group poverty whereby the weights are given by population shares. Decaluwé and others (1999) allow the nominal poverty line to be determined within the model. _The value of the reference basket of goods is adjusted on the basis of equilibrium prices computed by the model_ .

# **Box 6: Computable General Equilibrium Model The Impact of Trade Policies on Income Distribution in a Planning Model for Colombia**

De Melo and Robinson (1980) use a multisector static CGE model to simulate the effect of trade on both the functional and the size distributions of income in Columbia. The model focuses on the real economy and tries to capture the economic dualism and structural rigidities characteristic of Columbia. Seven broad socioeconomic groups are considered: small farmers, marginal laborers, industrial laborers, service-sector laborers, agricultural capitalists, industrial capitalists, and service-sector capitalists. These groups are assumed to have different consumption patterns, and the size distribution within each group is represented by a lognormal distribution. The CGE model endogenously determines various incomes, consumption and investment, and trade flows. Based on these results, the distribution of income to socioeconomic groups and the overall size distribution by individuals are estimated.

The study investigates the impact of three alternative trade regimes on the distribution of income in Colombia and compares them with the free trade alternative (FT): an inward-looking strategy with a 50 percent tariff on manufacturing sectors (ILS), an outward-looking strategy with a 50 percent subsidy on agricultural and manufacturing exports (OLS), and a direct-subsidy strategy that provides a 50 percent value-added subsidy to manufacturing sectors (DDS). The simulation results are presented below.

The study finds that the domestic price system in Columbia is insulated from changes in world market prices. Furthermore, outward-looking trade policies with increased primary exports are likely to have an adverse impact on the distribution of income in the medium term compared to inward-looking policies. This conclusion depends on the structure of exports and imports. Colombian exports are concentrated in primary goods; imports are mostly manufactured goods, and the country is self-sufficient in food production. In such a case, an open trade strategy is likely to decrease the purchasing power and real incomes of most socioeconomic groups.

**Income Distribution Measures for a Model of Colombia**

||**FT**|**ILS**|**OLS**|**DSS**|
|---|---|---|---|---|
|**Net mean income**|||||
|Rural income|5.55|5.60|5.53|4.88|
|Unskilled urban|11.82|11.89|11.79|12|
|Skilled labor|25.72|26.44|25.46|30.39|
|Rural capitalist|37.47|36.75|38.62|33.55|
|Manufacturing capitalist|160.85|166.50|159.02|204.82|
|Service capitalist|67.68|66.30|66.14|63.12|
|Economy-wide mean income|19.00|19.09|19.00|19.47|
|**Aggregate measures**|||||
|Mean income (top 10%)|98.09|98.36|98.44|104.86|
|Mean income (bottom 10%)|2.90|2.93|2.88|2.69|
|Rural poverty|58.51|58.05|59.53|62.92|
|Urban poverty|41.48|41.95|40.47|37.08|
|Total poverty|29.90|29.40|30.30|32.10|
|Ginicoefficient|0.581|0.580|0.583|0.601|
|_Source_: de Melo and Robin|son 1980.||||

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