1. Quantitative assessment of the impact of the NDP/NSRF using a macroeconomic model for the Czech Republic   Project 05/5 Ministry of Regional Development – Czech Republic Prague, 23 November 2006 Final presentation
GEFRA EMDS IREAS

2. Report: Table of contents, I
Overview about the results
Modelling the Czech Economy
The HERMIN modelling framework
The new HERMIN model for the Czech Republic
4.1 Some characteristics of the Czech Economy
4.2 Some characteristics model results (equations)

3. Report: Table of contents, II
5. The NSRF Evaluation
5.1 How to analyse the Structural Fund interventions (demand and supply-side effects)
5.2 Implementation into HERMIN
5.3 Some detailed results
6. The future of the Czech NSRF Evaluation
A series of technical annexes

4. 1. Overview of the results
During the implementation phase (nine years instead of the formal seven year SF interventions) two separate mechanisms work:
The demand side effect (mainly through programmes of public and accompanying private investment)
The supply-side effect which work through the build-up of stocks of infrastructure, human capital and R&D.
After the termination of the programmes in 2015 the demand side effects will vanish rapidly but the supply-side effects will remain for a longer period.

5. 1. Overview of the results, continued
When measuring the impact of the NSRF it is important to distinguish between
Level effect
Growth effect
The Level-effect compares the economic outcome relative to a baseline-scenario and can be expressed as a percentage or absolute difference from the baseline.
The Growth-effect compares the different growth rates within one scenario with the growth rates in a baseline scenario.
Even if there are large level effects the growth rates can be very similar.

6. 1. Overview of the results, continued

7. 1. Overview of the results, continued
Revised expenditure profile of the NSRF (euro million per year)
And as % of the NSRF per year

8. 1. Overviewof the results, continued
Effects of the NSPF on the real Czech GDP
Level effect compared to the baseline as %-difference
Growth rates effect, as % difference
Gradually increasing impact on the level of GDP compared to the baseline-scenario (without NSRF), even in 2020 the level about 2% percent higher then without the NSPR
Moderate differences up to one percent during the implementation phase and a significant difference in 2016

9. 1. Overview of the results, continued
In 2007 the initial effect on employment compared to the no-NSRF baseline is just over 20 thousand, given the initial low injection by the SF
In 2013 this has built up to and is still in 2015.
In 2020 total employment is still higher.
The NSRF introduces extra productivity gains of around 1% over the baseline. This is notable since even in the baseline there is are substantial increases in productivity.

10. 2. Modelling the Czech Economy
Very limited modeling research of the Czech economy
Only recently policy-making institutions (MoF or the Central Bank) set-up a structural approach to economic modeling
Not all material is in the public domain!
Lack of long data series is a serious problem
Models developed have a main focus on:
Monetary and fiscal policy issues and
Long-term growth, structural change and convergence prospects.

11. 3. The HERMIN Modelling Approach A pictorial outline of the model

12. Important economic relationships
Output: Exposed and sheltered sectors
Production inputs: Labour and capital
Output prices: Price taking and price making
Wage determination: Bargaining and sectoral transmission
Labour supply: natural growth, migration, participation
Consumption: Is there a liquidity constraint?
Trade: Modelled as a net trade balance (exports minus imports)
Government: General government expenditure, revenue and balance

13. What determines sectoral output?
Manufacturing: Local & external demand; competitiveness
Market services: Local demand
Agriculture: Productivity
Government: Public employment

14. What determines production inputs?
Output
Cost of labour compared to cost of capital
Technical progress

15. What determines output prices?
Manufacturing: World prices, labour costs
Market services: Labour costs
Building and construction: Labour costs
Agriculture: Common Agricultural Policy (CAP)

16. What determines wage rates?
Consumer prices
Output prices
Productivity
Unemployment rate

17. What determines labour supply?
Population growth, but more specifically
Working age population growth
Participation rate
Net migration flows

18. What determines household consumption?
Income, but more specifically
Household income, but more specifically
Household disposable income
Wealth??

