Poverty and Social Impact Analysis by the IMF: Review of Methodology and Selected Evidence by Robert Gillingham

Author:Robert Gillingham
Language: eng
Format: epub
ISBN: 9781452795744
Publisher: International Monetary Fund
Published: 2008-08-15T00:00:00+00:00

B. Selected Methodological Issues

Overview of Methodological Approaches

Generally, three broad types of methodological approaches are employed to analyze the poverty impact of trade liberalization and devaluation in empirical studies: general equilibrium, limited general equilibrium, and partial equilibrium.68’69 Studies with general equilibrium approaches evaluate both the direct as well as the indirect effects that arise from a specific reform on household welfare. The direct effect captures the impact on welfare arising from the change in consumer prices resulting from the reform that affects the household’s real income. The indirect effect captures the welfare impacts that result from demand- and supply-side responses to the reforms, which generate efficiency and revenue impacts. Limited general equilibrium approaches (sometimes referred to as multimarket) similarly evaluate the direct effect but incorporate only a subset of market responses, for example, by focusing on responses in key agricultural markets related to an agricultural commodity whose price is changed or only on final demand responses, ignoring factor demand responses. Partial equilibrium approaches ignore all responses and focus solely on the direct effect.

A comprehensive study of the distributional impact of trade liberalization and devaluation ideally requires a general equilibrium approach. Because these policies have significant effects on factor prices in addition to changing consumer prices, general equilibrium approaches are necessary to incorporate relevant indirect welfare effects into the results and avoid serious partial equilibrium biases.

In practice, however, data limitations and time constraints typically determine the level of analysis in empirical studies related to distributional effects of trade liberalization and devaluation. Information requirements for the estimation of fully fledged general equilibrium models are quite high for the average developing country. Therefore, many empirical studies of trade liberalization and devaluation are conducted at the partial equilibrium level with implicit or explicit assumptions regarding the significance of general equilibrium effects that could significantly alter their conclusions.

Another practical difficulty facing studies is being able to separate empirically the impact of each policy and define the relevant counterfactual. On many occasions several economic policies are implemented at the same time the policies of interest are implemented. Therefore, disentangling the separate effects may prove very difficult. The issue of the counterfactual refers to defining the initial position to which to compare the outcome postimplementation of the economic policy to be analyzed. For example, in the case of devaluation, comparing the situation after devaluation with an unsustainable initial situation would not be appropriate. Ideally, the comparison should be with the situation that would have prevailed in the absence of devaluation.

The remainder of this section discusses the main economic mechanisms linking trade policies and devaluation to poverty use in empirical studies. The discussion below follows very closely that in Winters, McCulloch, and McKay (2004).70

Download

Copyright Disclaimer:
This site does not store any files on its server. We only index and link to content provided by other sites. Please contact the content providers to delete copyright contents if any and email us, we'll remove relevant links or contents immediately.