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Poverty Analysis Macroeconomic Simulator (PAMS) and PSIA with an application to Burkina Faso. Jan Walliser Senior Economist The World Bank. Outline of the Presentation. Introduction PAMS: Inputs and Outputs A brief tour of PAMS A Set of Policy Experiments.
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Poverty Analysis Macroeconomic Simulator (PAMS) and PSIA with an application to Burkina Faso Jan Walliser Senior Economist The World Bank
Outline of the Presentation • Introduction • PAMS: Inputs and Outputs • A brief tour of PAMS • A Set of Policy Experiments
Introduction: why “macro”PSIA? • Changes in the macro frameworksuch as the fiscal, inflation and exchange rate targets? How do they affect the poor? • Exogenous shocks such as trade shocks, capital flows volatility, changes in foreign aid and foreign payment crises? How can policy mitigate these effects on the poor?
Introduction: why “macro” PSIA? • Improving public expenditure targeting? How can public expenditure be better targeted? • Structural reforms such as trade policy, privatization, agricultural liberalization? How are the poor affected?
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
The Logic of PAMS • Three Recursive Layers Consistent with Incidence Approach • Macro-framework: GDP, national accounts, taxes & government spending, BOP, prices • Labor model breaking down population by skill level and economic sectors using categories from HHS • Model to simulate income changes by group, allowing calculation of poverty incidence and inter-group inequality
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.)
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
PAMS: Inputs and Outputs • Micro input • Macro input • Micro-Macro Linkage
PAMS: Micro Input • Household Survey Data • Expenditure or income • Size of household • Household weight in population • Data arranged by socioeconomic groups of representative households
PAMS: Macro Input • Macro framework from any macro consistent model (IMF macro projections, World Bank’s RMSM-X model, other domestic macro models) Aggregate variables (GDP, BOP, fiscal accounts, monetary accounts, inflation)
PAMS: Micro-Macro Linkages • Labor market module breaks down the economy into sectors: rural/urban, formal/informal, tradable/non-tradable • Labor supply is driven by exogenous factors • Labor demand is demand is broken down by sector, skill level and location and depends on sector demand and real wages • Labor model produces wage income by representative households of SEG and location based on income aggregates, group-specific tax and transfer variables
PAMS: Micro-Macro Dynamics • Base year as starting point • Simulation of macro variables/population • Simulation labor demand and supply, wages and incomes by groups • Simulation of changes in HH-level income data to calculate poverty indicators assuming unchanged intra-group distribution of incomes
PAMS: Outputs • 1. Standard macroeconomic Indicators • 2. Standard poverty and inequality indicators (P0, P1, P2, Gini, etc.) • 3. Poverty decompositions: Growth, inequality and population effects with respect to P1 and P2
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)
Macro-Framework PAMS House H. Survey DEBT Results RMSM-X MEMAU Int. PAMS Micro Meso Assum PAMS
Simulation with PAMS Update Macro Update Earning & Trans. Module Pov. & Ineq Simul. Scen. Household survey Pov. & Ineq Baseline Scen. Iteration Process
PAMS: Burkina Faso • 1994, 1998, 2003 HHS • Longstanding macroeconomic Program with IMF • HIPC CP in 2000 (original) and enhanced (2002, with topping up) • Growth rates averaging 5 percent • Largely rural population
PAMS: Burkina Faso • Poverty rates (1998) of 45 percent based on national poverty line (which is below $1/day) • Cotton as major cash crop – 50-60 percent of exports, and significant growth of cotton production • Cereal production stabilized due to promotion of small-scale irrigation
PAMS development • Work started before 2003 HHS in context of PRSP • Interest in having better handle on poverty projections using macro-growth projections • Home-grown excel-based macro-model (IAP) with technical assistance of GTZ • Collaboration on PAMS based on 2003 HHS • PAMS model linked to IAP output tables
PAMS development • PAMS model linked to IAP output tables with support from local GTZ adviser and team • Close collaboration with macro forecasting division in Ministry of Economy and Development • (Political) challenge: integration of 2003 HHS because of weaknesses in data analysis
Lessons learned • Strong payoffs of building a close early collaboration with the government forecasting team • Close collaboration with the local GTZ technical assistance crucial • Close involvement of World Bank country office staff essential • Need to make greater allowance for the collection and analysis of poverty data when embarking on PAMS modeling