1 bellow summarizes the key contents of international papers Most

of these papers reported the positive impacts of unhealthy commodities tax towardsconsumption, public health, medical cost and state budget revenue The mostcommon research methodologies used to measure the economic impacts of taxpolicies are price-elasticity measurement and CGE model

Regarding to the impacts of taxation on alcohol, research of Koski et al.(2007) said that alcohol tax cuts in Finland in 2004 led to the increase in the number

of sudden deaths relating to alcohol meanwhile Cook & Moore (1994) affirmed thatalcohol tax reduces drinking prevalence, traffic fatalities, robbery rate and increasecollege graduation among the youth

On the tobacco taxation, Zhang et al (2006) said that reducing tobacco taxrates in Australia led to the increase of smoking initiation among the youth Usingthe data of California State, USA, Keeler et al (1993) said that tobacco taxsupported to reduce the number of smokers Ye, Lee, & Chen (2006) employedCGE model to prove that tobacco tax supported to reduce consumption, increasestate budget revenue and create positive impacts on the health of the people

Regarding to SSB, Andreyava et al.(2011) used partial equilibrium model toprove that tax on SSB raised state budget revenue and reduced obesity ratio Wang,Coxson, Shen, Goldman, & Bibbins-Domingo (2012) stated that tax on SSB wouldreduce SSB consumption and medical cost, prevent diabetes, coronary heart events,strokes, premature deaths and generate state budget revenue

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Table 2.1: International literature on the impacts of taxation on unhealthy

commodities

Topic

Impacts of alcohol tax

Impacts of

tobacco

tax

Impacts of SSB tax

Source: compiled by the author

Four Vietnam literature in recent years were found related to the topic of thisresearch Different from international, Vietnamese literature did not reach theconsensus on the impacts of unhealthy commodities tax policy Dao (2018) strongly

supported the increase of tobacco tax rate meanwhile Nguyen (2014) and Truong &Pham (2017) suspected on the positive impacts of excise tax on SSB Again, theprice elasticity and CGE model are commonly used in measuring the economicimpacts of taxation policies.

Paper of Nguyen (2014) used CGE model combining with price elasticityestimation, showed that the loss of the soft-drink enterprises and GDP overweightthe gain from state budget revenue when excise tax is imposed for soft-drink

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However, this study did not mention the impacts of tax policy to consumption andhealth which are the key purposes of applying excise tax on unhealthy commodities.

In addition, tobacco and alcohol are not taken into consideration in this paper

Nguyen et al.(2018) also employed CGE and Almost Ideal Demand SystemModel (AIDS) of Deaton & Muellbauer (2008) to measure the impact of tax ratechange However, this paper worked with VAT, not excise tax While Dao (2018)worked only with tobacco, Truong & Pham (2017) analyzed only soft-drink tax.Dao (2018) and Truong & Pham (2017) employed partial equilibrium model whichcould not measure the impacts of tax policy on macroeconomic indicators like realGDP and cross-industrial effects

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Table 2.2: Vietnam literature on the impacts of taxation on unhealthy commodities

Authors

Soft-drink and

carbonated drink in Vietnam Impacts of VAT tax

increasing (2018)

tax rate

Source: compiled by the author

In conclusion, most international literature proved the positive impacts of

consensus on this matter The most common-used research methodologies are price

elasticity measurement and CGE model

2.2.Literature on research methodologies

The review of current literature on the impacts of taxation policies showed that the

most common-used research methodologies are Almost Ideal Demand System

Model (AIDS), a partial equilibrium model, and CGE model Three papers of

Deaton & Muellbauer (2008), Dervis et al (1982) and Lofgren et al (2002) were

reviewed to understand more on AIDS and CGE models

AIDS model developed by Deaton & Muellbauer (2008) measures the price

elasticity Later on, this elasticity could be used to estimate and compare the welfare

before and after imposing tax through estimating the compensated variation and

equivalent variation This method could measure the consumption and welfareimpacts of tax policy However, other macro-economic indicators such as real GDP,

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state budget or inter-industries effects would not be estimated Meanwhile, CGE model could show these macro-economic impacts.

CGE model was developed based on the concept of general equilibriumtheory of Walras (1877) However, until the 1970, the general equilibrium model stillremained theoretical With advances in computing and the development of I-O table,

it became possible to model the national economies At mid-1980s, CGE model wasable to provide relatively quick and large computable models for a whole economy,and was the preferred method of governments and the World Bank

In 1982, Dervis et al (1982) wrote a book on the application of CGE model

in development policies Later on, in 2002, Lofgren et al , based on Dervis book,suggested specific mathematical equations and GAMS code for the Standard SingleCountry CGE model This model simulate an economy with the participation of fourkey institutions: (i) firms, (ii) households, (iii) government and (iv) rest of the world

in which firms maximize their revenue within given technology constraints;households maximize their utility within given budget constraints; governmentcollects taxes and transfers fund back to other institutions Import and exportactivities follow the Armington frameworks2 The CGE model could measure theimpact of different policy socks such as trade and taxation policies to variousmacroeconomic indicators like real GDP, state budget revenue, consumption, inter-industrial effects

