Poverty alleviation has usually been addressed in financial programming models by adding social safety net programs to the financial programs but without modifying the underlying stabilization and adjustment targets. Despite its convenience, this traditional approach may be less effective than an integrated approach in which the settings of financial program instruments are chosen in such a way as to minimize adverse implications for poverty.
This paper addresses the issue by setting up a general version of the financial programming model that can be used to explore possible trade-offs between targets, such as for the balance of payments, inflation, and output growth. The Sen Poverty Index is explicitly introduced into this model and consists of the following: (1) head-count ratio (the proportion of a population below a predetermined poverty line, (2) poverty gap or the degree of poverty (the gap between the average income for the poor and the poverty line), and (3) the Gini coefficient (distribution of income) among the poor.
At the macroeconomic level, the poverty index may be affected either by the outcomes of the model with respect to output and inflation or by the policy measures that may be enacted, such as a devaluation or a fiscal consolidation. By reference to factors inducing a change in the Sen Poverty Index and with a view to containing their effects, the preferred short-term macroeconomic outcome of an adjustment program would be for (1) the rate of output growth not to be unduly depressed, (2) the balance of payments to be improved, (3) inflation to be reduced, and (4) fiscal outlays, especially those that benefit the poor, not to be excessively suppressed.
The paper presents a simulation in which an externally delivered shock (20 percent decline in export prices) is assumed. Although the economy will be impoverished by the terms of trade shock, the results indicate that the poverty index could be held at a lower (better) level with a better output and balance of payments performance. The cost would be a temporarily slightly higher fiscal deficit and higher inflation than with the traditional model, in which poverty programs are simply added on.