Academic journal article Journal of Management Research

Impact of Structural Adjustment Programme on Household Welfare and Inequality - Pakistan A Case-in-Point for the Developing Countries

Academic journal article Journal of Management Research

Impact of Structural Adjustment Programme on Household Welfare and Inequality - Pakistan A Case-in-Point for the Developing Countries

Article excerpt

Abstract

In this article the impact of Structural Adjustment Programme on Household Welfare and Inequality is discussed and the situation in Pakistan is reviewed as a Case-in-Point which will be useful in studying the situation in other developing countries. A computable general equilibrium model is used to analyse policies under structural adjustment programmes for Pakistan. This model was used to analyse the economic implications of two key elements in the structural adjustment programmes, namely fiscal strictness and trade liberalization policy. The experiment was based on a combination of the said two elements. The objective of this experiment was to determine the possibility of making up the existing trade deficit and revenue losses due to the abolition of tariff. Three variables were considered in this experiment - increase in sales tax, increase in income tax, and cut in government's consumption expenditures. It was observed that a cut in government consumption expenditure tends to outperform other fiscal stances in terms of household and economy-wide welfare indicators. The results suggest that targeting the government's consumption expenditures tends to be a real and potent tool for reducing government budget deficit and to cover losses arising out of the import tariff abolition.

Keywords: Structural adjustment, Household, Inequality, Economic adjustment, Fiscal strictness, Trade Liberalization, Traffic, Sales tax, Income tax, Government consumption, Welfare indicators

(ProQuest: ... denotes formulae omitted.)

1. Introduction

International Monetary Fund (IMF) loans, or what the IMF calls as its lending 'facility', are intended for the recipient countries to meet their short term liquidity needs. In the case of Pakistan, these include balance of payment deficits, stabilization of currency, rebuilding international reserves to manage its liquidity problems.

It is an established fact that IMF and WB, directly and indirectly, have played a crucial role in the macroeconomics of Pakistan. They have provided direct bilateral support to Pakistan in order to cope with imbalances like balance of payment deficits. On the other hand, the IMF has had indirect influence on lending by other donor agencies. This is evident from the fact that whenever Pakistan enjoyed good relations with the IMF, other lending agencies also provided financial assistant to Pakistan.

In fact IMF has had little problem with its aid operations in Pakistan as the country's development planners have mostly fulfilled the conditions of its loans. However, two conditions - tariff cuts and the cut in the budget deficit - are not fulfilled properly, perhaps due to severe short run implications. Controversy between the IMF and Pakistan was witnessed quite a few times. It is very interesting that each time this controversy was linked with either a refusal of tariff cut or budget deficit cut. This is evident in SAP (1982), SAP (1988) and Standby Arrangement (1993).

The purpose of this paper is to examine the effects of fiscal strictness and trade liberalization on some key variables of Pakistan's economy in general and on the household level welfare and inequality in particular using a computable general equilibrium model. The findings of this research can potentially serve a dual purpose. Firstly, it gives insights into how the Pakistani economy is potentially affected when the IMF's recommendations are implemented. Secondly and more practically, it provides a platform to the government (or policy makers) to base their future policy considerations on.

Based on our research, the paper is organised as follows: Section 2 presents computable general equilibrium model of Pakistan. Section 3 highlights the Data and model calibration. Sections 4 and 5 present welfare and inequality measuring methodologies. Implementations of the simulation (Fiscal strictness to cover revenue losses due to trade liberalization and existing budget deficit) are presented in section 6. …

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