Transcript MDG Strategy Analysis: Methods and an Agenda for Future Work

MAMS: A Tool for Public Finance and
Development Strategy Analysis
Hans Lofgren
Carolina Diaz-Bonilla
Hans Timmer
DECPG
Presentation for the Public Finance Analysis and Management
Core Course, PREM Learning Week, April 27, 2007
Introduction
•
•
MAMS (Maquette for MDG Simulations)
originally designed for MDG strategy
analysis.
Given the broad nature of MDGs and the
important role of the government in MDG
strategies, MAMS is also a framework for
analysis of medium-to-long-run
economywide public-finance issues.
Introduction
•
•
MAMS is being applied in numerous countries:
–
19 in Latin America and the Caribbean (in
collaboration with the UNDP and UNDESA)
–
7 in Sub-Saharan Africa
In Ethiopia (the pilot country), MAMS has been
extensively used by the World Bank and the
government in the analysis of MDG and Poverty
Reduction Strategies, as well as independent
studies on demography, labor market, and
aid/budget policy.
Introduction
Outline of presentation
1. Issues in MDG strategy analysis – what an
analytical framework should consider
2. The Structure of MAMS
3. Data for MAMS
4. MAMS simulations
1. Issues in MDG strategy analysis
•
A framework for analysis of MDG strategies should
consider the following factors:
1.
Synergies between different MDGs
2.
Role of non-government service providers
3.
Demand-side conditions (incentives, infrastructure, incomes)
4.
Role of economic growth
5.
Macro consequences of increased government spending
under different financing scenarios
6.
Diminishing marginal returns (in terms of MDG indicators) to
services and other determinants.
7.
Unit service costs depend on efficiency and input prices (e.g.
wages)
1. Issues in MDG strategy analysis
• A simple first approach establishes feasible
strategies and evaluate costs in an fixedcoefficient fixed-price framework (UNMP)
• Such a framework does not consider important
factors influencing the design of MDG strategies
 it is limited and possibly misleading
2. Model Structure
•
•
•
MAMS may be described as an extended,
dynamic-recursive computable general
equilibrium (CGE) model designed for MDG
analysis.
MAMS is complementary to and draws
extensively on sector and econometric research
on MDGs.
Motivation behind the design of MAMS:
– An economywide, flexible-price model is required.
– Standard CGE models provide a good starting point
– But Standard CGE approach must be complemented
by a satisfactory representation of 'social sectors'.
General Features
•
Many features are familiar from other open-economy,
CGE models:
–
–
–
Computable  solvable numerically
General  economy-wide
Equilibrium 
•
•
•
–
optimizing agents have found their best solutions subject to their
budget constraints
quantities demanded = quantities supplied in factor and
commodity markets
macroeconomic balance
Dynamic-recursive  the solution in any time period depend
on current and past periods, not the future.
MDGs
•
•
Extensions capture the generation of MDG outcomes.
MAMS covers MDGs 1 (poverty), 2 (primary school
completion), 4 (under-five mortality rate), 5 (maternal
mortality rate), 7a (water access), and 7b (sanitation
access).
•
The main originality of MAMS compared to standard
CGE models is the inclusion of (MDG-related) social
services and their impact on the rest of the economy.
•
Social services may be produced by the government
and the private sector.
Government
• Government services are produced using labor, intermediate inputs,
and capital (fixed coefficients for capital, intermediate inputs, and
aggregate labor; flexible coefficients for disaggregated labor).
• Government consumption is classified by function: social services
(education, health, water-sanitation), infrastructure and “other
government”.
• Government spending is split into
– Recurrent: consumption, transfers, interest
– Capital
• Government spending is financed by taxes, domestic borrowing,
“money printing”, foreign borrowing, and foreign grants.
• Model tracks government domestic and foreign debt stocks
(including foreign debt relief) and related interest payments.
MDG “production”
•
•
Together with other determinants, government social
services determine the "production" of MDGs.
MDGs are modeled as being “produced” by a
combination of factors or determinants (table following)
using a (reduced) functional form that permits:
– Imposition of limits (maximum or minimum) given by logic or
country experiences
– Replication of base-year values and elasticities
– Calibration of a reference time path for achieving MDGs
– Diminishing marginal returns to the inputs
•
Two-level function:
1. Constant-elasticity function at the bottom: Z = f(X)
2. Logistic function at the top: M(DG) = g(Z)
Determinants of MDG outcomes
Service
per capita or
student
Consumption per
Capita
Wage
incentives
Public infrastructure
Other MDGs
2–Primary
schooling
X
X
X
X
4
4-Under-five
mortality
X
X
X
2,5,7a,7b
5-Maternal
mortality
X
X
X
2,4,7a,7b
7a-Water
X
X
X
7b-Sanitation
X
X
X
MDG
Logistic function in MAMS
1.0
M
0.8
0.6
0.4
0.2
0.0
0
2
4
Z
6
8
Modeling education in MAMS
• Service measured per student in each teaching cycle
(primary, secondary, tertiary).
