Microsimulation approaches to studying shocks and social protection in selected developing economies

In this paper, I calculate automatic stabilization in Ghana, South Africa, and Ecuador to explain how they cushion income amid income and demand shocks. Additionally, I stress-test fiscal policies within these countries to gauge welfare alternatives and insurance. Adopting a discretionary action approach for Ghana, I introduce additional safety nets that improve welfare since the existing system fails shock resistance tests. The use of a microsimulation framework is justified as it can isolate the exact redistributive impact of tax-benefit policies and reforms from a changing environment where such policies operate. Income stabilization ranges from 1% to 22%, while demand stabilization ranges from 4% to 25% across the three countries. I formalize a new concept of poverty stabilization that ranges from nil to 46% to measure vulnerability. Through the study’s results, I reveal that the extent of income insurance needs to be improved in lower- and middle-income countries.