Simple Macroeconomic Model for MDGs based Planning and Policy Analysis Thangavel Palanivel UNDP Regional Centre in Colombo OutlineOutline ofof thethe presentationpresentation •• MDGMDG consistentconsistent SimpleSimple MacroeconomicMacroeconomic frameworkframework (SMF)(SMF) •• NeedNeed forfor aa macroeconomicmacroeconomic modelmodel forfor MDGMDG basedbased planningplanning •• CommonlyCommonly usedused modellingmodelling approachesapproaches •• BestBest strategystrategy inin modelmodel buildingbuilding •• SMFSMF processprocess andand stepssteps •• TentativeTentative trainingtraining schedulesschedules forfor SriSri LankaLanka MDGMDG consistentconsistent SMFSMF (1)(1) MDGMDG--consistentconsistent SMFSMF isis thethe frameworkframework thatthat •• providesprovides aa setset ofof sectoralsectoral projectionsprojections consistentconsistent withwith eacheach otherother andand alsoalso withwith macroeconomicmacroeconomic goalsgoals andand policiespolicies,, andand •• takestakes intointo accountaccount thethe levellevel andand compositioncomposition ofof investmentinvestment requiredrequired toto achieveachieve MDGMDG targetstargets andand itsits potentialpotential effecteffect onon thethe economy.economy. MDGMDG consistentconsistent SMFSMF (2)(2) ExamplesExamples ofof MDGMDG consistentconsistent macroeconomicmacroeconomic frameworkframework •• ProjectionsProjections ofof realreal sectorsector (i.e.,(i.e., growth,growth, consumption,consumption, investment,investment, etc)etc) needneed toto bebe consistentconsistent withwith projectionsprojections ofof fiscal,fiscal, monetarymonetary andand externalexternal sectorssectors andand MDGMDG targetstargets •• ProjectionsProjections ofof fiscalfiscal accountsaccounts (revenue,(revenue, expenditures,expenditures, fiscalfiscal balance)balance) needneed toto bebe consistentconsistent withwith real,real, external,external, andand monetarymonetary sectorsector projectionsprojections andand MDGMDG financingfinancing requirements.requirements. MDGMDG consistentconsistent SMFSMF (3)(3) •• SectoralSectoral projectionsprojections needneed toto bebe consistentconsistent withwith nationalnational developmentdevelopment goalsgoals andand targetstargets suchsuch asas growth,growth, poverty,poverty, inflation,inflation, etc.etc. •• InvestmentsInvestments basedbased onon MDGMDG NANA maymay createcreate somesome imbalancesimbalances amongamong macromacro variables.variables. DevelopingDeveloping MDGMDG consistentconsistent macroeconomicmacroeconomic frameworkframework isis aa processprocess toto provideprovide policypolicy optionsoptions toto addressaddress itit.. ObjectivesObjectives ofof MDGMDG consistentconsistent SMFSMF •• ProvideProvide inputinput forfor preparingpreparing MDGMDG basedbased longlong termterm developmentdevelopment planningplanning •• StrengthenStrengthen coherencecoherence betweenbetween planningplanning andand MTEF/budgetaryMTEF/budgetary frameworkframework •• ProvideProvide aa monitoringmonitoring && evaluationevaluation frameworkframework •• SupportSupport thethe nationalnational policypolicy dialoguedialogue && negotiationsnegotiations withwith developmentdevelopment partnerspartners MacroeconomicMacroeconomic ModelModel •• MacroeconomicMacroeconomic modelsmodels areare numericalnumerical representationsrepresentations ofof economiceconomic theory,theory, intuitionintuition andand data.data. •• TheyThey highlighthighlight thethe importantimportant linkageslinkages andand transmissiontransmission mechanismsmechanisms inin thethe economyeconomy •• TheyThey provideprovide aa consistentconsistent frameworkframework withinwithin whichwhich behaviouralbehavioural relationshipsrelationships areare storedstored andand policypolicy issuesissues examined.examined. NeedNeed forfor aa MacroeconomicMacroeconomic ModelModel forfor MDGMDG basedbased Plans?Plans? (1)(1) •• SocioSocio--economiceconomic variablesvariables interactinteract inin aa complexcomplex manner;manner; aa macroeconomicmacroeconomic modelmodel helpshelps toto understandunderstand thethe complexcomplex interactioninteraction •• ItIt helpshelps inin developingdeveloping aa MDGMDG consistentconsistent macroeconomicmacroeconomic frameworkframework whichwhich isis keykey forfor formulatingformulating MDGMDG basedbased nationalnational plans.plans. •• ItIt alsoalso helpshelps inin undertakingundertaking exex--postpost andand exex--anteante policypolicy impactimpact assessmentassessment andand monitoringmonitoring whichwhich areare keykey forfor designingdesigning MDGsMDGs orientedoriented policies/strategies.policies/strategies. NeedNeed forfor aa MacroeconomicMacroeconomic ModelModel forfor MDGMDG basedbased Plans?Plans? (2)(2) •• ItIt complementscomplements thethe workwork onon MDGMDG sectoralsectoral needneed