A CGE MODEL TO MEASURE THE IMPACT OF THE US EXPENDITURES ON THE LAJES AIR BASE ON THE ECONOMIES OF THE AZORES AND TERCEIRA – An updated evaluation

The current study analyses the impact on a local economy, the Azores, of a downsizing/closure of a military base. To this effect, a dynamic CGE model detailing six household categories, forty-five sectors and four trading partners is used. Air bases can have important local and even regional economic impacts and can influence the structure of the immediate communities. Geopolitical and technical change has dictated, in many cases, base reduction or even base closure policies. The current paper specifies a CGE model to measure the impact of such policies on the local economy and to analyze possible mitigating policy reactions. It is found that the potential impact on this small regional economy will mostly be felt on private consumption and investment, will have a relatively higher impact on the lowest income group and will have differentiated sector impacts. The mitigating policies have the potential to, temporarily, offset the negative economic impacts, but they will not provide long-term positive impact with the current government expenditure structure. Relative to the business as usual scenario, GDP is estimated to be in the range of 0, 07 to 0, 09 percent lower by 2030. Using equivalent variation, the estimated welfare impact is negative for all six household categories with relatively higher losses for the lower income categories. The estimated loss in income varies between 22 and 44 million euros by 2030, depending on the scenario. Previous estimates of Bayar et al (2009) pointed to a fall of about 28 million euros, for an earlier time period and using an earlier SAM. Using the change in value added, the primary production sectors tend to be positively impacted while industrial and services sectors are negatively impacted. External balances are affected negatively. Since the model is conceived for economy wide impacts and the base is in one specific island, that represents 20% of the total economy, the impacts are expected to be fivefold in this island. Suggesting an overall negative impact, the model also points to a positive impact on primary production due to the fall in relative prices, which, however, does not compensate the negative impacts in other sectors. These results suggest that mitigation policies should be considered. It is also identified that policies based on the current structure of government expenditures will crowd-out private demand.