Pro-Poor Macroeconomics: Potential and Limitations

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Redistribution means taking income from those with higher incomes and providing income to those with lower incomes. Earlier in this chapter, we considered some of the key government policies that provide support for the poor: the welfare program TANF, the earned income tax credit, SNAP, and Medicaid. If a reduction in inequality is desired, these programs could receive additional funding. The programs are paid for through the federal income tax, which is a progressive tax system designed in such a way that the rich pay a higher percent in income taxes than the poor.

News stories occasionally report on a high-income person who has managed to pay very little in taxes, but while such individual cases exist, according to the Congressional Budget Office, the typical pattern is that people with higher incomes pay a higher average share of their income in federal income taxes. Of course, the fact that some degree of redistribution occurs now through the federal income tax and government antipoverty programs does not settle the questions of how much redistribution is appropriate, and whether more redistribution should occur.

Economic inequality is perhaps most troubling when it is not the result of effort or talent, but instead is determined by the circumstances under which a child grows up. One child attends a well-run grade school and high school and heads on to college, while parents help out by supporting education and other interests, paying for college, a first car, and a first house, and offering work connections that lead to internships and jobs.

Another child attends a poorly run grade school, barely makes it through a low-quality high school, does not go to college, and lacks family and peer support. These two children may be similar in their underlying talents and in the effort they put forth, but their economic outcomes are likely to be quite different. Public policy can attempt to build a ladder of opportunities so that, even though all children will never come from identical families and attend identical schools, each child has a reasonable opportunity to attain an economic niche in society based on their interests, desires, talents, and efforts.

Some of those initiatives include those shown in Table The United States has often been called a land of opportunity. Although the general idea of a ladder of opportunity for all citizens continues to exert a powerful attraction, specifics are often quite controversial. Society can experiment with a wide variety of proposals for building a ladder of opportunity, especially for those who otherwise seem likely to start their lives in a disadvantaged position. Such policy experiments need to be carried out in a spirit of open-mindedness, because some will succeed while others will not show positive results or will cost too much to enact on a widespread basis.

There is always a debate about inheritance taxes. It goes like this: On the one hand, why should people who have worked hard all their lives and saved up a substantial nest egg not be able to give their money and possessions to their children and grandchildren?


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In particular, it would seem un-American if children were unable to inherit a family business or a family home. On the other hand, many Americans are far more comfortable with inequality resulting from high-income people who earned their money by starting innovative new companies than they are with inequality resulting from high-income people who have inherited money from rich parents. The United States does have an estate tax —that is, a tax imposed on the value of an inheritance—which suggests a willingness to limit how much wealth can be passed on as an inheritance.

Government policies to reduce poverty or to encourage economic equality, if carried to extremes, can injure incentives for economic output. The poverty trap, for example, defines a situation where guaranteeing a certain level of income can eliminate or reduce the incentive to work. An extremely high degree of redistribution, with very high taxes on the rich, would be likely to discourage work and entrepreneurship.

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Better Livelihoods for Poor People: The Role of Agriculture

Thus, it is common to draw the tradeoff between economic output and equality, as shown in Figure 1 a. In this formulation, if society wishes a high level of economic output, like point A, it must also accept a high degree of inequality. Conversely, if society wants a high level of equality, like point B, it must accept a lower level of economic output because of reduced incentives for production. This view of the tradeoff between economic output and equality may be too pessimistic, and Figure 1 b presents an alternate vision.

Here, the tradeoff between economic output and equality first slopes up, in the vicinity of choice C, suggesting that certain programs might increase both output and economic equality. For example, the policy of providing free public education has an element of redistribution, since the value of the public schooling received by children of low-income families is clearly higher than what low-income families pay in taxes.

A well-educated population, however, is also an enormously powerful factor in providing the skilled workers of tomorrow and helping the economy to grow and expand. In this case, equality and economic growth may complement each other. Moreover, policies to diminish inequality and soften the hardship of poverty may sustain political support for a market economy.

After all, if society does not make some effort toward reducing inequality and poverty, the alternative might be that people would rebel against market forces. Citizens might seek economic security by demanding that their legislators pass laws forbidding employers from ever laying off workers or reducing wages, or laws that would impose price floors and price ceilings and shut off international trade.