assessmentsassessments towardstowards preparingpreparing MDGMDG basedbased planplan •• BecauseBecause itit analyzeanalyze thethe impactimpact ofof scalingscaling upup expenditureexpenditure andand assessesassesses thethe ‘‘absorptiveabsorptive capacitycapacity’’ ofof thethe economyeconomy •• ItIt isis alsoalso usefuluseful inin addressingaddressing somesome emergingemerging issuesissues suchsuch asas thethe impactimpact ofof crudecrude oiloil andand foodfood priceprice increases.increases. MajorMajor ApproachesApproaches inin MacroeconomicMacroeconomic ModellingModelling • Macroeconometric Approach (i.e., ME Models) • Computable General Equilibrium Approach (i.e., CGE Models) – (focuses on modelling approaches, not on specific models) Macroeconometric Models •• MainMain purposepurpose isis toto produceproduce shortshort--termterm forecastsforecasts oror longlong--termterm outlookoutlook andand policypolicy evaluation.evaluation. •• MainMain strengthstrength lieslies inin theirtheir abilityability toto estimateestimate robustrobust parametersparameters •• MainMain weaknessweakness isis thatthat thethe parametersparameters maymay notnot properlyproperly capturecapture thethe changeschanges inin thethe policypolicy regimeregime.. CGECGE ModellingModelling •• CGECGE modellingmodelling isis aimedaimed toto incorporateincorporate micromicro behaviourbehaviour intointo macroeconomicmacroeconomic analysisanalysis •• MainMain purposepurpose isis policypolicy evaluationevaluation.. •• ButBut areare complexcomplex andand datadata--demandingdemanding (detailed(detailed inputinput--outputoutput matrixmatrix forfor aa year)year) KeyKey DifferenceDifference betweenbetween MEME andand CGECGE ApproachesApproaches •• MEME modellingmodelling:: parameterparameter valuesvalues areare estimatedestimated usingusing econometriceconometric techniquestechniques •• CGECGE modellingmodelling:: parameterparameter valuesvalues areare drawndrawn fromfrom aa varietyvariety ofof sourcessources –– PriorPrior econometriceconometric studiesstudies –– OtherOther simulationsimulation modelsmodels –– IntuitionIntuition andand judgmentjudgment ChoosingChoosing AmongAmong ApproachesApproaches •• NoNo singlesingle economiceconomic modelmodel oror approachapproach cancan fullyfully capturecapture allall thethe interactionsinteractions andand impactsimpacts •• DifferentDifferent modelsmodels areare designeddesigned forfor differentdifferent purposespurposes •• AA modelmodel mustmust ultimatelyultimately bebe judgedjudged onon whetherwhether itit answersanswers thethe questionsquestions itit waswas designeddesigned toto answeranswer NoNo ““OneOne SizeSize FitsFits AllAll”” ModelModel BestBest StrategyStrategy inin ModelModel buildingbuilding • Start small: Go small to large • Start simple: Go from simple to complex • Choose approach (ME or CGE models) depending upon objectives and data availability • Choose software (EViews, Vensim, Gams) depending upon modelling types • Keep it transparent – avoid any ‘black-box’ syndrome • Develop several models instead of try to address all issues by one model • Have always two versions of the model: one operational and another in development RollRoll--outout ExperienceExperience ofof SMFSMF inin AsiaAsia andand thethe PacificPacific •• SMFSMF hashas alreadyalready beenbeen appliedapplied inin BhutanBhutan andand MongoliaMongolia.. •• InIn Bhutan,Bhutan, thethe modelmodel hashas beenbeen usedused forfor thethe preparationpreparation ofof 1010th FiveFive--YearYear Plan.Plan. •• InIn Mongolia,Mongolia, thethe modelmodel hashas beenbeen usedused forfor formulationformulation ofof MDGMDG strategiesstrategies andand MTEFMTEF •• ThereThere areare requestrequest fromfrom aa fewfew moremore countriescountries (e.g.,(e.g., LaosLaos andand NepalNepal)) •• KeyKey aspectsaspects ofof thethe SMFSMF rollroll--outout areare givengiven below:below: SMFSMF InitialInitial considerationsconsiderations-- whatwhat wewe wantedwanted •• AA simplesimple projection/policyprojection/policy evaluationevaluation modelmodel takingtaking intointo considerationconsideration ofof thethe specificitiesspecificities ofof LDCsLDCs •• CapableCapable ofof analyzinganalyzing MDGMDG resourceresource needsneeds andand policypolicy optionsoptions inin anan integratedintegrated frameworkframework •• ComprehensivenessComprehensiveness –– enoughenough disaggregationdisaggregation inin thethe realreal andand fiscalfiscal sectorssectors toto analyseanalyse thethe macroeconomicmacroeconomic impactimpact ofof scalingscaling--upup ofof publicpublic expendituresexpenditures •• LongLong--TermTerm perspectiveperspective untiluntil 20152015 •• UserUser--friendlinessfriendliness andand locallocal expertiseexpertise •• TimelinessTimeliness –– sixsix monthsmonths toto completecomplete