• Model tracks evolution of enrollment in each cycle
• Educational outcomes as functions of a set of
determinants: for each cycle, rates of entry, pass, repeat,
and drop out; between cycles, share that continues
• MDG 2 (net primary completion rate) computed as product
of 1st grade entry rate and primary cycle pass rates for the
relevant series of years.
Intertemporal behavior
Dynamics:
• Updating of stocks of factors (different types of labor and
capital, other factors) and debt (domestic and foreign)
• TFP
– Endogenous part depends on economic openness and growth
in government infrastructure stocks.
– Exogenous part captures what is not explained in model
(institutions, new technologies, ….)
• GDP growth is determined by:
– growth in economywide TFP (influenced by laborforce composition)
– growth in factor employment (mostly endogenous)
Flexible modeling framework
• MAMS has evolved from an Ethiopia-specific pilot version to one
that is more widely applicable, and may include:
–
–
–
–
–
multiple sectors
multiple households
wide range of taxes
NGO + private MDG/HD services
special-case sectors (resource-based export sectors, regulated utilities)
• MAMS can also be used as an simple two-sector (government –
private) framework for dynamic macro analysis.
• MAMS works with standard approaches to poverty and inequality
analysis:
– aggregate poverty elasticity
– representative household
– microsimulation (integrated, top-down)
Typical Simulations and Indicators
• MAMS scenarios relevant to public-finance analysis may
differ in terms of:
– level and composition of government spending;
– financing of government spending (different types of taxes,
domestic borrowing, money printing)
– government efficiency
• Outcome indicators of interest include the evolution of:
– Private and government consumption and investment, exports,
imports, value-added, taxes; all indicators may be national totals
are disaggregated
– Domestic and foreign debt stocks
– MDG indicators (poverty, non-poverty MDGs)
3. Data
• Basic data needs are similar to other CGE models:
– Social Accounting Matrix (SAM); factor and population stocks; shares
and elasticities in trade, production, and consumption
• Data (and model) disaggregation highly flexible outside the
government and the labor market
• Data requirements specific to MAMS:
– In SAM: government consumption and investment disaggregated by
MDG-related functions; labor disaggregated by educational
achievement;
– Education parameters: stocks of students by educational cycle;
student behavioral patterns (ex: rates of passing, repetition, dropout);
population data with some disaggregation by age;
– MDG data: base-year indicators; elasticities; service expansion
required to reach MDGs (MDG scenarios)
• Other worksheets
– Ex: debt, foreign debt relief, growth rates
3. Data
• The data demands define a research agenda for
empirical research.
• Likely key sources:
– Standard data publications (macro aggregates,
government budget, balance of payments)
– World Development Indicators (WDI) (Labor stocks;
Value-added in Ag/Ind/Srv; Population)
– Public Expenditure Reviews and Country Economic
Memoranda
– Sector-focused MDG studies (health, education, watersanitation, public infrastructure)
– Existing SAMs
MDG Values for Ethiopia
1990
2002
goal: 2015
38.4
36.2
19.2
MDG 1
headcount poverty rate (%)
MDG 2
primary (1st cycle) net completion rate (%)
24
36
100
MDG 4
under-five mortality rate (per 1,000 live births)
204
163
68
MDG 5
maternal mortality rate (per 100,000 live births)
870
609
218
MDG 7a
access to safe drinking water (%)
25
24.4
62.5
MDG 7b
access to safe sanitation (%)
8
12
54
4. Simulations
• BASE (business-as-usual scenario)
– No MDG targeting
– Government demand and GDP growth close to
recent trends
– Scenario calibrated around current resource
availability
• MDG-BASE (core MDG scenario):
– Government service growth is sufficient to
achieve all HD MDGs (2, 4, 5, 7a, 7b) by 2015
– Foreign grants are unconstrained; adjust to meet
the government financing gap
Evolution over Time for MDG 2
Net Primary School Completion Rate (%)
(By Simulation)
120
base
100
mdg-base
80
60
40
20
0
2005
2006
2007
2008
2009
2010
Note: 2015 target for MDG 2 = 100%
2011
2012
2013
2014
2015
Evolution over Time for Wages
Workers with Secondary-School Education
(By Simulation)
2700
2600
base
2500
mdg-base
2400
2300
2200
2100
2000
1900
1800
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
Note: Wages are shown in Ethiopian Birr
Foreign Aid Per Capita (US$)
By Simulation
90
base
80
mdg-base
70
60
50
40
30
20
10
0
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
Real Exchange Rate
110
100
90
80
70
60
base
50
mdg-base
40
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
Note: Indexed at 100 in 2005
Illustrative Simulations
• MDG-INFCUT (cut in infrastructure)
– Government receives 85 percent of the aid as under
MDG-Base.