From this viewpoint, policies to reduce inequality may help economic output by building social support for allowing markets to operate. The tradeoff in Figure 1 b then flattens out in the area between points D and E, which reflects the pattern that a number of countries that provide similar levels of income to their citizens—the United States, Canada, the nations of the European Union, Japan, Australia—have different levels of inequality.


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They could not pay a wealth tax that could be several thousand dollars annually without financial strain, perhaps going to the bank for a loan, dipping into the small amount of cash they have, or in some cases being forced to sell their farm, small business, home, or other illiquid asset for cash. The practical difficulties mentioned in this section, as well as others, shed light on why many nations that once imposed wealth taxes, among them Austria, Denmark, Germany, Sweden, and Finland, have since repealed their wealth taxes, and why no nation has, on a long-term basis, imposed a comprehensive annual wealth tax.

For example, although France levies a wealth tax, it is not comprehensive. These provisions require a federal direct tax to collect the same amount in two states if the states have the same number of people. In Pollock v. Supreme Court invalidated an early federal income tax, finding that it was a direct tax and violated the apportionment requirement. To remove this constitutional barrier, Congress and the states responded with the Sixteenth Amendment which explicitly repeals the apportionment requirement in the case of the income tax. The Sixteenth Amendment does not discuss wealth taxes.

Since most legal scholars classify wealth taxes as direct taxes and since a federal wealth tax would by its nature take more from people in rich states than poor states, a federal wealth tax may be ruled unconstitutional unless Congress and the states first pass a constitutional amendment allowing it. In Capital in the Twenty-First Century , Thomas Piketty declares that higher tax rates on the wealthy are the path to a fairer and more prosperous future.

A key element of his program is a comprehensive wealth tax. This paper has modeled the growth and distributional effects of a broad-based, Piketty-style wealth tax. The wealth tax would cause large declines in investment, employment, wages, and national output. The nation as a whole would be poorer. A distributional analysis reveals that the loss of after-tax income would be greatest at the top of the income scale but that families at all income levels would suffer.

Some people with low current incomes, such as many retirees, would be hurt, because they have saved enough to be subject to the wealth tax, but most of the losses for the poor and middle class would occur because the wealth tax would lead to fewer jobs, lower wages, and a diminished supply of goods and services. In addition to the large, negative growth effects, the broad-based wealth tax that Piketty recommends may not be practical because it would place huge compliance costs on many households and be difficult to enforce.

These problems would not go away even if the wealth tax were global. Taxes have a major impact on economic growth, because people respond to incentives. If a tax change reduces the after-tax reward at the margin for working and investing, people will supply less labor and capital equipment, structures, and intellectual property in the production process. Fewer production inputs will lead to less output and a smaller economy. Conversely, if taxes take a smaller bite at the margin, people will supply more labor and capital in production, resulting in faster growth and a larger economy.

Empirical evidence indicates that labor is moderately sensitive to after-tax rewards and capital is extremely sensitive. With these points in mind, the model calculates by how much if at all a proposed tax change would alter average and marginal tax rates. From that, it estimates the adjustments people would make in the quantities of labor and capital they supply in the production process and then estimates the impact on the economy after people have fully adjusted.

If a tax change causes a large movement in marginal tax rates, the static and dynamic revenue scores can be very different. In the earlier paper that estimated the economic effects if the U. No data source of comparable quality exists for wealth. Here we describes several possible sources of wealth data and the pros and cons of each. The two main ways for investigators to gather the required wealth information are by analyzing tax data and through surveys.

If you are dealing with only a small number of people and they are in the public eye, a third way is to have skilled researchers prepare an estimate for each person or family under consideration by perusing public records, conducting interviews, and making educated guesses. This is essentially how Forbes produces its list.

SOI then uses mortality tables to deduce how many people in the total U. If you know how likely a person of a given age, sex, and certain other characteristics is to die, you can calculate quite accurately how many people with similar characteristics are in the total population.

For these reasons, this study turned to wealth information based on survey data. In this study, we relied on family net worth data generated by a long-running, highly respected survey operating out of the University of Michigan called the Panel Study of Income Dynamics PSID. A weakness of the survey approach is that most surveys contain relatively few extremely wealthy families. These small numbers are a caution to treat the wealth tax computations as approximations, not as precise to the last decimal point.

