IFC M3 Modeling INITIATIVE Measuring the Impact of Private Sector Investments on Jobs Let’s Work Partnership Workshop September 16-17, 2015 Office of the Chief Economist Development Impact Unit

The Impact of IFC Interventions: current and future focus IFC private sector-led interventions in the economy are like dropping rocks in a pond: they generate a direct impact when hitting the water and ripple effects ultimately affecting the poor and bottom 40% … Consumption-Investment Growth Cycle Effects Indirect Effects Increased Public Investment: Education, Health, Infrastructure… Direct Effects Supply Value Chain Jobs Increased Supply Value Chain Output, Profits & Taxes Other Positively Impacted Sectors Jobs Other Positively Impacted Sectors Output, Profits & Taxes Increased Private Investment Total Impact on WBG Twin Goals Construction Operation & Maintenance Jobs Increased Household Income Increased Household Income IFC Intervention Increased Project Output, Profits & Taxes Increased Private Firms Sales, Profits & Taxes Increased Consumption Where IFC focus has been …plus, the impact of joint interventions needs to take into account potential synergies What IFC intends to assess going forward while continuing to improve existing systems

Illustrative example of how RM 3 Illustrative example of how RM 3.0 model works A model linking private sector investments with household income, through job creation and economy-wide growth cycles Impacts of the Construction of a Hydropower Plant (hypothetical figures) Additional Income flows across sectors through spending & investment in the Economy Additional Spending, Savings and Taxes flow again across different sectors in the Economy . . . and the cycle goes on, with a further boost from the project’s operational phase 80 million Additional Household Income 60 million Additional Household Spending 2,000 Construction Induced Jobs Created 1,500 Further Induced Jobs Created 15 million Additional Savings 50 million Additional Taxes 80 million additional household income 75 million additional household income 3,500 Construction Direct & Indirect Jobs Created 10 million Additional Taxes …and Public Invesment improves education, health and productivity Additional households consume and save more …model identifies those within the bottom 40 and those getting out of poverty, through types of jobs created across industries Wider range of households consume and save more …including the estimated impacts on those within the bottom 40 and especially the poor Private Investment to build a new Hydropower plant

…or the macro- dynamics within an entire economy: What does it mean to be systematic and dynamic, and how to leverage existing knowledge? Broadly speaking, System Dynamics Models are representations of all stocks, flows and feedback loops in a system …which could reflect a specific manufacturing line …the dynamics of a specific industry sector: Production Households Capital Unskilled Labor Skilled Labor Intermediate Goods Power wages dividends & interest exports Government local sales non-labor costs taxes IFC RM 3.0 models (M3) will mainly link Micro with Macro: M3 will be a representation of country economies, adopting existing macro models structure M3 will have details of industry/ sector dynamics and inter-relations, based on IFC industry knowledge and expertise. …or the macro- dynamics within an entire economy:

What kind of framework is IFC building to assess development impact holistically? – Balancing theoretical rigor and practicality IFC M3: A Dynamic General Equilibrium Simulation Model using a system dynamics modeling framework, which implies: A General Equilibrium structure that ensures consistency …like in standard CGE models within a Truly Dynamic Setting …providing the ability to trace development impact over time using a Micro-Founded Integrated approach to Labor Markets and Poverty …ensuring interconnectedness between micro and macro under a Flexible, Intuitive and Modular Framework: …allowing us to model specific sectors of interest in more detail, reflect as close as possible how the private sector functions in the real world, and improve communication with our clients and stakeholders

IFC M3 Model Main Components …and specific characteristics of the Philippines Pilot Households 1 - 3 adults in labor force with certain human capital levels (defined by education and age) 0 – 4 dependents Household and population dynamics derived from historical structural transitions observed in micro-data Consumption basket “pseudo - conditional” on total income Labor Market Segmented by education groups, rural and urban areas, and formal and informal sectors (and modeling experience premium through productivity) Demand from sectors and government labor profiles in micro-data Supply by households available types of human capital Dynamic price adjustment as in goods markets (including some degree of wage stickiness) Domestic Sectors 7 inter-related industry sectors: agri crops, other agri, food manufacturing, other manufacturing, power, transportation, services Specific sub-sectors: agri [4 land types], power [4 technologies], transport [air / water / ground] Degree of sector module complexity conditional on sector significance, expertise and data availability Productivity and size: formal large firms, formal SMEs and informal firms. Investments reflecting combinations of goods and services, instead of “abstract “capital Government Collects taxes from households, domestic and external sectors Provides subsidies to targeted households (CCT and rice) Invests in infrastructure cross various sectors of the economy Financial Sector (upcoming) Collects deposits: from households and domestic sectors Provides loans: mainly to the government and domestic sectors Interest rates determined by credit supply and demand External Sector Trade by industries: following domestic sector structure Remittances from labor exports Loan and equity flows to governments and domestic sectors Goods & Services Markets Demand from households, government, domestic and external sectors Supply from domestic and external sectors Dynamic market closure adjustment through price elasticities Note: model components in light blue are still under development, and in some cases included exogenously in the meantime.

