Appendix CInitial Values for Variables and Parameters

ENDOGENOUS VARIABLES

ProductionPeriod 0 Period 1

X_AT Production of traded agricultural goods 315.7895X_AN Production of nontraded agricultural goods 158.4675X_I Production of informal goods 105.6203X_G Production of public goods 403.3064X_P Production of private urban (formal) goods 300 568.6940T1 Composite input from T2 and unskilled labor 2098.5317T2 Composite input from capital and skilled labor 2034.5155V_AN Value added in nontraded agricultural good 93.6744V_AT Value added in traded agricultural good 300.0000V_I Value added in informal good 100.3393V_G Value added in public good 200.0003V_P Value added in private urban (formal) good 356.6373RGDP_FC Real GDP at factor cost 1476.1 1153.2102

111

EmploymentPeriod 0 Period 1

U_R Unskilled workers in rural economy 985.29 1005.4184U_U Unskilled workers in urban economy 272.06 278.5556S Skilled workers 118.04 119.7509U_AT Unskilled labor employed in traded rural 500.00 500.0000U_AN Unskilled labor employed in nontraded rural 505.4184U_I Unskilled labor employed in informal sector 164.9632U_P Unskilled labor employed in private urban formal 50.00 63.5921S_P Skilled labor employed in private urban formal 50.00 68.1453UNEMP Unemployment of skilled workers 0.16 0.0135W_AT Nominal wage rate for U_AT 0.4673 0.3072W_AN Nominal wage rate for U_AN 0.2000 0.0495W_I Wage for U_I 0.3000 0.0424W_M Nominal wage rate for U_P 0.9346 0.7081W_S Nominal wage rate for S 1.8692 1.1909W_AN_R Real wage rate for U_AN 0.0818W_I_R Real wage rate for U_I 0.0912W_S_R Real wage rate for S 1.5716EF Effort 0.7735MIGR Migration to urban area 1.6340 1.7712SKL New skilled workers 1.9608 1.7197g_u Population growth in urban economy 0.0237omega_w Opportunity cost (wage) for skilled workers 1.0000EW_U expected urban unskilled wagesEW_A expected agricultural wagesEW_S expected skilled wages

112

DemandPeriod 0 Period 1

Q_AN Demand for agricultural composite good 296.1989Q_I Demand for informal composite good 105.6203Q_G Demand for public composite good 403.3067Q_P Demand for private urban composite good 713.7016Q Aggregate Demand 1000.0000C_AN Aggregate consumption of agricultural good 231.4046C_I Aggregate consumption of informal good 100.3392C_G Aggregate consumption of public good 134.2745C_P Aggregate consumption of private urban good 334.9838CTOT Aggregate consumption per sector 760.0000G_AN Government spending in agricultural good 0.0000G_I Government spending in informal good 0.0000G_G Government spending in public good 0.0000G_P Government spending in private urban good 51.9013G Government expenditures 50.0000Z_AN Investment demand for agricultural good 0.0000Z_I Investment demand for informal good 0.0000Z_G Investment demand for public good 65.7264Z_P Investment demand for private urban good 120.00 114.7561Z Total investment 190.00 180.4678INT_AN Intermediate good demand for agricultural 64.7929

nontraded goodINT_AT Intermediate good demand for agricultural 15.7895

traded goodINT_I Intermediate good demand for informal good 5.2810INT_P Intermediate good demand for formal private 212.0575

goodINT_G Intermediate good demand for public good 203.3058

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TradePeriod 0 Period 1

E_AT Export of agricultural good (equal to X_AT) 300.0000E_P Export of private urban (formal) good 400.6817M_AN Import of agricultural good (equal to X_AN) 138.5661M_P Import of private urban (formal) good 549.8396D_P Domestic demand for domestic private urban good 165.9481D_AN Domestic demand for domestic agricultural good 158.4677