Another weakness of the survey approach is that if the value of an asset is uncertain, a person will have a monetary incentive to value it lower on a tax return than in a survey. That is, respondents will tend to state their best guesses on surveys but be motivated to report the lowest legally defensible numbers on tax returns. Consequently, survey results may overstate taxable net worth and, hence, potential wealth tax liabilities. This study also uses PSID data on family incomes and the number of persons in each family.

Income Inequality Really Increased? But given his desire to use taxes to reduce inequality and the fact that capital is owned unequally, it is plausible that he would want capital gains and dividends to be taxed at least as heavily as ordinary income. In these passages, Piketty gives the impression that policy should be based on what is tempting as opposed to what is efficacious, much like a diet of chocolate doughnuts or cakes.

Another way to convert euros into dollars would be with exchange rates. Two disadvantages of using exchange rates are that they are highly volatile, and that they do not reflect the relative values across nations of goods and services that are not internationally traded. Notice that the tax rates which Piketty says in the book might apply to billionaires would now commence at 20 million euros.

Compared to what this study does model, the 5 and 10 percent rates would worsen the economic damage but the replacement of existing property taxes, if actually carried out, would lessen the harm. Also, while the 0. Constitution, because its apportionment requirement only applies to federal taxes. One might wonder why the federal estate tax does not run afoul of the apportionment requirement for federal direct taxes.

It is getting into the legal weeds, but the answer seems to be that the courts regard the estate tax as an indirect tax, not a direct tax, because it is triggered by an event, namely death. Its measure of family wealth includes home equity and subtracts out net debt. As a check, the post-weighting distribution of family net wealth was compared with the distribution of household net worth that the Census Bureau reports in its survey.

Reassuringly, the two distributions are fairly close. The Tax Foundation works hard to provide insightful tax policy analysis. Our work depends on support from members of the public like you. Would you consider contributing to our work? We work hard to make our analysis as useful as possible. Would you consider telling us more about how we can do better? October 22, Michael Schuyler. Print this page Subscribe Support our work.

Key Findings A wealth tax in the United States would reduce investment, wages, employment, incomes, and output. All income groups would be worse off under a wealth tax due to decreased economic activity; in the second scenario, the after-tax income loss for the top quintile would exceed 10 percent, but the losses for all lower quintiles would be in the 7 to 9 percent range. Unless one is willing to fight income and wealth inequality by making everyone poorer, any distributional gains from the wealth tax would come at too great a cost.

In his words: To my mind, the objective ought to be a progressive annual tax on individual wealth—that is, on the net value of assets each person controls. In his words again: At what rate would it be levied? Figure 1. The thresholds are converted here into dollars using purchasing power parity. Hayami and Ruttan [ ] provide a theoretical framework of this type of biased technological change based on the induced innovation hypothesis. According to this theory, innovation is induced as a response to changes in relative prices, which push firms to innovate in order to use less of the resource that has become more expensive.

However, the hypothesis of biased technical change as hypothesized by Hayami and Ruttan may not hold in low income and sub-Saharan countries Cuffaro [ ]. In most of these countries, land and labor are abundant, but capital is scarce, and land inequality is high so that most of the farmers are smallholders.

Thus, the theory of induced innovation cannot hold for the following reasons: 1 demand for innovation for small- and large-scale farms is different; 2 small- and large-scale farms have different influence on public research; 3 imported technology is absent in induced innovation theory.

This means that agricultural modernization includes mechanization strategy as part of technological change and the modernization of agriculture behavior, structure and institutions. The choice of the technology, which depends on the factor price and public policies, must be centered on the technological need of small-scale farmers. The process of agriculture modernization includes mechanization and chemicalization. Mechanization comes with higher capital intensity whereas chemicalization implies that farmers adopt practices that increase the efficiency in the use of fertilizer and chemicals required to produce a certain level of outputs.

This scheme includes also organic farming that maintains soil fertility to avoid the overuse of chemicals. Given the actual price and subsidies level, this technological path enables farmers to make effective and efficient use of the limited amount of fertilizer.

