The Poverty Reduction and Growth Facility (PRGF) is used by the IMF to provide support for countries’ implementation of their poverty reduction and growth strategies. A key requirement in the design of PRGF programs is understanding the effects of reform program measures on vulnerable groups—particularly the poor—and how to devise measures to mitigate any negative effects. Poverty and social impact analysis (PSIA) is a critical instrument for pursuing this goal. The IMF has therefore established a small group of staff economists to facilitate the integration of PSIA into PRGF-supported programs. In this book, the group’s members review analytical techniques used in PSIA as well as several important topics to which PSIA can make valuable contributions. These reviews should prove useful and interesting to readers interested in PSIA in general and the IMF’s PSIA efforts in particular.
It is common for governments in developing countries to manipulate prices of goods and services using a range of policy instruments and institutional arrangements. The motivations behind these price manipulations reflect varying objectives, such as the need to raise revenue, the desire to redistribute income toward the poor or toward politically important groups, the desire to provide protection to domestic producers, or the desire to influence the levels of supply or demand in other related markets where prices cannot easily be influenced.17 For example, the major source of revenue in most developing countries is commodity taxation such as domestic sales and excise taxes and taxes on international trade (Burgess and Stern, 1993; and Keen and Simone, 2004); food prices are often kept artificially low for consumers in order to increase the real incomes of poor households (Pinstrup- Andersen, 1988; and Gupta and others, 2000); and public sector prices (e.g., of electricity, gas, petroleum, coal, other fuels, fertilizers) are also often controlled by governments, reflecting either the perceived strategic importance of these inputs for development or the need to provide these sectors with an independent source of revenue and thus greater financial autonomy (Julius and Alicbusan, 1986).
Trade liberalization and devaluation (TLD) policies have always been present in many IMF-supported programs. Tariffs, quotas, and other trade restrictions reduce the level of trade and tend to foster the development of import substitute industries that often fail to attain the degree of efficiency and flexibility shown by firms continuously exposed to international competition.66 Programs tend to promote the removal of trade restrictions in order to improve resource allocation and growth outcomes in the medium term. Devaluation policies in IMF programs tend to play a shorter-term adjustment role instead. The objective is in most cases to restore external viability by switching expenditures from the nontradables sector to the tradables sector.