1. 2. 10. 2008, Herľany Modelling of the NSRF 2007-2013 impact to the Slovak economy – possible alternatives Viliam Páleník, Marek Radvanský Institute for Economic Research SAS

2. 2. 10. 2008, Herľany Motivation  Significant delay of NSRF funds spending for years 2007-13  IER SAS as an NSRF evaluator  Use of existing methodology  Problem of time changes in Structural funds spending on macroeconomic effects

3. 2. 10. 2008, Herľany Presentation structure  Methodology  Model HERMIN for Slovak economy   Modelling of the NSRF 2007-2013 impact to the Slovak economy – possible alternatives

4. 2. 10. 2008, Herľany Model HERMIN for Slovak economy

5. 2. 10. 2008, Herľany HERMIN – basic characteristic  Basic methodology  Bradley, Modesto, Sisvilla – Rivero (1995)‏  Econometric models ISWExxQx and ECM-ISWExxQx  Econometric model:  Yearly  Demand – supply oriented (CD, CES)‏  Sectoral disaggregated  Small open economy – relation with foreign countries

6. 2. 10. 2008, Herľany Model relations describing aggregate supply  Industrial sector   Output = f1(World Demand, Domestic Demand, Competitiveness, time)‏   Employment = f2(Output, Relative Factor Prices, time)‏   Investment = f3(Output, Relative Factor Prices, time)‏   Capital Stock = Investment + (1-d) Capital Stock t-1   Output Price = f4(World Price * Exchange Rate, Unit Labour Costs)‏   Wage Rate = f5(Output Price, Tax Wedge, Unemployment, Productivity)‏   Competitiveness = National/World Relative Production Cost and Prices  Sector of market services  Output = f6(World Demand, Domestic Demand)  Employment = f7()‏  Employment = f7(Output, Relative Factor Prices, time)‏  Investment = f8(Output, Relative Factor Prices, time)‏  Capital Stock =  Capital Stock = Investment + (1-d) Capital Stock t-1  Output price = Derived from Unit Labour Costs  Wage inflation = Derived from wage inflation in the industrial sector

7. 2. 10. 2008, Herľany Model relations describing aggregate supply II  Agriculture and non-market services sector:  exogenous, driving variables.  Job offer and unemployment  Population growth = f9(Natural growth, Migration)‏  Job offer = f10(Population, Measure of participation of labour force)‏  Unemployment = Labour force – Total unemployment  Migration = f11(Relative expected wages)‏

8. 2. 10. 2008, Herľany Model relations of aggregate demand (absorption) and income distribution  Aggregate demand (absorption)‏  Consumption = f12(Disposable household income)‏  Home demand = Private and public consumption + Investments + Change of stocks  Balance of foreign trade = Total output – Home demand  Incomes distribution  Prices of public sector expenditures = f13(Output prices, Import prices, Measure of indirect taxation)‏  Income = Total output  Disposable household income = Income + Transfers – Direct taxes  Balance of an account = Balance of foreign trade + Incomes of foreign factors  Public debt = Public sector expenditures – Measure of taxation * Tax base  Public debt = (1 + Interest rate) Debt t-1 + Public debt

9. 2. 10. 2008, Herľany Industry sector  Industrial sector  Raw materials mining (C)‏  Industrial production (D)  Civil engineering (F).  log(OT 1,t ) = b1 + b2*log(WD t ) + b3*log(ULCMAN t / PMAN t ) + b4*log(PDEU t / PDSKK t ) + b5*TREND + b6*log(DD t )‏  OT 1,t - industrial sector production  WD t - foreign demand  ULCMAN t - unit labour costs  PMAN t - price level in industrial sector  PDEU t - price deflator EU25 (HDP)‏  PDSKK t - Slovak price deflator (GDP)‏  TREND- trend component (time, for 1994 = 0)‏  DD t - domestic demand

