Pergamon World Development, Vol. 24, No. 6, pp. 1003-1013, 1996

Copyright 0 1996 Elsevier Science Ltd Printed in Great Britain. All rights reserved

0305-750X/96 $15.00 + 0.00

SO305-750X(%)000162

Adjustment and Income Distribution in an

Agricultural Economy: A General Equilibrium

Analysis of Cameroon

NANCY BENJAMIN* U.S. International Trade Commission, Washington, DC, U.S.A.

Summary. - To distinguish policy packages that have favorable characteristics for both structural adjustment and income distribution, this paper uses static and dynamically optimizing simulations of a Computable General Equilibrium (CGE) model based on detailed country and household data from Cameroon. Model results indicate that public spending to reduce transport and marketing costs are bene- ficial for the poor and for economic growth, even at the expense of competing public investments. Copyright 0 1996 Elsevier Science Ltd

1. INTRODUCTION

Structural adjustment refers broadly to the eco- nomic reorientation suited to coping with external shocks such as losses in terms of trade or in the avail- ability of foreign loans. The policies used to encour- age economic restructuring often include reduction and reallocation of government spending, changes in the structure of trade and excise taxes, and changes in the real exchange rate. While such adjustment plans consist of national-level policies, their effects are felt at the household level, particularly in terms of the dis- tribution of income. Since many of the countries requiring structural adjustment are poor, observers have asked whether adjustment policies conflict or complement these countries’ poverty alleviation goals. The purpose of this paper is to analyze the implications for income distribution of alternative structural adjustment paths in a low-income, agricul- tural economy. We do so by performing counterfac- tual simulations on a general equilibrium model of a particular country, Cameroon. During the second half of the 198Os, Cameroon was subjected to three exter- nal shocks: oil prices declined, agricultural prices fell and Cameroon’s currency, the CFA Franc, being tied

to the French Franc, appreciated substantially relative

to the US dollar. There was no question that the coun- try needed structural adjustment. But there are alter- native tax and expenditure policies that could generate a given external balance, each with different implica- tions for the distribution of income. In this paper, we examine these options and their implications, holding the level of current account reduction fixed, i.e., con-

trolling for the overall level of adjustment required by the economy.

In order to analyze structural adjustment and income distribution, we need a framework which can capture both the macroeconomic effects of external shocks and adjustment (i.e., shifts in the current account balance, etc.) and the microeconomic factors which determine income distribution - factor mar- kets, product markets and household behavior. In addition, analysis of this type requires simulation of alternative paths or, in other words, a model which permits counterfactual simulatioirs. Both these criteria are met by computable general equilibrium (CGE) models which have a long history of analyzing income distribution issues (Adelman and Robinson, 1978; de Melo and Robinson, 1982; Bourguignon, Branson, and de Melo, 1992).

Section 2 of this paper provides a thumbnail sketch of the data and CGE model used to analyze income distribution and adjustment in Cameroon. In section 3, we report on simulation results which reveal both the impact of external shocks as well as the implica-

*Research for this paper was undertaken as part of the Cornell University Food and Nutrition Policy Program pro- ject on Adjustment and Income Distribution in sub-Saharan Africa. I am grateful to Shantayanan Devarajan, Paul Dorosh, David Sahn and two anonymous referees for helpful comments on earlier drafts. The views expressed in the paper are the author’s own and not necessarily those of the US International Trade Commission. Final revision accepted: January 2,1996.

1003

1004 WORLD DEVELOPMENT

tions of alternative adjustment scenarios for the distri- bution of income among different household groups. Section 4 contains some concluding remarks.

2. DATA AND MODEL DESCRIPTION

(a) Data sources

The data used in the model come from a 1984-85 Social Accounting Matrix (SAM) described in Gauthier and Kyle (1990). The SAM starts with the aggregate balances given in the national accounts, adds sectoral input-output relations from the Cameroon input-output table, and disaggregates fac- tor payments, household income and consumption according to data from the Cameroon household sur- vey. Results of the household survey are detailed in Blandford and Lynch (1990) and Lynch (1991).

Each sector’s expenditures on trade and transport are accounted for in a manner like other intermediate purchases, but kept separate so that these services can be addressed by policy measures. For example, if the government spends more on road maintenance, the cost of operating and insuring transport equipment should fall, but not the cost of other services. Similarly, if the government works to improve storage facilities and reduce waste, this may reduce marketing margins but not other service inputs.