114

PricesPeriod 0 Period 1

PE_AN Price of exported agricultural good 1.0000PE_P Price of exported private urban good 1.0000PM_AN Price of imported agricultural good 1.0000PM_P Price of imported private urban good 1.0000PX_AN Sale price of nontraded agricultural good 0.8456PX_AT Sale price of traded agricultural good 1.0000PX_I Sale price of informal good 0.6933PX_P Sale price of private urban (formal) good 0.9467PX_G Sale price of public good 0.9812PQ_AN Composite good price of nontraded agricultural 0.9202

goodPQ_I Composite good price of informal good 0.6932PQ_G Composite good price of public good 0.9812PQ_P Composite good price of private urban good 1.00 0.9634PLEV Price level (PLEV_EQ w/ partial adjustments) 1.00 0.9313PT1 Price of T1 0.7576PT2 Price of T2 0.7578PD_P Domestic price of domestic sales of private urban 0.8299PD_AN Domestic price of domestic sales of nontraded 0.8456

agriculturePK Price of capital 0.9699PINF Inßation rate 0.00 -0.0687DEV Devaluation rate 0.0000P_R Rural price index 1.00 0.9313P_UU Urban unskilled price index 1.00 0.8346P_US Urban skilled price index 1.00 0.9461P_KAP Capitalist price index 1.00 0.9571PV_AN Value added price of agricultural nontraded good 0.6051PV_AT Value added price of agricultural traded good 0.6574PV_I Value added price of informal good 0.4642PV_P Value added price of private formal good 0.4658PV_G Value added price of public good 0.8848PGDP_FC Price Deßator for RGDP at factor cost 0.7344

115

IncomePeriod 0 Period 1

YH_R Aggregate rural household income 391.6183YH_AN Household income for U_AN labor 131.5594YH_AT Household income for U_AT labor 260.0570YH_UU Aggregate unskilled urban household inc. 148.9436YH_UI Unskilled urban household income in 50.1286

informal sectorYH_UF Unskilled urban household income in 98.8136

formal sectorYH_US Skilled urban household income 194.7526YH_KAP Capitalist�s household income 160.4257CON_R Consumption by rural households 322.3882CON_AN Consumption by U_AN household 103.3465CON_AT Consumption by U_AT household 219.0402CON_UU Consumption by urban unskilled household 122.5175CON_UI Consumption by urban unskilled in informal 39.2879

sectorCON_UF Consumption by urban unskilled in formal 83.2284

sectorCON_US Consumption by urban skilled household 164.0359CON_KAP Consumption by capitalist household 128.0109SAV_R Saving by rural households 49.6505SAV_AN Saving by U_AN household 21.6357SAV_AT Saving by U_AT household 28.0146SAV_UU Saving by urban unskilled household 21.4863SAV_UI Saving by urban unskilled in informal sector 10.8414SAV_UF Saving by urban unskilled in formal sector 10.6447SAV_US Saving by skilled household 20.9797SAV_KAP Saving by capitalist household 16.3722PROF_AN ProÞt by nontraded agricultural-good Þrm 70.8587PROF_AT ProÞt by traded agricultural-good Þrm 43.2523PROF_I ProÞt by informal Þrm 42.0398PROF_P ProÞt by private (formal) Þrm 129.8829

116

Period 0 Period 1YF_AN Income by nontraded agricultural-good Þrm 70.8592YF_AT Income by traded agricultural-good Þrm 43.2522YF_I Income by informal Þrm 42.0409YF_P Income by private urban (formal) Þrm 119.0053YF_PB Income by private bank 20.0126WT_AN Total wealth by U_AN household 36.00 57.6359WT_AT Total wealth by U_AT household 90.00 118.0147WT_UI Total wealth by urban unskilled in 36.00 46.8417

informal sectorWT_UF Total wealth by urban unskilled in formal 36.00 46.6447

sectorWT_S Total wealth by skilled household 72.00 92.9798WT_KAP Total wealth by capitalist 72.00 88.3722

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Financial SectorPeriod 0 Period 1

Savrate_AN Saving rate for U_AN household 0.1731Savrate_AT Saving rate for U_AT household 0.1134Savrate_UI Saving rate for urban unskilled in 0.2163

informal sectorSavrate_UF Saving rate for urban unskilled in 0.1134

formal sectorSavrate_S Saving rate for skilled household 0.1134Savrate_KAP Saving rate for capitalist 0.1134H_AN Money held by U_AN 16.00 21.2329H_AT Money held by U_AT 40.00 44.8752H_UI Money held by UI 16.00 8.0906H_UF Money held by UF 16.00 17.0511H_S Money held by skilled household 32.00 33.6063H_KAP Money held by capitalist 32.00 26.2258IK Return from equities 0.0893GammaBAN Share of domestic deposits in total 0.7500

depositsGammaBAT Share of domestic deposits in total 0.7500

depositsGammaBUI Share of domestic deposits in total 0.7500

depositsGammaBUF Share of domestic deposits in total 0.7500

depositsGammaBS Share of domestic deposits in total 0.7500

depositsGammaBKAP Share of domestic deposits in total 0.7500

depositsDD_AN Domestic deposits by U_AN household 15.00 27.3022DD_AT Domestic deposits by U_AT household 37.50 54.8546DD_UI Domestic deposits by UI household 15.00 29.0634DD_UF Domestic deposits by UF household 15.00 22.1951DD_S Domestic deposits by skilled household 30.00 44.5300DD_KAP Domestic deposits by capitalist 30.00 46.6098

