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External shocks and policy alternatives in small open economies: The case of El Salvador

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  • Morley, Samuel
  • Piñeiro, Valeria
  • Robinson, Sherman

Abstract

In this paper we used a dynamic, regionalized computable general equilibrium (CGE) model to analyze the effect of various negative balance of payments shocks on output and employment and the effect of different alternative investment strategies on growth. The model shows clearly how sensitive El Salvador is to remittance or terms of trade shocks. Each 10 percent reduction in remittances lowers gross domestic product (GDP) by 0.2 percent and household consumption by 1.4 percent, with the cost rising as the shock intensifies. Any negative balance of payments shock forces a reduction in absorption, production, and employment and a real devaluation. Because El Salvador's economy is dollarized, that real devaluation can only come about through a fall in domestic prices brought about by recession. We show that the impact of the shock on output depends on how flexible wages are—the impact is smaller when real wages are flexible and greatest when they are fixed in dollars. We used the CGE model to analyze alternative investment strategies for increasing the growth rate. The investment share of GDP is low, and the model makes it clear that without some strategy for increasing investment, the economy's overall growth rate is likely to remain low. We hypothesized two alternative growth rates for investment, both associated with an increase in exogenous technical change. Both strategies require a marginal increase in the share of output devoted to investment. We also showed that if El Salvador can increase the investment share from 15.5 percent to just 16 percent over five years by producing a growth rate in investment of 8 percent per year, and if that increase produces a 1 percent increase in the rate of technical change in all sectors, then the growth rate of the economy will practically double, rising from 2.85 percent to 4.95 percent per year. There are equally favorable effects on employment for unskilled labor and on wages for skilled labor.

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Bibliographic Info

Paper provided by International Food Policy Research Institute (IFPRI) in its series IFPRI discussion papers with number 1134.

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Date of creation: 2011
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Handle: RePEc:fpr:ifprid:1134

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Keywords: Development strategies; general equilibrium models; Regional development; Computable general equilibrium (CGE) modeling;

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References

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  1. Zhang, Xiaobo & Hu, Dinghuan, 2011. "Overcoming successive bottlenecks: The evolution of a potato cluster in China," IFPRI discussion papers 1112, International Food Policy Research Institute (IFPRI).
  2. Quisumbing, Agnes R. & Kumar, Neha & Behrman, Julia A., 2011. "Do shocks affect men's and women's assets differently?: A review of literature and new evidence from Bangladesh and Uganda," IFPRI discussion papers 1113, International Food Policy Research Institute (IFPRI).
  3. Ecker, Olivier & Mabiso, Athur & Kennedy, Adam & Diao, Xinshen 22905, 2011. "Making agriculture pro-nutrition: Opportunities in Tanzania," IFPRI discussion papers 1124, International Food Policy Research Institute (IFPRI).
  4. Takeshima, Hiroyuki & Salau, Sheu, 2011. "How does ownership of farm implements affect investment in other farm implements when farmers' liquidity constraint is relaxed?: Insights from Nigeria," IFPRI discussion papers 1133, International Food Policy Research Institute (IFPRI).
  5. Maystadt, Jean-Francois, 2011. "Poverty reduction in a refugee-hosting economy: A natural experiment," IFPRI discussion papers 1132, International Food Policy Research Institute (IFPRI).
  6. Manfred Wiebelt & Karl Pauw & John Mary Matovu & Evarist Twimukye & Todd Benson, 2011. "Managing Future Oil Revenues in Uganda for Agricultural Development and Poverty Reduction: A CGE Analysis of Challenges and Options," Kiel Working Papers 1696, Kiel Institute for the World Economy.
  7. de Brauw, Alan & Gilligan, Daniel, 2011. "Using the regression discontinuity design with implicit partitions: The impacts of comunidades solidarias rurales on schooling in El Salvador," IFPRI discussion papers 1116, International Food Policy Research Institute (IFPRI).
  8. Yu, Bingxin & Nin-Pratt, Alejandro & Funes, José & Gemessa, Sinafikeh Asrat, 2011. "Cereal production and technology adoption in Ethiopia:," IFPRI discussion papers 1131, International Food Policy Research Institute (IFPRI).
  9. Zambrano, Patricia & Maldonado, Jorge H. & Mendoza, Sandra L. & Ruiz, Lorena & Fonseca, Luz Amparo & Cardona, Iván, 2011. "Women cotton farmers: Their perceptions and experiences with transgenic varieties: A case study for Colombia," IFPRI discussion papers 1118, International Food Policy Research Institute (IFPRI).
  10. Ulimwengu, John & Liverpool-Tasie, Saweda & Randriamamonjy, Josee & Ramadan, Racha, 2011. "Understanding the linkage between agricultural productivity and nutrient consumption: Evidence from Uganda," IFPRI discussion papers 1128, International Food Policy Research Institute (IFPRI).
  11. Francesconi, Gian Nicola & Wouterse, Fleur, 2011. "The renewed case for farmers' cooperatives: Diagnostics and implications from Ghana," IFPRI discussion papers 1129, International Food Policy Research Institute (IFPRI).
  12. Douillet, Mathilde, 2011. "Which trade integration scheme can best help Sub-Saharan Africa develop and export more processed agricultural goods?:," IFPRI discussion papers 1119, International Food Policy Research Institute (IFPRI).
  13. Laborde Debucquet, David & Martin, Will & van der Mensbrugghe, Dominique, 2011. "Measuring the impacts of global trade reform with optimal aggregators of distortions:," IFPRI discussion papers 1123, International Food Policy Research Institute (IFPRI).
  14. Glendenning, Claire J. & Asenso-Okyere, Kwadwo & Babu, Suresh C., 2011. "Evaluation of value-added agricultural advisory services: Case study of agriclinics in Southern India," IFPRI discussion papers 1125, International Food Policy Research Institute (IFPRI).
  15. Nkonya, Ephraim & Place, Frank & Pender, John & Mwanjololo, Majaliwa & Okhimamhe, Appollonia & Kato, Edward & Crespo, Susana & Ndjeunga, Jupiter & Traore, Sibiry, 2011. "Climate risk management through sustainable land management in Sub-Saharan Africa:," IFPRI discussion papers 1126, International Food Policy Research Institute (IFPRI).
  16. Yamauchi, Futoshi & Liu, Yanyan, 2012. "Impacts of an early stage education intervention on students'learning achievement : evidence from the Philippines," Policy Research Working Paper Series 6246, The World Bank.
  17. Jin, Ling & Chen, Kevin Z. & Yu, Bingxin & Huang, Zuhui, 2011. "How prudent are rural households in developing transition economies:," IFPRI discussion papers 1127, International Food Policy Research Institute (IFPRI).
  18. Yamauchi, Futoshi & Liu, Yanyan, 2011. "Impacts of an early education intervention on students' learning achievement: Evidence from the Philippines," IFPRI discussion papers 1121, International Food Policy Research Institute (IFPRI).
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Cited by:
  1. Charness, Gary & Viceisza, Angelino, 2012. "Comprehension and Risk Elicitation in the Field: Evidence from Rural Senegal," University of California at Santa Barbara, Economics Working Paper Series qt5512d150, Department of Economics, UC Santa Barbara.

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