(ii) Consumer demand

The data allow for distinction in the model of seven household types. There are several agricultural households distinguished by region and income level, rural nonfarm households, and urban rich and poor. The overwhelming majority of the poor in Cameroon are rural, Most of the poor are farmers; the northern farmers are the poorest household group. Since the northern region is furthest from the capital and from major ports, northern farmers are isolated from other markets. They grow fewer cash crops and have less access to markets for food and consumer goods in other parts of the country (Blandford and Lynch, 1990).

Consumption behavior is governed by CES utility functions for each household. Consumption shares by commodity by household are taken from the house- hold survey data. Income elasticities by good by household were also derived from the survey data. The methodology and results are in Lynch (1991). Given these component values of the utility function, minimum subsistence consumption levels are deter- mined as a residual. The crossprice elasticities are a function of these minimum consumption levels.

(iii) Macroeconomic closure

(b) Model description

Unless noted otherwise, the macroeconomic clo- sure used in model experiments involves a fixed net flow of foreign exchange between Cameroon and the rest of the world. The numeraire of the model is the world price level or, equivalently, the price of foreign exchange. Thus the nominal exchange rate is fixed, but the domestic price level can vary against the world price level, and in this way the real exchange rate varies. The domestic price level is made up of the prices of pure nontraded goods and the prices of imperfect substitutes for world goods.

The CGE model used for policy simulation is described in detail in Benjamin and Lee (1991). At this point, only certain model features are summarized for the purpose of understanding experiment results. A full set of equations is listed in the appendix.

(i) Production and trade

The static general equilibrium simulation model solves for a single period based only on current values of variables. (No account is taken of the burdens of future debt repayment, for example.) The model can be run over several periods by incorporating each period’s investment less depreciation into the follow- ing period’s capital stock and updating total labor sup- ply. In most cases, the results of model experiments are measured at the end of five years. Production in each sector is characterized by

Cobb-Douglas production functions with four labor types (rural and urban unskilled, skilled, and highly skilled) and sector-specific capital that can be augmented only between periods. Domestic goods are imperfect substitutes for imports in the same sector. Consumers purchase a CES aggregate of imported and domestic goods based on the relative price. Similarly, the price of exports can differ from world prices since Cameroon’s exports are considered distinguishable from world goods in the sector. Domestic producers will also respond, according to a constant elasticity transformation function that governs the rate at which domestic production can be transferred to export markets. be saved.

All investment must be incorporated with the capital stock of the 11 sectors if it is to affect future output. The role of public investment can be seen in the flow of investment resources to public services and to the other public manufacturing sectors. Later, in an experiment, government investment will be directed toward one of the private sectors to simulate a change in public investment policy. Any decline in government tax revenue, such as from agriculture export taxes, will diminish government contribu- tions to aggregate saving. Thus a tax cut (or public spending increase) transfers revenue from aggregate savings to private income, where only a fraction will

ADJUSTMENT AND INCOME DISTRIBUTION 1005

This simulation model allows us to pose the coun- terfactual question: Is adjustment to a negative shock better for low income groups than nonadjustment? It also allows us to compare the outcomes of different adjustment policies to determine which are best for income distribution. In addition, it allows the distinc- tion of changes in the relative income positions of dif- ferent households versus changes in absolute income levels. Given the concern for the welfare of poor households, policy makers must beware of improve- ments in relative income distribution that nevertheless generate unacceptable outcomes for the poor.

(iv) Dynamic extension In addition to the simulation model, there is also a

dynamic optimizing version of the model designed to check the growth characteristics of strategies whose distributional characteristics are tested with the simu- lation model. The dynamic model has the same sec- toral and trade structure but lacks the detail related to income distribution. The model includes perfect fore- sight and maximizes the present discounted value of the utility of consumption over a 20-year period. All dynamic models face the problem of terminal condi- tions. To be solved, the model must define a steady state. In this case the steady state involves constant ratios of investment to capital stock and foreign debt to GDP. The 20-year period is necessary to establish a reasonably smooth growth path to this steady state. Several macro aggregates that are fixed in the static model - such as the time path of foreign capital flows, government consumption expenditures, house- hold savings rates - are endogenous in the dynamic model. Clearly, solutions to the static model simula- tions are not optimal. Therefore, policy experiments tested with the simulation model cannot be replicated exactly with the optimizing model. The structure of an optimal growth path delineated by the dynamic model, however, can help in judging the growth char- acteristics of strategies mapped out by the simulation model. It allows us to consider optimal adjustment strategies while the simulation model can indicate their likely impact on income distribution.

3. SIMULATION RESULTS

(a) Portrait of adjustment

To set the stage for analysis of adjustment strate- gies, we first describe the effects of the most striking aspects of Cameroon’s terms-of-trade shocks using model simulations.