118

Period 0 Period 1FD_AN Foreign deposits by U_AN household 5.00 9.1008FD_AT Foreign deposits by U_AT household 12.50 18.2849FD_UI Foreign deposits by UI household 5.00 9.6878FD_UF Foreign deposits by UF household 5.00 7.3984FD_S Foreign deposits by skilled household 10.00 14.8434FD_KAP Foreign deposits by capitalist 10.00 15.5366DL_P Domestic loan by private urban (formal) Þrm 128.25 190.1616K_P Private capital 1470.59 1500.0000ll Interest rate for domestic loan 0.07 0.0699il_eq Equilibrium interest rate for domestic loans 0.07FL_b Banks� foreign liabilities 0.00 -11.9374PR Premium 1.09 1.0922

119

Public SectorPeriod 0 Period 1

K_G Public capital 0.00 50.0000K_INF Capital in infrastructure 494.95 500.0000K_H Capital in health 46.51 50.0000K_E Capital in education 46.51 50.0000RR Reserve requirements 14.25 22.4555H Money supply 152.00 151.0511TXREV Tax revenues 52.80 52.3694GOVSAV Government savings -1.1185DEF Government deÞcit 1.1185TRH Transfers to households 207.4011MB Money base 166.25 173.5070FF Foreign reserves 116.25 123.5074

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EXOGENOUS VARIABLES AND PARAMETERSProduction

Per 0 Period 1sigma_xan elasticity of substitution in nontraded agricultural 0.7500

productionsigma_xat elasticity of substitution in traded agricultural 0.7500

productionsigma_xg1 elasticity of substitution between labor and public 0.7500

capital in public productionsigma_xg2 elasticity of substitution between skilled and 1.2000

unskilled workers in public productionsigma_xp elasticity of substitution between input and public 0.7500

capital in private productionsigma_xp1 elasticity of substitution between unskilled 1.2000

workers and composite input of skilled workersand private capital

sigma_xp2 elasticity of substitution between skilled workers 0.4000and private capital

sigma_tp elasticity of transformation between exported and 1.0100domestic private production

alpha_xan shift parameter in nontraded agricultural 0.5407production

beta_xan share parameter in nontraded agricultural 0.6310production

rho_xan substitution parameter in nontraded agricultural 0.3333production

alpha_xat shift parameter in traded agricultural production 0.7944beta_xat share parameter in traded agricultural production 0.9151rho_xat substitution parameter in traded agricultural 0.3333

productionalpha_xi shift parameter in informal production 0.1315beta_xi informal production 0.1500alpha_xg shift parameter in public production 4.0000beta_xg1 share parameter between labor and public capital 0.8953

in public productionbeta_xg2 share parameter between skilled and unskilled 0.7605

workers in public production

121

Per 0 Period 1rho_xg1 substitution parameter between workers and 0.3333

public capital in public productionrho_xg2 substitution parameter between skilled and 0.1667

unskilled workers in public productionalpha_xp shift parameter in private production 0.3393beta_xp share parameter between inputs and public 0.8953

capital in private productionrho_xp substitution parameter between inputs and public 0.3333

capital in private productionalpha_xp1 shift parameter in composite input of unskilled 28.5784

and skilled/capital composite inputbeta_xp1 share parameter between unskilled and 0.0310

skilled/capital composite inputrho_xp1 substitution parameter between unskilled 0.1667

and skilled/capital composite inputalpha_xp2 shift parameter in composite input of skilled 4.6174

workers and private capitalbeta_xp2 share parameter between skilled workers 0.0350

and private capitalrho_xp2 substitution parameter between skilled workers 1.5000

and private capitalalpha_tp shift parameter in transformation function between 2.1201

exported and domestic private productionbeta_tp share parameter between exported and domestic 0.3349

private productionrho_tp substitution parameter between exported and 1.9901

domestic private productiona_an_an input-output coefficient 0.0500a_at_an input-output coefficient 0.0000a_i_an input-output coefficient 0.0000a_p_an input-output coefficient 0.1000a_g_an input-output coefficient 0.1000a_an_at input-output coefficient 0.0000a_at_at input-output coefficient 0.0500a_i_at input-output coefficient 0.0000a_p_at input-output coefficient 0.1000a_g_at input-output coefficient 0.2000