Executive summary

These practices include crop rotation or integrated livestock crop rotation, intercropping, cover cropping or green manure, and composting waste materials. Finally, it is worth noting that achieving agricultural mechanization requires institutional changes that increase trust and encourage the private sector to adapt progressively proven technologies to local practices and production modes Thirtle et al.

How Potential GDP Grows - Economic Growth (2/4) - Principles of Macroeconomics

In the case of DRC, public interventions are required to improve access to markets for inputs, outputs and finance, as transaction costs are very high. To evaluate the pro-poorness of agricultural modernization-led growth, I adopt a sequential approach that combines a CGE model to a microsimulation model augmented to incorporate a pro-poor growth framework. The empirical strategy proceeds in four steps, as Fig.

I first use the CGE model to generate the effects of agricultural modernization strategies on employment, wages and rents, and the price of goods and services. Then I transmit these changes into a microsimulation model, which takes into account household heterogeneity in terms of factor endowments and consumption patterns, to generate welfare gains or losses at the household level.

Using these changes in welfare, I apply the pro-poor growth framework to assess which of the agricultural modernization strategies is pro-poor, and the extent to which growth and redistribution contribute to welfare changes. Finally, I select a strategy that produced pro-poor welfare gains in the previous stage, and use a least square regression to explain its characteristics. The general specification of the Congolese CGE model follows the basic structure of the single-country model as described by Dervis et al. However, I closely follow Arndt et al. A full description of the CGE model can be found in Otchia [ ].

However, additional data were required to fully run the CGE model, including household demand elasticities, trade elasticities, and production elasticities. Footnote 10 Trade elasticities include elasticities for the Armington and transformation functions. Armington elasticities represent the elasticity of substitution in demand between imported commodities and domestic goods; whereas transformation elasticities include substitution elasticities among primary inputs in the value-added production function. For the case of the Congo, no trade elasticity was found due to the lack of time series data.

Therefore, trade elasticities used in this study are from the Global Trade and Analysis Project based on Dimaranan [ ]. Finally, production elasticities, which are drawn from the empirical CGE literature for African economies, vary between 0. Footnote My framework posits that agricultural technological change affects household income through channels such as changes in price of goods and services, changes in employment, and changes in the return to factors of production. The microsimulation model has two building blocks: a labor participation model and an accounting equation.

Based on Magnac [ ] and Cogneau and Robilliard [ ] , I specify a labor participation model to estimate changes in the labor conditions. Specifically, I use the labor participation equations to estimate the probability to participate in the labor market. Later, I use these probabilities to allocate labor in the microsimulation model based on changes in employment levels from the CGE model.

The second component of the microsimulation transmits changes in commodity and factor prices following Otchia [ ]. The labor participation model has four components: 1 a probit model of the decision to participate in the labor market, 2 a multinomial probit model of the allocation of workers across sectors, 3 a bivariate probit model of the sectoral labor mobility, and 4 a rule for labor allocation and wage determination. The model assumes that workers can move from unemployment to employment status or the opposite and can move from across sectors.

Footnote 12 In the first stage, I estimate the choice of individuals to participate or not in the labor market. I run a probit model of employment to predict these probabilities, based on individual and households characteristics. The equation of the model is. Similarly, I use a multinomial probit model to estimate the probability to be employed in each of the economic sectors, relative to the probability to be unemployed. The second stage of the microsimulation model uses a bivariate probit model to estimate the decision of current workers to move from one sector to another.

This model estimates the probability of workers to be employed in the new sector given their current employment status. In the third step, I transmit employment levels taken from the CGE model into the microsimulation and determine which households are affected based on the job queuing approach Bibi et al. I rank the unemployed households by the decreasing order of their probability of being employed.

Then I use the changes in employment from the CGE model to simulate the number of households who will be employed, starting from households with higher probability. The number of workers is calculated by multiplying the variation from the CGE model to sectoral employment and their labor income is the sectoral and skill level average. For sectors where employment shrinks, I rank employed households by the decreasing order to their probability of being unemployed.


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Given the changes from CGE model, I assign them the status of unemployed and their wage is set to zero. When the demand for labor in one sector is higher than the supply from unemployment, I allow employed households to move to the sector with lack of supply based on their probability to move to other sectors. There is no cost of entry to the new sector as the CGE model assumed that labor moves to equalize wage.