High foreign exchange inflow during the oil boom certainly helped raise overall income levels. But one aspect of the foreign exchange windfall has strong implications for income distribution: real exchange rate appreciation.’ As mentioned earlier, spending an

oil windfall domestically can bias relative prices in favor of nontraded goods and against agricultural exports. Thus, at the time negative terms-of-trade shocks hit Cameroon, poor farmers were already in a relatively disfavored position. But we can further infer that, faced with a decline in terms of trade, it is better for farmers’ relative income if Cameroon adjusts to the shock than if it increases foreign borrowing and does not adjust.

Table 1 shows household income changes from a simulated drop in oil revenues. This is modeled as a capital outflow since Cameroon’s oil sector is an enclave with few production links with the rest of the economy (Benjamin, Devarajan and Weiner, 1989). In this case Cameroon’s capital outflow is increased by US$ 100 million. As expected, everyone’s income falls. But adjusting to achieve a larger current account surplus requires a decline in domestic prices against world prices, and this real depreciation helps farmers and their relative income position.

Given the decline in oil income, the Cameroon government eventually had to cut back on spending. To evaluate the distributional effects of less public spending we need to consider that funds released by government cutbacks can be used in different ways. For example, it can all be used to accommodate greater capital outflow, or, at a given level of capital flows, it can all be added to domestic investment funds, or any combination of the two. To examine the two extremes, Table 2 shows first, the results of repeating the base run with a lower level of public consumption and second, a repeat of the foreign capi- tal outflow reported in Table 1 with an accommodat- ing decrease in public spending. In the second of these experiments, investment in each year is set at the base- run levels and public spending must adjust to the cap- ital outflow. Of course, the results with higher capital

Table 1. Differences from the base run in percentage growth overfive years

Foreign capital outflow

Income for: Poor N. farmers Poor S. fanners Rich N+S farmers Nonfann rural Poor Nonfarm rural rich Urban poor Urban rich CPI

-6.9 -9.1 -8.8

-11.3 -11.2 -11.3 -11.0

-7.2

AP mfrs minus

@ag AP mfrs minus AP ag in the “no-shock” case

0.02

9.0

Source: Model simulations.

1006 WORLD DEVELOPMENT

Table 2. Differencesfrom the base run in percentage growth overfive years

Income for: Poor N. fanners Poor S. farmers Rich N+S farmers Nonfarm rural poor Nonfarm rural rich urban poor Urban rich CPI

Lower public spending Higher

Base run capital outflow

2.0 4.5 0.9 -8.1 1.3 -7.4

-0.2 -11.7 0.0 -11.4

XI.1 -11.6 0.6 -10.4

a.01 -7.8

AP mfrs minus

m ag AP mfrs minus m ag in the “no-shock” case

8.0 I.0

9.0

Source: Model simulations.

outflow in both tables show lower income levels than the case with base level capital flows. But in checking only for the impact of reduced government spending, we see the impact is small, largely because public and private spending do not have sufficiently different effects on factor incomes. The contribution of lower public spending to real depreciation gives rise to the small distributional effects observed.

(b) Alternative adjustmentpaths

In evaluating adjustment strategies it helps to con- sider structural adjustment and income distribution as targets and that policy should aim at both targets. The targets should first be defined so that policies can be tested relative to them. Measurements of income dis- tribution include indices based on income levels, such as poverty indices, and measurements of relative income positions comparing them to some egalitarian standard. For the purpose of this paper we consider only changes in relative incomes and record an “improvement” in income distribution when the income growth of the poorest households is high rela- tive to that of the richest households. Moreover, since structural adjustment involves economic reorientation to absorb terms of trade shocks with minimal contrac- tion of imports and growth, we consider the adjust- ment target to be foreign exchange generation or, in other words, importing capacity.

There is some problem, however, with trying to hit two targets with one model. Typically, adjustment policies are compared in terms of how much foreign exchange they can “free up” or allow the economy to

do without. Such comparison requires a model closure where the international capital account is left open; each policy leads to a different level of the current account and the capital account accommodates this level. As shown above, however, different amounts of capital inflow lead to different domestic income lev- els. This complicates analysis of income distribution effects. While policies can be compared on their results for relative income distribution, such compari- son is not always practical for the policy maker. Differences of income levels of several percentage points across adjustment plans will probably dominate any concern over differences in relative incomes.

What is more likely is that policy makers have a tar- get level for the current account or for income growth (or contraction) and are interested in the distributional consequences of alternative ways of hitting that target. For such an exercise, the model’s foreign capital account should be held at a constant level consistent with the target. In the base data, Cameroon transfers out US$162 million. This negative foreign exchange “shock” is held constant across policy experiments so that any improvement in income distribution is accom- plished at a given level of capital outflow.

