MACROECONOMIC ADJUSTMENT AND POVERTY 757
Instead, we use the four models to show how external conditions and the policy framework result in different growth and distribu-
tional outcomes in the four countries with diverse economic struc- tures and different abilities to absorb and respond to changing
external conditions. That is, we choose to simulate the same shocks and same policy responses to enable cross-country comparisons.
Use of four different models also provides an implicit sensitivity analysis to changes in model structure and parameters.
3. THE MODELS
The four CGEs, following Dervis, de Melo, and Robinson 1982, share many of the same characteristics.
4
Production is disaggregated into major agricultural, industrial, and tertiary sub-
sectors in a manner reflecting the importance of various subsectors in each country Appendix Table 1A, with value added modeled
as a CES constant elasticity of substitution function of labor of various skill types and sector-specific fixed capital. Capital includes
formal and informal nonagricultural capital, and land disaggre- gated by ecological region for Cameroon, Madagascar, and Niger
and the income level poornonpoor of farm households. Incomes of households are determined according to each household’s fixed
share of returns to factors of production. We model incomes net of household transfers, except in The Gambia, where they are
fixed in local currency terms.
5
Consumption of each commodity is alternatively modeled as a fixed value share of total expenditures
The Gambia and Niger or using a linear expenditure system LES specification Cameroon and Madagascar.
4
The structures of the CGE models are presented in Condon, Dahl, and Devarajan 1987, Benjamin 1993, and Subramanian 1996 for Cameroon; Dorosh and Lundberg
1996 for The Gambia; Dorosh 1996 for Madagascar; and Dorosh, Essama-Nssah, and Samba-Mamadou 1996 for Niger. See also Shoven and Whalley 1992 for a detailed
discussion of the data needs and the implications of alternative equation specifications in the CGE models of this type.
5
Private transfers, particularly international transfers, were small in all four countries for the base years. Private international transfers accounted for only 22.3 percent Niger,
1987 to 2.7 percent The Gambia, 1989 of GNP World Bank, 1995. National household survey data show that total private transfers were equivalent to 3.8 percent of household
expenditures in Madagascar Government of Madagascar, 1993. Reliable national house- hold data on transfers were not available for Cameroon, The Gambia, and Niger, though
in another West African economy, Ghana, the figures are similar to those in Madagascar.
758 P. A. Dorosh and D. E. Sahn
In all four models, prices and wages clear markets,
6
labor supply is fixed,
7
imports and exports are less than perfect substitutes for local goods, and government spending is exogenous. Investment
in the models is savings driven, with total savings equal to the sum of households’ savings a linear function of households’ in-
comes and government savings revenues less recurrent expendi- tures determined by total savings. Foreign savings foreign capital
inflow is held fixed across the model simulations presented here, so as to facilitate comparison of income levels across simulations.
8
No attempt is made to model monetary or financial variables. Given these market clearing assumptions, the models do not
accurately reflect short-term less than 1 year consequences of adjustment, but may be taken as indicative of medium-term adjust-
ment to the shocks and policy changes simulated. Sizeable evi- dence suggests, however, that markets, particularly labor markets
in African economies generally perform well, and that wages are flexible except in the public sector Lavy and Newman, 1989;
Colclough, 1991; Hoddintot, 1993; Horton, Kanbur, and Ma- zumdar, 1994. In Ghana, less than 10 percent of government rede-
ployees were unemployed 1 year after redeployment Younger, 1996, though in Guinea, male government redeployees appeared
to queue for formal sector wage jobs Mills and Sahn, 1993.
The major differences between the models lie in the structures of the economies modeled. Petroleum exports dominate Cameroon’s
foreign exchange earnings, but the sector uses little domestic labor or other resources. The large groundnut export trade, the reexport
trade, small manufacturing base, and reliance on noncompetitive imports make the Gambian economy very sensitive to changes in
the real exchange rate and foreign capital inflows. Rice dominates food production, consumption, and trade in Madagascar, and ex-
port crops account for 61 percent of total export earnings. In Niger, much of private investment is in the livestock sector, forging
a direct link between national savings and rural incomes.
6
In the simulations of foreign exchange rationing below, an implicit tariff is modeled that raises the price of imports in the open parallel market and brings about equilibrium
in the foreign exchange market.
7
In an earlier version of the simulations of adjustment to terms of trade shocks presented here, a non-zero labor supply elasticity was used to simulate underemployment Dorosh
and Sahn, 1993. This alternative specification does not lead to qualitatively different results.
8
An increase in foreign savings will, in itself, tend to raise real incomes of all households.
MACROECONOMIC ADJUSTMENT AND POVERTY 759
In presenting the simulation results, we focus on GDP growth, investment, and foreign savings, as well as income distribution.
To facilitate comparison, our functional income distribution distin- guishes between four groups: urban nonpoor, urban poor, rural
nonpoor, and rural poor. These groups are aggregated, according to the level of income, from those found in the income distribution
of the underlying Social Accounting Matrices SAMs.
9
Their in- comes per capita in local currency are found in Appendix Table
2A, along with shares of revenue from factors of production and transfers.
10
4. ADJUSTING TO THE ECONOMIC CRISIS