Criticisms of Fiscal Policy

In this study, I apply the pro-poor growth framework on the welfare changes from the microsimulation to assess the pro-poorness of agricultural modernization strategies. I follow Kakwani and Pernia [ ] to decompose the total changes in welfare into two components: the pure growth effect and the pure inequality effect.

Let L B denote the distribution of income before agricultural modernization and L A , the distribution of income after agricultural modernization. Thus, I define the pure growth effects G as the proportional change in welfare when the mean income changes but the distribution remains unchanged. The expression for the growth effects G is.

Equivalently, the income effect depicts the change in welfare when inequality changes, but the mean income remains constant. This can be expressed as. Based on this expression, Kakwani and Pernia [ ] introduced a pro-poor growth index to assess to what extent growth enables the poor to actively participate in and significantly benefit from it. Algebraically, this index is given by. Based on Kakwani and Pernia [ ] pro-poor index, Kakwani et al.

The PEGR is thus defined as the growth rate that will result in the same observed level of poverty change had the actual growth process not been accompanied by any change in inequality. It can, therefore, be written as. According to this expression, growth is absolutely pro-poor if the PERG index is positive.

Similarly, growth is relatively pro-poor if the PERG index exceeds the growth rate in average income. In the same way, Ravallion and Chen [ ] propose a measure of pro-poor growth using the mean growth rate of the poor as a measurement variable for the rate of pro-poor growth. They define the mean growth rate of the poor as the average growth in income of households below the poverty line. Thus, the Ravallion and Chen [ ] pro-poor index can be calculated as the mean of the growth rate of each percentile of the income distribution up to the headcount index, divided by the headcount index.

This measure is equivalent to the actual growth rate multiplied by the ratio of the actual change in the Watts index to the change in the same index that would have occurred had growth been distribution neutral. The pro-poor growth framework described in the previous section is highly descriptive and has limited policy implications. The reason is that this framework helps only to identify the sources of poverty changes, and policies that can produce pro-poor effects.

In order to design a comprehensive policy package for agricultural transformation, I go a step further by ascertaining the relative contribution of specific factors that can potentially increase the pro-poorness of agricultural modernization. I select one of the agricultural modernization strategies that produced pro-poor effects, and run regressions on its welfare changes. The regression model includes variables that capture the heterogeneity of agriculture production, such as household socioeconomic characteristics, farm structure, and farming system. Footnote 14 This is because the sole purpose of these regressions is to describe the profile of pro-poor technological changes at the household level.

I estimate separate regressions for households in rural and urban areas, as the determinants of pro-poor welfare gains, as well as the policy implications, might be different in these two areas. The vector of household socioeconomic characteristics includes household composition, the share of household members participating in off-farm activities, and some characteristics of the household head such as age and education.

Farm structure is a vector of variables related to farm-labor relationship, gender, and access to land, farm tools, and access to credit. In the model, I allow for interaction effects between farm tools and access to credit farm tools credit. This simultaneous effect of credit and farm tools intuitively indicates the role of credit for purchasing farm machineries and implements. Finally, I use three variables to control for household heterogeneity at regional level. These include farming system, household index, and regional unemployment rate.

Farming system is a binary variable which classifies regions according to the production of cassava, the leading crop in DRC. It takes a value of 1 if the region contributes less than 10 percent of total production of cassava, and 0 otherwise. Footnote 15 Household index is a composite variable estimated by applying a factor analysis. It includes household assets and building materials, access to cleaned water, proximity to school and hospital, among others.

This section experiments and analyzes agricultural modernization strategies using the methodology presented in the previous section. While the impacts of these policies on pro-poor growth will be the focus of this analysis, it is important that I discuss first the macroeconomic and sectoral effects of the experiments. I design experiments to examine policy options for the DRC to modernize its agriculture and increase the income and welfare of households. In addition to their impact on income, I analyze if those policy experiments are pro-poor. As I noted in the theoretical consideration, there are two schemes to modernize agriculture in DRC.

These are agricultural mechanization and chemicalization. On the order hand, I complement this analysis with two scenarios of institutional changes that lead to an increase in the supply of inputs. This is because institutional change is a key to the success of agricultural modernization in DRC as transaction costs within the input supply system are very high and there are no subsidies for inputs. I conduct two sets of experiments to evaluate the pro-poorness of different agricultural modernization strategies.

