External Shocks And Domestic Poverty Alleviation: Simulations With A Cge Model Of Malawi

Two sets of issues loom large on the economic horizon of Malawi: poverty alleviation and the countrys vulnerability to shocks emanating from the outside world. In this paper, simulations with a Computable General Equilibrium (CGE) model of Malawi are used to analyze aspects of these issues. The primary database that is used is a 1998 Social Accounting Matrix (SAM) for Malawi which in part is based on the recently published Malawian Integrated Household Survey (IHS) 1997-98. The simulations explore the effects of external shocks and domestic policy changes aimed at poverty alleviation. The external shocks reflect episodes to which Malawis economy has been exposed in recent times: changes in the international prices of tobacco and petroleum products and fluctuations in the real exchange rate. Two types of poverty-alleviating domestic policy shifts are simulated: a public works program and a land reform program. The public works program may function as an absorber of negative shocks elsewhere in the economy. The land reform program may introduce a structural change in the distribution of factor incomes in favor of the poor. The results for the simulated external shocks confirm that Malawis economy is highly sensitive to external shocks of the magnitudes that the country has experienced in recent years. The consequences are particularly negative for the non-agricultural population. Real depreciation has a pro-rural bias and is a powerful tool for eliminating balance-of-payment difficulties. Real appreciation protects the urban population (which may be more powerful politically) and total household consumption. A more diversified production and export structure would make Malawi less vulnerable to external price shocks and reduce the pressures that lead to sharp exchange rate fluctuations. Agricultural households are less exposed to changes in Malawis external environment since their incomes tend to be more diversified with a substantial non-agricultural component. Assuming that it is self-targeted, the expanded public works program generates significant gains for the rural poor but has a negative impact on non-agricultural households, especially in urban areas. High administrative costs and mobilization of workers that otherwise would have been employed elsewhere make the program less attractive from an over-all welfare perspective. It becomes more attractive if resulting improvements in infrastructure reduce distribution costs. The results for the land reform simulations show that a tax-based land reform program has the potential of generating substantial gains for the household groups that receive the redistributed resources. The aggregate gains and the distributional effects are reinforced if the new owners are able to maintain the production pattern of the estate sector. Matching financing from the rest of the world can play a similar role by benefiting the target groups.