IDEAS home Printed from https://ideas.repec.org/p/fpr/ifprid/1134.html
   My bibliography  Save this paper

External shocks and policy alternatives in small open economies: The case of El Salvador

Author

Listed:
  • Morley, Samuel
  • Piñeiro, Valeria
  • Robinson, Sherman

Abstract

In this paper we used a dynamic, regionalized computable general equilibrium (CGE) model to analyze the effect of various negative balance of payments shocks on output and employment and the effect of different alternative investment strategies on growth. The model shows clearly how sensitive El Salvador is to remittance or terms of trade shocks. Each 10 percent reduction in remittances lowers gross domestic product (GDP) by 0.2 percent and household consumption by 1.4 percent, with the cost rising as the shock intensifies. Any negative balance of payments shock forces a reduction in absorption, production, and employment and a real devaluation. Because El Salvador's economy is dollarized, that real devaluation can only come about through a fall in domestic prices brought about by recession. We show that the impact of the shock on output depends on how flexible wages are—the impact is smaller when real wages are flexible and greatest when they are fixed in dollars. We used the CGE model to analyze alternative investment strategies for increasing the growth rate. The investment share of GDP is low, and the model makes it clear that without some strategy for increasing investment, the economy's overall growth rate is likely to remain low. We hypothesized two alternative growth rates for investment, both associated with an increase in exogenous technical change. Both strategies require a marginal increase in the share of output devoted to investment. We also showed that if El Salvador can increase the investment share from 15.5 percent to just 16 percent over five years by producing a growth rate in investment of 8 percent per year, and if that increase produces a 1 percent increase in the rate of technical change in all sectors, then the growth rate of the economy will practically double, rising from 2.85 percent to 4.95 percent per year. There are equally favorable effects on employment for unskilled labor and on wages for skilled labor.

Suggested Citation

  • Morley, Samuel & Piñeiro, Valeria & Robinson, Sherman, 2011. "External shocks and policy alternatives in small open economies: The case of El Salvador," IFPRI discussion papers 1134, International Food Policy Research Institute (IFPRI).
    • Handle: RePEc:fpr:ifprid:1134
    as

