A GENERAL EQUILIBRIUM-BASED SOCIAL POLICY MODEL FOR CÔTE D´IVOIRE
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A GENERAL EQUILIBRIUM-BASED SOCIAL POLICY MODEL
FORCÔTE D´IVOIRE
Ngee-Choon ChiaSadek M. WahbaJohn Whalley
1992
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• Introduction
• Social Policy model
• Poverty-reduction targeting programs
• Conclusions
Outline
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INTRODUCTION
Analysis of social policy options
Implications of any proposed policy change
Gains or losses in the different groups
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• ECONOMY•Population: 12 million (1989)•French Colony•Key Member of the West African Monetary Union
SOCIAL POLICY MODELCÔTE D´IVOIRE
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• History 1960: Independence
1965-1973: Average annual growth rate 8.9%
1976: Coffee price boom, only one year*implementation of an investment program in spite of the fact that cocoa prices had fallen.1980: Structural adjustment programs1981: Budget deficit 12%of GDP, 1986: Terms of Trade had fallen by 40%1990: External debt: 125% of GDP Internal debt: 37% of GDP
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• General Equilibrium Model
•Objective: • Assessment of the social consequences of
the adjustment programs since 1981.
•Characteristics:• Based on SAM• Focuses on incomes and distribution• Operation of the underlying real economy• Predictions of what is likely to happen
when changes are introduced.
•Weaknesses:• Doesn´t capture macro imbalances• Can´t capture effects on infraestructure
and social development(education, health)
SOCIAL POLICY MODELCÔTE D´IVOIRE
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Stru
ctur
e (1
5 se
ctor
s)
Tradables7
Agricultural
Export sectorNontradition
alTraditional
First transformation
sectorFormal
InformalManufacturing
IndustriesFormal
Informal
Nontradables8
Gas and Electricity
Construction FormalInformal
Transport
Government Services
Other Services FormalInformal
Financial services
SOCIAL POLICY MODELCÔTE D´IVOIRE
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• Production functions: CES, Leontief and Cobb.Doublas
• Intermediate inputs (domestic and imported goods)
Production
SOCIAL POLICY MODELCÔTE D´IVOIRE
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• 7 households types
• Income from endowments and tranfers (Abroad, HH and government)Demand
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• Public Services (security, defense,etc)
• Activities financed by taxesGovernm
ent• Labour:
Agricultural(F), Skilled(M) and Unskilled(M)
• Capital: Sector specific and mobileLabour
Market
• Closure Rule• Small open price
taking economy (SOPTE)• M, X taken as
given• Armington
AssumptionExternal Sector
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Armington Assumption
• Final products traded internationally are differentiated on the basis of the location of production
• In one country each industry produces only one product – this is distinct from the product of the same industry from another country
• Accomodates ‘Cross-hauling’ – a problem in CGE models
Armington
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SOCIAL POLICY MODEL
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Export Taxes(STAB)
• Subsidies: Price lower internationally
• Government Revenue: Price higher internationally
Income Tax
• Marginal rates increase with income
• Tax:
• Revenue:
Taxes on goods and
Production VA
tax
• Taxes at rate enter the model as well as value added tax from each sector.
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Total Tax Revenue: Spent on:
Goods and servicesTransfersSavings
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Incidence of TaxesTax System
• Tax incidence changing over time• Strongly biased against exports (subsidies instead of taxes due to the cocoa
price reduction)• Dependence on import duties
Features• Large trasnfers between households• Narrow base of key taxes• Protected environment taking into consideration the trade taxes
Incidence•By modifying the taxes, sectors will be affected in different ways, specially if we consider transfers among households.
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Effectiveness of Poverty-Reducing Targeting Programs
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Poverty-Reducing Targeting programs
• Social expenditure Programs = highest share of total government expenditure
• Any tranfer scheme to reduce poverty will be at expense of some other governement expenditure (trade-off)
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Disaggregation of the
Household sectors
• Identify households by income level is a great constraint for targeting process and makes it impossible to target a specific group and track it since income varies.
• The model uses a division of households sectors accorging to different categories instead of income levels
Measures of poverty and
income distribution
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Poverty-Reducing Targeting programs
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Poverty-Reducing Targeting programs
Principles of targeting
Objetive of targeting
Types of targeting
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Poverty-Reducing Targeting programs
Complete Identification of Households
Tranfer only to the poor households
Self-financedTaxes from rich HH
=Transfer to poor HH
There is a cost of identification
Very difficult to apply
PERFEC
T TARGETING
Poverty Line
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Tranfer to all households
Tranfers are higher than in PT
No cost of identification
More realistic
Aim: erradicate poverty completely
Poverty-Reducing Targeting programs
UNIVERSAL TARGETING
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Perfec
t T.
Poverty IndexUniversalistic
Scheme
Poverty-Reducing Targeting programs
Amount needed to eliminate poverty (T)
TRANSFER SIZE
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Poverty-Reducing Targeting programs
Cost of the programs
In the case of perfect targeting the porverty-reduction program would represent 3% of GDP
UNIVERSAL TARGETING
PERFECT TARGETING
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GHANA
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GENERAL EQUILIBRIUM ANALYSIS
• Targeting programs would shift the function upwards
• Funds distributed to all households simultaneously or individually
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GENERAL EQUILIBRIUM ANALYSIS
GE effects
*Size of tranfers and its goal (zero head-count ratios)*Leakages*All vs group schemes
Size
of Transfer
If the size of the tranfer is proportional to the gain in income
Political
Implicati
ons
Feasibility of the programs
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Total Real Government revenues (expenditures) are kept constantIn both counterfactuals all households are taxed, including the beneficiaries2 types of counterfactuals:
All case: tranfers distributed simultaneously to all groups
Household Case: each household is targetted
separately
GENERAL EQUILIBRIUM ANALYSIS
GE
effe
cts
Uni
vers
alis
tic
Appr
oach Γ h (1− 𝑡h )
Tranfer:Tax:
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GENERAL EQUILIBRIUM ANALYSIS
Percentage increase in final
real income is less than the
percentage increase in base
income due to the transfer.
HH transfers are included, hence some HH gain (lose) from a
targeting program directed to other
group. MVIVA-MINAC
Government and formal private sector
lose from the universal targeting scheme
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Universal targeting scheme reduces
poverty by 7 percentage points
Reduction of poverty
(ALL, MEXP, MVIVA, MINAC)
Increase in poverty
(MSAV, MADP, MFOR, MIND)
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GENERAL EQUILIBRIUM ANALYSIS
Universal Targeting vs. Individual targeting
Universal • Better for
agricultural households • Has the greater
poverty reducing effect (if directed to correct households)• Leakage effects
Individual • Total poverty for the
group not eliminated • Effects the final
income of other households through inter-house transfers
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GENERAL EQUILIBRIUM ANALYSIS
Size
of T
rans
fer
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GENERAL EQUILIBRIUM ANALYSIS
Government and formal sector
households have
negative net gains Tax the
high income
groups is politically unfeasible
Polit
ical
Im
plic
atio
ns
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CONCLUSIONDistribution of tax and social policies in Cote d’Ivoire
Targeting programs and general equilibrium effects
Inter-house transfers play an important role in poverty reduction
Politically feasible
Provides a useable social policy framework
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QUESTIONS?