The first set of experiments focuses on technological change and includes three scenarios, of which two put emphasis on the mechanization policies that change the factor intensities in the production of agriculture goods, and one on the chemicalization policies that improve the efficiency in the use of chemicals.

In Scenario 1, I assume that DRC adopts a capital-using technology in agriculture, increasing the capital intensity by 3 percent. Scenario 2 models the effects of a labor-using technology that increases the labor intensity by 10 percent. In Scenario 3, I implement a strategy for agriculture chemicalization. This scenario implies that DRC farmers apply organic chemicals and best practices to increase the effectiveness and efficiency of chemicals. This simulation also means that farmers invest in soil and water management to increase the effectiveness in the use of chemicals.

Consequently, they can avoid the overuse of very expensive chemicals and increase their time or frequency on the farm. Technically, I implement this scenario as a joint simulation of a 10 percent reduction in the use of chemicals per unit of aggregate intermediate input and 20 percent increase in the factor requirement per agriculture output.

The second set of experiments considers a change in input markets related institutions. The first experiment Scenario 4 consists of reducing the fertilizers and pesticides sourcing costs by lowering imports and domestic trade margins by 50 percent. This can be achieved by cutting out the middlemen or breaking the monopoly in the distribution of agriculture inputs.

Lastly, Scenario 5 models the effects of reducing fertilizers and pesticides transportation costs through the improvement of road and rail infrastructure and conditioning of products. In the model, I simulate the reduced fertilizer distribution costs scenario by assuming a 50 percent reduction in imports and domestic transportation costs of fertilizer. In these scenarios, I assume that the direct tax rates are fixed and government savings adjust endogenously to ensure that government accounts balance. For the saving-investment account, the balanced closure specifies aggregate investment and government consumption as fixed shares of total domestic absorption.

To keep investment fixed as a proportion of total absorption, the marginal savings propensities of households and enterprises move freely and maintain balance between investment and savings. Under this closure, agricultural modernization affects investment, consumption and savings evenly to absorb the full effect of the shock. Thus, the magnitude of the change of household consumption depends on the magnitude of the shock on savings, which in turn depends on the changes in investment and government consumption.

The foreign exchange closure assumes a flexible exchange rate maintains a fixed level of foreign savings, which is consistent with the floating exchange rate system adopted in the DRC. Labor is unemployed and mobile across sectors, given high unemployment rate among all labor categories. This assumption is justified, as there is an excess supply of labor. In this case, real wage is fixed and the level of employment adjusts to restore the equilibrium in the labor market. Capital, in turn, is sector-specific but fully employed. As expected, the impact of agricultural modernization is an increase in the size of the Congolese economy.

Under capital-using technological change Scenario 1 , real GDP increases by 1. Because of the saving-investment balanced closure, the increased total absorption forces total investment and government consumption to rise by 0.

1 Introduction

The increase of total investment depends also on the increase in government savings 1. At the same time, enterprise and household saving rates decrease by 0. Private consumption increases by 2. Despite the fall in household and enterprise saving rate, savings by these domestic non-governmental institutions increase because of the impact of capital-using technological change on income.

As a result of increased absorption, imports and exports rise, leading to an appreciation of the exchange rate. Labor-using technological change Scenario 2 leads to a 2. Under this scenario, private and government consumption increase by 2. Contrary to capital-using technological change, labor-using technological change would cause an increase in household saving rate by 0. From a policy perspective, the increase in household saving rate implies more private sector involvement in economic activity.

In the case of agricultural households, savings can be invested in non-farming activities as well as in fertilizers and seeds. Finally, the simulation reveals that the real exchange rate appreciates by 1. Scenario 3 indicates the potential impact of an improved agricultural resource base. The first thing to observe is that GDP and total absorption increase by 1 and 0.

As expected, total investment, household and government consumption also increase, due to the balanced closure. However, government savings decrease by 1. Hence, only household and enterprise savings fuel total investment. Household savings increase significantly, reaching 3. Under this scenario, exports and imports fall by 0.

A reduced chemical sourcing costs and reduced fertilizer distribution costs Scenarios 4 and 5 yield quite similar macroeconomic results. However, the reduced chemicals sourcing costs scenario gives better impacts, mainly in terms of GDP, private consumption and total investment. The simulation exercise reveals that GDP increases by 0.

