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“ World Crisis and MDG’s achievement in Mexico : A CGE Model”

“ World Crisis and MDG’s achievement in Mexico : A CGE Model”. October 23, 2013 UAM, Spain. By Araceli Ortega Díaz. Structure of the presentation. Introduction to Mexican MDGs Macro economy, politics and poverty in Mexico. CGE Model: adaptation and calibration.

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“ World Crisis and MDG’s achievement in Mexico : A CGE Model”

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  1. “World Crisis and MDG’s achievement in Mexico : A CGE Model” October 23, 2013 UAM, Spain By Araceli Ortega Díaz Araceli Ortega araortega@gmail.com

  2. Structure of the presentation • Introduction to Mexican MDGs • Macro economy, politics and poverty in Mexico. • CGE Model:adaptation and calibration. • MDG Module:adaptation and calibration. • Feasibility to reach MDGs under different scenarios of public policy. • Labor Market: Including Poverty and Inequality results. • Conclusions and recommendations. Araceli Ortega araortega@gmail.com

  3. Introduction to Mexican MDGs Araceli Ortega araortega@gmail.com

  4. Introduction • In September 6, the “Millennium Meeting” of United Nations took place in Monterrey, Mexico where there was signed and agenda to reduce poverty and improve the living standards of the world. • This agenda was agreed within the framework of MDGs, which should be reached by 2015, using 1990 as the reference year. • For every MDG there are several specific targets and for every target there are several verifiable indicators. • Every MDG and every target are interlinked, and reaching the goals will warranty that the world is a better place to live in economic, social and political terms. Araceli Ortega araortega@gmail.com

  5. ¿What are the MDGs? • The MDG are 8, every one has a target, and each target has one or more indicators, in such a way that we have 18 targets and 49 indicators: There is not a I-O with gender perspective Currently discussion of postmillennial goals are in http://ec.europa.eu/europeaid/how/public-consultations/towards_post-2015-development-framework_en.htm Araceli Ortega araortega@gmail.com

  6. Introduction • Between 2004 and 2008, 18 countries in Latin America and the Caribbean made CGE models to reach MDGs. http://www.pnud.cl/MDG/4-1.asphttp://www.econbiz.de/en/search/detailed-view/doc/all/Mexico/10003977752/?no_cache=1 • http://www.palgrave.com/products/title.aspx?pid=400775 • The research we finished have incidence of macroeconomic policies on income distribution and poverty, child and maternal mortality, and potable water and sewage. • With collaboration of UN agencies, ECLAC, UNDP, IFPRI, and IADB, we all implement these models. • Taking into account the 2008 crisis, this CGE calculated the MAMs for five countries. • We work the first Mexican MAMs from 2005 to 2008, and this crisis MAMs from 2009 to 2012. Araceli Ortega araortega@gmail.com

  7. Research Questions • 1. ¿Are the MDGs 2, 4, 5 and 7ab reached in the base scenario? ¿How much is reached and what is the economic growth and public expenditures? • 2. ¿How much will it cost to reach those MDGs using different financial options– in terms of annual average expenditure additional to the base scenario? • 3. ¿What is the impact of each type of financial option in economic growth (trade-offs) and in MDGs and why? • 4. ¿What seems to be the most feasible financial option and recommended, and why? – in terms of resources mobilization with respect to GDP and the accumulated public debt stock with respect of GDP in the relevant cases? Araceli Ortega araortega@gmail.com

  8. Research Questions • 7. ¿How much additional public expenditure is required to reach MDGs once the effects of the crisis are considered? • 8. ¿Will the governments have the capacity to finance a sustainable strategy for MDGs ? • 9. ¿Until what point the public expenditure required to finance the success of MDGs will have a counter cyclical effect over the recovery of economic growth? • 10. ¿How will the above be linked with the current public policies that the government is implementing to dismiss the effects of the crisis? • 11. ¿What will be the impact of an increase in the public expenditure in infrastructure in terms of MDGs achievement? Araceli Ortega araortega@gmail.com

  9. MDG 1990 2003 Goal 2015 Trigger MDG1 Reduce extreme poverty in 50% 0.11 0.04 0.05 Accomplished % of the population with per capita income below to MDG1 1 usd, (PPP ) MDG2 Universal Primary 0.70 0.89 1.00 On track MDG2 (Terminal efficiency in primary education) MDG4 Reduce Child Mortality in 2/3 0.44 0.25 0.15 Far Mortality in children below 5 years old MDG4 (death for every 1,000 births) MDG5 Reduce Maternal Mortality in ¾ 0.89 0.65 0.22 Far MDG5 (deaths for every 100 000 births) MDG7A Reduce in ½ Gap in Water Access 0.75 0.89 0.88 Accomplished (% of HH with potable water inside the HH) MDG7a MDG7B Reduce in ½ Gag in Sewage Access 0.58 0.77 0.79 On track ( % of people in HH with sewage connected to public MDG7b service) Source: Ortega (2012). Mexican MDGs using 2003 as base year Araceli Ortega araortega@gmail.com