In this way we hold the adjustment target constant and seek the greatest improvement in income distribu- tion. Then the adjustment and growth characteristics of these policies can be examined. For example, any distribution-changing policy that succeeds in raising total income is consistent with a growth strategy, since the income expansion is achieved without reducing capital outflow and without removing any structural rigidities. Moreover, such a policy will generate forces in the same direction over a wide range of adjustment targets.

Once we know which adjustment plans are also good distribution policies, we want to know which of the good distribution policies make good adjustment plans. To this end, the optimizing model can be used to check the compatibility between optimal growth strategies and those that improve income distribution.

In considering policies that most affect income dis- tribution, there is solid evidence supporting the impor- tance of the agricultural terms of trade or the relative price of agricultural goods to manufactures (Adelman and Robinson, 1978). Since, in Cameroon, most of the poor are rural farmers, it is not surprising that the agri- cultural terms of trade would remain significant in experiments with the Cameroon model. But this raises the question: What most affects the agricultural terms of trade? The next set of experiments addresses this question beginning with policies intended to improve the relative price of agricultural output.

(c) Lower rnunufacturing tariffs

Consider first a policy that could lower the price of

ADIIJSTMENT AND INCOME DISTFUBUTION 1007

manufactures, a significant intermediate and invest- ment good for agriculture sectors. Since a large share of manufactures are imported, an effective instrument for reducing their cost is to cut the import tariff of 25% in half. With cheaper manufactures imports, the cost of production is lower for all other sectors. The results in Table 3 show that this effectively improves the agricultural terms of trade and the relative income of poor farmers. The decline in tariff revenue cuts income to the government, however, which saves all above a constant consumption level, and diverts these flows to others who will provide fewer savings to finance investment. While demand for manufactures is aided by the lower price, the slump in investment reduces a major source of demand for this sector. The policy leads to an overall decline in income. Such neg- ative macroeconomic trends are not unlikely when trade liberalization is undertaken in a country with a fixed exchange rate. Overall efficiency gains are insufficient to compensate for the loss of competitive- ness in one sector and the loss of tariff revenue.

(d) Agricultural subsidy

Suppose instead there is a subsidy designed to raise the producer price of agricultural goods. In this case the food and cash-crop sectors have their indirect taxes set to zero and they receive a 10% export sub- sidy. The subsidy is even more successful in improv- ing the agricultural terms of trade and the relative income of farmers, while raising income overall. This time the favored sectors generate income for house- holds with high budget shares for the sectors’ output. Therefore income expansion is possible even though

investment funds are again reduced from higher pub- lic expenditures on the subsidies.

The agriculture subsidy produces favorable results for income distribution. There are, however, obvious problems with subsidizing domestic prices above world prices. As a practical matter it is difficult to maintain such price wedges when there are porous borders with neighboring countries which are export- ing and importing the same commodities as Cameroon. In addition, since the early work with CGE models on income distribution, the biggest change has been the pressures of structural adjust- ment. Developing economies are increasingly required to conform to world prices for tradable goods. Under this constraint, there is often little scope either for raising the price of primary products or for lowering the price of manufactured inputs. This directs attention to improving the operation of domes- tic markets so that income can rise for the poor with- out using extensive trade taxes.

(e) Trade and transport margin subsidy

One possibility is to approach a problem identified by several observers of Cameroon: the large gap between wholesale and retail agriculture prices (World Bank, 1989). Indeed the data for Cameroon indicate that many sectors are making large purchases of trade and transport or marketing margin services. Without inducing any sudden productivity increases in trade and transport services, the model can simulate the effects of a government subsidy of marketing mar- gins. Thus all sectors need as many services as before, but the government pays for 20% of the total package

Table 3. Differencesfrom the base run in the tetminal year (in percentage)

Lower mfrs tariff

Experiments

Ag Margin subsidy Margin subsidy subsidy (gov services) (construction)

Income of: Poor N. farmers Poor S. farmers Rich N+S farmers Nonfarm rural poor Nonfarm rural rich Urban poor Urban rich CPI

-3.0 5.6 5.1 7.8 -4.1 2.4 1.5 2.7 4.0 2.9 2.0 3.7 -5.2 -0.7 -1.6 -2.2 -5.1 4l.9 -1.1 -1.3 -5.2 -0.7 -1.6 -2.2 -5.0 -1.1 0.1 1.3 4.3 2.1 -1.6 -2.3

AP mfrs minus

APag AP mfrs minus AP ag in the “no-shock” case

5.0

9.0

2.0 3.0 1.5

Source: Model simulations.