122

Per 0 Period 1a_an_i input-output coefficient 0.0000a_at_i input-output coefficient 0.0000a_i_i input-output coefficient 0.0500a_p_i input-output coefficient 0.1000a_g_i input-output coefficient 0.1000a_an_p input-output coefficient 0.1000a_at_p input-output coefficient 0.0000a_i_p input-output coefficient 0.0000a_p_p input-output coefficient 0.2000a_g_p input-output coefficient 0.2000a_an_g input-output coefficient 0.0000a_at_g input-output coefficient 0.0000a_i_g input-output coefficient 0.0000a_p_g input-output coefficient 0.1000a_g_g input-output coefficient 0.0000eta_xan coefficient of returns to scale 0.30 0.30eta_xat coefficient of returns to scale 0.30 0.30

123

EmploymentPeriod 0 Period 1

U_G unskilled workers in public sector 50.00 50.0000S_G skilled workers in public sector 50.00 50.0000W_AT_R real wage rate paid to U_AT 0.4673W_M_R real minimum wage rate 0.9346K_I (exogenous) capital in informal economy 1000.0000gamma_ef elasticity of effort to wages 0.1701efm minimum effort level 0.2356g_r population growth in rural economy 0.0222miu shift parameter in migration function 0.0019theta_u share of urban unskilled workers employed 0.2222

in formal sectortheta_r share of rural workers employed in traded 0.5000

sectorsigma_m elasticity of migration to wage differentials 0.5000kappa_e shift parameter in skills acqusition function 0.0150sigma_w elasticity of skills acqusition to wage 0.5000

differential

124

sigma_edu elasticity of skills acqusition to capital 0.8273in education

lambda_m partial adjustment rate on migration 0.3000lambda_s partial adjustment rate on skills acqusition 0.3000kappa_s shift parameter for skilled private employment 0.3946alpha_gu shift parameter for urban unskilled worker 0.0210

population growth rategamma_gu elasticity of urban unskilled worker population 0.1000

growth rate to the proportion of skilled workersin total urban population

alpha_edu elasticity of skills acqusition to cost of education 0.1000omega_w_bar shift parameter for skilled reservation wage 1.0000

functionphi_u elasticity of skilled reservation wage to 0.0000

the unemployment rate of skilled workerslambda_gu coefficient of distributed lag of effect of past 0.00 0.0000

income on growth rate of urban unskilledpopulation

theta_s Initial ratio of the number of workers employed 0.10 0.1000in the private sector

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DemandPeriod 0 Period 1

sigma_qa elasticity of agricultural composite good 0.8000sigma_qp elasticity of private urban composite good 1.0100alpha_qa shift parameter in agricultural composite good 2.0000beta_qa share parameter in agricultural composite good 0.5000rho_qa substitution parameter in agricultural composite 0.2500

goodalpha_qp shift parameter in urban composite good 1.6519beta_qp share parameter in urban composite good 0.7978rho_qp substitution parameter in urban composite good -0.0100cc_ana shares of household consumption in goods 0.5000cc_ata shares of household consumption in goods 0.5000cc_aui shares of household consumption in goods 0.1500cc_auf shares of household consumption in goods 0.2000cc_aus shares of household consumption in goods 0.1000cc_akap shares of household consumption in goods 0.1000cc_ina shares of household consumption in goods 0.0500cc_ita shares of household consumption in goods 0.0500cc_iui shares of household consumption in goods 0.7992cc_iuf shares of household consumption in goods 0.1158cc_ius shares of household consumption in goods 0.0600cc_ikap shares of household consumption in goods 0.0200cc_gna shares of household consumption in goods 0.1711cc_gta shares of household consumption in goods 0.1711cc_gui shares of household consumption in goods 0.0200cc_guf shares of household consumption in goods 0.2500cc_gus shares of household consumption in goods 0.1832cc_gkap shares of household consumption in goods 0.1950cc_pna shares of household consumption in goods 0.2789cc_pta shares of household consumption in goods 0.2789cc_pui shares of household consumption in goods 0.0308cc_puf shares of household consumption in goods 0.4342cc_pus shares of household consumption in goods 0.6568cc_pkap shares of household consumption in goods 0.6850

