THE ALCHEMIST OF THE POOR

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THE ALCHEMIST OF THE POOR
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ERIK THORBECKE, THE ALCHEMIST OF THE POOR
A SHORT RETIREMENT TALE BY ALAIN DE JANVRY AND
ELISABETH SADOULET DEDICATED TO ERIK ON BEHALF
OF NEUDC IN ADMIRATION AND FRIENDSHIP
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DEFINITIONS
ALCHEMIST A PERSON WITH MAGIC POWERS OF
TRANSMUTATION OF BASE METALS INTO GOLD
DEVELOPMENT ALCHEMIST AN ECONOMIST WITH MAGIC
POWERS OF TRANSMUTATION OF POVERTY INTO WEALTH
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PART I LEARNING FROM THE ALCHEMIST HOW TO
MANAGE POVERTY ERADICATION PROGRAMS?
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THE ALCHEMISTS SECRETS ERIKS FIRST PRINCIPLE
OF ALCHEMY
INTRODUCE P2-BASED WELFARE BUDGETS IN NATIONAL
CONSTITUTIONS
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1999 MEXICAN CONSTITUTION CHAPTER V, ARTICLE 34
CENTRAL GOVERNMENT TRANSFERS WILL BE ALLOCATED
ACCORDING TO THE SEVERITY OF POVERTY (THE
FGT-P2 CRITERION AT WORK)
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SIMULATION EXERCISE
WHAT WOULD A P2-BASED WELFARE PROGRAM DO TO
THE MEXICAN POOR?
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Po 50. Source INEGI data, 1995
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Its too expensive!
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Its in the constitution!!
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ALCHEMISTS OUTCOME OF THE P2-BASED WELFARE
PROGRAM
INITIAL Po 50
CURRENT Po 0 88 OF THE FORMER POOR ARE NOW
RICHER THAN THE 2 RICHEST IN THE COUNTRY
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ERIKS SECOND PRINCIPLE OF ALCHEMY
USE SAM PATHS MULTIPLIERS TO INCREASE THE
INCOME OF THE POOR
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NET GAIN FOR THE POOR 100
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NET GAIN FOR THE POOR 150
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NET GAIN FOR THE POOR 50
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NET GAIN FOR THE POOR 200
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NET GAIN FOR THE POOR 250
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NET GAIN FOR THE POOR 300
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NET GAIN FOR THE POOR
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ALCHEMISTS OUTCOME OF SAM MULTIPLIER-BASED
WELFARE PROGRAM
AFTER 8 NUMBER OF ITERATIONS THE POOR HAVE
BECOME 8-TELY RICH
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PART II THE ALCHEMISTS FUTURE SOLVE THE
ALCHEMISTS RETIREMENT PROBLEM
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PROBLEM REBALANCING OF ACTIVITIES UNDER FULL
INCOME CONSTRAINT
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OPTIONS FOR TIME REALLOCATION?

• CHARLA AND GRANDCHILDREN
• TENNIS
• MANAGE CALIFORNIA HOMESTEAD WITH MILLENARIAN
  SEQUOIAS
• COOPERATE WITH DEVELOPMENT ECONOMISTS AT U.C .
  BERKELEY ALMA MATER
• MORE TENNIS
• CONNECT WITH ROOTS IN DUTCH HISTORY
• VISIT FORMER STUDENTS AROUND THE WORLD
• VOLUNTEER TIME FOR DEPARTMENTAL
  ADMINISTRATION (!!!)
• MORE MORE TENNIS
• MORE TIME TO RESEARCH

