The paper reviews various tools presently available to evaluate the impact of economic policies in general on poverty reduction, or on the distribution of living standards, and explores directions for improvement. The paper argues that standard incidence analysis cannot be conducted in isolation from a macroeconomic framework when applied to public spending and taxation. The paper proposes various generalizations of micro-based standard incidence analysis of public spending and taxation that should permit covering macro policy issues. The paper proposes a three layer structure (macro, meso-disaggregated, micro) for evaluating poverty effect of economic policies. The bottom layer consists of a micro-simulation module based on household micro data that permits analyzing the distributional incidence of public spending and taxation as well as the income generation behavior of households.The top layer includes aggregate macro modeling tools that permit evaluating the impact of exogenous shocks and policies on aggregates like GDP, its components, the general price level, the exchange rate, the rate of interest, etc., either in the short run or in a growth perspective. The intermediate layer consists of tools that permit disaggregating the predictions obtained with the top layer into various sectors of activity and various factors of production.
Bibliography: Bourguignon, Francois, Luiz Pereira da Silva and Nicholas Stern. 2002. "Evaluating the Poverty Impact of Economic Policies: Some Analytical Challenges." World Bank, Washington, DC.