126

Period 0 Period 1gg_a share of government expenditure on 0.0000

agricultural goodsgg_i share of government expenditure on informal 0.0000

goodsgg_g share of government expenditure on public goods 0.0000gg_p share of government expenditure on formal 1.0000

private goodszz_a share of investment expenditure on agricultural 0.0000

goodszz_i share of investment expenditure on informal 0.0000

goodszz_g share of investment expenditure on public goods 0.3684zz_p share of investment expenditure on formal private 0.6316

goods

127

TradePeriod 0 Period 1

ER nominal exchange rate 1.00 1.0000

PricesPeriod 0 Period 1

wpe_a world price of agricultural export 1.0000wpe_p world price of private urban export 0.9524wpm_a world price of agricultural import 1.0000wpm_p world price of private urban import 0.9615wt_a share of agriculture in aggregate demand 0.2000wt_g share of government in aggregate demand 0.2000wt_p share of private urban good in aggregate demand 0.5000wt_i share of informal good in aggregate demand 0.1000wr_a share of agricultural good in rural consumption 0.5000wr_g share of government good in rural consumption 0.1711wr_p share of private urban good in rural consumption 0.2789wr_i share of informal good in rural consumption 0.0500wu_a share of agricultural good in urban unskilled 0.1750

workers� consumptionwu_g share of government good in urban unskilled 0.1350

workers� consumptionwu_p share of private urban good in urban unskilled 0.2325

workers� consumptionwu_i share of informal good in urban unskilled 0.4575

workers� consumptionws_a share of agricultural good in skilled workers� 0.1000

consumptionws_g share of government good in skilled workers� 0.1832

consumptionws_p share of private urban good in skilled workers� 0.6568

consumptionws_i share of informal good in skilled workers� 0.0600

consumption

128

wkap_an share of nontraded agricultural good in 0.1000capitalists� consumption

wkap_g share of government good in capitalists� consumption 0.1950wkap_p share of private urban good in capitalists� 0.6850

consumptionwkap_i share of informal good in capitalists� consumption 0.0200v_an weight for AN real GDP at factor cost price deßatorv_at weight for AT real GDP at factor cost price deßatorv_i weight for I real GDP at factor cost price deßatorv_p weight for P real GDP at factor cost price deßatorv_g weight for G real GDP at factor cost price deßator

129

IncomePeriod 0 Period 1

TAX_R income tax for rural workers 0.0500TAX_UU income tax for urban unskilled workers 0.0500TAX_US income tax for urban skilled workers 0.0500TAX_KAP income tax for capitalists 0.1000TM_A import tariff for agricultural goods 0.0000TM_P import tariff for private urban goods 0.0400TE_A export subsidy for agricultural goods 0.0000

(negative values)TE_P export subsidy for private urban goods 0.0500

(negative values)re percentage of proÞts retained 0.2020sigma_s elasticity of saving rate to deposit rate 0.5000so_na saving coefficient for agricultural 0.1623

workers in nontraded sectorso_ta saving coefficient for agricultural 0.1063

workers in traded sectorso_ui saving coefficient for unskilled urban 0.2027

workers in informal economyso_uf saving coefficient for unskilled urban 0.1063

workers in formal economyso_us saving coefficient for skilled workers 0.1063so_kap saving coefficient for capitalists 0.1063gammaTAN share of transfers allocated to workers 0.1667

in agricultural nontraded sectorgammaTAT share of transfers allocated to workers 0.5000

in agricultural traded sectorgammaTUI share of transfers allocated to workers 0.0000

