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Adjustment and Income Distribution: A Counterfactual Analysis

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  • Francois Bourguignon
  • William H. Branson
  • Jaime de Melo

Abstract

This paper presents a structural macro simulation model to quantify the effects of alternative stabilization packages on the distribution of income and wealth. The model combines the explicit microeconomic optimizing behavior characteristic of computable general equilibrium models with asset portfolio behavior of macroeconomic models in Tobin's tradition. In this model there are four main mechanisms by which policy changes affect the distribution of income and wealth. First changes in factor rewards affect directly household income distribution. Second, household real incomes are affected by changes in their respective cost of living indexes. Third, household real incomes are affected by changes in real returns on financial assets since household incomes include income from financial holdings. Fourth, household wealth distribution is affected by capital gains and losses. Simulations with' the model are carried out for a representative economy subject to the interest rate and terms-of-trade shocks of the early 1980s. The simulations suggest a large adverse impact on the distribution of income of a sharp contractionary package. The resulting distributional shifts are likely to endanger the sustainability of the package even though the distribution of income becomes more equal when normal policies are resumed. By contrast, the targeted expenditure cut programs advocated by the critics of contractionary packages result in a much less unequal distribution of income during the adjustment package, even though the distributional improvements of the targeted package are mostly reversed in the post-adjustment period. The simulations support the view that stabilization packages which do not have specific components targeted towards the poor will have a noticeable adverse effect on the distribution of income, which is likely to result in some form of permanent damage for those below the poverty line.

Suggested Citation

  • Francois Bourguignon & William H. Branson & Jaime de Melo, 1989. "Adjustment and Income Distribution: A Counterfactual Analysis," NBER Working Papers 2943, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:2943
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    1. Cornia, Giovanni Andrea & Jolly, Richard & Stewart, Frances (ed.), 1987. "Adjustment with a Human Face: Volume 1, Protecting the Vulnerable and Promoting Growth," OUP Catalogue, Oxford University Press, number 9780198286097.
    2. Vittorio Corbo & Jaime de Melo & James Tybout, 2015. "What Went Wrong with the Recent Reforms in the Southern Cone," World Scientific Book Chapters,in: Developing Countries in the World Economy, chapter 2, pages 21-54 World Scientific Publishing Co. Pte. Ltd..
    3. François Bourguignon & William H. Branson & Jaime de Melo, 1989. "Macroeconomic Adjustment and Income Distribution: A Macro-Micro Simulation Model," OECD Development Centre Working Papers 1, OECD Publishing.
    4. Tobin, James, 1969. "A General Equilibrium Approach to Monetary Theory," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 1(1), pages 15-29, February.
    5. Jaime de MELO & Sherman ROBINSON, 2015. "Trade Adjustment Policies And Income Distribution In Three Archetype Developing Economies," World Scientific Book Chapters,in: Modeling Developing Countries' Policies in General Equilibrium, chapter 10, pages 217-242 World Scientific Publishing Co. Pte. Ltd..
    6. Dell, Sidney, 1982. "Stabilization: The political economy of overkill," World Development, Elsevier, vol. 10(8), pages 597-612, August.
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    Cited by:

    1. Haider A. Khan, 2007. "Social Accounting Matrix: A Very Short Introduction for Economic Modeling," CIRJE F-Series CIRJE-F-477, CIRJE, Faculty of Economics, University of Tokyo.
    2. Sahn, David E. & Dorosh, Paul & Younger, Stephen, 1996. "Exchange rate, fiscal and agricultural policies in Africa: Does adjustment hurt the poor?," World Development, Elsevier, vol. 24(4), pages 719-747, April.
    3. repec:dau:papers:123456789/5149 is not listed on IDEAS
    4. Khan, haider, 2008. "Analyzing Poverty Impact of Trade Liberalization Policies in CGE Models: Theory and Some Policy Experiments in Agricultural and Non-agricultural Sectors in South Asia," MPRA Paper 7609, University Library of Munich, Germany, revised Mar 2008.
    5. Anne Maasland, 1992. "Consecuencias Distributivas de las Políticas de Ajuste: Una Revisión de Metodologías," Latin American Journal of Economics-formerly Cuadernos de Economía, Instituto de Economía. Pontificia Universidad Católica de Chile., vol. 29(86), pages 141-162.
    6. Dorosh, Paul A. & Sahn, David E., 2000. "A General Equilibrium Analysis of the Effect of Macroeconomic Adjustment on Poverty in Africa," Journal of Policy Modeling, Elsevier, vol. 22(6), pages 753-776, November.
    7. Jorge Alarcon & Jan Van Heemst & Niek De Jong, 2000. "Extending the SAM with Social and Environmental Indicators: An Application to Bolivia," Economic Systems Research, Taylor & Francis Journals, vol. 12(4), pages 473-496.
    8. White, Howard & Luttik, Joke & DEC, 1994. "The countrywide effects of aid," Policy Research Working Paper Series 1337, The World Bank.
    9. Maasland, Anne, 1990. "Methods for measuring the effect of adjustment policies on income distribution," Policy Research Working Paper Series 474, The World Bank.
    10. Aliaga Lordemann, Jevier & Villegas Quino, Horacio, 2011. "Poverty, Indigence and Public Investment in Bolivia: A Simulation Analysis," Documentos de trabajo 5/2011, Instituto de Investigaciones Socio-Económicas (IISEC), Universidad Católica Boliviana.

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