19. What determines trade?
National data on exports and imports are available
Net regional trade balance (NTS) determined as production (GDPM) less regional absorption (GDA)
NTS = GDPM - GDA

20. What determines general government revenue and expenditure?
Revenue: Tax bases and tax rates
Expenditure: Policy decisions (discretionary) as well as policy rules (automatic)

21. Model calibration
“Old” EU models: Simple econometrics (OLS), using data for period
Czech national model: Curve-fitting and selective parameter imposition, using data for period
Other approaches to calibration:
(i) Extend data sample, using pre-1995 (or even pre-1989) data?
(ii) Panel data from group of countries (imposing cross-country constraints)

22. HERMIN documentation Data-based description of the economy
Theoretical underpinnings of the HERMIN modelling framework
Calibration of the behavioural equations
Model testing: simulations and shocks
Data appendix, model listing: public domain
Standardised software:

23. Uses of a HERMIN-type model
Preparation of economic forecasts
General economic policy analysis
NSRF-related policy analysis
Design/evaluation of national industrial strategies

24. Preparation of economic forecasts
Short-term national forecasts (12 months) are widely available
Medium-term national forecasts (up to 5 years) are very rare
Long-term economic forecasts of any kind are not usually available

25. 4. The new HERMIN model for the Czech Republic Shocking the model to test its properties

28. 5. The NSRF Evaluation How to analyse the SF interventions

29. Construction phase vs Use phase for cohesion policy
During construction phase, there will be large demand-side impacts. These vanish after completion (i.e., after 2013 for next NSRF)
Increased stocks of infrastructure, human capital and R&D can generate long-tailed supply-side impacts
The size of the supply-side impacts depend on the appropriateness and effectiveness of the NDP

30. Inserting a CSF/NDP into HERMIN
The three aggregate elements of a CSF
(a) Physical infrastructure
(b) Human resources
(c) Direct aid to productive sector
Conventional Keynesian expenditure and income impacts (role of policy multiplier)
Additional externality effects on output and productivity

31. Implementation versus Use phase in evaluation
During the implementation phase, there will be large demand-side impacts. These vanish after completion (i.e., after 2013/15 for next NSRF)
Increased stocks of infrastructure, human capital and R&D can generate long-tailed supply-side impacts
The size of the supply-side impacts depend on the appropriateness and effectiveness of the NSRF

32. Physical infrastructure: PI
Demand-side impacts (implementation):
PI  IG  I (total investment)
 (Keynesian multiplier)
 impact on GDP
Supply-side impacts (mainly post-implementation):
PI  increased stock of infrastructure (KPI)
 boost to output/productivity

33. Human resources: HC Demand-side impacts (implementation):
HC  Income & Public expenditure
 Keynesian multiplier
 GDP
Supply-side impacts (mainly post-implementation):
HC  stock of human capital (KHC)
 boost to output/productivity

34. Research and Development
Demand-side impacts (implementation):
R&D  I (total investment)
 (Keynesian multiplier)
 impact on GDP
Supply-side impacts (mainly post-implementation):
R&D  increased stock of R&D (KRD)
 boost to output/productivity

35. A serious methodological challenge
Ex-ante impact analysis of “yet-to-be-implemented” NDPs
Is the NSRF appropriate? How effective will be the implementation?
Strict monitoring and evaluation can help, but do not guarantee success

36. Infrastructure, human capital and R&D: interaction effects
The links between infrastructure, human capital and R&D are difficult to measure.
A parallel improvement in all three is probably necessary
But we cannot say much about the optimum balance between them within an NSRF

37. Where do the spillover measures come from?
International literature on the impact of PI and HC on output and productivity
Comprehensive ESRI survey
Recent survey of HC impacts by IFS
Problems:
very little from cohesion countries!
nothing from CEE countries
no agreement on size of impacts!
no agreement on level versus growth impacts!