in urban informal sectorgammaTUF share of transfers allocated to workers 0.0833

in urban formal sectorgammaTS share of transfers allocated to workers 0.2500

in skilled sectorgammaTKAP share of transfers allocated to capitalists 0.0000

130

Financial SectorPeriod 0 Period 1

delta_p private capital�s depreciation rate 0.1092ID interest rate on domestic deposits 0.06 0.0600IF interest rate on foreign deposits 0.04 0.0400IF_G interest rate on government foreign loans 0.04 0.0400phiBAN domestic/foreign deposits shift parameter 2.9603phiBAT domestic/foreign deposits shift parameter 2.9603phiBUI domestic/foreign deposits shift parameter 2.9603phiBUF domestic/foreign deposits shift parameter 2.9603phiBS domestic/foreign deposits shift parameter 2.9603hubcap domestic/foreign deposits shift parameter 2.9603sigma_bNA domestic/foreign deposits elasticity 0.7000sigma_bTA domestic/foreign deposits elasticity 0.7000sigma_bUI domestic/foreign deposits elasticity 0.7000sigma_bUF domestic/foreign deposits elasticity 0.7000sigma_bS domestic/foreign deposits elasticity 0.7000sigma_bKAP domestic/foreign deposits elasticity 0.7000FL_P foreign loan by private urban (formal) Þrm 47.50 136.5848phi_z shift parameter of rate of return to capital 0.1738phi_d shift parameter of external debt effect 0.0092phi_dd shift parameter of external debt effect 0.0199sigma_l elasticity of rate of return to capital 0.8000sigma_p elasticity of inßation on investment 0.1000beta_il partial adjustment coefficient on loan rate 0.1000gammaHAN money demand shift parameter 0.1695gammaHAT money demand shift parameter 0.1812gammaHUI money demand shift parameter 0.1695gammaHUF money demand shift parameter 0.1812gammaHS money demand shift parameter 0.1812gammaHKAP money demand shift parameter 0.1716betaD money demand elasticity on domestic rate 0.5000betaF money demand elasticity on foreign rate 0.5000betaPINF money demand elasticity on inßation 0.5000sigma_H money demand elasticity on real income 1.0000

131

Period 0 Period 1beta_pi partial adjustment coefficient on price level 1.0000beta_z partial adjustment coefficient on investment 0.5000sigma_ik elasticity of investment to return to capital 0.8000alpha_b share of domestic funding in total bank 0.9000

fundinggamma_pr elasticity of premium to Þrms� net worth 0.0500

positionlambda_pr premium shift parameter 1.0934eta_pr partial adjustment coefficient for premium 1.0000delta_c collateral parameter 0.1475sigma_k elasticity of investment to gross growth rate of 0.1000

infrastructure capitalsigma_acc elasticity of investment to growth rate of real

GDP at factor cost

Public SectorPeriod 0 Period 1

I_INF investment in infrastructure 10.00 10.0000I_H investment in health 10.00 10.0000I_E investment in education 10.00 10.0000alpha_g shift parameter for public capital 0.2140beta_g share parameter for public capital 0.7500sigma_g substitution elasticity between 0.7500

infrastructure and health capitalrho_g substitution parameter for public capital 0.3333delta_inf depreciation of infrastructure 0.0100delta_h depreciation of health capital 0.1400delta_e depreciation of education capital 0.1400DL_G domestic loans to government 0.00 0.0000rreq reserve requirement ratio 0.1000G_C government consumption 20.0000DC_G domestic credit to government 50.00 50.0000FL_G foreign loans to government 1566.25 1567.3685TAX_AN sales tax rate on agricultural nontraded goods 0.00 0.0000TAX_AT sales tax rate on agricultural traded goods 0.00 0.0000TAX_P sales tax rate on formal private goods 0.00 0.0000TAX_G sales tax rate on public goods 0.00 0.0000

132

CONSTRUCTED VARIABLESPHC_AN Poverty headcount index in agricultural nontraded sector

based on consumptionPHC_AT Poverty headcount index in agricultural traded sector

based on consumptionPHC_R Poverty headcount index in rural area based on

consumptionPHC_UI Poverty headcount index in urban informal sector based

on consumptionPHC_UF Poverty headcount index in urban formal unskilled sector

based on consumptionPHC_UU Poverty headcount index in urban unskilled sector based

on consumptionPHC_S Poverty headcount index in skilled sector based on

consumptionPHC_KAP Poverty headcount index in capitalists based on

consumptionPHC_U Poverty headcount index in urban area based on

consumptionPHC_Economy Poverty headcount index in entire economy based

on consumptionPGC_AN Poverty gap in agricultural nontraded sector based

on consumptionPGC_AT Poverty gap in agricultural traded sector based on

consumptionPGC_R Poverty gap in rural area based on consumptionPGC_UI Poverty gap in urban informal sector based on

consumptionPGC_UF Poverty gap in urban formal unskilled sector based

on consumptionPGC_UU Poverty gap in urban unskilled sector based on

consumptionPGC_S Poverty gap in skilled sector based on consumptionPGC_KAP Poverty gap in capitalists based on consumptionPGC_U Poverty gap in urban area based on consumptionPGC_Economy Poverty gap in entire economy based on consumption

