Poverty and Social Impact Analysis: a User’s Guide – Economic tools Nairobi, 6-8th December 2006

Introduction The choice of the methodology or economic tool to be applied is highly dependent : Indirect impacts: scale of the reform, importance to the economy and time horizon. (Nature of the reform) Data availability Timeframe Local capacity

Economic Tools to Analise Impact Types Examples Direct impact analysis Incidence analysis Poverty mapping Behavioral models Supply and demand analysis Household models Partial equilibrium tools Multi-market models Reduced-form models General equilibrium tools CGEs SAM-IO Macro-micro models 1-2-3 PRSP PAMS

1. Direct Impact Analisys Question: who is directly affected by a policy change and by how much. Assumption: No behaviourial reaction from affected households or groups - suitable for short-term impacts and no general equilibrium effects Tools: incidence analysis, poverty mapping, tools to assess public service delivery.

1.1. Incidence Analysis Objective: To estimate the distributional incidence of a component of income/consumption at the household level. Which households are exposed to a policy change: useful for expenditure or tax reforms. Simple incidence analysis: the incidence of the average expenditure. Marginal incidence analysis: the incidence of the last or next unit of expenditure.

1.2. Poverty Maps Objective: to display a geographical profiles of spatial distribution of poverty within a country, and suggest where policies might have the greatest impact on poverty reduction. Application: public investment decision on health, education, rural roads. Shortcoming: very intensive on disaggregated data

1.3. Tools to assess public service delivery Objective: to allow analysts to measure the efficiency of public spending and the delivery performance through assessing leakages and their sources, captures of financial flows, and incentives and accountability mechanisms at all stages of the expenditure chain. Application: analysis of the efficiency and quality of health and education service delivery.

2. Behavioural Analysis Objective: to go beyond direct impact analysis to recognize some behavioural responses among households and economic agents. Assumption: households doreact to an exogenous policy shock based on behavioural specifications and model assumptions. Tools: behavioral incidence analysis, demand/supply analysis, and household models.

2.1.Behavioural Incidence Analysis Objetive: to combine incidence analysis with econometric estimates of household behaviour. Application: expanding acess to education, disencitive effects of welfare programmes.

2.2.Demand and Suply Analyses Objective: to estimate the responses of consumers and producers, respectively, to price changes. Application: Demand: willingness to pay – public utility reforms. It models the consumer’s reaction. Supply: agriculture – trade reform (quota elimination), subsidies, rural roads. It models the producer’s reaction.

2.3.Household Models Objective: to analyze impacts by taking account of households as both consumers and producers. Application: agriculture (hh is both producer and consumer) and also huge tax reforms.

3. Partial Equilibrium Analysis Objective: to equate supply and demand in one or more markets so that prices clear at their equilibrium level. Assumption: allow for indirect impacts that occur when changes in one market affect other markets, but only in the relevant markets for the model. Tools:multimarket models and reduced form techniques.

3.1. Multimarket Models Objective: to estimate systems of supply and demand relationships, so that the analyst can see how policies in one sector impact on other related sectors. Application: agriculture policy changes (subsidies, technical change, liberalisation)

3.2. Reduced-form Estimation Objective: to simulate the impact of different policy variables on poverty and social outcomes. Application: direct impact on poverty (income or consumption) of reforms controlling for a series of counfounding factors.

4. General Equilibrium Analysis Objective: to go beyond partial equilibrium analysis modelling all economic accounts in the economy and thus aims to present a comprehensive picture of the impact of the policy change. (different levels of aggregation). Assumption: results depend on the model specification and parameters. Tools: social account matrices (SAM), input-output models (IO) and computable general equilibrium models (CGE).

4.1. SAM and IO models Objective: to simulate impacts by selecting some accounts as exogenous, and leaving the others endogenous Shortcoming: results are very sensitive to the assumpiton of what accounts are exogenous or not. Prices do not adjust.

4.2. CGE Description: Completely specified models that can vary from 1 country, 2 activities, 3 goods to several activities and actors with hundreds of parameters. Application: public finance and macroeconomic stabilization. Shortcoming: data demanding and time consuming.

Tools linking microeconomic distribution or behavior to macroeconomic frameworks or models Objective: to integrate macro models to microsimulation of the impact of the reform. Key parameters of the macro models feed into the estimation technique of the impact on poverty. Tools: a) linking macro-framework to a reduced form simulation; b) linking macro-framework to behavioral analysis estimated for representative households; c) linking macro-framework to microsimulation.

References Tools for Institutional, Political and Social analysis (TIPS): http://www.worldbank.org/psia Economic tools for impact analysis “The impact of Economic Policies on Poverty and Income Distribution: Evaluation Techniques and Tools” (Bourguignon and Pereira da Silva, 2003) “Analyzing the Distributional Impact of Reforms” (Coudouel and Paternostro)