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Impact of the Crisis on the MDGs in Latin America: A Macro-Micro CGE Assessment. “ mini ” LINK meeting St. Petersburg 4 June 2009 Rob Vos United Nations. Was Latin America on track towards the MDGs?. Some key questions regarding MDG strategies Before the crisis :

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Impact of the crisis on the mdgs in latin america a macro micro cge assessment

Impact of the Crisis on the MDGs in Latin America:A Macro-Micro CGE Assessment

“mini” LINK meeting

St. Petersburg

4 June 2009

Rob Vos

United Nations



Some key questions regarding MDG strategies

Before the crisis:

  • But trends differ greatly across countries

  • Are existing economic and social policies good enough to reach the goals?

  • Need country-specific answers:

    • What does it take to achieve the MDGs?

    • Do we know how much it will cost and can we afford achieving the goals?

    • What policy options do we have in financing the MDG strategy? What are the macroeconomic trade offs?


Some key questions regarding MDG strategies

After the crisis:

  • How much more difficult will it be to achieve the MDGs by 2015?

  • Will it cost more? How much?

  • To what extent would an MDG strategy be countercyclical?

  • Are macroeconomic tradeoffs more difficult to manage?




Methodology un desa undp world bank project modeling framework
METHODOLOGYUN/DESA-UNDP-World Bank projectModeling framework

  • MAMS: MAquette for MDG Simulations.

    • Economy-wide (dynamic CGE) simulation model to analyze MDG strategies in different countries.

    • Dynamic MDG module

  • Sector analysis of MDG determinants and of interventions needed to achieve MDGs in education, health, water and sanitation

    • Microeconomic analysis of determinants of access to schooling, infant mortality, etc.

    • Costing exercise, considering household behaviour

  • Microsimulation methodology

    • Translate labour market outcomes of CGE simulations into impact on poverty and income distribution at household level using micro datasets



Macroeconomic influences on cost estimates
Macroeconomic influences on cost estimates

  • Synergies among MDGs: is achieving all MDGs simultaneously cheaper than pursuing them one by one?

  • Complementary investment requirements, especially in infrastructure

  • Macro analysis: economy-wide effects matter for the (relative) cost estimates (labour costs and constraints, prices, growth effects)


Mdg simulations with cge
MDG simulations with CGE

  • BAU: projection without policy change

    • Continued pre-crisis trends

    • Crisis prolonged during 2009-2010 (gradual recovery after)

  • MDG scenarios:

    • Optimize to reach MDGs

      • Each MDG separately

      • Simultaneously

    • Different financing strategies

      • Foreign aid, Foreign borrowing, Domestic borrowing,Tax increases



  • Impact crisis on mdgs 2 and 4 crisis pre crisis bau 2015
    Impact crisis on MDGs 2 and 4(crisis/pre-crisis BAU; 2015)


    Additional public spending needed will be higher because of the crisis
    Additional public spending needed will be higher because of the crisis

    Required additional social spending needed to meet MDGs 2, 4, 5 and 7

    (% of GDP, per year 2010-15)


    Mdg strategy would be countercyclical but insufficient for economic recovery
    MDG strategy would be countercyclical, but insufficient for economic recovery

    GDP growth per year (%), 2010-2015


    Financing strategies and mdg costing results
    Financing strategies and MDG costing results economic recovery

    • Additional spending requirements are generally lower in the case of external finance - through aid or foreign borrowing – than in case of domestic resource mobilization

    • Additional spending requirements are higher in the case of domestic finance - through borrowing or taxation - owing to crowding out effects and consumption compression


    What are realistic financing options
    What are realistic financing options? economic recovery

    • MDG costs in form of required additional public spending is just one criterion for assessing desirability of a financing strategy

    • Other criteria:

      • Debt Sustainability

      • Other macroeconomic trade-offs (e.g. Dutch disease effects, crowding out of private investment, squeeze of private consumption, labour constraints, poverty outcomes)

      • Institutional constraints and political economy considerations


    Rising public debt under mdg strategy with foreign borrowing total public debt in 2015
    Rising public debt under MDG strategy with foreign borrowing economic recovery(total public debt in 2015)


    Required tax increase under MDG strategy with tax-financing economic recovery(increase income tax, % of GDP, avg 2010-2015)



    Conclusions and recommendations
    Conclusions and recommendations economic recovery

    • Affordable: the cost of reaching MDGs is not prohibitive though substantially increase because of crisis,

    • Tax and spend (revisited): analysis of macroeconomic trade-offs suggest tax reform may still be best strategy in most countries (though because of crisis more will need to consider mixed financing strategies)

    • Efficiency increases in social spending: MAMS assumes efficient spending on MDG services to reach goals, but in practice space to improve efficiency in public spending to create more fiscal space


    Conclusions and recommendations1
    Conclusions and recommendations economic recovery

    • Socially responsible macroeconomic policies: broad perspective on macro policies beyond stabilization and inflation targeting: growth, adequate social spending, employment growth and inter-temporal objective of human development

    • Structural adjustment: need to generate more productive employment and reduce inequality: MDG strategy per se insufficient to meet poverty reduction target


    Caveats
    Caveats economic recovery

    • Integrated modelling approach: never perfect, but provides comprehensive and consistent picture

      • Better costing instrument than alternatives

      • Improved identification of “on track” vs “off track”

      • Link macroeconomic and social policies

    • Need to avoid its use as “black box”, but see as instrument to help policy dialogue


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