Africa Region Working Paper Series No. 38

A Macroeconomic Framework for Poverty Reduction Strategy Papers:
With an Application to Zambia

Shantayanan Devarajan and Delfin S. Go

Abstract

This paper describes a modeling framework that was designed to respond to the new demands created by the PRSP process. Existing macroeconomic models used in country economic work, such as the IMF's Financial Programming Model (FPM) or the World Bank's RMSM-X, take the two most important determinants of poverty-economic growth and relative prices-as exogenous, so they cannot evaluate the impact of policies on poverty. More sophisticated approaches, such as computable general equilibrium models, can capture the poverty impacts of policies, but are too data-intensive and difficult to master to be useful in the time frame of the PRSP process.

The model presented here, called the "123PRSP Model" represents the middle ground between these two approaches: it is as simple to estimate, learn and use as RMSM-X or the FPM, but it is able to capture the salient links between macroeconomic policies and shocks and poverty in a way that is both consistent with economic theory and faithful to the structural characteristics of the country. Most importantly, it has been developed and used by teams from two low-income countries-Mauritania and Zambia-in their PRSP process. In the second part of the paper, we described an application to Zambia in which we estimated the adverse distributional consequences of a terms of trade shock (a fall in the price of copper) as well as cyclical impact on growth of an increase in government spending.

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