Modeling Issues Related to EDRC Modeling Issues Related to EDRC ModelsModels

Ex-ante Poverty Impact Assessment of Ex-ante Poverty Impact Assessment of Macroeconomic policies Macroeconomic policies International WorkshopInternational Workshop

Washington D.C. Washington D.C. October 14-15, 2003October 14-15, 2003

Mushegh TumasyanMushegh TumasyanEconomic Development and Research Center, Economic Development and Research Center,

ArmeniaArmenia

ContentsContents Why EDRC participates in PRSP and modeling processes and how it Why EDRC participates in PRSP and modeling processes and how it

contributed to the development of PRSP in Armenia?contributed to the development of PRSP in Armenia?

What are the Criteria that a Model Dealing with Poverty Issues should What are the Criteria that a Model Dealing with Poverty Issues should meet?meet?

What Environment EDRC’s Models are Developed for?What Environment EDRC’s Models are Developed for? Ideas underlying the model: Political economics of the MIdeas underlying the model: Political economics of the Modelodel

The Set of The ModelsThe Set of The Models

Why EDRC Participates in PRSP and Why EDRC Participates in PRSP and Modeling Processes and how It Modeling Processes and how It

Contributed to the Development of PRSP Contributed to the Development of PRSP in Armenia?in Armenia?

To contribute to a comprehensive understanding of To contribute to a comprehensive understanding of poverty and possibilities of poverty reduction in Armeniapoverty and possibilities of poverty reduction in Armenia

To design independent domestic policy programsTo design independent domestic policy programs

To provide a tool to Civil Society Organizations (CSO-s) for To provide a tool to Civil Society Organizations (CSO-s) for policy evaluationpolicy evaluation

To create institutional basis for strengthening alternative To create institutional basis for strengthening alternative macro-modeling capacities of the non-governmental macro-modeling capacities of the non-governmental sectorsector

To promote CSO-s participation in public policy makingTo promote CSO-s participation in public policy making

PRSP Processes in Armenia: PRSP Processes in Armenia: EDRC ContributionEDRC Contribution

EDRC conducted the “Policy Choice for Poverty Reduction” EDRC conducted the “Policy Choice for Poverty Reduction” project to develop policy recommendations for PRSPproject to develop policy recommendations for PRSP

Using EDRC’s models, our experts developed the Using EDRC’s models, our experts developed the macroeconomic strategy and analysis of the macroeconomic macroeconomic strategy and analysis of the macroeconomic policy impact on poverty for the first draft of PRSP for policy impact on poverty for the first draft of PRSP for ArmeniaArmenia

However in the final PRSP it was replaced by the However in the final PRSP it was replaced by the macroeconomic framework of the IMF’s PRGF program with macroeconomic framework of the IMF’s PRGF program with ArmeniaArmenia

In the final PRSP the tools that were used to derive the In the final PRSP the tools that were used to derive the policy impact on distribution and poverty incidence are not policy impact on distribution and poverty incidence are not transparent and have not been disclosedtransparent and have not been disclosed

What are the Criteria that a Model What are the Criteria that a Model Dealing with Poverty Issues Should Dealing with Poverty Issues Should

Meet?Meet? Ability to estimate policy impact on welfareAbility to estimate policy impact on welfare

The model needs to produce a macroeconomic framework, to forecast income distribution The model needs to produce a macroeconomic framework, to forecast income distribution and poverty incidenceand poverty incidence

For participatory policy making, models also should be transparent and user-friendlyFor participatory policy making, models also should be transparent and user-friendly

Data availability constraint should be properly taken into accountData availability constraint should be properly taken into account

What Environment EDRC’s Models What Environment EDRC’s Models are Developed for?are Developed for?

