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Poverty Impacts of Macroeconomic Reforms The Case of Bolivia Rolf J. Langhammer Kiel Institute for World Economics www.uni-kiel.de/ifw/projects/bolivien.htm I. The Problem Structural adjustment impacts very differently upon income groups due to large differences in sources of income generation and income expenditures between rich and poor house-holds. Programmes intended to fight poverty cannot rely on analyses based on average income data for all households. I. The Problem CGE modelling cannot directly take institu-tional reforms into account and thus should be complemented by qualitative country-specific and sectorspecific enquiries. Both levels of analyses are mostly not the common base of policy dialogues between all groups of the civil society. There is reluctance and even resistance II. The Objective The Bolivia-project is intended to contribute to an empirically rooted discussion on strat-egies to fight poverty and to improve the in-come distribution. More important than the dissemination of the CGE framework is the dissemination of reasons why the model produces specific results. II. The Objective Both policy options and policy restrictions should be reported to domestic actors. In poor countries, fatalism is as inappropriate as an overstatement of own capabilities. In concrete terms, can we give an answer to the question whether or not a country like Bolivia is able to pursue an anti-shock policy which compensates for short-term III. How to proceed Two-track approach (model plus countryspecific sector-specific enquiries). What the model should do: the entire income cycle should be taken into account; real and financial factors should be related to each other, different households should be sur-veyed concerning income generation and income expenditure. III. How to proceed The model should be suitable for simulation of monetary stabilization measures. The model should reflect the openness of the economy and should be applicable to both price takers (small country assumption) and price setters in commodity markets. III. How to proceed The model should be calibrated with recent data to mirror the Bolivian economy after successful stabilization. Fresh data are particularly necessary for the income situation of the various households. The model should not only be closed via price adjustment but should also include “structural” elements, for instance, via III. How to proceed The model should simulate the impact of internal and external policy variables on the various households, for instance, depreciation, terms of trade shocks, and fiscal expansion. IV. Structural Rigidities and Restrictions of the Bolivian Economy Export supply is hardly diversified and thus exposed to international commodity price shocks. The diversification of export supply costs time. Import demand is inelastic. There are hardly any domestic substitutes to imports of capital goods and intermediates. IV. Structural Rigidities and Restrictions of the Bolivian Economy Private capital flows are volatile. High inflows are rapidly followed by high outflows. There are competitive depreciations of Latin American currencies which because of Bolivia lagging behind in exchange rate adjustment led to a real appreciation of the Bolivian currency and to losses in export competitiveness. IV. Structural Rigidities and Restrictions of the Bolivian Economy Internal structural measures like the eradication of Coca production are income reduc-ing and have procyclical effects in a situation of an exogenous shock. High dollarization and a high fiscal deficit reduce the efficacy of domestic anti-shock measures. Classification in the Bolivia CGEModel Sector/Goods and Services Factors Institutions Households Indicators Trad. agriculture Rural labor Households Smallholders Macroeconomic Modern agriculture Urban unskilled labor Private corporations Agr. workers Sectoral Coca Urban skilled labor State enterprises Non-agr. workers Factoral Oil & gas (nm) Informal (un-incorp.) capital Government Employees Institutional Mining Formal (corp.) capital Rest of the World Urban informals Households: Consumer goods Financial institutions Employers Nom. income Intermediate goods Commercial banks Real income Capital goods Development banks Cost of living Utilities (nt) Central Bank Share of dispos-able households Construction (nt) Pension Fund Poverty : Inf. services (ne) Incidence Formal service Poverty gap Publ. services (nt) Policy Variables and Simulation Parameters Government Central Bank Rest of the World Income/corporate taxes Minimum reserves (in relation to imports) Development aid Export subsidies Central Bank interest rate Foreign portfolio investment (FPI) Import tariffs Nominal exchange rate Foreign direct investment in public and private enterprises (FDI) Excise taxes Net credit to government Value-added taxes Debt relief (HIPC) Transfers to house-holds and corporations Foreign interest rate Total real consumption Factor income from abroad Total real investment Remittances from abroad World export prices World import prices Grant element on concessional credits Three Assumptions in the Model 1. Perfectly elastic export supply, high import substitution elasticity. 