Macro Economic Policy Analysis Applications

1. You cannot solve the problem with the same thinking that created the problemAlbert Einstein Macro Economic Policy Analysis Applications Dr. John Shilling Millennium InstituteJanuary 28, 2013

2. Introduction • Millennium Institute is devoted to helping decision makers achieve sustainable development • Its Threshold 21 model is an innovative system dynamics approach to help strategic decision making • I worked at the World Bank and have been involved with MI since I retired. • At the Bank, I learned the limitations of conventional models, which led me to T21

3. Out of Macro Economic Box • The T21 China model illustrates the importance of moving outside of the Macro economic modeling box • It is clear that the economy depends on the environment and society to function, • So the relations of economic activity with these areas must be taken into account • This includes addressing externalities, the commons, and public goods • MI has many more examples with its applications of T21 around the world

4. Moving Beyond the M-E Box • The impacts of economic activity on other areas are well known – pollution, GHG emissions, resource depletion, etc. but are rarely taken into account in the conventional models • The positive and negative feedbacks can be quite important and reverse expected results • It is important to develop a more complete view of these activities, even as it adds to complexity • Much can be learned by holding discussions of these relations among experts in different areas.

5. S D Modeling Gets Out of the Box • It is based on real world causal relations • The T21 model is adapted to individual countries based on their particular situation • Local data is the basis for the modeling • Valid local sector models can be incorporated • Local experts are involved to describe the critical causal relations and visioins from their sectors, which expands the scope of the model and deepens their confidence • Local advisors help define the issues to focus on and policies to examine in the scenarios

6. Causal Diagram Example Society Economy Environment Legend: ➝ (+) Positive link ⇢ (-) Negative link

7. Advantages of T21 Approach • Incorporates cross sector relations based on real world causal relations • Takes account of long term effects, which may indicate tipping points and ‘cliffs’ • Includes impacts of resource depletion, climate change, population shifts, etc. • Illustrates and compares the effects of different sets of policies on all indicators to bring policymakers together

8. Examples of Its Application • China on energy, food, population, and GHG emissions • USA on CAFE Standard • Mali on meeting growth targets • Natural disasters in Jamaica • Food security for IFAD • Green Economy for UNEP

9. USA: Impact of CAFÉ on GDP

10. USA: GHG Emissions

11. Examples of Its Application • China on energy, food, population, and GHG emissions • USA on CAFE Standard • Mali on meeting growth targets • Food security for IFAD • Green Economy for UNEP

12. Contributions of T21 • Learn about important relations in country • Improve data base • Bring together many interest groups to work together on cross sector issues • Illustrate results of different policies to reach decisions about policies for common good • Demonstrate values of policies to public • Provide basis for monitoring and evaluation

13. Application of T21 • Identify partners to work with in country, establish an advisory council, and gather data • Train team of local experts to use and further develop the model • Create with local team a fully functional model and transfer it to the country • Examples of many cases on our website: www.millennium-institute.org

14. Thank You for Your Attention Questions and comments are welcome www.millennium-institute.org Jed.shilling@verizon.net