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MAMS: A Tool for Public Finance and Development Strategy Analysis

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Title: MAMS: A Tool for Public Finance and Development Strategy Analysis


1
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

2
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.

3
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.

4
Introduction
  • Outline of presentation
  • Issues in MDG strategy analysis what an
    analytical framework should consider
  • The Structure of MAMS
  • Data for MAMS
  • MAMS simulations

5
1. 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)

6
1. 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

7
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'.

8
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.

9
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.

10
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.

11
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
  • Constant-elasticity function at the bottom Z
    f(X)
  • Logistic function at the top M(DG) g(Z)

12
Determinants of MDG outcomes
13
Logistic function in MAMS
14
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.

15
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
    labor-force composition)
  • growth in factor employment (mostly endogenous)

16
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)

17
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)

18
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

19
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,
    water-sanitation, public infrastructure)
  • Existing SAMs

20
MDG Values for Ethiopia
21
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

22
Evolution over Time for MDG 2Net Primary School
Completion Rate ()(By Simulation)
Note 2015 target for MDG 2 100
23
Evolution over Time for WagesWorkers with
Secondary-School Education(By Simulation)
Note Wages are shown in Ethiopian Birr
24
Foreign Aid Per Capita (US)By Simulation
25
Real Exchange Rate
Note Indexed at 100 in 2005
26
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 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.

27
Evolution over Time for MDG 2Net Primary School
Completion Rate ()(By Simulation)
Note 2015 target for MDG 2 100
28
MAMS 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

29
Trade-offs between Human Development (HD) and
Poverty
30
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 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.

31
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33
Government 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.

34
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.

35
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.

36
Government 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.

37
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39
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.
40
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.

41
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.

42
Foreign Aid vs Tax Increase (cont)
43
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.

44
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.

45
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 cross-country econometric
    work).

46
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.
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