Low income transition economy Low income transition economy

High level of “transitional” polarization High level of “transitional” polarization

Corruption and resulting market distortionsCorruption and resulting market distortions

Openness to trade and capital account liberalizationOpenness to trade and capital account liberalization

Low level of resource utilizationLow level of resource utilization

Stable pricesStable prices

The Set of the model The Set of the model

“MAGMA”

Macroeconomic framework

“Income Distribution

Matrix”

Income Distribution

and GINI

“Growth and Distribution

Model”

Poverty Incidence

Household Survey Data

Policy

Exogenousvariables

GINI

Growth

Policy Revision

Growth and Distribution Model Growth and Distribution Model Estimates poverty incidence for different combinations of Gini Estimates poverty incidence for different combinations of Gini

coefficient and economic growthcoefficient and economic growth

Estimation of Lorents curve functionEstimation of Lorents curve function

Calculation of coefficients of Lorents curve for Calculation of coefficients of Lorents curve for different Gini coefficientsdifferent Gini coefficients

Calculation of poverty incidence for given Calculation of poverty incidence for given combinations of Gini and income growth indexcombinations of Gini and income growth index

Growth and Distribution Model: Estimation of Lorents Curve Growth and Distribution Model: Estimation of Lorents Curve FunctionFunction

To choose the type of distribution function, logarithmic, To choose the type of distribution function, logarithmic, exponential and combined functions and polynomials exponential and combined functions and polynomials were observed.were observed. We estimate Lorents curve by solving the following We estimate Lorents curve by solving the following system of equationssystem of equations..

(3) [0,100] ,0')'( ,0)'(

(2) G50005000)(

(1) 0F(0) 100,)100(

xxFxF

xF

F

Equation (2) expresses the relation between the selected function Equation (2) expresses the relation between the selected function and actual Gini index, and equation (1) is the equation satisfying the and actual Gini index, and equation (1) is the equation satisfying the

condition x=100; y=100 and x=0; y=0.condition x=100; y=100 and x=0; y=0.

2bx1

axf(x)

To choose the best function we should take one To choose the best function we should take one with minimum dispersion from actual deciles with minimum dispersion from actual deciles values. In case of Armenia we select following values. In case of Armenia we select following functional form:functional form:

Growth and Distribution Model: Estimation of Poverty Growth and Distribution Model: Estimation of Poverty Incidence for Different Combinations of Gini Coefficient and Incidence for Different Combinations of Gini Coefficient and Economic GrowthEconomic Growth

Income

Population

Poverty line

Change of Gini

Poverty Reduction

Growth and Distribution ModelGrowth and Distribution Model: : Calculation of Poverty Calculation of Poverty Incidence for Various Combinations of Gini and Income Incidence for Various Combinations of Gini and Income Growth IndexGrowth Index

Macroeconomic Adjustments and Growth Model Macroeconomic Adjustments and Growth Model for Armenia (MAGMA)for Armenia (MAGMA)

Main OutcomeMain Outcome Endogenous GDP growthEndogenous GDP growth Forecast GDP by expenditures, production and Forecast GDP by expenditures, production and

incomeincome Estimation of employment by sectorsEstimation of employment by sectors

Main FeaturesMain Features

behavior of different income groups and institutions behavior of different income groups and institutions

decomposition of consumption and import functions decomposition of consumption and import functions by income groupsby income groups

Assuming that higher income groups have higher Assuming that higher income groups have higher propensity to save and to consume imported goods, propensity to save and to consume imported goods, decrease of polarization leads to economic growthdecrease of polarization leads to economic growth

MAGMA: Main EquationsMAGMA: Main Equations

)12(*****

)11(*)(

)10()(Re

)9(*)(

)8(4,1*

)7(

)6(

)5(*)(Re

)4(Re

)3(4,1,*

)2(

)1(

4

1

3

2

4

1

1

4

1

∑

iXGgIPIiC

g

piii

ii

gP

g

iPp

iPP

gP

XKGKIKIKCKM

gFYYDef

TrPGvDefI

gFYYG

iYMPCaC

CC

FYMXGIICY

gFYYv

TrPvY

idYY

YY

YYY

gPi

i

i

i

VariableEndogen

ousExogeno

us

Gross National Disposable Income (GNDI) Y +

Gross National Disposable Income of Private Sector

Yp +

Private GNDI of i group Yp i +

Private Consumption of i group Ci +

Public Consumption G +

Private Investments Ip +

Public Investments Ig +

Exports (goods & services) X +

Imports (goods & services) M +

Net Factor Income and Transfers from Abroad FY +

Consolidated Budget Revenues and Grants Rev +

Description of Variables of Main Equations (1)

