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GTAP Resource #1692

"External Shocks, Policy Reforms and Pro-Poor Growth in Bolivia"
by Lay, Jann, Rainer Thiele and Manfred Wiebelt

This paper analyzes how major external shocks and policy reforms affect Bolivia's ability to achieve pro-poor growth as envisaged in the national poverty reduction strategy. Specifically, it considers three different scenarios: an optimistic baseline scenario that roughly extrapolates the situation prevailing before the onset of the recent economic crisis; a more realistic scenario that accounts for two important negative external shocks (declining capital inflows and the El Nino phenomenon); and a scenario that captures the combined effect of the shocks and two major reform projects (long-term export contracts for natural gas and a deregulation of the urban labor market).

To evaluate the different scenarios, we employ a comparative-dynamic CGE model, which combines neoclassical and structuralist features. Production, trade and household consumption are specified along standard neoclassical lines, using CES and CET functions as well as a Linear Expenditure System for private demand. Labor markets, by contrast, constitute the main structuralist element of the model. They are assumed to be highly segmented so as to capture the reality of Bolivian employment and to keep track in a detailed manner of the poor's main income flows. Beside the self-employed labor of smallholders and urban informals, two types of unskilled labor (agricultural and non-agricultural) as well as skilled labor are distinguished. Labor markets are linked via rural-rural and rural-urban migration. While the former involves smallholders (mainly subsistence farmers) becoming hired workers in modern, export-oriented agriculture, the latter involves the absorption of smallholders by the urban informal sector. Along the lines of the Harris-Todaro model, the decision to migrate depends on wage differentials. In the urban labor market, the barriers for informal workers to enter the formal workforce are taken into account by assuming limited mobility between these labor market segments. The model allows for underemployment in the sense that people are stuck in low-paid informal sector jobs, but not for open unemployment.

The numerical specification of the CGE model is based on a Social Accounting Matrix (SAM) for 1997, which appears to be a fairly "normal" year for the Bolivian economy in the sense that no major shocks occurred, rendering it an appropriate benchmark against which to evaluate counterfactual simulations. Data used to construct the SAM comprise an Input-Output Table, the National Accounts and - given the considerable disaggregation at the factor and household level (5 labor categories and 6 household groups)- a household survey.

The CGE model is linked to household survey data in order to obtain detailed results on the poverty and distributional impact of the simulated shocks and policies. The link is simply sequential: each individual income in the household survey is scaled up or down according to the CGE results reported for factor, interest and transfer income of the different household groups. This in turn allows us to compute the evolution of various poverty and inequality indicators (headcount ratio, poverty gap, poverty severity index, Gini coefficient).

Our model simulations suggest that the shocks have not only contributed to the recent economic crisis, but that they are also likely to impair Bolivia's medium-term development prospects, leading to marked increases in both urban and rural poverty. If the reform projects were implemented, their impact on medium-run growth would be large enough to slightly overcompensate the impact of the negative external shocks. The poverty increase caused by the shocks would be more than offset for urban households, but reinforced for rural households who risk to be bypassed by the boost in gas exports and to suffer indirect income losses due to the economy-wide repercussions (in particular, a real appreciation) the gas boom entails.

Resource Details (Export Citation) GTAP Keywords
Category: 2005 Conference Paper
Status: Published
By/In: Presented at the 8th Annual Conference on Global Economic Analysis, Lübeck, Germany
Date: 2005
Created: Thiele, R. (4/26/2005)
Updated: Thiele, R. (4/26/2005)
Visits: 3,777
No keywords have been specified.

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