    Download full text from publisher

    File URL: http://www.ifpri.org/sites/default/files/publications/ifpridp01134.pdf
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. Douillet, Mathilde, 2011. "Which trade integration scheme can best help Sub-Saharan Africa develop and export more processed agricultural goods?:," IFPRI discussion papers 1119, International Food Policy Research Institute (IFPRI).
    2. Ecker, Olivier & Mabiso, Athur & Kennedy, Adam & Diao, Xinshen 22905, 2011. "Making agriculture pro-nutrition: Opportunities in Tanzania," IFPRI discussion papers 1124, International Food Policy Research Institute (IFPRI).
    3. Futoshi Yamauchi & Yanyan Liu & Violy Cordova & Fe Gascon & Juliet Abunyawan & Felisberta Sanchez, 2011. "Impacts of an Early Education Intervention on Students' Learning Achievement," Policy Brief Series, Southeast Asian Regional Center for Graduate Study and Research in Agriculture (SEARCA), vol. 2011.
    4. Maystadt, Jean-Francois, 2011. "Poverty reduction in a refugee-hosting economy: A natural experiment," IFPRI discussion papers 1132, International Food Policy Research Institute (IFPRI).
    5. Zhang, Xiaobo & Hu, Dinghuan, 2014. "Overcoming Successive Bottlenecks: The Evolution of a Potato Cluster in China," World Development, Elsevier, vol. 63(C), pages 102-112.
    6. de Brauw, Alan & Gilligan, Daniel, 2011. "Using the regression discontinuity design with implicit partitions: The impacts of comunidades solidarias rurales on schooling in El Salvador," IFPRI discussion papers 1116, International Food Policy Research Institute (IFPRI).
    7. Wiebelt, Manfred & Pauw, Karl & Matovu, John Mary & Twimukye, Evarist & Benson, Todd, 2011. "Managing future oil revenues in Uganda for agricultural development and poverty reduction: A CGE analysis of challenges and options," Kiel Working Papers 1696, Kiel Institute for the World Economy (IfW Kiel).
    8. Futoshi Yamauchi & Yanyan Liu, 2013. "Impacts of an Early Stage Education Intervention on Students' Learning Achievement: Evidence from the Philippines," Journal of Development Studies, Taylor & Francis Journals, vol. 49(2), pages 208-222, February.
    9. Jin, Ling & Chen, Kevin Z. & Yu, Bingxin & Huang, Zuhui, 2011. "How prudent are rural households in developing transition economies:," IFPRI discussion papers 1127, International Food Policy Research Institute (IFPRI).
    10. David Laborde & Will Martin & Dominique van der Mensbrugghe, 2017. "Measuring the Impacts of Global Trade Reform with Optimal Aggregators of Distortions," Review of International Economics, Wiley Blackwell, vol. 25(2), pages 403-425, May.
    11. Nkonya, Ephraim & Place, Frank & Pender, John & Mwanjololo, Majaliwa & Okhimamhe, Appollonia & Kato, Edward & Crespo, Susana & Ndjeunga, Jupiter & Traore, Sibiry, 2011. "Climate risk management through sustainable land management in Sub-Saharan Africa:," IFPRI discussion papers 1126, International Food Policy Research Institute (IFPRI).
    12. Prasad, Sanjay K. & Pullabhotla, Hemant & Ganesh-Kumar, A., 2011. "Supply and demand for cereals in Nepal, 2010–2030:," IFPRI discussion papers 1120, International Food Policy Research Institute (IFPRI).
    13. Yu, Bingxin & Nin-Pratt, Alejandro & Funes, José & Gemessa, Sinafikeh Asrat, 2011. "Cereal production and technology adoption in Ethiopia:," IFPRI discussion papers 1131, International Food Policy Research Institute (IFPRI).
    14. Francesconi, Gian Nicola & Wouterse, Fleur, 2011. "The renewed case for farmers' cooperatives: Diagnostics and implications from Ghana," IFPRI discussion papers 1129, International Food Policy Research Institute (IFPRI).
    15. Zambrano, Patricia & Maldonado, Jorge H. & Mendoza, Sandra L. & Ruiz, Lorena & Fonseca, Luz Amparo & Cardona, Iván, 2011. "Women cotton farmers: Their perceptions and experiences with transgenic varieties: A case study for Colombia," IFPRI discussion papers 1118, International Food Policy Research Institute (IFPRI).
    16. Pullabhotla, Hemant & Ganesh-Kumar, A., 2012. "Review of input and output policies for cereal production in Bangladesh:," IFPRI discussion papers 1199, International Food Policy Research Institute (IFPRI).
    17. Yamauchi, Futoshi & Liu, Yanyan, 2011. "Impacts of an early education intervention on students' learning achievement: Evidence from the Philippines," IFPRI discussion papers 1121, International Food Policy Research Institute (IFPRI).
    18. Takeshima, Hiroyuki & Salau, Sheu, 2011. "How does ownership of farm implements affect investment in other farm implements when farmers' liquidity constraint is relaxed?: Insights from Nigeria," IFPRI discussion papers 1133, International Food Policy Research Institute (IFPRI).
    19. Ulimwengu, John & Liverpool-Tasie, Saweda & Randriamamonjy, Josee & Ramadan, Racha, 2011. "Understanding the linkage between agricultural productivity and nutrient consumption: Evidence from Uganda," IFPRI discussion papers 1128, International Food Policy Research Institute (IFPRI).
    20. Glendenning, Claire J. & Asenso-Okyere, Kwadwo & Babu, Suresh C., 2011. "Evaluation of value-added agricultural advisory services: Case study of agriclinics in Southern India," IFPRI discussion papers 1125, International Food Policy Research Institute (IFPRI).
    21. Quisumbing, Agnes R. & Kumar, Neha & Behrman, Julia A., 2011. "Do shocks affect men's and women's assets differently?: A review of literature and new evidence from Bangladesh and Uganda," IFPRI discussion papers 1113, International Food Policy Research Institute (IFPRI).
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Charness, Gary & Viceisza, Angelino, 2011. "Comprehension and risk elicitation in the field: Evidence from rural Senegal," IFPRI discussion papers 1135, International Food Policy Research Institute (IFPRI).