  10. Macroeconomy, Finance and Poverty in Mexico. http://www.pnud.cl/mdgproject/NarrativaMexicoFinalSzekelyOrtega.pdf Araceli Ortega araortega@gmail.com

  11. Countercyclical Policy • According to the General Criteria of Economic Policy in the “Secretaría de Hacienda y Crédito Público” the principal instruments of this countercyclical policy are : • “Using non recurrent income like the savings that are in the stabilization funds, • Petrol / oil hedges , • Operational rebate of the Central Bank; and • Exercise a more efficient public expenditure, in which the budget for social development is protected and there is an impulse to investment to contribute and reactivate the Mexican economy and generate savings in key areas of the Federal Public Administration” (SHCP 2010). • This measure takes into account the 15.2% annual real expenditure , an increase in 74.8% of the real investment in infrastructure in the period January-July 2008 with respect to 2009, and an increase in the public investment foster by the public sector of 5.0% of GDP. Araceli Ortega araortega@gmail.com

  12. Aggregate Supply and Aggregate Demand GDP Public Consumption Public Capital Formation GDP* Public Consumption Public Capital Formation GDP** Public Consumption*** Public Capital Formation*** Araceli Ortega araortega@gmail.com

  13. Growth rate of foreign borrowing (fborgrw) and new infrastructure aumento del 74.8% real de la inversión física Mexico was paying less and less interests and the debt was decreasing at an average rate of 1,5% . Notwithstanding, due to the crisis, Mexico asked for an IMF borrowing and the debt increased to 22%, and afterwards it is expected not to increase more than 10% annually (BANXICO, January 2010) . Araceli Ortega araortega@gmail.com

  14. GDP Growth rate at Factor Costs in the “precrisis” and “crisis” scenario, 2003-2015 (percentage) Araceli Ortega araortega@gmail.com

  15. Evolution of income poverty for official Mexican Lines Araceli Ortega araortega@gmail.com

  16. Model: adaptation and calibration. Araceli Ortega araortega@gmail.com

  17. ¿What Model Shall we use? • We need a model that takes into account: • Macroeconomic processes, • Public Policy decisions of the Government, • Consumption-saving decisions of the households, • Effects of the ROW, • Heath of individuals. • The School level of the workers and household members. Araceli Ortega araortega@gmail.com

  18. CGE • We use a Computable General Equilibrium Model (CGEM) designed to reach MDGs and the strategies of economic growth, poverty reduction and inequality. • The key requirement is the creation of a database that summarizes the economy and track the MDG’s for Mexico. Araceli Ortega araortega@gmail.com

  19. MODEL Dynamic GCE Module Static CGE Module MDG Module Micro simulation Module Araceli Ortega araortega@gmail.com

  20. MODEL • Block of prices and Production • Consumption (Household and Government) • Investment (Private and Public) • Trade (Domestic and Foreign) Static CGE Module 62 eq. • Income and Expenditure of Government • Market Restrictions • Macroeconomic Balances (Closures) • Government Balance. • Balance of payments. • Balance of savings and investment. • Factor Markets. • Simulation decisions Araceli Ortega araortega@gmail.com

  21. MODEL Dynamic GCE Module, 15 eq. Associate and Update parameters • Supply Factors • Productivity Factors • Population • Economic Indicators Araceli Ortega araortega@gmail.com

  22. MODEL MDG Module,14eq. • Processes that determine the achievement of MDGs • Provisions of services (health, education, water & infrastructure) • Size and composition of the labor force • Effects of feedback to the rest of the economy Araceli Ortega araortega@gmail.com

  23. MODEL MDG Module Static CGE Module Dynamic CGE Module Micro simulation Module • Poverty and Inequality Analysis. Araceli Ortega araortega@gmail.com

  24. Adaptation and Calibration of the Model • SAM 2003 with 21 activities and21 goods, 8 factor types and 3 instituions types. Araceli Ortega araortega@gmail.com Source: National Accounts, Economic Census, ENIGHs.

  25. SAM 2003: 21 Activities and 21 Goods 1 + 1 + 1+ 6+ 8 + 1 + 1 + 1+ 1 = 21 • Agriculture , Forestry and Fishing • Miner • Manufacture • Health Services: 3 public & 3 private • Education Services: 4 pub & 4 priv. • Water and Sewage services • Other private services • Other government services • Infrastructure Use I-O Matrix for 2003 (RAS from 1980), in 2007 INEGI released 2003 I-O. Araceli Ortega araortega@gmail.com

  26. SAM – Labor types • LAB-N: workers with less than secondary school completed. • LAB-S: workers with secondary school completed and less than high school completed. • LAB-T: workers with high school completed or more. There are three labor types in Mexican SAM-MAMs ENIGH & National Accounts. Araceli Ortega araortega@gmail.com

  27. Institutions in SAM 2003 • HHD- Household, enterprises and NGOs. • GOB- Government • ROW- Rest of the World Araceli Ortega araortega@gmail.com

  28. ¿ Wage? Workers Araceli Ortega araortega@gmail.com

  29. MDG Module: adaptation and calibration Araceli Ortega araortega@gmail.com

  30. ELASTICITIES: Adaptation and calibration 1. Armington (CES): was estimated using error correction method with a quarterly time series 1993-2005: Xd domestic demand of good j , Xi foreign demand of good j. OLS PA ECM Araceli Ortega araortega@gmail.com