1008 WORLD DEVELOPMENT

of margin services. The subsidy forces government spending to increase by about 30%. If the structure of these new payments are the same as those for other publicly provided services, the impact on income dis- tribution is as given in the column labeled Margin Subsidy (Gov Services) in Table 4.

With government covering some of the cost of margin services, the private cost of delivering goods to final consumers is reduced. It is possible for pro- ducer prices to rise and consumer prices to fall. In this case the agricultural terms of trade improves as does the relative income of farmers. So reducing the burden of margin services is relatively more important for farmers whereas the decline in aggregate investment (due to higher public current expenditures) hurts them relatively less.

There is an aggregation problem in that payments for marketing margins are observed for entire sectors in the model, but are actually concentrated on trans- ported or marketed output. Likewise, the benefits of the margin subsidy affect value added throughout the sector, though in reality it will affect some producers more than others. What can be determined is that the household groups in the model that gain from the sub- sidy are those whose income sources are concentrated in sectors where marketing margins are high on aver- age.

In model experiments we can only suppose that government expenditures can reduce private market- ing costs by some amount. The productivity of such a subsidy is a key parameter in these results. Model results indicate that if public spending could lessen

Table 4. D@erencesfrom the base run in terminal year (in percentage)

Five-year run after two-year contraction

Margin subsidy Margin subsidy (gov services) (construction)

Income for: Poor N. farmers Poor S farmers Rich N+S farmers Nonfarm rural poor Nonfarm rural rich Urban poor Urban rich CPI

5.4 7.9 1.6 2.7 2.2 3.7

-1.7 -2.3 -1.2 -1.4 -1.7 -2.2

0.1 1.3 -1.8 -2.4

AP mfrs minus

Nag AP mfrs minus AP ag in the “no-subsidy” case

9.0 7.0

15.0

Source: Model simulations.

private marketing margin expenses, it would be good for income distribution. Given some possibility for success, the government may be able to reduce the effective cost of margin services to private sectors through various types of public expenditures. In the last experiment it was assumed that all new expendi- tures were made on public services. To test one other extreme, suppose that marketing margins can be sub- sidized through public expenditures on construction. As indicated earlier, current public spending on main- tenance of roads and storage facilities can reduce trade and transport costs. Results from this experiment, assuming again a 20% subsidy, are listed under Margin Services (construction) in Table 4.

The change in the composition of government spending accentuates the results of the earlier margin subsidy experiment. The gap between agriculture and manufactures prices is even smaller than with the direct agriculture subsidy. From the four experiment results presented so far, we can see that directing pub- lic expenditures toward reducing marketing margins can be similarly or more effective in reaching distrib- ution and adjustment targets as direct approaches to the agricultural terms of trade.

It could be argued that the role of trade and trans- port services - all nontraded activities -is exagger- ated in the base data because 1984-85 reflects the peak absorption of oil revenues, which tends to inflate the price of nontraded goods relative to traded. After a few years of economic contraction and nontraded good price declines, the value of subsidizing margin services could be lower. This possibility is tested by repeating the margin subsidy experiment on a new base-year solution created from the original by con- tracting foreign capital for two years. After two years of contraction, the relative price of nontraded goods does decline. The results in Table 4 show, however, that the subsidy policies do not lose their effective- ness, even when applied to a deflated base-year solu- tion. Clearly the size of margin services is not simply a matter of relative prices but involves the fundamen- tal structure of the economy.

These results differ from those in studies focused on increasing productivity by expanding public infra- structure (for example, Feltenstein and Morris, 1990). In such cases, the cost of producing infrastructure may be well known but its effectiveness in raising private productivity is simply imposed exogenously. With the Cameroon data, we know the size of the complete package of public and private trade and transport ser- vices purchased by each sector. The economy-wide value of reducing these costs can be determined and the expense deducted from the government account, but this does not determine the value of government spending on infrastructure. The last two modeling exercises look at the potential for investment schemes to contribute some of the effects generated by the cur- rent subsidies simulated above.

ADIUSTblENT AND INCOME DISTRIBUTION 1009

(f) Dynamic model simulation

Reducing transport margins may be a productive way of raising the relative incomes of the poor in Cameroon, but is it also a good growth and adjustment strategy? By using the dynamic optimizing model we can check the consistency of this policy with a growth-maximizing investment strategy. The model finds the level and structure of investment that maxi- mizes the present discounted value of the utility of consumption; thus it maximizes economic growth. Foreign borrowing and domestic saving are endoge- nous, but foreign debt must largely be repaid in order to meet the terminal condition on the ratio of foreign debt to GDP. The results in Table 5 compare the struc- ture of the capital stock in the base year with the capi- tal structure at the end of the optimal 20-year invest- ment path.