133

PHI_AN Poverty headcount index in agricultural nontraded sectorbased on income

PHI_AT Poverty headcount index in agricultural traded sectorbased on income

PHI_R Poverty headcount index in rural area based on incomePHI_UI Poverty headcount index in urban informal sector based

on incomePHI_UF Poverty headcount index in urban formal unskilled sector

based on incomePHI_UU Poverty headcount index in urban unskilled sector based

on incomePHI_S Poverty headcount index in urban skilled sector based

on incomePHI_KAP Poverty headcount index in capitalists based on incomePHI_U Poverty headcount index in urban area based on incomePHI_Economy Poverty headcount index in entire economy based on

incomePGI_AN Poverty gap in agricultutal nontraded sector based on

incomePGI_AT Poverty gap in agricultutal traded sector based on incomePGI_R Poverty gap in rural area based on incomePGI_UI Poverty gap in urban informal sector based on incomePGI_UF Poverty gap in urban formal unskilled sector

based on incomePGI_UU Poverty gap in urban unskilled sector based on

incomePGI_S Poverty gap in skilled sector based on incomePGI_KAP Poverty gap in capitalists based on incomePGI_U Poverty gap in urban area based on incomePGI_Economy Poverty gap in entire economy based on incomeGiniCON-Immpa Consumption-based Gini Coefficient based on ImmpaGiniYH-Immpa Income-based Gini Coefficient based on ImmpaTheilCON-Immpa Consumption-based Theil Index based on ImmpaTheilYH-Immpa Income-based Theil Index based on Immpa

134

GiniCON-Survey Consumption-based Gini Coefficient based onHousehold Survey Data

GiniYH-Survey Income-based Gini Coefficient based on HouseholdSurvey Data

TheilCON-Survey Consumption-based Theil Index based on HouseholdSurvey Data

TheilYH-Survey Income-based Theil Index based on Household SurveyData

135

Table 1IMMPA: Financial Balance Sheets

(in domestic-currency terms, at current prices)

HouseholdsAssets Liabilities

Cash holdings (H) Financial wealth (WT )Domestic bank deposits (DD)Foreign bank deposits (ER · FD)

FirmsAssets Liabilities

Stock of private capital (KP ) Domestic borrowing from banks (DLP )Foreign borrowing (ER · FLP )

Commercial BanksAssets Liabilities

Domestic loans to government (DLG) Domestic bank deposits (DD)Domestic loans to Þrms (DLP ) Banks� foreign liabilities (ER · FLB)Reserve requirements (RR)

Central BankAssets Liabilities

Loans to government (DCG) Cash in circulation (H)Foreign reserves (ER · FF ) Reserve requirements (RR)

GovernmentAssets Liabilities

Physical capital in education (KE) Loans from central bank (DCG)Physical capital in health (KH) Loans from commercial banks (DLG)Physical capital in infrastructure (KINF ) Foreign borrowing (ER.FLG)

Consolidated Public SectorAssets Liabilities

Physical capital in education (KE) Cash in circulation (H)Physical capital in health (KH) Reserve requirements (RR)Physical capital in infrastructure (KINF ) Loans from commercial banks (DLG)Foreign reserves (ER · FF ) Foreign loans to government (ER · FLG)

136

Old Abstract:This paper presents an integrated quantitative macroeconomic framework (called

IMMPA) designed for the analysis of the impact of adjustment policies andexternal shocks on poverty and income distribution in both low- and middle-income developing countries. The model emphasizes the role of labor marketsegmentation, the differential impact of public expenditure in infrastructure,education, and health on supply and demand, and (in the prototype versionfocusing on low-income, highly-indebted countries) the link between foreignborrowing and private investment. It also accounts for the existence of urbaninformal activities, credit market imperfections, and the effects of Þnancialvariables on the real economy, by linking Þrms� short- and medium-term bor-rowing needs to bank lending. The dynamic nature of the model allows theuser to examine inter-temporal trade-offs in evaluating the impact of policyshocks on the poor. The prototype model for low-income countries is cali-brated for a representative economy and various numerical simulations areperformed to illustrate its properties. The results highlight the importanceof accounting for the various channels through which poverty alleviation pro-grams and debt relief may ultimately affect the poor.

taxation: possibility of adding VAT instead of a sales tax (conclusion).Model liquidity-asset ratio (as in CFA Franc Zone now) instead of required re-

serves.Issue: does public investment raise or lower the efficiency of private investment?

Some components of public investment may be complementary to privateinvestmentl this is likely to be the case for public investment in infrastructureand education. However, not all public investment in infrastructure has abeneÞcial impact on private investment and growth; this would be the caseif infrastructure projects are of low quality. Further, since public investmentutilizes scarce resources (physical and Þnancial) or produces output thatcompetes directly with the private sector, it can also �crowd out� privateinvestment.

