Riga 18th June 2008 EU funds macroeconomic impact assessment for Latvia Alf Vanags BICEPS

Riga 18th June 2008 The project To evaluate the macroeconomic impact of the structural funds using best international practice Evaluation for two time periods: – programming period – programming period Two phases: –Partial equilibrium –General equilibrium (modelling)

Riga 18th June 2008 Data issues Funds financial data comes in administrative form Not very useful for economic analysis Requires transformation into economic categories Production function approach

Riga 18th June 2008 Expenditures that enter the production function Y = AF(K,L) K: Physical capital: expenditures that augment the stock of capital L: Human capital: expenditures that augment skills and are embodied in people. L = NxH A:Expenditures that enhance total factor productivity: but are not embodied in physical capital or people F:Expenditures that change technology: expenditures that change the way output is produced eg shift to wind power, and correspond to changes in F.

Riga 18th June 2008 AFKL 1.1. Infrastructure99.31%0.00%0.69%0.00% 2.2. Productive environment12.52%8.22%79.26%0.00% 3.3. Human resources0.00% % 4.4. Agriculture and fishery18.73%0.00%80.16%1.12% 5.5. Technical assistance100.00%0.00% Comparison of SPD priorities and economic categories ( )

Riga 18th June 2008 The model Five sector model of the Latvian economy –Manufacturing (tradable goods) –Private (market) services –Construction –Agriculture –Public services (health, education) For funds are subtracted from actual to get no funds scenario For funds added to a no funds base line

Riga 18th June 2008 The economics of the model Demand –Keynesian –Distributed across sectors through input/output relationships Supply –All sectors except public services explicitly modelled with Cobb-Douglas production functions External balance –Imports and exports not explicitly modelled –Balance = Output -Expenditure

Riga 18th June 2008 Key indicators of interest GDP Inflation Productivity Budget balance Efficiency of funds

Riga 18th June 2008 Interpretation Results are NOT a forecast!! They represent the difference between with and without funds Some important uncertainties –Crowding out –Here we report 30% crowding out –Crowding out can include ‘rent seeking’ and other ‘wasted resources’

Riga 18th June 2008 Impact on GDP programming period

Riga 18th June 2008 Impact on prices programming period

Riga 18th June 2008 Impact on GDP programming period

Riga 18th June 2008 Impact on prices programming period

Riga 18th June 2008 Impact on the trade balance

Riga 18th June 2008 Impact on the budget balance

Riga 18th June 2008 Impact on productivity

Riga 18th June 2008 Results for the programming period GDP cumulative Inflation (cumulative increase in price level) Employment (cumulative) Budget % of GDP Trade balance % of GDP Productivity (cumulative)

Riga 18th June 2008 Results for the programming period GDP cumulative increase Employment Labour productivity Consumer price level Government budget balance, percentage points of GDP Trade balance, percentage points of GDP

Riga 18th June 2008 Efficiency of funds A standard measure: –Cumulative policy multiplier –(cumulative change in real GDP)/(cumulative share of funds in nominal GDP) Represents the return of the funds measured in terms of the overall GDP impact Results:

Riga 18th June 2008 Some final remarks Overall positive effect of funds confirmed Limited impact on macroeconomic imbalances of recent years Results still preliminary … robustness checks ongoing Delay in implementing new funds may prove fortuitous