VariableEndogen

ous

Exogen

ous

Interest Payments of Government P +

Public Transfers and Subsides Tr +

Marginal Propensity to Consume in i group MPC +

Share of Imports in the Consumption of i group Kci +

Share of Imports in the Public Consumption KG +

Share of Imports in the Public Investments KIg +

Share of Imports in the Private Investments KIp +

Share of Export Related Imports in the Exports Kx +

Consolidated Budget Revenues and Grants / GDP g1 +

Public Consumption / GDP g2 +

Consolidated Budget Deficit / GDP g3 +

Private GNDI of i group / Private GNDI di +

Autonomous Consumption of i group ai +

Description of Variables of Main Equations (2)

Income Distribution Matrix (IDM)Income Distribution Matrix (IDM)

IDM assesses the policy impact on income distribution IDM assesses the policy impact on income distribution

It produces a distribution table showing the type (wages, It produces a distribution table showing the type (wages, profit, transfers) and sources of income for each income profit, transfers) and sources of income for each income group, finally deriving Gini coefficient.group, finally deriving Gini coefficient.

Analyzes the distribution of 1) assets, 2) employment and Analyzes the distribution of 1) assets, 2) employment and 3) pensioners for each income group3) pensioners for each income group

IDM uses Households’ surveys Data, outcomes of the IDM uses Households’ surveys Data, outcomes of the Macro Model (MAGMA) and some other exogenous Macro Model (MAGMA) and some other exogenous estimatesestimates

Income Distribution MatrixIncome Distribution Matrix  I II III IV V VI VII VIII IX X Total

Wages and Salaries

0.03 0.47 1.251.9

42.78 4.04 4.38 5.73

6.09

20.45 47.16

Industry 0.00 0.04 0.11 0.45 0.90 1.44 1.44 1.56 1.56 2.99 10.46

Agriculture 0.01 0.37 0.68 0.68 0.90 0.90 1.47 1.76 2.05 4.78 13.61

Construction 0.00 0.00 0.00 0.12 0.15 0.28 0.29 0.36 0.36 2.65 4.21

Trade 0.00 0.00 0.00 0.17 0.19 0.31 0.31 0.44 0.54 3.41 5.38

Public Services 0.02 0.03 0.35 0.16 0.48 0.74 0.50 0.62 0.49 0.03 3.43

Other Services 0.00 0.03 0.11 0.37 0.15 0.38 0.37 0.99 1.09 6.59 10.07

Profit 0.00 0.00 0.000.0

00.00 0.00 2.82 4.34

8.67

24.26 40.09

Industry 0.00 0.00 0.00 0.00 0.00 0.00 0.61 0.94 1.88 5.26 8.70

Agriculture 0.00 0.00 0.00 0.00 0.00 0.00 1.08 1.66 3.32 9.29 15.35

Construction 0.00 0.00 0.00 0.00 0.00 0.00 0.25 0.38 0.76 2.12 3.51

Trade 0.00 0.00 0.00 0.00 0.00 0.00 0.23 0.35 0.70 1.95 3.22

Services 0.00 0.00 0.00 0.00 0.00 0.00 0.66 1.01 2.01 5.63 9.31

Transfers 0.67 1.43 1.652.0

62.22 2.36 0.90 0.63

0.53

0.29 12.76

Private 0.00 0.80 1.04 1.47 1.65 2.14 0.71 0.44 0.35 0.23 8.84

Government 0.67 0.64 0.61 0.59 0.57 0.22 0.20 0.19 0.18 0.06 3.92

Total 0.7 1.9 2.9 4.0 5.0 6.4 8.1 10.715.

345.0 100.0

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