LDC Adjustment Policies
How do they affect the poor?

In recent years, a number of developing countries have experienced unsustainable accumulations of foreign debt, the result of a sustained imbalance between aggregate demand and supply. In response LDCs have instituted adjustment programmes, ranging from the traditional IMF 'Macroeconomic Adjustment' packages to the World Bank's 'Structural Adjustment' packages, which focus on the removal of price distortions in the domestic market in order to alter the pattern of production and the efficiency of resource allocation.

Adjustment is not costless, however, and there has been considerable disquiet regarding the impact of these packages on the poor. In Discussion Paper No. 132, Research Fellow Ravi Kanbur discusses how one might quantify the impact of adjustment on poverty. Adjustment policies may be viewed as benefiting certain sectors of the domestic economy relative to other sectors, he argues. Exchange rate devaluations, for example, favour the traded against the non-traded sector; tariff reductions favour the export against the import-competing sector; agricultural price reform may favour rural producers against urban consumers. What is required, according to Kanbur is a poverty index which can easily capture such sectoral shifts and their impact on income distribution: the index should be decomposable across sectors.

It is very difficult to construct a fully specified general equilibrium model which takes account of all the feedbacks of adjustment programmes: data are unavailable, and often too many containtious assumptions must be made. Kanbur therefore proposes a simplifying assumption: that the existing pattern of income distribution within each of a number of broad macroeconomic sectors remains unchanged as the result of the adjustment policy. These policies are assumed to cause a redistribution in the sectoral composition of national output and expenditure; further assumptions are made to explain how these sectoral shifts affect individual incomes. Once this is done, decomposable poverty indices can be used to estimate poverty changes in each sector and at the national level. The attraction of this approach, according to Kanbur, is that existing household income and expenditure data can be used to link 'macroadjustment' to 'micropoverty'.

To assess the effects of an exchange rate devaluation, for example, we need to consider the effects of a change in the relative price of traded and non-traded goods, but data on income distribution within the traded and non-traded sectors are seldom available. Kanbur's approach requires manipulating the sectoral disaggregations that are available in household income and expenditure surveys to approximate to the division between the traded and non-traded sectors. This approach also requires data on income distribution by source of income, since relative price changes often cause shifts in individuals' incomes from one source to another. Disaggregation of household income by source is not, however, always a feature of household income and expenditure surveys in developing countries. What is the effect on poverty of a policy which raises the domestic price of rice to world levels in order to conserve foreign exchange and encourage domestic production - a common policy in structural adjustment packages. Kanbur's approach to evaluating the effect of such a policy would require data on the income distributions for consumers of rice and for producers of rice and of rice substitutes. In the absence of such information, Kanbur suggests that data on income distributions in urban and rural sectors might be used, supplemented in the latter case by information on rice-producing regions.

Kanbur applies his approach to several illustrative examples, but he stresses that the usefulness of the methodology can only be assessed through its application in case studies.


Structural Adjustment, Macroeconomic Adjustment and Poverty: A Methodology for Analysis
Ravi Kanbur

Discussion Paper No. 132, October 1986 (IT)