The importance of distributional issues in policymaking creates a need for empirical tools to assess the social impact of economic shocks and policies. This paper reviews some of the modeling approaches that are currently in use at the World Bank and other international financial institutions. The specification of these models is dictated by the issues at stake, the knowledge about the nature of the process involved, and the availability and reliability of relevant data. Furthermore, shocks and policies have macroeconomic, structural, and distributional implications. This creates interdependence between such policy issues. Finally, the distributional impact of shocks and policies hinges on the heterogeneity of socioeconomic agents with respect to endowments and behavior. In the end, each modeling approach should be judged on how well it handles the interdependence between policy issues and the heterogeneity of the stakeholders, given other constraints. " -- Cover verso.
The 2015 Millennium Development Goal to cut in half the share of the world’s population living in extreme poverty was met with time to spare. By 2013, the percentage of developing-country populations living in extreme poverty decreased from 43 percent in 1990 to 21 percent by 2010. Clearly, there is still a long way to go, with 1.2 billion people without enough to eat. What can we learn from the recent success? This volume presents recent methods to decompose the contributions to poverty reduction. What was the main contributor to poverty reduction? Using a simple accounting approach, we find that labor income growth was the largest contributor to moderate poverty reduction for a group of 21 countries with substantial reductions in poverty over the past decade. Moreover, in most cases, it was the growth in income per worker that contributed the most to poverty reduction, rather than an increase in employment. Changes in demographics, public transfers and remittances helped, but made relatively smaller contributions to poverty reduction. Public transfers were important in reducing extreme poverty, pointing to the crucial role of social protection systems. How was labor income growth able to reduce poverty? After a review of the literature, a structural decomposition method is presented and implemented in three countries. The results show that that labor income grew mainly because of higher returns to human capital endowments. This could signal increases in productivity, a higher relative price of labor, or both. In Bangladesh and Peru, this was driven by higher returns to workers with low levels of education, which may have partly been driven by higher food prices. In contrast, in Thailand, poverty fell partly due to increasing returns to education.
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