After reviewing 14 papers on the impact of taxation policies on unhealthycommodities and research methodologies, the following conclusions are withdrawn:First of all, many international experience proved the positive impacts of taxation

on unhealthy commodities towards consumption, state budget revenue and publichealth Meanwhile, Vietnamese literature did not reach consensus on the impacts ofthis kind of tax policy Secondly, the most common-used and suitable researchmethodology to measure the macro-economic impacts of tax policy is CGE model.Thirdly, there was still research gap for this thesis to measure the macro economicimpacts of imposing/increasing excise tax on unhealthy commodities in Vietnam

2 Details on Armington frameworks are presented on part 3.1.5, Chapter 3 of this research

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CHAPTER 3.RESEARCH METHODOLOGY

3.1.Static Standard Single Country CGE model

The CGE model of this study follows closely the Standard Single Country CGEmodel developed by Dervis et al (1982) and Lofgren et al (2002) The CGE model

of this thesis specifies 36 industries consisting of 7 agricultural industries (foodcrops, industrial plants including sugar-cane, vegetable and annual crops, perennials,livestock, forestry and aquaculture), 01 mining industry, 13 manufacturingindustries (processed foods, non-alcohol drink, sugar-sweetened food, alcohol, beer,tobacco, cloth, gasoline, automobile, common machine, boat and ship, other vehicleincluding aircraft and other manufacturing) 01 public utility industry, constructionand 14 service industries (see the list of industries in Appendix 1) The list of

industries was arranged to best analyze the impact of excise tax in model simulation

The standard single-country CGE model employed in this study includes 4key institutions:

First, producers maximize their profit within given technology and factorconstraints On the factor market, producers use labour and capital resource andprovide wage, rents and profits back to consumers On the product markets,producers provide products for the consumption of consumers Different producersalso provide intermediate goods for each other;

Second, consumers maximize their utility within given budget constraints; Third, government collects taxation from producers, consumers and receivetransfer from rest of the world and provide transfer back to other institutions in theeconomy;

Fourth, rest of the world participates in investment and export-importactivities through Armington Frameworks;

The model is run using GAMS software The GAMS program is written by

Dr Nguyen Tien Dung, lecturer at the Faculty of International economics andbusiness, University of Economics and Business, Vietnam National University,

14

Hanoi The simulation is conducted through two steps In the replication step, thebenchmark data are used to calibrate parameters In the counterfactual step, thepolicy shock would be put in to the model to compare the before and after-policy-shock equilibrium status.

The economy include 36 industries, denoted by s and 36 commodities, denoted by c Other sub-sets are as following:

3.1.1.Price block

There are six types of price in CGE model, including domestic price of import (PM), domestic price of export (PE), market price (PC), value added price (PN), composite price (PQ), and average output price (PX) which are defined by accounting

equations in equations (1) to (4) Equations (5) and (6) define the composite priceindex and GDP deflator while equations (7) and (8) are market clearing equations

(1) Domestic price of

imports: where:

tarf: tariff rates

stax: other commodity taxes

(2) Domestic price of exports:

where:

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PE : domestic price of exports

PWE: world market price of exports

etax: export duties

(3) Market price:

where:

PQ: price of composite goods

spstax: excise tax

stax: sale tax

where:

PX: average output price

ptax: production taxes

iocf: I-O coefficients

(5) Composite price index: ∑

PQ: composite commodity price

XQ: composite commodity quantity

PM: domestic price of imports

PE : domestic price of exports

XE: volume of exports

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3.1.2.Production block

Production block defines outputs (equation 9), labour demand (equation 10), capitalstock (equation 11), wage (equation 12), capital rent rate (equation 13) Equilibriumrate of return to capital is presented in equation (14) meanwhile equation (15) and(16) define real and nominal GDP

Notably, the equation (10) and (11) are the results of solving the optimizationproblem of firm to maximize their profit:

where:

F: production factors (labour and capital)

PF: price of production factors (PK or PL)

With production function (CES form) in equations 9

where:

ad: production function shift parameter

alphl: share parameter in production function

rhop: production function exponent

PN: value added price

alphl: share parameter in production function

(11) Capital stocks:

where:

PK: rate of capital rent

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(12) Wage rate by sector:

PKE: equilibrium rate of return to capital

pkcf: coefficients for capital rents

(14) Equilibrium rate of return to capital:

where:

PKE: equilibrium rate of return to capital

PI: investment price index

IVR: inventory investment

ID: demand for capital goods

PI: price of investment goods

Price with “0” at the end means price of bench-mark data

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(17) Household income: ∑ ∑

where:

TRGOVHH: income transfers from government to households

TRROWHH: income transfers from the rest of the world to households

TRROWGOV: transfers from the rest of the world to government

(20) Total household savings:

where:

shcf: household saving rate

dtaxh: personal income tax

(21) Corporate savings:

where:

sccf: corporate saving rate

dtaxc: corporate income tax

TRFRGOV: transfer from firm to government

TRFRROW: transfers from firms to the rest of the world