A dual-dual CGE model of an archetype African economy: trade reform, migration and poverty

Abstract

We build a CGE model of an archetype African economy to simulate the welfare effects of trade liberalization specifically on poverty. The economy is modeled following a dual-dual framework (Thorbecke, 1993, 1994, 1997) that is characteristic of the structure of a developing country in its middle development phase. This provides the basis for analyzing the distribution of modern and informal sector activities in both rural and urban areas. The interdependence of these four broadly defined sectors is modeled not only in terms of production and consumption decisions within them, but also in terms of labor migration among them, adding a richness which is missing in the standard CGE models. Poverty analysis is integrated in the CGE methodology by endogenizing both intra-group income distributions and the nominal poverty line. The application of standard poverty measures to the pre- and post-simulation poverty lines and distributions of income for each socio-economic group, allows the assessment of policy-induced changes on group specific poverty and national poverty. Simulations with a model calibrated from a social accounting matrix (SAM) of a prototype African economy, show that an important contribution of the dual-dual model vis-à-vis poverty analysis in a CGE model is the inter-group migration it incorporates. Changes in the population shares of the socio-economic groups that follow population shifts have important implications for the magnitudes of changes in national poverty.