Transcript An Analysis of Ex-ante Poverty Impact Assessment Practices of

An Analysis of Ex-ante Poverty
Impact Assessment Practices of
Macroeconomic Policies in Nepal
Presentation by
D. R. Khanal
Institute for Policy Research and Development (IPRAD)
Rationale and Motivation
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Beginning from the mid 1980s, Nepal intensified macroeconomic policy
reforms since early 1990s.
More poverty focused policies and programs also started in the early 1990s.
With the beginning of the ongoing Tenth Plan ( 2002-2007), PRSP is also
under implementation.
Up to the mid 1990s, Nepal succeeded in improving macroeconomic
performance.
Poverty also reduced considerably over time, from 42 percent in 1996 to 31
percent in 2004.
Nepal now stands as one of the most liberalized countries in South Asia.
Despite these, Nepal could not sustain growth and enhance more equitable
development. Today Nepal is confronting with:
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Deceleration in economic growth amidst slow down in trade and industry.
Rise in income inequality with continued high poverty incidence among certain castes and
ethnic groups (graph).
Above all, possibilities of rise in poverty again.
Sectoral Growth Rate
Sectroal Growth Rate
15
5
2003
2002
2001
19902003
-5
19972002
0
19921997
Growth Rate
10
-10
-15
Fiscal Years
Agriculture
Manufacturing
Trade
Transport
Financial and Real Estate
Community and Social Services
Non-agriculture GDP
Total GDP (at factor cost)
Poverty Ratio and Inequality
2003
1996
1985
0.0
10.0
20.0
Poverty Ratio
30.0
40.0
Poverty Inequality
50.0
60.0
Poverty Ratio by Caste and Ethnicity
Total
Others
Muslims
Tharu
Hill Janajati
Newa
Dalits
Yadavs
Upper Caste
0
10
20
Poverty Headcount Rate 1995-96
30
40
50
Poverty Headcount Rate 2003-04
60
In these backgrounds, study was devoted to:
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review the developments on political, economic, social and poverty
fronts in the light of the macroeconomic reforms since 1991,
assess strengths and weaknesses of macroeconomic policies in the light
of their features and outcomes,
review ex-ante poverty impact assessment techniques and other
interrelated processes followed in Nepal in the course of intensive
policy reforms, and
Explore alternative techniques to be useful in an ex-ante poverty impact
assessment of macroeconomic policies in the Nepalese context.
Methodology, Data and
Information Sources
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Two-pronged methodological approach followed –
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Descriptive analytical approach to examine reforms and
review techniques used in macro economic policy
making processes including measures taken to enhance
internal technical capacity.
Comparative assessment technique to evaluate various
ex-ante poverty impact assessment techniques for
identifying more suitable one in the Nepalese context.
Both published and unpublished documents as
well as secondary data sources used.
Study broadly covers the period 1985 – 2003.
Main Features of Macroeconomic
Polices and Outcomes
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Internally more focus on deregulation policies - abolition
all types of subsidies, market determined interest and
exchange rates (except with India), more autonomy to the
public enterprises in fixing prices.
Fiscal balance and price stability, privatization, tax reforms
including introduction of VAT, public expenditure control
and management.
Externally focus on open up and trade liberalization
policies.
However, no rigorous internal exercise either to fulfil
initial conditions or fix proper sequencing. Reforms
broadly influenced by either reforms drives in India or
donors programs like SAP and ESAF.
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Financial sector reform delayed, structural
problems in business and industry overlooked, less
attention on strengthening corporate governance
and market institutions.
In the taxation front cascading tariff structure
affecting high value added and labor intensive
industries.
Deepening of financial crisis and decline in access
to institutional credit in rural areas.
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Reduction in the level of development outlay and declining
investment in sectors like infrastructure and agriculture.
Continued fix exchange rate with India and misalignment
affecting agriculture and export competitiveness.
High transaction cost amidst high infrastructure cost, low
labor productivity and declining competitive strength of
trade and industry.
Policy
mismatch
and
sometime
contradictory
macroeconomic policies with poverty reduction goals and
above all problems of sustained and equitable growth as
well as poverty reduction among vulnerable groups of the
society.
Various Techniques Developed
and Used
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A Regionally Disaggregated Planning Model for
Nepal (1988).
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CGE model with high level of regional and sectoral
disaggregation.
