Application of PAMS: Extended Financial Programming to Poverty Reduction Strategies

1. DECVP - World Bank The Impact of Economic Policies on Poverty and Income Distribution Application of PAMS:Extended Financial Programming to Poverty Reduction Strategies PREM LEARNING WEEK, MAY 3-7, 2004 Issouf Samake Isamake@worldbank.org

2. Outline of the Presentation • Introduction • PAMS: Inputs and Outputs • A brief tour of PAMS • Simulation Process • Extended FP to the Poverty Reduction Strategies • A Policy Experiment

3. Introduction • Policy Challenges • Changes in the macro frameworksuch as the fiscal, inflation and exchange rate targets? How can policy make the best use between the trade-offs between several objectives? • Exogenous shocks such as trade shocks, capital flows volatility, changes in foreign aid and foreign payment crises? How can policy mitigate these effects?

4. Introduction • Policy Challenges • Improving public expenditure targeting? How can public expenditure and revenue be better monitored and improved? • Structural reforms such as trade policy, privatization, agricultural liberalization and price decontrol? How policy could sequence these reforms?

5. Introduction • Policy Challenges • Quality of governance in its relation to investment and to growth (through the effect on the perceptions by private investors of the stability of the business environment in which they will operate, i.e. the “investment climate”).

6. Introduction • Modeling Implications and Challenges • Maintain simplicity of macroeconomic consistency frameworks (e.g., RMSM-Xs or other country-based models) • Link macro-consistency frameworks directly with household survey data

7. The Logic of PAMS • Three Recursive Layers Consistent with Incidence Approach • Macro-framework: Aggregate growth and inflation • Functional Distribution of Means of Livelihood: earnings and non-earnings • Size Distribution of Economic Welfare

8. General Structure : 3 Layers Top-down HHL "micro-simulation" approach Macroeconomic Model Macro Accounting (RMSM-X), CGE (123), Econometric Layer 1: Macro Sectoral Disaggregation, Factor Markets  Linkage Aggregate Var For k representative groups of households Layer 2: Meso Household Survey (HHS), i individual households, Macro "consistent" changes in real household incomes and change in the distribution of welfare Layer 3: Micro (yi) with poverty line, z,  indicator of poverty Pi for each household i and indicators of within-group inequality (e.g., Gini, etc.)

9. Limitations • Not all policy challenges covered • PAMS best suited to simulate poverty and distributional implications of: • PRSP-PRGF macro baseline scenarios • Sensitivity analysis along the base case • Sectoral growth scenarios • Average tax burden (standard incidence analysis) • Average social transfer

10. PAMS: Inputs and Outputs • Micro input • Macro input • Micro-Macro Linkage

11. PAMS: Micro Input • Socioeconomic Groups (Max =18) • Household Survey (HHS, Exp, Income, Size, Weight, SEG) • Template + Interface Sheet

12. PAMS: Macro Input • Macro framework (FP Models, 1-2-3 Model, RMSM-X, Macro econometric Model, Flow of Funds, etc) • Transmission channel= country specific • Labor Market • Template + Interface Sheet

13. PAMS: Micro-Macro Linkages and Closing Rules • SEG: Occupation by sector/Source and composition of revenues • Base year: Population, Labor D & S, Wages and Incomes +HHS weights and Sizes

14. PAMS: Micro-Macro Linkages and Closing Rules • Dynamic: Population, Labor D & S, Wages and Incomes + HHS weights and Sizes • Base year and adjustment of the macro framework base year

15. PAMS: Outputs • 1. Standard macroeconomic Indicators • 2. Standard poverty and inequality indicators (P0, P1, P2, Theil, Gini, etc.) • 3. 2 Poverty decompositions: Growth, inequality and population effects; with respect to P1 and P2

16. PAMS: Outputs • 4. Pro-poor growth indicators • Pro-poor growth index (Kakwani and Pernia, 2000) • Growth Incidence Curve (Ravallion and Chen, 2003) • Poverty Equivalent Growth Rate (Kakwani and Son, 2003) • Labor market indicators + 41 Charts

18. Structure and Property of PAMS

19. Structure of Current Version RMSM-X Debt Module Layer 1: Macro Macro-Framework Core Module PAMS PAMS Outputs Layer 2: Meso Household Survey Data Layer 3: Micro

20. Y, s from Macro-consistent F Exogenous Production Total Production Rural Production Urban Production Formal Tradable (1) Non-Tradable (2) Private Public (4) Informal (3) X, E from Macro-consistent F Tradable (5) Non-Tradable (6)

21. Macro-Framework PAMS House H. Survey DEBT Results RMSM-X MEMAU Int. PAMS Micro Meso Assum Operational PAMS

22. Property of PAMS • Simultaneous and Sequential comparison of different models and scenarios • Macro level • Micro level • Core module level

23. Simulation with PAMS Update MEMAU Update Earning & Trans. Module Pov. & Ineq Simul. Scen. Household survey Open for Macro Pov. & Ineq Baseline Scen. Iteration Process

24. Financial Programming(FP) with PAMS • Integration: Macro framework and Poverty Toolkit • Polak or the extended framework • The RMSM-X • 3-Gap Model • 1-2-3 Model • Lags & Behavioral Functions

25. Financial Programming(FP) with PAMS • FP Exercise: • Closure 1: Set policy instruments and derive optimal output and inflation • Closure 2: Target output and inflation and assess optimal policy response • Set policy policy and reforms

26. Financial Programming(FP) with PAMS • Extended FP Exercise: • Pov. Closure 1: Poverty target and imply closer 1 or 2 by iterations (2 scenarios) • Pov. Closure 2: chose closer 1 or 2 and then derive the poverty responses (2 possible scenarios) • Set pro-poor policy and reforms

27. Simulation Exercise

28. The Way Forward