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

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

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

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

Introduction Policy Challenges n 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”).

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

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

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

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 Socioeconomic Groups (Max =18) Household Survey (HHS, Exp, Income, Size, Weight, SEG) Template + Interface Sheet

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

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

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

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

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

Structure and Property of PAMS

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

Total Production Rural ProductionUrban Production Tradable (1)Non-Tradable (2) Public (4)Private Y,  from Macro- consistent F X,  from Macro- consistent F Exogenous Formal Informal (3) Tradable (5)Non-Tradable (6) Production

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

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

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

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

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

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

Simulation Exercise

The Way Forward