– Government focus on human development:
• Maintains its spending on MDG human development targets
(defined here to include primary education, health, and watersanitation), while cutting spending on infrastructure.
• MDG-HDCUT (cut in human development)
– Government receives 85 percent of the aid as under
MDG-Base.
– Government focus on infrastructure:
• Maintains its spending on infrastructure, while cutting spending
on MDG human development targets.
Evolution over Time for MDG 2
Net Primary School Completion Rate (%)
(By Simulation)
120
base
mdg-base
mdg-infcut
mdg-hdcut
100
80
60
40
20
0
2005
2006
2007
2008
2009
Note: 2015 target for MDG 2 = 100%
2010
2011
2012
2013
2014
2015
MAMS Ethiopia findings
• Key results:
– Foreign aid per capita increases five-fold to US$79 in
2015 as compared to 2005.
– Heavy reliance on foreign aid appreciates the real
exchange rate appreciation and skews production
toward non-tradables.
– In the educated part of the labor market, wage
increases are initially rapid but will later slow down
when labor supplies increase and the scaling-up
period is concluded.
– Relative to an emphasis on infrastructure, a human
development focus puts the economy on a slower
growth track
Trade-offs between Human
Development (HD) and Poverty
Share of HD Target (%)
PV of Aid:
100
100%
95
90%
90
80%
85
75%
80
70
80
90
Share of Poverty Target (%)
100
Illustrative Simulations
• MDG-MIX:
– MDG scenario with smaller increase in foreign aid
• Grant aid relative to the base scenario is only half as large; in per-capita
terms, foreign aid reaches US$51 in 2015.
– Direct tax collection adjusts to assure that government receipts are
sufficient to cover government spending
• MDG-GPRD:
– more rapid government productivity growth but otherwise is identical
to MDG-Base
– MDG scenario with increased government productivity
• To explore the potential for government productivity in facilitating
progress toward the MDGs
– Productivity of government labor and intermediate input use improves
by an additional 1.5 percent per year whereas government
investment efficiency grows at the same annual rate.
Figure 3.3: Present value of foreign aid
35
2005 US$ bn
30
25
20
15
10
5
0
base
mdg-base
mdg-mix
mdg-gprd
Figure 3.1: Foreign aid per capita
base
mdg-base
mdg-mix
mdg-gprd
90
80
2005 US$
70
60
50
40
30
20
10
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
Government Mix: MDG-MIX
• The PV of total foreign aid 2006-2015 falls from US$30.9
billion to US$20.2
• As a result of less foreign aid, the appreciation of the real
exchange rate is less pronounced whereas export
growth increases and import growth slows down.
• Huge increase in direct taxes
– From 6.3% of GDP in 2005 to close to 25% in 2015.
• Strong dampening impact on growth in household factor
incomes, consumption, savings and investments
– Results in slower growth in the private capital stock and private
GDP
– GDP falls from 5.2% under MDG-Base to 4.3% in this scenario.
Government Mix: MDG-MIX (cont)
• Although the scenario MDG-Mix has a
more realistic outcome for foreign aid, it
has the drawbacks of reducing private and
over-all GDP growth, achieving only a
subset of the MDGs (MDG 1 is far from
being reached) and generating an even
larger government share in GDP.
Government Productivity: MDG-GPRD
• Compared to MDG-Base, results show:
– Declines in foreign aid needs (to $26.6 billion; $60 per
capita in 2015)
– Declines in the GDP share for the government (to
51.7 percent)
– Whereas the deterioration in terms of poverty
reduction, private consumption growth, and GDP
growth is minor.
• However, it should be noted that such efficiency
gains may be particularly difficult to bring about
in the context of rapid government expansion.
