Title: MAMS: A Tool for Public Finance and Development Strategy Analysis
1MAMS 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
2Introduction
- 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.
3Introduction
- 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.
4Introduction
- Outline of presentation
- Issues in MDG strategy analysis what an
analytical framework should consider - The Structure of MAMS
- Data for MAMS
- MAMS simulations
51. Issues in MDG strategy analysis
- A framework for analysis of MDG strategies should
consider the following factors - Synergies between different MDGs
- Role of non-government service providers
- Demand-side conditions (incentives,
infrastructure, incomes) - Role of economic growth
- Macro consequences of increased government
spending under different financing scenarios - Diminishing marginal returns (in terms of MDG
indicators) to services and other determinants. - Unit service costs depend on efficiency and input
prices (e.g. wages)
61. Issues in MDG strategy analysis
- A simple first approach establishes feasible
strategies and evaluate costs in an
fixed-coefficient fixed-price framework (UNMP) - Such a framework does not consider important
factors influencing the design of MDG strategies
? it is limited and possibly misleading
72. 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'.
8General 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.
9MDGs
- 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.
10Government
- 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.
11MDG 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
- Constant-elasticity function at the bottom Z
f(X) - Logistic function at the top M(DG) g(Z)
12Determinants of MDG outcomes
13Logistic function in MAMS
14Modeling 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.
15Intertemporal 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
labor-force composition) - growth in factor employment (mostly endogenous)
16Flexible 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)
17Typical 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)
183. 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
193. 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,
water-sanitation, public infrastructure) - Existing SAMs
20MDG Values for Ethiopia
214. 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
22Evolution over Time for MDG 2Net Primary School
Completion Rate ()(By Simulation)
Note 2015 target for MDG 2 100
23Evolution over Time for WagesWorkers with
Secondary-School Education(By Simulation)
Note Wages are shown in Ethiopian Birr
24Foreign Aid Per Capita (US)By Simulation
25Real Exchange Rate
Note Indexed at 100 in 2005
26Illustrative 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 water-sanitation), 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.
27Evolution over Time for MDG 2Net Primary School
Completion Rate ()(By Simulation)
Note 2015 target for MDG 2 100
28MAMS Ethiopia findings
- Key results
- Foreign aid per capita increases five-fold to
US79 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
29Trade-offs between Human Development (HD) and
Poverty
30Illustrative 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 US51 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.
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33Government Mix MDG-MIX
- The PV of total foreign aid 2006-2015 falls from
US30.9 billion to US20.2 - 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.
34Government 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.
35Government 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.
36Government Productivity MDG-GPRD (cont)
- In an additional simulation, not reported
elsewhere in this chapter, we let the
productivity improvement of the government be
doubled, to 3 percent per year. The results is a
further strengthening of these outcomes the PV
of aid declines to 22.7 billion and the
government GDP share in 2015 falls to 45.7
percent, without any significant impact on
poverty reduction.
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39Foreign 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.
40Foreign 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.
41Foreign 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.
42Foreign Aid vs Tax Increase (cont)
43Foreign 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.
44More 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.
455. 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 cross-country econometric
work).
46References
- 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.