Median Wages by Industry and Education for Formal Paid Workers A Micro-Founded Integrated Approach to model Labor Markets – What kind of data is used? 35% 9% 0.2% 7% 1% 48%  % Share M3 exploits available micro-data to characterize labor markets Median Wages by Industry and Education for Formal Paid Workers (Philippino pesos per day, year 2008) Primary Secondary Tertiary Agriculture - Crops 192 208 231 Public Sector 198 488 Manufacturing 250 282 345 Power & Utilities 220 316 400 Transportation 300 423 Finance & Insurance 280 384 Other Services 270 362

An Intuitive and Modular Framework What does the model look like?

A Micro-Founded Integrated Approach to model Labor Markets – What kind of output is generated? Employment in growing sector Employment in declining sector The model provides the capability of following different labor market indicators (by labor type and industry sector) over time. …and relate these to the overall trends of specific sectors and the overall economy

Reported and Simulated Poverty Incidence for Philippines (2000 – 2012) Ensuring Interconnectedness between Micro and Macro: A Micro-Founded Integrated Approach to model Poverty Reported and Simulated Poverty Incidence for Philippines (2000 – 2012)

A Flexible Modular Framework: …incorporating detailed data from the Let’s Work funded study for the Power sector in the Philippines Power Supply for the Philippines from Let’s Work funded study Category, MW IFC Investments, % total capacity Type of Technology,   LRMC, US cents Category 1  2940 MW 6% 2 geothermal plants Natural gas=82% Coal=2% Geo=16%  2.47-3.57 cents Category 2 5296 MW 3% 2 geothermal plants, 1 coal plant, 1 large hydro Coal=82% Geo=10.3% Hydro=7.7% 3.62-4.45 cents Category 3 2066 MW 2% 3 large hydro plant, 1 geothermal plant Coal=1% Renew=1% Geo=5% Diesel/Oil=6% Hydro=87%  4.7-9.02 cents Category 4 575 MW 0% Diesel/Oil (efficient)=100% 9.87-12.17 cents Category 5 655 MW Gas turbine=76% Diesel/Oil=24% 12.37-14.51 cents Category 6 352 MW Diesel/Oil (inefficient)=100% 17.08 cents

A Truly Dynamic Setting: …incorporating detailed data from the Let’s Work funded study for the Power sector in the Philippines we can model how investing in cost-efficient power changes the energy supply mix …and estimate market price effects over time

FAQ When can the model be built? What does the model replace? We already have a functioning pilot draft model (using data for the Philippines), to be vetted, refined an finalized by CY2015-end. What does the model replace? Nothing. It expands existing IFC results measurement frameworks (currently focused on direct & indirect job creation), toward better estimation of IFC impact on WBG twin goals. How does it relate to other macro models? It leverages existing frameworks developed by the WB (MAMS, MFM, Micro-Simulation), IMF (fiscal sustainability) and others (GTAP), while focusing on linking micro (IFC & private sector interventions across sectors) to macro (poverty and bottom 40%). Do we need a model for each project? No, the model represents the main sectors in the economy and quantifies impacts of “representative investments” of a given magnitude in a given sector, and in particular total impact of an investment program across sectors. What data is required to build the model? Standard macro data from national accounts, recent input-output tables, household-level data on labor, income & expenditures, firm-level and/or business census surveys, central bank data on financial sector, population, education and demographics; plus data or research on specific sectors when available. Can non-technical people understand the model? The system dynamics framework was chosen because it is not a black box – all data input and logical linkages can be easily traced through. In fact, the modeling team works jointly with IFC industry staff and external experts on conceptual models of individual sectors and sub-sectors. A user-interface will be developed to allow non- technical users to “play” with the model, creating scenarios by adjusting various inputs and run different simulations.

Thanks !