Table 3.2: Impacts on macroeconomic indicators
(Levels in 2005, average annual percent compound growth rate, 2006-2015)
2005
mn US$
Absorption1
GDP at market prices
Private consumption
Government consumption
Private investment
Government investment
Exports
Imports
GDP at factor cost (total)
GDP at factor cost (private sector)
GDP at factor cost (government)
Real exchange rate (index)
10,153
8,528
6,734
1,458
942
1,019
1,283
2,908
7,704
7,101
603
1.0
2005
percent
Absorption1
Base
3.5
3.5
3.1
4.0
4.4
4.0
3.7
3.4
3.6
3.5
4.0
0.2
Base
MDGMDG MDG MDG Base
Mix
Gprd
Infcut
Real annual growth 2006-2015 (%)
8.5
5.7
5.4
8.4
8.5
20.0
-1.0
12.8
5.5
5.2
8.7
-3.4
MDGBase
6.5
4.8
1.8
8.6
3.0
20.3
1.1
9.1
4.7
4.3
8.8
-0.9
7.6
5.7
4.9
8.4
7.4
17.6
1.0
10.4
5.4
5.1
8.7
-1.8
7.6
5.2
4.7
8.7
7.2
17.9
-0.7
11.2
5.0
4.6
8.9
-2.9
MDG MDG MDG Mix
Gprd
Infcut
Percent of GDP in 2015
MDG HDcut
7.9
5.7
5.5
6.7
8.4
18.3
0.6
11.4
5.5
5.4
7.3
-2.5
MDG –
Hdcut
119.1
118.6
141.7
137.4
136.8
138.7
138.5
Private consumption
Government consumption
79.0
17.1
76.0
17.9
72.1
22.1
58.6
24.4
73.0
19.6
71.2
23.9
74.4
19.0
Private investment
Government investment
11.0
12.0
12.1
12.6
12.0
35.5
8.9
45.5
12.1
32.1
11.5
32.0
12.5
32.7
15.0
-34.1
15.6
-34.2
5.7
-47.4
9.7
-47.1
8.2
-45.0
6.4
-45.1
7.3
-45.9
Exports
Imports
Note:
1. Absorption is the sum of private and public consumption and investment.
Source: World Bank staff simulations with the MAMS model.
Table 3.5: Impacts on government revenues (as share of GDP)
2005
percent
Direct taxes
Import taxes
Other indirect taxes
Central bank borrowing
Other domestic borrowing
Foreign borrowing
Foreign grants
Net other capital inflows and errors
Total
Base
MDGBase
MDG –
MDG MDG Mix
Gprd
Infcut
Percent of GDP in 2015
MDG HDcut
6.3
6.4
3.3
1.2
2.0
5.8
5.1
0.0
6.0
6.2
6.2
1.4
2.5
4.2
5.7
0.0
5.8
7.0
5.9
1.1
1.9
2.4
34.6
0.0
24.8
6.3
6.0
1.2
2.2
3.4
27.4
0.0
5.8
6.8
6.1
1.1
2.0
2.9
28.2
0.0
7.9
6.9
5.9
1.1
2.0
2.7
30.7
0.0
3.5
6.9
6.0
1.1
2.0
2.7
30.7
0.0
30.1
32.2
58.7
71.4
53.0
57.2
52.9
30.1
32.2
58.7
71.4
53.0
57.2
52.9
Memorandum items:
Total public expenditures
Foreign aid per capita (US$)1
16.2
18.5
80.8
51.4
59.7
67.5
67.5
Note:
1. Foreign aid per capita includes allowance for aid outside the government budget. In per-capita terms, aid
in the government budget was around US$11 in 2005.
Source: World Bank staff simulations with the MAMS model.
Foreign Aid vs Tax Increase
FGEXP: double the increase in foreign aid in each year (2004-2020); entirely in
grant form; the resources are used for HD and infrastructure spending.
TAXEXP: impose same increases in real government service and capital stock
growth (as in FGEXP) but finance this expansion with an increase in direct taxes.
Indicator
Real
macro
Absorption
Private consumption
Government consumption
Private investment
Government investment
Exports
Imports
GDP at factor cost
Real exchange rate index
Real government
services
Primary education
Secondary education
Tertiary education
Health
Water
Agriculture**
Roads**
Other government
Government Direct taxes
revenue
Foreign aid
2003
bn
13,484
9,232
1,799
1,903
553
1,463
3,088
10,871
100
bn
260.2
75.2
85.7
192.3
2.9
15.6
57.6
1,109.6
% of GDP
3.0
11.3
Simulations*
base
fgexp
taxexp
% annual growth
6.0
6.7
6.0
5.6
6.1
5.4
7.3
8.4
7.9
6.2
6.8
5.8
6.0
9.2
8.8
7.2
6.3
7.4
5.7
6.7
5.7
6.2
6.6
6.2
0.3
-0.2
0.3
% annual growth
5.1
7.3
5.2
14.8
16.3
15.4
13.7
15.7
14.4
6.2
8.8
8.8
6.2
8.5
8.5
6.2
8.5
8.5
6.2
8.5
8.5
6.2
6.2
6.2
% of GDP in final year
6.8
6.9
11.2
10.8
14.7
10.6
Foreign Aid vs Tax Increase (cont)
• Addition to foreign aid under FGEXP has a positive impact on
all components of domestic final demand (absorption).