2. Perfectly elastic export supply, low import substitution elasticity. 3. Price elastic export supply; low import substitution elasticity. Assumption (3) is closest to reality Three Simulations 1. Constant wages, employment volume adjusts, unemployment 2. Full employment, passive fiscal policy 3. Active expansionary fiscal policy Short-term Macroeconomic Effects of a Reduction of Export Prices for Agricultural and Mineral Commodities by 10 per cent (deviation from baseline scenario in per cent) Macroeconomic indicators Simulation 2 Full employment/ Passive Fiscal policy Simulation 1 Underemployment/ Passive fiscal policy Reference run Simulation 3 Full employment/ Expansionary fiscal policy 41.644 I -0.43 II -0.47 III -0.62 I -0.18 II -0.16 III -0.10 I 0.00 II 0.00 III -0.06 36.903 -0.45 -0.50 -0.42 -0.37 -0.40 -0.25 1.68 1.58 0.59 5.790 8.175 0.0(Ex) -1.76 0.0(Ex) -2.02 0.0(Ex) -2.79 0.0(Ex) -1.40 0.0(Ex) -1.55 0.0(Ex) -2.25 0.0(Ex) 7.33 0.0(Ex) 6.90 0.0(Ex) 3.84 Absorptiona 2.086 45.078 0.0(Ex) -0.69 0.0(Ex) -0.77 0.0(Ex) -0.85 0.0(Ex) -0.55 0.0(Ex) -0.61 0.0(Ex) -0.61 12.35 2.71 12.62 2.55 7.55 1.18 Export volume Export value (US$) Import volume and import value (US$) Trade balance (US$)b 8.791 1.675 2.329 -0.654 -2.82 -6.53 -3.10 -0.648 -1.06 -4.92 -2.02 -0.676 -1.87 -5.78 -2.42 -0.673 -2.04 -5.83 -2.89 0.678 -0.08 -4.04 -1.76 -0.676 -0.41 -4.45 -2.22 -0.673 -8.46 -11.98 3.92 -0.939 -7.91 -11.22 3.91 -0.927 -3.48 -7.27 2.05 -0.819 GDPa Consumptiona. of which: Publica Investmenta. of which: Publica Nominal exchange ratec Domestic inflation Real exchange rate index d Employmente (real wage) Agr. workers Employees Non-agr. workers External terms of trade p$m/p$e 5.25 0.0(Ex) 0.0(Ex) 0.0(Ex) 0.0(Ex) 0.0(Ex) 0.0(Ex) 0.0(Ex) 0.0(Ex) 0.0(Ex) – 102.79 -1.60 102.98 -1.97 102.63 -2.41 102.29 -1.62 103.03 -2.0 102.68 -2.96 101.85 0.0(Ex) 104.77 0.0(Ex) 104.77 0.0(Ex) 104.98 989.6 667.7 626.4 296.5 – -9.71 -0.39 -0.30 – -10.13 -0.46 -0.79 – -8.25 -1.17 -1.82 – (-10.56) (1.13) (1.53) – (-10.80) (1.40) (1.23) – (-8.33) (0.68) (0.24) – (-11.74) (1.22) (-1.68) – (-12.48) (1.18) (-1.41) – (-11.09) (1.71) (-0.85) 0.991 0.993 0.993 0.992 0.994 0.989 0.990 0.992 0.954 0.994 I: Perfectly elastic export supply and high import substitution elasticities. II: Perfectly elastic export supply and low import substitution elasticities. III: Price elastic export supply and low import substitution elasticities. aIn bill. Bolivianos at prices of 1997. – bIn bill. US$ at 1997 exchange rate. – cPrice notation: Bol./US$. – dIMFnotation: Index rises/declines with real appreciation/depreciation. – eIn 1000 man/years. Figures in parentheses refer to real wage changes (producer wage rate). Source: Wiebelt 2002: Own calculations. Short-term Distribution Effects of Reduction of Export Prices for Agriculture and Mineral Commodities by 10 per cent (deviation of real per capita income from baseline scenario in per cent) Price elastic export supply Perfectly elastic export supply High import substitution elasticity (I) Low import substitution elasticity (II) Low substitution elasticity (III) 1a 1a 2 3 1a 2 Small holders -4.85 -4.41 -9.32 -6.57 -5.98 -10.77 -3.39 -7.69 -7.67 Agr. workers -8.47 -10.75 -11.55 -8.52 -10.96 -12.13 -8.92 -10.93 -10.94 Non-agr. workers 0.14 0.15 -2.33 0.24 0.02 -2.11 -0.84 -1.61 -1.54 Employees 0.40 0.14 7.28 0.64 0.28 6.98 -0.25 1.50 4.45 Urban informals 0.93 1.87 4.46 0.79 2.02 5.98 1.15 2.87 2.90 Employer -1.04 -0.83 7.34 -0.90 -0.67 6.91 -0.54 3.66 3.59 All households -0.75 -0.65 1.02 -0.84 -0.73 0.81 -0.84 -0.75 1.91 GINI-coefficient 0.60 0.60 0.63 0.61 0.61 0.63 0.60 0.62 0.62 3 2 3 1 and 2: Under passive fiscal policy. 3: Active fiscal policy (public expenditure expansion). 1: Nominal wages are constant, employment volume adjusts. 2 and 3: Employment is constant, wages adjust. aIn calculating real income, it is assumed that employees support the unemployed. Source: Wiebelt 2002: Own calculations. Terms-of-trade shock Share of disposable income 1,5 1,0 CapOwn GINI RurWork 0,5 0,0 UrbSkill -0,5 UrbUnsk Smallhold -1,0 UrbSelf -1,5 0 1 2 3 4 5 6 Source: Wiebelt 2002: Own calculations 7 8 9 10 Devaluation Share of disposable income 2,0 Smallhold 1,5 1,0 UrbSelf 0,5 UrbSkill RurWork UrbUnsk GINI CapOwn 0,0 -0,5 -1,0 0 1 2 3 4 5 6 Source: Wiebelt 2002: Own calculations 7 8 9 10 Fiscal Expansion Share of disposable income 2,0 GINI Smallhold UrbSkill CapOwn UrbSelf 1,0 0,0 -1,0 -2,0 -3,0 RurWork -4,0 UrbUnsk -5,0 0 1 2 3 4 5 6 Source: Wiebelt 2002: Own calculations 7 8 9 10 Fiscal Expansion and HIPC Share of disposable income 3,0 2,0 GINI UrbSkill CapOwn Smallhold UrbSelf 1,0 0,0 -1,0 -2,0 -3,0 RurWork UrbUnsk -4,0 -5,0 -6,0 0 1 2 3 4 5 6 Source: Wiebelt 2002: Own calculations 7 8 9 10