The results from this model show that to maximize growth, the share of capital in sectors producing trade and transport services must be increased (Table 5). Thus the productivity of investing in these areas is made apparent by the optimal growth path. It should be noted that the sectors with growing capital shares start with only average rates of return in the base year. Other sectors with higher returns lose capital share. Thus the optimizing model recognizes the bottleneck in services and the long-run value of expanding capac- ity in those sectors.

While the optimizing model shows the growth advantage of investing in sectors providing marketing margin services, it does not guarantee that the income distribution results shown above will be sustained under an investment scheme as well as under direct current expenditures. If the government adds its own purchases of capital to those made by the service-sup- plying sectors, the added investment should bring down the cost of trade and transport services, though

not as much as a direct subsidy. This approach has a more favorable outcome for total capital stock, but is less effective on income distribution compared to the current subsidy. The investment instrument is even more blunt if it brings down the price of all output to all users of the sectors producing margin services. It is possible to target margin services with an investment strategy by first, measuring the degree to which addi- tional investment in the relevant sectors lowers their output price and then, combining such investment with a compensating tax on all uses other than market- ing margins. Table 6 gives the results of this experi- ment where the amount of directed investment is equal to the amount spent on direct margin subsidies in the earlier experiments. The decline in price for margin services is 5% while the price for all other uses of these sectors remains very close to its base-run val- ues. If the directed investment expenditures could be targeted toward adding only trade and transport capi- tal stock, the impact on margin service prices would be greater.

5. POLICY CONCLUSIONS

Evaluating the impact of adjustment programs on income distribution requires a general equilibrium framework for analysis and detailed data on the stmc- ture of the economy. For Cameroon these data show the sources of income of different households and the importance of trade and transport services for prod- ucts produced by the poor. Given these two features, general equilibrium analysis demonstrates the value of lowering the cost of marketing margin services in improving the relative income of the poorest house- holds. This finding has several implications: for adjustment strategy, for investment plans, and for exchange rate policy.

Table 5. Composition of capital stock in a dynamic, 20-year optimizing scenario

Sectoral share of total capital stock in: (in percentage)

Year 0 (Base) Year 20

1. Traditional food crops 7.5 8.0 2. Traditional export crops 5.9 5.1 3. Forestry 3.6 3.9 4. Agriculture modem sector 0.9 0.8 5. Food industries - private 4.9 3.4 6. Food industries - public 0.6 0.4 7. Manufacturing - private 33.0 26.9 8. Manufacturing - public 5.3 4.2 9. Construction 10.7 14.5

10. Services -private 21.0 25.4 11. Services -public 6.3 7.3

Source: Model simulations.

1010 WORLD DEVELOPMENT

Table 6. Differences from the base run in percentage growth overfive years

Targeted investment in margin services

Income for: Poor N. farmers Poor S. farmers Rich N+S farmers Nonfarm rural poor Nonfarm rural rich Urban poor Urban rich CPI

2.6 0.4 0.1

-2.1 -2.0 -2.0 -1.1 -0.4

AP mfrs minus

mag AP mfrs minus AP ag in the “no-shock” case

Source: Model simulations.

7.0

9.0

Structural adjustment shocks place producers of traded goods under greater pressure from world prices, the producers of nontraded goods less so. The Cameroon data and model results indicate that those who profit from domestic trading routes are not the poor. Farmers gain more from having transport costs reduced than they lose in income from employment in the supplying sectors. Therefore, adjustment strate- gies should examine the possibility of reducing costs in sectors least pressured by world prices, but also how those sectors affect the employment of the poor and the price of goods produced by the poor.2

Public investment plans should also be considered in terms of their impact on income distribution. Model experiments show that poor households are favored by a policy where the government allocates funds away from investment into current subsidies of marketing margin services. This indicates that poor households do not gain much directly from investment expendi- tures.3 Nor, after five years, are the benefits of a higher capital stock sufficient to outweigh the advantage of lower margin costs for farmers.

When the direct margin subsidy is replaced with capital investment to lower margin costs, the beneli- cial effects are diminished. Various factors combine

to lessen the effect of investment spending. One, indi- cated above, is the lack of employment of the poor in investment goods sectors. Another is the low capital intensity of the service sectors. This generates a low average productivity of capital and indicates that the greater efficiency gain is in lowering labor costs. Finally, model experiments only simulate the effects of adding capital to existing service technologies. They do not measure the benefits of adding new roads where none exists. The most common characteristic of poor farmers, however, is limited access to markets allowing cash sales of output and a variety of foods for purchase. This indicates the need for infrastructure investments to lessen the isolation of certain regions.

