1. 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

2. 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

3. 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

4. …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:

5. 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

6. 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.

7. 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

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

9. 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

10. 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)

11. 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% 
cents
Category 2
5296 MW 3%
2 geothermal plants,
1 coal plant,
1 large hydro
Coal=82%
Geo=10.3%
Hydro=7.7%
cents
Category 3
2066 MW 2%
3 large hydro plant,
1 geothermal plant
Coal=1%
Renew=1%
Geo=5%
Diesel/Oil=6%
Hydro=87% 
cents
Category 4
575 MW 0%
Diesel/Oil (efficient)=100%
cents
Category 5
655 MW
Gas turbine=76%
Diesel/Oil=24%
cents
Category 6
352 MW
Diesel/Oil (inefficient)=100%
17.08 cents

12. 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

13. 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.

14. Thanks !