Two issues:- We may be omitting a big aspect of poverty reduction, and that is the fact

that we are not capturing the switching of workers from one labor market toanother. We could very well have a shock where many workers in the ruralnontraded sector move to the rural traded sector, therefore earning higherwages and moving out of poverty. This will be completely ignored in ourestimates. Something similar will happen with migration effects, switchingfrom urban informal into urban formal, as well as switching from urban un-

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skilled into urban skilled. The growth rate in income after switching impliedby wage differentials accross groups will almost certainly be higher than theone that would obtain from income growth rates within a group.

- When the overall economy poverty gap was constructed, the poverty line usedis a weighted average of rural and urban poverty lines, yet the income gapsare calculated using the rural poverty line for rural workers, and the urbanpoverty line for urban workers. Shouldn�t we instead deÞne a national povertyline (still a weighted average of rural and urban poverty lines) and thencalculate gaps for all workers using the national poverty line?

Disaggregated data on Þnancial ßows for various households groups: often diffi-cult to compile.

Vos (1998): uses an investment function where the level of investment is theminimum of desired investment, budget constrained investment, and foreign-exchange constrained investment. Naastepad (1998): investment is equal tothe minium of credit constrained and desired investment.

52

Contributions in the early stages of this project were provided by ShantayananDevarajan, DelÞn S. Go, Lodovico Pizzati, Christopher D. Scott, and LuisServén.

53

a well-established fact, the high degree of correlation between the level of edu-cation and the level of income. As a result, the larger the share of skilledworkers in the urban labor force is, the higher will be the level of income inthe urban sector, the lower will be the fertility rate, and the lower will bethe growth rate of the (unskilled) urban population.

Combining these hypotheses implies that the average expected urban consump-tion wage is a weighted average (with weights given by θU and 1− θU , where52If Qi denotes the composite good of imported and domestically-produced goods i (with

i = AN,P ), deÞned as

Qi = [βQiM−ηii + (1− βQi)M−ηi

i ]−1/ηi ,

where σQi = 1/(1 + ηi).53Note that, in principle, treating land as a Þxed input would imply that the production

function should exhibit decreasing returns to scale in the remaining inputs, labor andgovernment capital. This can easily be accounted for in the model by assuming a Cobb-Douglas technology, which boils down to taking the right-hand side of equations (3) and(4) to the power 1-η, say, where 0 < η < 1 denotes the share of land in output. Butbecause there is no market for land, this would require an arbitrary estimate of its price.

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θU is the proportion of urban unskilled workers employed in the formal sec-tor) of expected wages in the formal sector and the going wage in the informalsector, deßated by an urban consumption price index.54 We deÞne the prob-ability of Þnding a job in the formal sector as the ratio of workers in thatsector relative to unskilled urban workers net of government employment pre-vailing in the previous period; and because workers can always Þnd a job inthe informal economy, the expected wage in that sector is simply the goingwage. The expected, unskilled urban real wage for the current period, EwU ,is thus55

EwU =

³UP,−1

UU,−1−UG,−1WM,−1

´θUW 1−θUI,−1

PUU,−1

.

A similar reasoning is used to calculate the expected rural consumption realwage, EwA. Here the employment probability is equal to unity for the ruralnontraded sector:

EwA =

³UAT,−1

UR,−1WAT,−1

´θRW 1−θRAN,−1

PR,−1.

In contrast, if they remain unskilled, they expect to get the average unskilledwage, which is a weighted average of the minimum wage WM (weighted bythe probability of getting a job in the formal sector) and the informal wagerate. The weights used are θU and (1 − θU), where θU is measured by theinitial proportion of urban unskilled employed in the formal sector (that is,θU = (UP + UG)/UU). The average expected wage is then deßated by anurban unskilled consumption price index to measure purchasing power:

EwU =

"µUP,−1

UU,−1 − UG,−1WM,−1

¶θUW 1−θUI,−1

#1

PUU,−1.

DP 2001/32 Niels Hermes and Robert Lensink: Fiscal Policy and Private In-vestment in Less Developed Countries54The weights of each type of good in the price index represent consumption patterns

for urban unskilled workers in the base period (see the discussion below).55Note that these expression assumes that there is no �auctioning� of public sector jobs,

that is, the government does not turn over its employees over every period as occurs in theprivate sector. This assumption captures the view that public jobs are not �randomly�offered but result rather from various non-economic considerations, such as politicial pa-tronage. If there is turnover in the public sector, however, the probability of Þnding a jobwould by (UP,−1 + UG,−1)/UU,−1, instead of (UP,−1/(UU,−1 − UG,−1).

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