Endnotes

¹ For a recent survey, see Khan(2004d), and Rahman(2004).

² One way to defend this approach theoretically is to appeal to the Rawlsian maximin criterion. Alternatively, Sen’s capabilities approach can be used to argue that addressing issues related to poverty reduction will help a society towards equalization of capabilities.

³ See Weiss(2004), pp. 17-19, for a succinct discussion of the strengths and weaknesses of such models, and for further details see Roland-Holst (2002), and Lee et. al.(2004). Their models are based on Van der Mensbrugghe’s LINKAGE model.A recent documentation with technical details can be found in Van der Mensbrugghe(2003) See also, Van der Mensbrugghe(1998). More directly relevant to our generic modeling approach with special emphasis on poverty reduction is the paper by Stifel and Thorbecke(2003).

⁴ See for example, Goldberg, P. K. and N. Pavcnik(2004) and Galiani and Sanguinetti(2004).

⁵ Like all historical classifications of ideas or schools of thought,this one also involves some arbitrariness. There is much overlap among the “generations” and at times, prescient anticipations of latter work. However, the categorization according to some prevalent general features during a particular period can still serve as a convenient marker or guidepost if we do not apply it in too rigid a manner.

⁶ See also Clautier et. als.(2002) for a review of the CGE literature on the impact of trade liberalization on welfare and poverty. Cororaton(2003) is a detailed study of the Philippine tariff reform using the CGE-Microsimulation approach.

⁷ There is, of course, the question of whether even the second generation of reforms will lead to the kind of sustained growth and poverty reduction that is anticipated. See for example, Hayami(2003) for questioning the view that growth and poverty reduction are sustainable. In particular, Hayami raises the issues of infrastructure building and other public investment projects that may still need to be undertaken by the public sector in order to make growth and poverty reduction sustainable.See also Naim(1994,2000,2002).

⁸ An important ADB document(Weiss 2003) recognizes this point by pointing to the link between growth and specific social expenditure categories and refers to some specific programs in three different countries. This type of analysis is clearly necessary, but may be too disaggregated for macromodels to address. However, much insight can be gained by such specific analyses alongside the standard multisectoral macro models. As the document points out:
Growth “…would allow greater expenditure to meet social development goals. Whether this expenditure is actually made by the public sector will vary depending upon government commitments to social targets, although a lack of public sector response can be compensated in part by private or NGO provision. Efficiency in public provision of social – essentially health and education services – has been addressed by recent program loans for these sectors, although their share of total program lending is small. A survey of program lending since mid-1999 reveals three main loans aimed explicitly at social development goals – the Health and Nutrition Sector Development Policy loan to Indonesia (March 1999), the Bangladesh Secondary Education Sector Development Program loan (June 1999) and the Bhutan Health Care Reform loan (September 2000). Of these the first aimed at maintaining social services in the face of declining government revenue in the wake of the Financial Crisis. The other two loans aimed at general improvement in the efficiency of the education and health sectors, respectively. Governance issues are addressed directly by loans for public sector reform and privatization, as well as by programs designed specifically to address the legal and justice system. The more common program lending for governance purposes has had as the major objective improved public resource management and increased revenue collection capacity; for example the Madhya Pradesh Public Resource Management program (December 1999) and the Governance Reform program in Mongolia (December 1999). Overtly political governance issues have been addressed in just a very small number of cases, notably the Decentralization Support program in Pakistan (November 2002) and the Access to Justice program in Pakistan (December 2001).”See also ADB(2001;2002a,b,c;2003a,b)

⁹ See also, Agenor and Montiel (1999), Thorbecke and Morrison(1989), Khan(1983,1996,1997), Khan and Sogabe(1994), Khan and Sonko(1994) Khan and Thorbecke(1988),and Fields(2001).

¹⁰ Later in the case of the “dual-dual” approach to modelling, we will find basically the same classification scheme. However, the number of production sectors in the particular model discussed in section 7 is four. The reasons will be explained in section 7.

¹¹ See Agenor, Pierre-Richard and Peter J. Montiel, Development Macroeconomics and the references there for evidence on the empirical importance of the costs of financing working capital in Argentina and Korea respectively. If empirically relevant, the role of working capital in the short run supply curve would imply, for instance, that contractionary monetary policy may have short-term stagflationary consequences.

¹² See for example, the papers collected in D. Mookherjee and D. Ray, Readings in the Theory of Economic Development, Oxford: Basil Blackwell, 2001, for a representative sample. See also, P. Bardhan and C. Udry. Development Microeconomics, Oxford: Oxford University Press, 1999, Hayami, Development Economics (1997) and Otsuka(2001,2000).

¹³ I am grateful to Amartya Sen for drawing my attention to this. See also, Dreze and Sen(2002) chapter 9, “Well Beyond Liberalization” for a deep and insightful assessment and suggestions for the future course of the Indian economy.

¹⁴ Virmani(2004), p. 17.

¹⁵ See Virmani(2004). Dr. Kurian of the National Institute of Public Finance made some particularly insightful observations regarding the continuity of social objectives such as poverty reduction, and the moderation and relatively nonideological stance of leaders such as Manmohan Singh in particular.

