The Welfare Effects of Balance of Payments Reform: A Micro-Macro Simulation of the Cost of Rent-Seeking

This article proposes a methodology for analysing the effect of balance of payments liberalisation on measures of poverty and distribution and applies it to the case of Jamaica in the 1990s. The methodology consists of a macro-micro simulation in which a CGE model provides labour market outcomes, which in turn are used to manipulate the sectoral allocation of employment to generate the income distribution consistent with the new labour market outcome. In the application to Jamaica, we find that the reallocation of resources away from rent-seeking activities in the presence of exchange controls is significant and has large macroeconomic effects. Opening up of the current account has little effect on poverty, but liberalisation of the capital account reduces poverty, especially amongst the very poor. Neither policy change taken separately, nor the combination of the two, has more than a negligible effect on the distribution of income.