SENSITIVITY OF CONDITIONALITY

Saime Suna KAYAM (Istanbul Technical University)

In this paper, I look at the welfare implications of a loan tied to a reform, i.e. conditionality. Structural parameters of an economy affect the outcome of any reform process. In many computable general equilibrium models, the elasticity of substitution between final goods is assumed. However, the welfare implicaitons of assuming one or the other substitution elasticity are different. Most importantly, if the reform adopted is part of a conditionality agreement then the reform outcome is altered depending on whether the loan injections are sequencial or simultaneous.

This paper investigates the welfare implications of conditionality within the trade reform framework using two different substitution elasticities between final goods, i.e. low (σ<1) and high (σ>1). I also look at two settings in terms of income shares of population quantiles in the functional distribution context.

Free trade is is the first best policy in theperfectly competitive environment both in terms of welfare changes and income distribution. However, alternative trade policies (neutral trade, etc.) have different implicaitons depending on the parameters chosen to define the economy.