DEC Course on Poverty and Inequality Analysis Module 7: Evaluating the Poverty Impacts of Economy-Wide Policies
April 16-17, 2007 U3-555 World Bank Objective Policy impact analysis is essentially an exercise in social evaluation as it involves a comparison of social states on the basis of a criterion stemming from the policy objective. In general, social evaluation is as an assessment of variations in individual and social welfare attributable to an exogenous chock or the implementation of a policy. Economic shocks and policies may have at once macroeconomic, structural and distributional implications working through a number of flow-of-funds variables, and a set of markets. This creates a need for an analytical framework that explicitly accounts for the interdependence between these three dimensions. A general equilibrium model offers such a framework. In addition, it is used to infer the counterfactual state. This module is an introduction to social impact analysis within a general equilibrium framework. The basic approach followed here is to link a social evaluation criterion to a computable general equilibrium (CGE) model describing the fundamental determinants of poverty namely, individual behavior and social interaction. The participants will learn how to build and run a simple CGE model in EViews. They will also learn how to link such a model to a poverty module based on a parameterization of the Lorenz curve. The full simulation model will then be used to illustrate the assessment of the poverty impacts of exogenous shocks (Dutch disease and terms of trade shocks), and changes in budgetary policies. The module ends with a presentation of two case studies of trade reform for China and Morocco. Outline: Monday, April 16, 2007 9:00-9:30 Session I 9:30-10:30 INTRODUCTION THE LOGIC OF GENERAL EQUILIBRIUM MODELING Presenter: B. Essama-Nssah Themes: Observed poverty and inequality in a given society depend fundamentally on individual behavior and endowments (internal and external), and the political arrangements that govern social interaction. A general equilibrium model is a logical image of a socioeconomic state
wherein the behavior of all agents is compatible. The framework can help in the analysis of the impact of policies on the determinants of poverty. This session uses the Walrasian template to explain the structure and the specification of a general equilibrium model of an open economy. Within this framework, the behavior of each agent complies with the optimization principle while social interaction is governed by the rule of quid pro quo via the market system. This session will focus particularly on the following topics: (1) Representation of the circular flow of economic activity by a social accounting matrix (SAM); (2) Analytic expression of a reduced-form general equilibrium model; and (3) limitations of the standard Walrasian framework for poverty and inequality analysis. 10:30-11:00 Break
Session II 11:00-12:30
THE MODEL OBJECT IN EVIEWS Presenter: B. Essama-Nssah Themes: Quantitative analysis of the impact of policies on poverty and the distribution of economic welfare requires a computing platform. In the case of economy-wide policies, it is desirable to be able to handle both general equilibrium modeling and the processing of individual or household level data as presented in household surveys. EViews (for Econometric Views) is one possible choice among available computing platforms. It is a Windows application designed by Quantitative Micro Software (QMS) for general econometric analysis and model simulation. The language is structured around the notion of object (a collection of related information and operations). After a brief introduction to the syntax of EViews covering objects and their containers, this session will focus on the model object which is crucial for the implementation of policy impact analysis. Using Leontief’s input-output model as an example we will show how to: (1) set up the model, (2) calibrate structural parameters; (3) solve the model and perform simulations.
12:30- 2:00 Session III 2:00-4:00
Lunch NUMERICAL IMPLEMENTATION OF A SIMPLE GENERAL EQUILIBRIUM MODEL Presenter: B. Essama-Nssah Themes: In this session, we apply the techniques learned in the previous one to build an applied general equilibrium model on the basis of the template presented in session I. EViews requires a one-to-one mapping between equations and endogenous variables. In general, closure is the
process of determining which variables to make endogenous or exogenous. The choice of a closure rule determines the behavior of the model. We will also discuss, in addition to calibration, the process of validation which seeks to determine whether the model is behaving according to the underlying theory.
Tuesday, April 17, 2007 Session I 9:00-10:30 THE LORENZ MODEL OF THE SIZE DISTRIBUTION OF ECONOMIC WELFARE Presenter: B. Essama-Nssah Themes: The value judgments underlying the Walrasian paradigm preclude interpersonal comparison of welfare. The comparison of socioeconomic states is possible only on the basis of the Pareto principle. But one cannot pass distributional judgments. For poverty impact analysis, we relax the non comparability assumption and adopt a social evaluation criterion based on the Lorenz curve. Such a criterion is consistent with the Pigou-Dalton principle of transfers. The session therefore reviews the normative underpinnings of Lorenz comparisons of distributions. We also show how to recover well-known poverty and inequality measures from a parameterized Lorenz curve.
10:30-11:00 Session II 11:00-12:30
Break ASSESSING THE SOCIAL IMPACT OF EXOGENOUS SHOCKS AND POLICIES Presenter: B. Essama-Nssah Themes: This session uses a stylized simulation framework to illustrate the analysis of the poverty and distributional impacts of exogenous shocks and policies. The first component is a two-sector CGE based on an extension of the generalized Salter-Swan model of international trade. The second component is a poverty module composed of two parameterized Lorenz curves representing the distribution of economic welfare in the rural and urban sectors. Within this framework, the government has three tax instruments available: tariffs on final and intermediate goods and an indirect tax on domestic sales. All government revenue is transferred to two representative households (rural and urban). The framework is used to simulate the social impact of Dutch disease, variations in the terms of trade and fiscal policy reforms.
12:30-2:00
Lunch
Session III 2:00-4:00
WINNERS AND LOSERS FROM TRADE REFORM CASE STUDIES FOR CHINA AND MOROCCO Presenter: Martin Ravallion Themes: One side of the globalization debate argues that openness to external trade is distributionally neutral while the other side points to the losers amongst the poor and the vulnerable. Both can be right. This session sheds light on these issues using two case studies of actual or planned trade reform in China and Morocco. The session also demonstrates how to move beyond the aggregate household approach illustrated in session II to maintain the extent of household heterogeneity found in national surveys. In this framework, the price and wage changes induced by the trade reform are estimated using a CGE, and the corresponding welfare impacts are then estimated for each household. Standard poverty and inequality measures can then be calculated to show the impact of the reforms. But we can also study the gains and losses at each level of pre-intervention income.