¹⁶ At least this is the consensus position I heard frequently from government advisers in the ministry of finance, planning commission members, private think tanks, university professors and political leaders during my visit to India in July 2004.

¹⁷ Actually, it is necessary and sufficient for all but one of the markets to be in equilibrium. As is well known, by “Walras’ law” when all but one markets clear, the last one must clear also.

¹⁸ Formally, the maximization of expected utility must be possible. For this, an axiomatic characterization was given by von Neumann and Morgenstern. A necessary condition is the possibility of expressing all states as quantifiable probability distributions.

¹⁹ For a succinct discussion of some of the relevant features of the applied models for policy analysis, see Yao, Shujie and Aying Liu, “Policy Analysis in a General Equilibrium Framework” Journal of Policy Modelling, 22(5):589-610, 2000.

²⁰ For a description of SAM as a data gathering device, see G. Pyatt and E. Thorbecke, Planning Techniques for a Better Future (Geneva: ILO, 1976). See also Khan(1983,1997,1998,2004b) and, Khan and Thorbecke(1988,1989).

²¹ In macroeconomic terms, we can include the assumption of neutrality of money. And thus create a ‘classical’ model.

²² It should be noted, however, that the assumption of full employment means that the economy is at the wrong point of the (multidimensional) production possibilities frontier, not inside it.

²³ More precisely, the system must satisfy solvability conditions. For a linear system this means that the number of linearly independent equations must equal the number of endogenous variables.

²⁴ See Armington(1969).

²⁵ The theoretically inclined reader will recognize this as being in line with the Salter-Swan model.

²⁶ Therefore, this is properly described as a comparative statics exercise with the chain of causality starting with the exogenous change in foreign savings and ending with a new trade balance.

²⁷ See in particular, Bourguignon, F., J. de Melo, and A. Suwa, 1989. Distributional Effects of Adjustment Policies:

Simulations for Two Archetype Economies, Background Paper for 1990 WDR, World Bank. Bourguignon, F., J. de Melo, and A. Suwa, 1991. Modelling the Effects of Adjustment Programmes on Income Distribution, World Development.19:11 1527-1544.

Bourguignon, F., W. Branson, and J. de Melo, 1989. Adjustment and Income Distribution: A Counterfactual Analysis. World Bank, PPR Working Paper 215.

For a concise review of recent issues in both macro and micro aspects of poverty analysis, see Bourguignon, F., L.

Pereira da Silva and N. Stern (2002), Evaluating the Poverty Impact of Economic Policies: Some Analytical Challenges, draft paper, World Bank.

²⁸ See Decaluwé, Bernard, A. Patry, Luc Savard, and Erik Thorbecke, 1999. Poverty Analysis within a General Equilibrium Framework. Working Paper No. 99-09, African Economic Research Consortium (June). Also Dorosh, Paul A. and David E. Sahn, 2000, “A General Equilibrium Analysis of the Effect of Macroeconomic Adjustment on Poverty in Africa, Journal of Policy Modelling 22(6):753-776.

²⁹ See Azis, Iwan J.(2002), A New Approach to Modelling the Impacts of Financial Crises on Income Distribution and Poverty,Tokyo: ADBI Research Paper no. 35.

³⁰ See also, Svejnar and Thorbecke (1980,1982), Khan(1983,1985,1997). In these analyses, the particular country chosen was South Korea in the 1970s. Instead of CGE flex-price models, SAM-based models of fixed price variety were used.

³¹ See Khan (1997) chs. 2 and 3 for a historical survey and a specific intertemporal dualistic model which is used to analyze the conflict between employment and output.

³² See Svejnar-Thorbecke(1980,1982) and Khan(1983) for early developments.

³³ Stifel-Thorbecke paper uses Cobb-Douglas production functions with elasticities of substitution restricted to a value of 1.

³⁴ Alternatively, one could also postulate that there is an ‘insider’ market wage equilibrium in the formal sector, and those unskilled workers lucky enough ( or more likely, because they know someone already working in the formal sector) to get a job in the formal sector can enjoy this wage premium. This is not a hypothesis the authors consider, but the data will be consistent with this hypothesis as well.

³⁵ Salaries are excluded in equation 24. The reasoning is that these are invariant to exogenous shocks.

³⁶ Implicitly, this amounts to claiming for a reforming economy(see section 5 above) that the stabilization policies indeed succeed in restoring the external balance.

³⁷ Namely, skilled and unskilled labor, and capital and agricultural capital.

³⁸ This reflects approximately, the actual Indian policy changes and the consequent trajectory of tariffs. See Joshi and Little(2004(1996)), Virmani(2004) and Ahluwalia and Little(1998). A ‘generic’ set of experiments in tariff reductions starting with an index of 100 and going down to 0 in steps of 10 per cent reductions is given in the appendix.

³⁹ The nominal price of exports which is the numeraire remains constant.

⁴⁰ The exact extent will naturally vary with the extent of relative price changes and the supply elasticities.

⁴¹ For recent work on some of the dynamic connections via productivity increases see Alcala and Ciccone(2004) and the references therein.

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