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ASSUME THE SOLUTION MORE TIME TO RESEARCH
ERIKS THREE MAIN RESEARCH AREAS
1. ECONOMY-WIDE MODELING IN SAM-CGE 2.
INSTITUTIONS AND MARKET CONFIGURATIONS 3.
POVERTY INDICATORS AND STRATEGIES
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PART III MAKE GRATUITOUS SUGGESTIONS FOR
RESEARCH AGENDA IN EACH AREA
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AREA 1 ECONOMY-WIDE MODELING IN SAM-CGE
ERIKS WORK IMPORTANT POLICY QUESTIONS IN
GENERAL EQUILIBRIUM FRAMEWORK.
NEW CHALLENGE CGIAR problem. How to optimize
the use of agricultural technology to reduce
poverty through direct and indirect effects?
Direct effects benefits for poor adopters
Indirect effects benefits to poor else than
adopter through - Price of food - Employment
creation in agriculture - Growth linkages
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IMPORTANCE OF PROBLEM CGIAR 16 INTERNATIONAL
CENTERS (IFPRI, ETC.) 1300 SCIENTISTS US350
MILLION/YEAR DID THE GREEN REVOLUTION REFOCUSING
FROM COMMODITIES TO POVERTY HOW DO? WHAT
TECHNOLOGY FOR WHOM?
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PRELIMINARY RESULTS SAM-CGE
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AREA 2 INSTITUTIONS AND MARKET CONFIGURATIONS
ERIKS WORK MARKET/NON-MARKET TYPES
OF CONFIGURATIONS ---------------gt TRANSACTIONS
(EXOGENOUS) (ENDOGENOUS) Transactions
costs Household market
integration Observables (surveys)
Seller, buyer, self-sufficient Non-observables?
Supply and demand responses.
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FUNDAMENTAL CONTRIBUTION TO THE NEW INSTITUTIONAL
ECONOMICS
MEASURE THE MAGNITUDE OF TRANSACTIONS COSTS EVEN
THOUGH THEY ARE LARGELY UNOBSERVABLE
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PROPOSITION OBSERVE HOUSEHOLD BEHAVIOR AS
PRODUCERS AND CONSUMERS UNDER TRANSACTIONS COSTS
(TRANSACTION) INFER FROM THIS WHAT ARE THE
UNDERLYING TRANSACTIONS COSTS (CONFIGURATION)
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STRATEGY TO MEASURE TRANSACTIONS
COSTS Proportional transactions costs (PTC) in
selling and buying Effective price paid
for purchase Effective price received for
sale Fixed transactions costs (FTC) in entering
and exiting markets
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SD FOR STAPLE FOOD. NO TC
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SD WITH PTC IN SELLING
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SD WITH PTC IN SELLING BUYING
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SD THREE MARKET INTEGRATION REGIMES
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SD WITH PTC AND FTC FOR SELLER THRESHOLD
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S WITH PTC FTC IN SELLING AND BUYING
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ESTIMATE CENSORED SUPPLY THRESHOLD QUANTITY
FOR SELLER SUPPLY FOR SELF-SUFFICIENT.
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ESTIMATION OF PTC FROM NON-LINEAR SEGMENT OF
CENSORED SUPPLY
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ESTIMATION OF FTC SOLVE FOR IN EQUIVALENT
VARIATION FOR EQUALITY OF UTILITY OF BEING IN
SELF-SUFFICIENCY OR IN MARKET AT ENTRY THRESHOLD
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AREA 3 POVERTY INDICATORS
ERIKS WORK CELEBRATED FGT INDICATOR OF
SEVERITY OF POVERTY
WHY P SQUARED? WHY NOT 1.5 OR 3? DOES 2 OVER OR
UNDER ESTIMATE THE WELFARE COST OF INCOME
DEFICITS?
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PROPOSITION USE Pu AS ALTERNATIVE TO P2 Pu
MEASURES THE UTILITY LOSS DUE TO THE INCOME
DEFICIT. V INDIRECT UTILITY FUNCTION
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UTILITARIAN APPROACH TO THE MEASUREMENT OF Pu
ASSUME A PARAMETRIC FORM OF V.
V SAME FOR ALL HOUSEHOLDS, BUT FUNCTION OF
HOUSEHOLD CHARACTERISTICS.
USE BACKWARD INTEGRATION ESTIMATE DEMAND
FUNCTIONS RECOVER THE PARAMETERS OF V
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SPECIAL CASE
IF UTILITY IS SEPARABLE IN AGGREGATES CAN
RECOVER V FROM A SINGLE DEMAND EQUATION, e.g.,
FOOD
EXAMPLE INDIRECT ADDILOG V APPLIED TO MEXICAN
HOUSEHOLD FOOD CONSUMPTION AND EXPENDITURE DATA
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WEIGHTS OF INCOME DEFICIT IN P1 WEIGHT 1.
CONSTANT IN P2 WEIGHT
LINEAR IN y IN Pu WEIGHT EXPONENTIAL
IN y
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WEIGHTS OF INCOME DEFICIT
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CONCLUSION
SQUARE IS NOT ENOUGH! (IN THIS CASE)
NEED USE HIGHER EXPONENTIAL (OR OTHER FUNCTIONAL
FORM) TO CAPTURE THE SEVERITY OF POVERTY AS A
WELFARE LOSS
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RETIREMENT TALE EPILOGUE
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AS ANOTHER ALCHEMIST (IN PAULO COELHO) SAID TO
REALIZE ONES DESTINY IS A PERSONS ONLY
OBLIGATION
AS DEVELOPMENT ECONOMISTS (OUR DESTINY), THIS
GIVES US QUITE A CHORE TO DO!
AS A DEVELOPMENT ALCHEMIST, YOU GAVE US A
MAGNIFICENT ROLE MODEL TO EMULATE.
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WE THANK YOU FOR THIS AND WISH YOU SUCCESS AND
HAPPINESS IN YOUR NEW TIME ALLOCATION
SOLUTION THE END