  31. ELASTICITIES: Adaptation and calibration 2. LES : Income elasticity of demand for good and services was estimated using a logit model and data from ENIGH-2002, it was an aggregate estimation. QH is the demand of good c by household h, EH is the expenditure of h, PQ is the price of c, γ>0 & ß<1 are the LES parameters, γ is the subsistence parameter and ß the additional marginal unit after consuming γ. Araceli Ortega araortega@gmail.com

  32. ELASTICITIES: Adaptation and calibration 3. CET: We estimated as in CES. 4. Prodelas:Elasticity of substitution among factor for the low part of the technology and was estimated using annual data from 1970-2003 controlling for crisis periods. 5. Logistics:We estimate different models using the determinants of education, health and potable water and sewage. We calibrate the model using this estimations and some initial parameters. It is worth to mention that calculating the elasticities is one of the most difficult parts to complete the data base for a CGE model due to lack of information. Araceli Ortega araortega@gmail.com

  33. MDG MODULE : Adaptation and Calibration • Scenarios : according to different studies we define the different scenarios for the simulations. Araceli Ortega araortega@gmail.com

  34. MDG MODULE : Adaptation and Calibration • Scenarios for the public policies considerate. FINANCE WITH: • Domestic debt • Foreign debt • Fiscal • Foreign endowments Araceli Ortega araortega@gmail.com

  35. Macroeconomic Closures Araceli Ortega araortega@gmail.com

  36. Macroeconomic Closures Araceli Ortega araortega@gmail.com

  37. Macroeconomic Closures Infra, o-gov Araceli Ortega araortega@gmail.com

  38. Macroeconomic Closures Araceli Ortega araortega@gmail.com

  39. Macroeconomic Closures Araceli Ortega araortega@gmail.com

  40. Macroeconomic Closures Araceli Ortega araortega@gmail.com

  41. Macroeconomic Closures Araceli Ortega araortega@gmail.com

  42. MDG Module: Cross Effects Labor Supply MDG 2 TERMINAL EFFICIENTY IN PRIMARY MDG1 Labor remuneration MDG4: Child Mortality MDG 7: Access to water and sewage services MDG5: Maternal Mortality Araceli Ortega araortega@gmail.com

  43. MDG2: Universal PrimaryStudents Behavior Some primary students: • Enter at the official age : 6 year old • Enter later • Pass to next level • Others Fail • Others drop out • Others repeat and • Others enter the labor market. Araceli Ortega araortega@gmail.com

  44. MDG2: Universal PrimaryStudents Behavior PRIMARY SECONDARY HIGH SCHOOL University Araceli Ortega araortega@gmail.com

  45. LABOUR FORCE BEHAVIOUR Endowment of labor type lab in year t (this year) = [no-retired type lab of previous year ] + [entrant type lab graduated of different school levels the previous year] + [entrants type lab drop outs of different school levels the previous year] +[entrants type lab out of schooling system (esp. 12-year old] Araceli Ortega araortega@gmail.com

  46. ¿Do we reach MDG 2, 4, 5 and 7ab in the base scenario? ¿What is reach and at what public cost? Araceli Ortega araortega@gmail.com

  47. ¿Do we reach MDG 2, 4, 5 and 7ab in the base scenario? ¿What is reach and at what public cost? • In the base scenario without crisis we use the macroeconomic rates observed until 2008 and the forecast from 2009 to 2015 estimated before the crisis. • With these assumptions we determine what would be the advance of MDGs in 2015 and we found that if Mexico would have continued with this economic growth and paying the foreign debt (every time smaller), all MDGs except MDG2, would have been reached. • But only MDG1 is reached in the post crisis counter cyclic scenario. • In the post-crisis counter cyclic scenario, the other MDGs are not reached, we need more resources than the ones given by the economic package to increase government expenditure. Araceli Ortega araortega@gmail.com

  48. Child mortality goal for 2015 is 147 deaths for every 10,000 births. In the base scenario of precrisis the goal was reached, whereas in the postcrisis base scenario even with countercyclical policies is not reached. Mexico would need to decrease 5.2 deaths to reach the goal. This result is helped due to the economic package in 2009 that increased health expenditure in 6000 million pesos (mdp) extras in Fideicomiso del Sistema de Protección Social en Salud (Catastrophic expenses), otherwise the situation would be worse. Araceli Ortega araortega@gmail.com

  49. The maternal mortality goal, is the most difficult goal to be reached for Mexico because it implies to decrease the indicator to 0.223 for 2015. This MDG5 could have been reached in 2014 under macroeconomic stability and pre crisis parameters, reaching 0.200 in 2015. In the base scenario post crisis countercyclical is not reached (0.174), it stays in 0.266. Araceli Ortega araortega@gmail.com

  50. ¿How much will it cost to reach MDGs with different financial options– in terms of additional annual expenditure with respect the base scenario? Araceli Ortega araortega@gmail.com

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