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Implications of macroeconomic policy, external shocks and social protection systems for poverty, inequality and social vulnerability in Latin America and the Caribbean

Background:

A wi In the context of implementing the Millennium Development Goals, poverty incidence should be reduced provided that favourable medium- to long-term economic growth is sufficiently broadly based to ensure that the poor benefit from such growth. However, economic growth and expectations are constantly threatened by inappropriate macroeconomic policies, poor economic management and external shocks. In the Latin America and Caribbean region a series of stabilization and structural adjustment reform policies have been implemented to ensure high and steady growth rates, but these policies have been frustrated by periodic financial and macroeconomic instability. Existing social protection systems put in place accompanying these reforms (including safety nets for the poorest) have not been able to counteract the negative repercussions of such instability for the poor.

The effects that restrictive fiscal and monetary polices, exchange-rate regime, and economic liberalization reforms have on national and regional poverty and inequality have to be better understood.

ECLAC and UNDP recently joined forces to develop instruments to approximate the impact of macroeconomic and external shocks on labour and household incomes through the use of a computable general equilibrium (CGE) model. The project covers 16 Latin American and Caribbean countries. Each country-specific CGE model is coupled with a microsimulation method to enable the inclusion of survey data to better approximate the effects of inequality and poverty. However, along with trade policy, deregulation policies, fiscal policy, and exchange-rate regimes also have the potential to cause considerable adverse effects in terms of inequality and poverty. These, together with the external shocks triggered by the volatility of speculative capital flows, drastic terms-of-trade adjustments and even inflows of remittances, make the potential benefits of structural adjustment and stabilization policies difficult to attain.

ECLAC, in cooperation with other United Nations partners, will undertake this study to arrive at an in-depth understanding of the effects of macroeconomic and external shocks on poverty, inequality and social vulnerability, using country-specific, dynamic macro-micro CGE modelling analysis. Country-case studies (mainly in Andean and Central American countries) will provide details on countries’ characteristics in terms of economic growth, volatility and reaction to economic and financial crises. Information-sharing and policy discussions are foreseen with other United Nations offices and agencies with a presence in the field, such as UNDP, ILO and the United Nations Research Institute for Social Development.

Objective:

To increase the skills and knowledge of policymakers and policy shapers (the stakeholders) to design more effective macroeconomic and social protection policies based on an improved understanding of the relationship between macroeconomic and external shocks, on the one hand, and the impact on inequality, poverty and vulnerability of the population and social protection systems, on the other.

Expected accomplishments:

  • Increased knowledge of stakeholders on the mechanisms of transmission from macroeconomic policy and external shocks to poverty, social vulnerability and inequity
  • Strengthened capacity of stakeholders to analyse the mechanisms of transmission from macroeconomic policy and external shocks to poverty, social vulnerability and inequity
  • Strengthened capacity of stakeholders to monitor the achievement of Millennium Development Goal 1 through macro-micro modelling analysis

Implementation status:

This project aimed to increase the skills and knowledge of policy-makers and policy officers (the stakeholders) to design more effective macroeconomic and social protection policies that facilitate the reduction of total poverty and the eradication of extreme poverty. Such reductions are based on policy-makers and policy shapers (the stakeholders) improved understanding of the relationship between macroeconomic policies, external shocks, and social protection policies, on the one hand, and their impact on inequality, poverty, and the vulnerability of the non-poor to become poor, on the other.

The analysis was conducted using country-specific, dynamic computable general equilibrium (CGE) models that were combined with a micro-simulation methodology so as to enable a more realistic assessment of inequality and poverty. The study of actual facts played a critical role in understanding the socio-economic problems of the countries involved and for model calibration. The countries included in the study were Bolivia, Costa Rica, Ecuador, Guatemala, and Nicaragua, all of which are small-open economies with significant rates of poverty and inequality, although differences exist between the countries. Additionally, two more countries, Colombia and Mexico, participated in the project at their own expense

Participant countries enhanced their skills and knowledge to construct the required social accounting matrices (these matrices were the tools used to identify transmission mechanisms from macroeconomic shocks) and developed their capacities to apply the CGE known as the Analysis of Exogenous Shocks and Economic and Social Protection Model (MACEPES), through the provision of technical assistance..