Model simulations do show the value to all farmers of reducing the gap between wholesale and retail prices, even after two years of simulated macroeco- nomic contraction. This shows that high marketing margins arise from structural characteristics of the market, and not only from temporary conditions in rel- ative prices.

Given these features of the economic structure in Cameroon, however, the role of the exchange rate can- not be ignored. Poor farmers are engaged in producing both traded and (largely) nontraded goods, and exchange rate changes can have varying degrees of effectiveness in improving the market for cash crops. But the importance of certain nontraded services in total intermediate costs for farmers guarantees the value of real depreciation in improving income distri- bution in Cameroon.

The general equilibrium analysis in this study enables us to simulate the distributional consequences of several public tax and spending policies and exchange rate policy. It also allows us to pinpoint those features of the economy having strong effects on income distribution. Once discovered, these features indicate fruitful areas for further investigation, such as: the market organization of transport and distribu- tion services, the dependence of these services on pub- lic infrastructure, or the propensity of different farm- ing households to market surplus output as transport costs fall. With such investigations we can look ahead to how structural adjustment programs may affect sen- sitive elements of the economy, and thus design reforms so that adjustment can proceed more smoothly.

NOTES

1. The impact of real exchange rate changes on income This conclusion further enhances the role of detailed analysis distribution and poverty is discussed in Kanbur (1987). of distributional effects.

2. The impact of adjustment strategies on the nonpoor but 3. Blejer and Guerrero (1990) find similar results for the powerful can affect the political feasibility of these strate- Philippines. gies, according to de Janvry, Fargeix and Sadoulet (1991).

ADJUSTMENT AND INCOME DISTRIBUTION 1011

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APPENDIX: DEFINITIONS AND EQUATIONS

(a) Indices Export elasticity of demand Private marginal propensity to consume Minimum consumption level Government consumption share Export duty rates Tariff rates Indict tax rate Depreciation rates Proportion of the average wage by labor cat- egory and by sector Shares of investment by sector of destina- tion

iJ if im 1 h a na

agcY nacy r

maq

maf? PC St

sub,

sectors exportable sectors importable sectors Labor categories Household categories Agricultural sectors nonagricultnral sectors Agricultural capital income categories Nonagricultural capital income categories Time period

(b) Parameters

Marketing margin as a rate of domestic out-

put Marketing margin as a rate of imports Private consumption share of public goods Subsidy rate on marketing margin Subsidy rates on private consumption of public goods CES utility (Armington) function shift para- meter CES utility (Armington) function share parameter CES utility (Armington) function exponent Elasticity of substitution CET function shift parameter CET function share parameter CET function exponent Elasticity of transfonnation

a,, h I. I tt;

PC,

sub,

-58

P ,I

p< PQ PE, PWE,

Ratios of inventory investment to gross out-

put Input-output coefficient Capital composition coefficient Share of marketing margin expenditures Aggregate private savings rate Private consumption shares of public goods by household group Subsidy rates on private consumption of public goods by household group Private savings rate by household category Private consumption shares by sector and by household group

(c) Variables

Price of composite good i Price of domestic sales Domestic price of exports World market price of exports

1012 WORLD DEVELOPMENT

PM Domestic price of imports (d) Equations in the model

px, PMW, PWE, PVA,

WA,

Domestic supply price World market price of imports World market price of exports Value added price Average wage rate by labor category

(i) Import Demand X, = A,C [6, M,+” + (1 - Si) XXDiPi]-“+’

ER

MM

Exchange rate Value of marketing margins

PJ, = PDJXD, PM, M,

(M,JXXD,) = (PDjPM,p’ (S/l - 6Joi

MMTOT Total value of marketing margins

PC Price of trade margins Pindx Aggregate price index

4 Return to capital ISHR, Sector share of investible funds

4 Composite goods supply

XD, Domestic output

PM,=PW,(l+?m,)ER+mum,(l-st)

(ii) Exporfs E, = E0 (PWE,IPE,) q

XD, = A,T [“I E,o’ + (1 - yi) XXDi(,]“+,

Domestic sales of domestic output Imports Exports Sector specific capital Inventory investment demand Employment by labor category and by sec- tor

PX, XD; = PD, XXD, + PE, E,

(EJXD,) = (PEjPD,)+'l [(1 - yJr]+”

L.4 C, Ci,,

CTOT

G, GDTOT

Z, RG Y F s

Dk,

Labor supply Private consumption demand for good i Consumption demand for good i by house- hold group Total private consumption demand Public consumption demand for good i Total public consumption demand Investment demand by sector of origin Government revenue Total income of private sector Foreign savings Total savings Volume of investment by sector of destina- tion

PWE, ER PE;= -

1 + te,

DKTOT Total investment DEPRECIA Total depreciation charges CTOT, Private consumption demand by household

group

(iii) Domestic supply of goods and demand for labor XD, = A&;p” L,,&’ I+*i L4, ~4, KC..% , (10)

a,, = 1 - x, Q,, and A, is a constant.

