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Fiscal Policies and Increased Trade Openness: Poverty Impacts in Ecuador

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  • Sara Wong
  • Ricardo Arguello
  • Ketty Rivera

Abstract

This research quantifies the effects on poverty in Ecuador of bilateral trade liberalization with the U.S. and fiscal changes (value added tax and direct taxes) which seek to compensate tariff revenue losses, so that the government deficit remains constant. This is a very important issue for Ecuador because it adopted the U.S. dollar as its currency in 2000, forgoting the use of monetary and exchange rate policy instruments. This paper highlights labor market effects and fiscal policies as the main mechanisms through which trade impacts poverty. The paper combines a reduced-form micro household income and occupational choice model (using the 2005/6 Ecuadorian household survey) with a standard single-country computable general equilibrium model (employing a 2004 Social Accounting Matrix). A sequential approach that simulates the full income and distributional impact of trade and tax policies is followed. The impact of these policy changes on the economy is small. Indigence and income distribution effects are small but positive. There are mixed results on poverty. The best poverty reduction outcomes are attained when only direct taxes are used for making up tariff revenue losses and the worst when a flat VAT rate is employed, including the elimination of current VAT exemptions (mostly for agricultural goods). A key contribution of this research is to illustrate the significance for poverty of policy choices available to the government.

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Bibliographic Info

Paper provided by PEP-MPIA in its series Working Papers MPIA with number 2008-19.

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Date of creation: 2008
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Handle: RePEc:lvl:mpiacr:2008-19

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Related research

Keywords: Poverty; free trade agreement; fiscal policy; CGE; micro simulation;

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References

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  1. Bourguignon, François & Robilliard, Anne-Sophie & Robinson, Sherman, 2008. "Examining the Social Impact of the Indonesian Financial Crisis Using a Macro-Micro Model," Open Access publications from Université Paris-Dauphine urn:hdl:123456789/5130, Université Paris-Dauphine.
  2. Fields, Gary S, 1989. "Changes in Poverty and Inequality in Developing Countries," World Bank Research Observer, World Bank Group, vol. 4(2), pages 167-85, July.
  3. Ravallion, Martin, 2001. "Growth, inequality, and poverty : looking beyond averages," Policy Research Working Paper Series 2558, The World Bank.
  4. Dollar, David & Kraay, Aart, 2001. "Growth is good for the poor," Policy Research Working Paper Series 2587, The World Bank.
  5. François Bourguignon & Anne-Sophie Robilliard & Sherman Robinson, 2003. "Representative versus real households in the macro-economic modeling of inequality," Working Papers DT/2003/10, DIAL (Développement, Institutions et Mondialisation).
  6. L. Alan Winters & Neil McCulloch & Andrew McKay, 2004. "Trade Liberalization and Poverty: The Evidence So Far," Journal of Economic Literature, American Economic Association, vol. 42(1), pages 72-115, March.
  7. Robilliard, Anne-Sophie & Robinson, Sherman, 2005. "The social impact of a WTO agreement in Indonesia," Policy Research Working Paper Series 3747, The World Bank.
  8. Angus Deaton & Salman Zaidi, 1999. "Guidelines for Constructing Consumption Aggregates For Welfare Analysis," Working Papers 217, Princeton University, Woodrow Wilson School of Public and International Affairs, Research Program in Development Studies..
  9. Luc Savard, 2003. "Poverty and Income Distribution in a CGE-Household Micro-Simulation Model: Top-Down/Bottom Up Approach," Cahiers de recherche 0343, CIRPEE.
  10. Davies, James B., 2004. "Microsimulation, CGE and Macro Modelling for Transition and Developing Economies," Working Papers UNU-WIDER Research Paper , World Institute for Development Economic Research (UNU-WIDER).
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