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Modeling Issues Related to EDRC Models

Modeling Issues Related to EDRC Models

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Modeling Issues Related to EDRC Models

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  1. Modeling Issues Related to EDRC Models Mushegh TumasyanEconomic Development and Research Center, Armenia Ex-ante Poverty Impact Assessment of Macroeconomic policies International WorkshopWashington D.C. October 14-15, 2003

  2. Contents • Why EDRC participates in PRSP and modeling processes and how it contributed to the development of PRSP in Armenia? • What are the Criteria that a Model Dealing with Poverty Issues should meet? • What Environment EDRC’s Models are Developed for? • Ideas underlying the model: Political economics of the Model • The Set of The Models

  3. Why EDRC Participates in PRSP and Modeling Processes and how It Contributed to the Development of PRSP in Armenia? • To contribute to a comprehensive understanding of poverty and possibilities of poverty reduction in Armenia • To design independent domestic policy programs • To provide a tool to Civil Society Organizations (CSO-s) for policy evaluation • To create institutional basis for strengthening alternative macro-modeling capacities of the non-governmental sector • To promote CSO-s participation in public policy making

  4. PRSP Processes in Armenia: EDRC Contribution • EDRC conducted the “Policy Choice for Poverty Reduction” project to develop policy recommendations for PRSP • Using EDRC’s models, our experts developed the macroeconomic strategy and analysis of the macroeconomic policy impact on poverty for the first draft of PRSP for Armenia • However in the final PRSP it was replaced by the macroeconomic framework of the IMF’s PRGF program with Armenia • In the final PRSP the tools that were used to derive the policy impact on distribution and poverty incidence are not transparent and have not been disclosed

  5. What are the Criteria that a Model Dealing with Poverty Issues Should Meet? • Ability to estimate policy impact on welfare • The model needs to produce a macroeconomic framework, to forecast income distribution and poverty incidence • For participatory policy making, models also should be transparent and user-friendly • Data availability constraint should be properly taken into account

  6. What Environment EDRC’s Models are Developed for? • Low income transition economy • High level of “transitional” polarization • Corruption and resulting market distortions • Openness to trade and capital account liberalization • Low level of resource utilization • Stable prices

  7. The Set of the model Policy Revision Policy “MAGMA” Macroeconomic framework “Growth and Distribution Model” Poverty Incidence Growth Exogenous variables GINI “Income Distribution Matrix” Income Distribution and GINI Household Survey Data

  8. Growth and Distribution Model Estimates poverty incidence for different combinations of Gini coefficient and economic growth • Estimation of Lorents curve function • Calculation of coefficients of Lorents curve for different Gini coefficients • Calculation of poverty incidence for given combinations of Gini and income growth index

  9. Growth and Distribution Model: Estimation of Lorents Curve Function • To choose the type of distribution function, logarithmic, exponential and combined functions and polynomials were observed. • We estimate Lorents curve by solving the following system of equations. Equation (2) expresses the relation between the selected function and actual Gini index, and equation (1) is the equation satisfying the condition x=100; y=100 and x=0; y=0. • To choose the best function we should take one with minimum dispersion from actual deciles values. In case of Armenia we select following functional form:

  10. Growth and Distribution Model: Estimation of Poverty Incidence for Different Combinations of Gini Coefficient and Economic Growth Income Change of Gini Poverty line Population Poverty Reduction

  11. Growth and Distribution Model: Calculation of Poverty Incidence for Various Combinations of Gini and Income Growth Index

  12. Macroeconomic Adjustments and Growth Model for Armenia (MAGMA) Main Features • behavior of different income groups and institutions • decomposition of consumption and import functions by income groups • Assuming that higher income groups have higher propensity to save and to consume imported goods, decrease of polarization leads to economic growth Main Outcome • Endogenous GDP growth • Forecast GDP by expenditures, production and income • Estimation of employment by sectors

  13. MAGMA: Main Equations

  14. Description of Variables of Main Equations (1)

  15. Description of Variables of Main Equations (2)

  16. Income Distribution Matrix (IDM) IDM assesses the policy impact on income distribution • It produces a distribution table showing the type (wages, profit, transfers) and sources of income for each income group, finally deriving Gini coefficient. • Analyzes the distribution of 1) assets, 2) employment and 3) pensioners for each income group • IDM uses Households’ surveys Data, outcomes of the Macro Model (MAGMA) and some other exogenous estimates

  17. Income Distribution Matrix

  18. Economic Development and Research Center