• Increase in foreign aid increases the trade deficit that Uganda
can accommodate, leading to exchange rate appreciation
that brings about slightly slower export growth and more
rapid import growth (both rates move by 1%).
• Consumption and investment growth both expand by an
additional 0.5-0.7% compared to the base scenario.
• GDP growth increases by around 0.5%, boosted by more
rapid growth in private investment and more rapid expansion
for the educated labor force.
• The scenario has positive effects on all MDG indicators.
Foreign Aid vs Tax Increase (cont)
• Under TAXEXP, direct tax increase imposed on upper two
quartiles in rural and urban areas.
• Direct taxes increase: 3% of GDP in 2003 to 11% in 2020.
• Given unchanged trade deficit and little change in GDP
growth, the expansion in government demand comes at the
expense of private consumption and investment
– Growth rates of which decline by 0.3-0.4%.
• Distributional consequences driven by the tax policy
– Bottom two quartiles: marginal increase in per-capita consumption;
– Upper two quartiles: consumption declines by 0.4% per year.
• Compared to base: generates higher poverty rate but slight
improvements in the other MDG indicators; compared to
FGEXP: all MDG indicators perform less well.
Foreign Aid vs Tax Increase (cont)
Indicator
Factor
wages or
rents
Labor -- <secondary education
Labor -- secondary education
Labor -- tertiary education
Land
Private capital
Real household consumption
per capita
Rural
Urban
Quartiles 1-2
Quartiles 3-4
Total
MDG
indicators
1 (headcount poverty
2 (primary completion)
4 (Under-5 mortality)
7a (Improved water access)
2003
'000
0.218
3.061
9.748
0.087
0.205
'000
281.4
903.5
167.9
547.6
357.8
%
35.0
15.5
14.0
56.0
Simulations*
base
fgexp
taxexp
% annual growth
1.33
1.51
1.31
1.16
1.01
1.12
2.28
2.28
2.37
4.93
5.22
4.82
1.21
1.36
1.39
% annual growth
2.06
2.51
1.86
1.83
2.37
1.46
2.26
2.66
2.34
1.89
2.39
1.53
2.00
2.48
1.75
% in final year
21.0
17.0
23.0
75.7
92.4
78.2
9.2
8.0
8.2
64.0
72.7
72.4
Foreign Aid vs Tax Increase (cont)
• Scenarios show that attempts to let the
government grow more rapidly in the absence of
a parallel increase in foreign aid brings difficult
trade-offs to the fore: human development
services and the stocks of public infrastructure
increase more rapidly while leaving households
and the private sector with less resources for
consumption and investment, developments that
puts a break on progress in the human
development area.
More Examples
• Dominican Republic:
– Achievement of the MDGs under different financing
mechanisms: foreign borrowing, domestic borrowing,
taxation.
– Foreign grants not an option.
– Private sector an important player.
• Malawi:
– Trade-offs between spending on infrastructure versus
human development.
– Large debt and interest payments.
– Through Poverty Reduction Growth Facility strategy
pursuing fiscal discipline and macro stability.
– If can lower debt burden, and therefore the interest
payments, can then re-focus these resources into
infrastructure or human development sectors.
5. Conclusions
•
MAMS is a flexible framework for dynamic
development strategy analysis.
•
MAMS considers the links between MDG
indicators, growth, alternative compositions
and levels of government spending and
alternative government financing policies.
•
What has been done so far points to the need
for a better understanding of several issues,
most importantly the determinants of MDG
and education outcomes (single- and crosscountry econometric work).
References
• Bourguignon, François, Hans Lofgren, and Carolina Diaz-Bonilla.
2006. Aid, service delivery and the MDGs in an economy-wide
framework. Mimeo. World Bank.
• Lofgren, Hans and Carolina Diaz-Bonilla. 2006. “Economywide
Simulations of Ethiopian MDG Strategies.” Paper presented at the
Ninth Annual Conference on Global Economic Analysis, Addis
Ababa. June.
• Lofgren, Hans and Carolina Diaz-Bonilla. 2006. “MAMS: An
Economywide Model for Analysis of MDG Country Strategies:
Technical Documentation.” Paper presented at the Ninth Annual
Conference on Global Economic Analysis, Addis Ababa. June.