The Poverty And Distributional Impact Of Macroeconomic Shocks And Policies

"The importance of distributional issues in policymaking creates a need for empirical tools to assess the social impact of economic shocks and policies. This paper reviews some of the modeling approaches that are currently in use at the World Bank and other international financial institutions. The specification of these models is dictated by the issues at stake, the knowledge about the nature of the process involved, and the availability and reliability of relevant data. Furthermore, shocks and policies have macroeconomic, structural, and distributional implications. This creates interdependence between such policy issues. Finally, the distributional impact of shocks and policies hinges on the heterogeneity of socioeconomic agents with respect to endowments and behavior. In the end, each modeling approach should be judged on how well it handles the interdependence between policy issues and the heterogeneity of the stakeholders, given other constraints. " -- Cover verso.

The importance of distributional issues in policymaking creates a need for empirical tools to assess the social impact of economic shocks and policies. This paper reviews some of the modeling approaches that are currently in use at the World Bank and other international financial institutions. The specification of these models is dictated by the issues at stake, the knowledge about the nature of the process involved, and the availability and reliability of relevant data. Furthermore, shocks and policies have macroeconomic, structural, and distributional implications. This creates interdependence between such policy issues. Finally, the distributional impact of shocks and policies hinges on the heterogeneity of socioeconomic agents with respect to endowments and behavior. In the end, each modeling approach should be judged on how well it handles the interdependence between policy issues and the heterogeneity of the stakeholders, given other constraints.

To minimize the harmful impact on poor people of macroeconomic shock, sound policies for dealing with crises, and an adequate public safety net should be in place before a crisis starts.

A companion to the bestseller, The Impact of Economic Policies on Poverty and Income Distribution, this title deals with theoretical challenges and cutting-edge macro-micro linkage models. The authors compare the predictive and analytical power of various macro-micro linkage techniques using the traditional RHG approach as a benchmark to evaluate standard policies, such as, a typical stabilization package and a typical structural reform policy.

Reviews techniques and tools that can be used to evaluate the poverty and distributional impact of economic policy choices. This title describes the most robust techniques and tools, from the simplest to the most complex, and aims to identify best practices. It also addresses an evaluation technique and its applications.

Economists have long sought to predict how macroeconomic shocks will affect individual welfare. Macroeconomic data and forecasts are easily available when crises strike. But policy action requires not only understanding the magnitude of a macro shock, but also identifying which households or individuals are being hurt by (or benefit from) the crisis. A popular solution is to extrapolate the welfare impact of a shock from the historical response of income or consumption poverty to changes in output, by estimating an 'elasticity' of poverty to growth. Although this method provides an estimate for the aggregate poverty impact of a macro shock, it has limited value for analysts and policymakers alike. Aggregate numbers are useful to capture the attention of policymakers and the international community, but in the absence of any information on who is affected and to what extent, provide little guidance on what actions need to be taken. This volume outlines a more comprehensive approach to the problem, showcasing a microsimulation model, developed in response to demand from World Bank staff working in countries and country governments in the wake of the global financial crisis of 2008-09. Starting with the idea of using simple macroeconomic projections as the 'macro linkages' to a micro behavioral model built from household data, the model was conceptualized, refined and tested in a diverse mix of countries: Bangladesh, Philippines, Mexico, Poland and Mongolia. The results fed into country policy dialogue and lending operations of Bank teams, as well as various reports, research papers and briefs.

We construct unanticipated government spending shocks for 103 developing countries from 1990 to 2015 and study their effects on income distribution. We find that unanticipated fiscal consolidations lead to a long-lasting increase in income inequality, while fiscal expansions lower inequality. The results are robust to several measures of income distribution and size of the fiscal shocks, to an alternative identification strategy, across expansions and recessions and across country groups (low-income countries versus emerging markets). An additional contribution of the paper is the computation of the medium-term inequality multiplier. This is on average about 1 in our sample, meaning that a cumulative decrease in government spending of 1 percent of GDP over 5 years is associated with a cumulative increase in the Gini coefficient over the same period of about 1 percentage point. The multiplier is larger for total government expenditure than for public investment and consumption (with the former having larger effect), likely due to the redistributive role of transfers. Finally, we find that (unanticipated) fiscal consolidations lead to an increase in poverty.

"The analysis of the distributional impact of policy reforms on the well-being or welfare of different stakeholder groups, particularly on th e poor and vulnerable, has an important role in the elaboration and implementation of poverty reduction strategies in developing countries. In recent years this type of work has been labeled as Poverty and Social Impact Analysis (PSIA) and is increasingly implemented to promote evidence-based policy choices and foster debate on policy reform options. While information is available on the general approach, techniques, and tools for distributional analysis, each sector displays a series of specific characteristics. These have implications for the analysis of distributional impacts, including the types of impacts and transmission channels that warrant particular attention, the tools and techniques most appropriate, the data source typically utilized, and the range of political economy factors most likely to affect the reform process. This volume provides an overview of the specific issues arising in the analysis of the distributional impacts of policy and institutional reforms in selected sectors. Each chapter offers guidance on the selection of tools and techniques most adapted to the reforms under scrutiny, and offers examples of applications of these approaches. This is a companion to the first volume, which offers guidance on trade, monetary and exchange rate policy, utility provision, agricultural markets, land policy, and education."