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Takeshima, Hiroyuki & Salau, Sheu, 2011. "How does ownership of farm implements affect investment in other farm implements when farmers' liquidity constraint is relaxed?: Insights from Nigeria," IFPRI discussion papers 1133, International Food Policy Research Institute (IFPRI).
    2. Morley, Samuel & Piñeiro, Valeria & Robinson, Sherman, 2011. "A dynamic computable general equilibrium model with working capital for Honduras:," IFPRI discussion papers 1130, International Food Policy Research Institute (IFPRI).
    3. Yu, Bingxin & Nin-Pratt, Alejandro & Funes, José & Gemessa, Sinafikeh Asrat, 2011. "Cereal production and technology adoption in Ethiopia:," ESSP working papers 31, International Food Policy Research Institute (IFPRI).
    4. Glendenning, Claire J. & Asenso-Okyere, Kwadwo & Babu, Suresh C., 2011. "Evaluation of value-added agricultural advisory services: Case study of agriclinics in Southern India," IFPRI discussion papers 1125, International Food Policy Research Institute (IFPRI).
    5. David Laborde & Will Martin & Dominique van der Mensbrugghe, 2017. "Measuring the Impacts of Global Trade Reform with Optimal Aggregators of Distortions," Review of International Economics, Wiley Blackwell, vol. 25(2), pages 403-425, May.
    6. Yamauchi, Futoshi & Liu, Yanyan, 2011. "Impacts of an early education intervention on students' learning achievement: Evidence from the Philippines," IFPRI discussion papers 1121, International Food Policy Research Institute (IFPRI).
    7. Prasad, Sanjay K. & Pullabhotla, Hemant & Ganesh-Kumar, A., 2011. "Supply and demand for cereals in Nepal, 2010–2030:," IFPRI discussion papers 1120, International Food Policy Research Institute (IFPRI).
    8. Zambrano, Patricia & Maldonado, Jorge H. & Mendoza, Sandra L. & Ruiz, Lorena & Fonseca, Luz Amparo & Cardona, Iván, 2011. "Women cotton farmers: Their perceptions and experiences with transgenic varieties: A case study for Colombia," IFPRI discussion papers 1118, International Food Policy Research Institute (IFPRI).
    9. Cai, Ximing & Yang, Yi-Chen E. & Zhao, Jianshi & Ringler, Claudia, 2011. "Can water allocation in the Yellow River basin be improved?: Insights from a multi-agent system model," IFPRI discussion papers 1117, International Food Policy Research Institute (IFPRI).
    10. de Brauw, Alan & Gilligan, Daniel, 2011. "Using the regression discontinuity design with implicit partitions: The impacts of comunidades solidarias rurales on schooling in El Salvador," IFPRI discussion papers 1116, International Food Policy Research Institute (IFPRI).
    11. Yamauchi, Futoshi & Liu, Yanyan, 2011. "Girls take over: Long-term impacts of an early stage education intervention in the Philippines," IFPRI discussion papers 1144, International Food Policy Research Institute (IFPRI).
    12. Charness, Gary & Viceisza, Angelino, 2011. "Comprehension and risk elicitation in the field: Evidence from rural Senegal," IFPRI discussion papers 1135, International Food Policy Research Institute (IFPRI).
    13. Hector L. Lavilles Jr & Ava Clare Marie O. Robles, 2017. "Teachers’ soft skills proficiency level and school performance of selected schools in Sultan Kudarat Division," Journal of Advances in Humanities and Social Sciences, Dr. Yi-Hsing Hsieh, vol. 3(1), pages 10-28.
    14. Senakpon, Kokoye, 2017. "Farmers’ Willingness To Pay For Soil Testing Service In Northern Haiti," 2017 Annual Meeting, February 4-7, 2017, Mobile, Alabama 252804, Southern Agricultural Economics Association.
    15. Yamauchi, Futoshi & Liu, Yanyan, 2012. "School quality, labor markets and human capital investments : long-term impacts of an early stage education intervention in the Philippines," Policy Research Working Paper Series 6247, The World Bank.
    16. Mekonnen, Daniel Ayalew & Gerber, Nicolas & Matz, Julia Anna, 2018. "Gendered Social Networks, Agricultural Innovations, and Farm Productivity in Ethiopia," World Development, Elsevier, vol. 105(C), pages 321-335.
    17. Tabe-Ojong, M.P.J. & Mausch, K. & Woldeyohanes, T. & Heckelei, T., 2018. "A Triple-Hurdle Model of the Impacts of Improved Chickpea Adoption on Smallholder Production and Commercialization in Ethiopia," 2018 Conference, July 28-August 2, 2018, Vancouver, British Columbia 277287, International Association of Agricultural Economists.
    18. Samuel Sebsibie & Workineh Asmare & Tessema Endalkachew, 2015. "Agricultural Technology Adoption and Rural Poverty: a Study on Smallholders in Amhara Regional State, Ethiopia," Ethiopian Journal of Economics, Ethiopian Economics Association, vol. 23(2), December.
    19. Kym Anderson & Anna Strutt, 2012. "Agriculture and Food Security in Asia by 2030," Macroeconomics Working Papers 23309, East Asian Bureau of Economic Research.
    20. Okabe, Masayoshi, 2016. "Gender-preferential intergenerational patterns in primary educational attainment: An econometric approach to a case in rural Mindanao, the Philippines," International Journal of Educational Development, Elsevier, vol. 46(C), pages 125-142.

    More about this item

    Keywords

    Development strategies; general equilibrium models; Regional development; Computable general equilibrium (CGE) modeling;
    All these keywords.

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:fpr:ifprid:1134. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: the person in charge (email available below). General contact details of provider: https://edirc.repec.org/data/ifprius.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.