Poverty and Inequality Analysis within a CGE Framework : A Comparative Analysis of the Representative Agent and Micro-Simulation Approaches

We have observed a flourishing literature in recent years on the use of CGE models to perform poverty and income distribution analysis. In this context two approaches have emerged and no rigorous comparison of the two approaches has been done yet. The first approach is the traditional representative agent that has been used for a number of years to do inter group distributional analysis and more recently some extensive poverty analysis and the second approach is the micro-simulation CGE approach which consists of using large number of households in CGE models to perform poverty and income distribution analysis. In this paper we used three simple CGE models with representative agent and micro-simulation approaches to verify - if when used in a context of poverty and income distribution impact analysis - the two approaches produces compatible results. We concentrated our effort in using three simple models and adding some heterogeneity from one to the other to verify if changes in hypothesis would modify the differences or similarities we would obtain in the exercise. The results are quit surprising insofar as either for poverty analysis or for income distribution, the two approaches produce systematic opposite results. Pro-poor policies in the representative agent CGE model become a pro-rich policy when being analysed in a micro-simulation CGE context. And these results appear to be quit robust