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

1. 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

2. Was Latin America on track towards the MDGs?

3. 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?

4. 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?

5. Crisis: a deep dive, but will recovery be quick?

6. Also deceleration in the six countries of study

7. 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

8. MAMS: Determinants of MDG outcomes

9. 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)

10. 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

11. Is LAC “on track” under pre-crisis BAU?

12. Impact crisis on MDGs 2 and 4(crisis/pre-crisis BAU; 2015)

13. 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)

14. MDG strategy would be countercyclical, but insufficient for economic recovery GDP growth per year (%), 2010-2015

15. Financing strategies and MDG costing results • 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

16. What are realistic financing options? • 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

17. Rising public debt under MDG strategy with foreign borrowing(total public debt in 2015)

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

19. LAC: “Feasible” financing options

20. Conclusions and recommendations • 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

21. Conclusions and recommendations • 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

22. Caveats • 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