8 rural sub regions with separate model solution for each
region.
5 non-agricultural sectors under one urban region. In addition,
2 foreign regions: India and Rest of the World (ROW).
Exports exogenous and imports non-competitive. Markets for
agricultural goods clearing based on trade possibilities with
India (i.e. Indian border prices vis-à-vis Nepalese border
prices).
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Model solution through economic equilibrium (supply and
demand balancing) for all goods within each region.
Interregional transport playing a key role.
Model specification and estimation based on an initial national
level input/output table compiled for 198182. Numerous other
independent data sources including household level data from
the 1976/77 national sample survey conducted by the National
Planning Commission used.
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Construction of an integrated Macro-cum-Input output
Model (1990)
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A macro model with 31 behavioral equations comprising
production, consumption and investment demand, taxes, trade,
money supply and prices blocks.
A 39*39 input output table for the base year 1986/87.
An important feature-macro model through policy simulation
enabling macroeconomic forecast of final demand components
necessary for the input output model. In the macro model
equilibrium through stock adjustment.
Given the pattern of consumption, investments, exports and
imports, I/O provided consistent pattern of gross outputs satisfying
the demand supply balances in every sector of the economy at the
prevalent prices.
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SAM and CGE Model under MIMAP (1998)
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A SAM and a CGE model to assess probable impact of
macroeconomic policies on economic welfare and poverty.
Main features involved cost minimization by producers, utility
maximization by households, perfect mobility of factors, and
competitive market driving profits to zero. It allowed impact
analysis of tariff and income policy. Helped assess the impact of
anti-poverty programs within a general equilibrium framework.
Model also enabled to capture relative price, resource allocation
and other economy wide effects.
It follows standard calibration procedures and requires 3 steps:
construction of database (a SAM), calibration of model parameters
to the database and computation of counter factual equilibria for
the policy changes.
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IPRAD Model 2005
 Macro model with 20 behavioral equations featuring production,
consumption and investment demand, taxes, international trade and
prices as separate blocks.
 Through policy simulation it enabled to examine the strength and
weaknesses of macroeconomic policies in mitigating the adverse
effect of internal as well as external shocks on growth and poverty.
In this respect, it also additionally helped to assess the role and
contribution of remittances.
 In the model equilibrium established through stock adjustment.
Despite some bold assumptions, historical simulation results
showed strong predictive capacity of the model.
Use of Models in Policy Analysis
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Only model used in the planning process was macro-cum-input output
model. This was used for Eighth Plan growth projections. But this
model was less useful in policy or poverty related analysis due to
virtually no role to the prices. Despite CGE model under MIMAP
being extremely useful, it was also not used. Lack of parallel initiatives
or interest among policy makers to use models in the policy
formulation processes prevented institutionalization of models.
Beginning with very complicated models requiring high level of
expertise and huge data base also created problems in this direction.
Despite poverty being the single goal in the Ninth and Tenth Plan, no
attempt was made to use models for growth and poverty analysis.
Instead, during the PRSP preparation ( i.e. Tenth Plan ), a Medium
term expenditure framework (MTEF) was developed and used for
reprioritization of programs to make them compatible with poverty
goals.
Major Problems in the Absence of
Ex-Ante Impact Assessment
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Mismatch between the macroeconomic policies and poverty goals.
Problem in the harmonizing of macroeconomic policies.
Although some new initiatives in the course of PRSP preparations, no
built in mechanism in involving various stakeholders in policy
formulation processes.
Only a few gainers and majority losers leading to widening of social
contradiction and distributional conflict in a highly discriminatory
society.
Institutionalization of policy coordination always remaining a
contentious issue at the political front affecting the speed or direction
of policy reform.
Weak monitoring, feed back and implementation mechanism.
Poor internal technical capacity for policy analysis and continuity of
external influence in policy making.
Problems in improving data base and fulfilling data gaps including
problems in national accounting system.
Alternative Techniques and Their
Usefulness in the Nepalese Context
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CGE with micro foundation could be extremely useful.
CGE will be needing feedbacks from the macro models.
Additionally, following interrelated initiations required:
 Capacity building – especially in the research institutes
having some expertise on modeling exercise and
institutionalization of models.
 Feedback and coordination among policy making
bodies, donors and research institutes.
 Improvement and expansion of database including
introduction of new UN prescribed SNA with priority
on data collection within input/output framework.