Further, reduced chemicals sourcing costs Scenario 4 raises private consumption and total investment by 0. At a disaggregated level, capital-using and labor-using technological changes in agriculture Scenarios 1 and 2 generate spillover and lead to the expansion of other sectors in the Congolese economy. Nevertheless, it is worth mentioning that agro-industry related sectors benefit less from agriculture technological change than manufacturing and service related sectors. The small expansion of agro-industries is due to weak forward linkages from agriculture and high transaction costs.

This result reflects the dual characteristic of DRC economy where agriculture and service sectors have strong linkages and play a more active role in the economy. When I reduce chemical sourcing costs Scenario 4 , the value added of wood, trade, and mining decrease by 1. Note that these two scenarios produce a very small increase in agricultural value added.

Agricultural value added increases by around 0. Results show that capital-using technological change Scenario 1 is skill-biased as it favors workers with higher skill. Since I allow for unemployment and sectoral labor mobility, changes in factor income are a response to the change in employment. This result indicates that mechanization reduces the demand for rural low-skilled and semi-skilled workers and increases the demand for rural high-skilled workers.

In rural areas, capital and high skill appear to be complementary as capital-intensive technology increases the demand for high-skilled workers. High-skilled workers are needed to operate tractors or to spray chemical as manual work is less needed. Thus, the remuneration for rural unskilled and semi-skilled labor decreases by 3.

Labor-using technological change Scenario 2 influences labor income by increasing the intensity of workers on the farm and, therefore, raising working hours and the frequency of work throughout the year. As expected, rural workers capture higher benefits. However, it is interesting to see that many of the gains go to workers with lower skills. This is because agriculture uses low-skilled workers intensively. In addition, this scenario has important implications for income distribution in both rural and urban areas, as gain differences in favor of workers with lower skill are non-negligible.

For example, the remuneration of rural low-skilled workers increased by 8. With regard to the improved agricultural resource base scenario, one can see that the results are qualitatively similar with labor-using technological change. Returns to labor are higher among rural workers than urban workers with similar skills. Under this scenario, urban low-skilled workers gain more than urban semi-skilled and high-skilled workers do. Turning the attention to the institutional changes scenarios, simulation results show that reducing fertilizer sourcing costs Scenario 4 decreases the factor income for all labor categories, except for urban high-skilled labor.

Reducing trade margins for fertilizers and pesticides lowers the price for agriculture intermediate inputs and increases agriculture producer price. Rising producer price in agriculture, in principle, should lead to an increase in factor income of rural workers as they are intensively employed in agriculture. However, the simulation indicates the fall of factor income. Income for urban low-skilled and semi-skilled labor falls by 0.

In rural areas, the remuneration for unskilled and semi-skilled labor drops by 0. There are two reasons for this. First, the impact of reduced fertilizer sourcing costs on agriculture value added is marginal, as agriculture uses outdated technology. From a policy standpoint, this indicates that technological changes play an important role in boosting agriculture output and productivity.

Second and most importantly, lowering trade margins leads to a reduction of the producer price in the trade sector. This is due to the adjustment costs that occur when the Congolese marketing system transforms to a modern sector. Reduced producer price lowers the value-added price and thus wages of most of the labor categories since this sector is the second employer after agriculture.

Possible Reasons at the Top

To counterbalance those negative effects on labor income, policies that break the monopoly of intermediaries in agricultural trade should also aim to increase operational efficiency by focusing on reducing the costs of inputs. This can be done when DRC public policymakers aim to improve ICT services to farmers by removing administrative barriers that prevent the development of mobile banking, mobile remittance and the exchange of agricultural input price information. Under this scenario, the changes in income of rural workers are higher than those of urban areas. The highest increase is attributed to unskilled rural workers whose income increases by 1.

Meanwhile, returns to capital and land are also high and reach 1. Improving the agricultural resource base Scenario 3 raises the market price of agricultural products, but this leads to an insignificant fall in sales. On the other hand, lowering chemicals sourcing costs Scenario 4 reduces the market price of domestic production marginally, whereas reduced chemicals distribution costs Scenario 5 increases the market price.