Poverty Impacts of Macroeconomic Reforms The Case of Bolivia

1. Poverty Impacts of Macroeconomic ReformsThe Case of Bolivia Rolf J. Langhammer Kiel Institute for World Economics www.uni-kiel.de/ifw/projects/bolivien.htm

2. 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.

3. I. The Problem • CGE modelling cannot directly take institu-tional reforms into account and thus should be complemented by qualitative country-specific and sector-specific 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 of NGOs against dialog-ues primarily based on data and models.

4. 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.

5. 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 negative external shocks.

6. III. How to proceed • Two-track approach (model plus country-specific 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.

7. 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.

8. 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 adjustment in labour markets through unemployment.

9. 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.

10. 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.

11. 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.

12. Structural Rigidities and Restrictions of the Bolivian Economy • Internal structural measures like the eradi-cation 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.

13. Classification in the Bolivia CGE-Model

14. Policy Variables and Simulation Parameters

15. Three Assumptions in the Model • Perfectly elastic export supply, high import substitution elasticity. • Perfectly elastic export supply, low import substitution elasticity. • Price elastic export supply; low import substitution elasticity. Assumption (3) is closest to reality

16. Three Simulations • Constant wages, employment volume adjusts, unemployment • Full employment, passive fiscal policy • Active expansionary fiscal policy

17. 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) Source: Wiebelt 2002: Own calculations.

18. 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) Source: Wiebelt 2002: Own calculations.

19. Terms-of-trade shockShare of disposable income Source: Wiebelt 2002: Own calculations

20. DevaluationShare of disposable income Source: Wiebelt 2002: Own calculations

21. Fiscal ExpansionShare of disposable income Source: Wiebelt 2002: Own calculations

22. Fiscal Expansion and HIPCShare of disposable income Source: Wiebelt 2002: Own calculations