Fiscal Policies and Increased Trade Openness: Poverty Impacts in Ecuador
AbstractThis 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 InfoPaper provided by PEP-MPIA in its series Working Papers MPIA with number 2008-19.
Date of creation: 2008
Date of revision:
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Poverty; free trade agreement; fiscal policy; CGE; micro simulation;
Find related papers by JEL classification:
- D58 - Microeconomics - - General Equilibrium and Disequilibrium - - - Computable and Other Applied General Equilibrium Models
- E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy
- F11 - International Economics - - Trade - - - Neoclassical Models of Trade
- F16 - International Economics - - Trade - - - Trade and Labor Market Interactions
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