38. Presenting model-based cohesion policy impacts
Difficult to define an appropriate counterfactual baseline scenario.
Difficult to assign values to the spill-over (or externality) elasticities to different countries in he absence of empirical research.
Macro impacts are complex, and GDP is an imperfect indicator

39. 5. The NSRF Evaluation

49. 6. The future of the Czech NSRF Evaluation
Summing up:
the NSRF interventions will have a large impact on the level of GDP during the implementation phase up to 4.5% of GDP until 2015 compared to a baseline scenario and
in the long-run the level of GDP will be around 1.5% higher
there will be extra productivity gains and
employment will be higher then in the non-NSRF scenario.
Altogether the SF interventions will have a positive impact on convergence, the size of which will depend on the quality on the interventions.

50. 6. The future of the Czech NSRF Evaluation
These outcomes are based on a set of specific assumptions
Specific externalities for infrastructure, R&D and human capital
These externalities are high when the quality of the interventions are high
The likely impact of other issues like the Single Market, enhanced FDI etc. are not explicitly modeled.
These linked to the Structural Funds will further enhance convergence.

51. 6. The future of the Czech NSRF Evaluation
Future developments:
In order to use the HERMIN CZ macro-model as an instrument for policy evaluations, it has to updated on a regular basis.
During the implementation phase, and when the exact content of the measures is known, a new and improved classification of funding allocation into PI, HR and APS should be done.
In the absence of a comprehensive micro-economic evaluation, the spillover-elasticities have to be assumed on bases of the international literature.

52. 6. The future of the Czech NSRF Evaluation
Gains from these improvements:
As the NSRF is implemented can how we fine-tune the programme (at the Mid-term Evaluation stage) to optimise its impact on convergence.
To do this one must develop a micro-evaluation alongside the macro evaluation of the type described by this report.
The characteristics of micro and macro evaluation techniques are set out in the following slide.

53. Level of disaggregation High (individual projects)
Micro (bottom-up)
Macro (top-down)
Level of disaggregation
High (individual projects)
Low (sectoral aggregates, whole economy)
Use of theory
Weak (judgemental, CBA)
Strong (macroeconomics)
Model calibration
Judgemental/informal
Scientific(?)/econometric
Policy impacts
Informal/implicit/ranking/some quantification
Formal/explicit/quantified
Treatment of externalities
Limited or ignored
Included/explicitly modelled

54. How can we know if EU cohesion policy is successful
How can we know if EU cohesion policy is successful? Integrating micro and macro approaches to the evaluation of Structural Funds (Bradley, Mitze, Morgenroth & Untiedt, March 2006) Paper available on:

57. Annex to the Presentation

58. Are HERMIN-based NDP impacts robust and reliable?
Demand impacts: role of Keynesian multiplier (crowding out? Rational expectations? QUEST versus HERMIN)
Supply impacts: role of externality (or spillover) effects
Well-designed NSRF: large spillover effects
Poorly-designed NSRF: small spillover effects

59. Can we give a “point” estimate of NSRF impacts?
Almost certainly not!
But based on additional evidence (CBA, qualitative review of NSRF, etc.), we can probably suggest whether the spillovers are likely to be high or low.
As experience accumulates, we can move towards more precise estimates of the spillover parameters, and more precise long-term NSRF impacts

60. How can convergence become stronger and self-sustaining?
There must be an initial “cluster” of activities, supported by special incentives and local specialised inputs (trained labour force): role of industrial strategy
The increased local availability of skilled workers facilitates further growth of cluster: role of human capital
Spillovers of information and “learning-by-doing” encourage further cluster growth: role of physical infrastructure
National and regional policy stability, and consensual social partnership ensures efficiency is accompanied by equity, and facilitates self-sustaining regional growth

61. Porter’s Diamond of competitive advantage