PVA, = PD, - C, P, a,i - td, - pt marxi (11)

PVA, @XD,laL,,) = WDIST,, WA, 1 = 1,2,3,4 (12)

pt = z:, no, P,

tf, = rf0, MMTOT

Yh TWAG, TWNA,

TWAGL TWNAL

Tw, TWL (v) Consumer demand

YH,,,

Income by household category Total wage of agri sectors by labor category Total wage of non-agri sectors by labor cate-

gory Total wage of all agri sectors Total wage of all non-agri sectors Total wage of ag and non-ag sectors Total wage of all sectors and all labor cate-

gory Labor income by household and by labor category

MM, = (1 - st) (marx, XDi + marm, M, PWM, ER)

MMTOT = C, MM,

c, L,, = I&

(iv) Intermediate demand

W, = Z, a, XD,

C,, = 7,* + pih (CTOTIP,) + PC,, pi” GDTOT ( 1 - sub,,) (15)

CTOT, = (1 - s,,) Yh (lo)

DEPRAG Depreciation of agricultural sectors DEPRNA Depreciation of non-ag sectors

CAPY,,, Agricultural capital income by household sector

(vi) Income distribution TWAG, = Za WA, WDIST,,, XLE,,,

CAPY,,,, Non-ag capital income by household sector YHL, Total labor income by household category

Y/l Total private income by household category YSUM Total private income HHSA V, Household savings by household group THHSAV Total household savings LSUPD,,, Growth rates of labor supply by labor cate-

gory

TU’NA, = Zn. WA, WDIST,,, XLE,,,

TWAGL = XI TWAG,

TWNAL = Z, TWNAl

TW, = TWAG, + TWNA, TWL=C,Tw,

GDTOTUPD, Growth rate sof government consumption

(1)

(2)

(3)

(4)

(5)

(6)

(7)

(8)

(9)

(13)

(14)

ADJUSTMENT AND INCOME DISTRIBUTION

YH,, = Tw, YSHARE,, (17) DK, PK, = ISHR, KIO, (S - 03-T)

DEPRAG = ca DEPR, PK, KS, DKTOT = 2, DK,

DEPRNA = c, DEPR, PK, KS, ST, = Vi XDi

YAGCAP, = (& PVA, X0, - TWAG, -DEPRAG) CAPYk,, I’D, E, xi PW, M, - =F

YNACAP, = (C., PVA., XD., - TWNA, - DEPRNA) ER (1 + rei)

1013

(22)

(23)

(24)

x CAPY,,,, “- .- .._

YHLh = xi YH,,

Y, = YHL, + YAGCAPh + YNACAP,

YSUM = & Y,,

HHSAV, = CAPY, Y,

THHSAV = & HHSAV,,

DEPRECIA = DEPRAG + DEPRNA

P ,*=xiP,Pi

(vi) Government demand G, = pi” GDTOT (1 - (I,, PC,, (1 - sub&))

(vii) Investment demand S = s xi PVA, XDi + RG - pi Gi + DEPR + F*ER

RG = x:i td, PVA, XD, + tmi PM, + te,PD, E, R; = XL+ PVA, (1 - Xi ALPHLJKS, ISHR, = (R/KSi)I(xj R, KS,)

(viii) Supply- demand equilibn’um X, = W, + &,C,, + Z, + ST, + G, + tt, i = 1, ., n (25)

Equations used to update variables exogenously Ls ,.,+I = Ls,, (1 + x, ~UPD,,,)

KS,,,+, = KS,,, (1 - DEPR,) + DKi

GDTOT,+, = GDTOT, (1 + z, GDTOTUPD,)

Objective function of dynamic model:

(18) g’ (1 + r) -‘c:*/(l - E) + 7-l (1 + r) -Tc:“/(l -E)

where

(19)

(20)

(21)

c,=gcf

r = social rate of discount E = intertemporal substitution elasticity T = time horizon, after which the economy is assumed to be on its steady-state growth path.