10. 2. 10. 2008, Herľany Market services sector  Market services sector  Production of electricity, gas and water (E)‏  Wholesale, retail, repairs (G)  Hotels and restaurants (H)‏  Transport, storage, post and telecommunications (I)‏  Financial factoring (J)  Real estates, leasing and commercial activities (K)  log(OT 2,t ) = b1 + b2*log(WD t ) + b3*log(DD t )‏  OT 2,t, - production in market services sector  WD t - foreign demand  DD t - domestic demand

11. 2. 10. 2008, Herľany Non-market services sector  Non-market services sector  Public administration and defence, compulsory social insurance (L)‏  Educational system (M)‏  Health care and social aid (N)‏  Other social and personal services (O)‏  Household activities (P)  Extraterritorial organisations and associations (Q)‏  log(OT 3,t ) = b1 + b2* log(DD t )+ b3*TREND  OT 3,t, - production in non-market services sector  DD t - domestic demand

12. 2. 10. 2008, Herľany Use of ISWE – HERMIN model  Basic scenario and its derivation in quantity of physical infrastructure and human capital  NSRF – change of physical infrastructure and human capital stocks  Direct or indirect affecting onto production functions changes  Cumulative multiplicator – ratio of cumulative increases of GDP to cumulative increase of the NSRF

13. 2. 10. 2008, Herľany Modelling of the NSRF 2007- 2013 impact to the Slovak economy – possible alternatives

14. 2. 10. 2008, Herľany Evaluation of alternative NSRF scenarios impact to the Slovak economy  Used approaches  HERMIN  Two scenarios by two alternatives of funds spending  NSRF proposal from 3 April 2006 and IER SAS  Spending up to 11 bil. Euro  Difference in structure made by doubling the costs for science and research in the IER SAS scenario compared to the NSRF from 3 April 2006  Comparison of balanced and significantly delayed funds spending  Motivation – determine the impact of EU funds spending delay to effectiveness of their usage

15. 2. 10. 2008, Herľany Financial allocations proposal MCRD SR from 3 April 2006 40 mil. Eur ERDFFinancial consultancy, controlling... 80 mil. Eur 40 mil. EurERDFPreparation, direction, monitoring... Technical assistance 480 mil. EurESFSupport of employment growth and social inclusion 1 152 mil. Eur 672 mil. EurESFModern education for knowledge economy Human resources and education 268 mil. EurERDFHealthcare modernization 768 mil. EurERDFResearch and development 384 mil. EurERDFInformatization 1 996 mil. Eur 576 mil. EurERDFSupport of competitiveness of manufacturers and services. Innovation, informatization and knowledge economy 1 603 mil. EurERDFLocal infrastructure 1 712 mil. EurKF 16 mil. EurERDF Environmental infrastructure 1 712 mil. EurKF 6 402 mil. Eur 1 359 mil. EurERDF Transport infrastructure Infrastructure and regional accessibility Scenario MCRD - SP Scenario MCRD - SpP EC contribution FundSpecific priority (SpP)‏ Strategic priority (SP)‏

16. 2. 10. 2008, Herľany Suggestion of allocation by IER SAS 40 mil. Eur ERDFFinančné riadenie, kontrola... 80 mil. Eur 40 mil. EurERDFPríprava, riadenie, monitorovanie... ŠF a KF Technická pomoc 480 mil. EurESF Podpora rastu zamestnanosti a sociálnej inklúzie 1 152 mil. Eur 672 mil. EurESFModerné vzdelávanie pre znalostnú spoločnosť Ľudské zdroje a vzdelávani e 268 mil. EurERDFModernizácia zdravotníctva 1 468 mil. EurERDFVýskum a vývoj 384 mil. EurERDFInformatizácia spoločnosti 2 696 mil. Eur 576 mil. EurERDF Podpora konkurencieschopnosti podnikov a služieb... Inovácie, informatizá cia a znalostná ekonomika 1 153 mil. EurERDFLokálna infraštruktúra 1 712 mil. EurKF 16 mil. EurERDF Enviromentálna infraštruktúra a ochrana životného prostredia 1 712 mil. EurKF 5 702 mil. Eur 1 109 mil. EurERDF Dopravná infraštruktúra Infraštruktúra a regionálna dostupnosť Scenár EU SAV - SP Scenár EU SAV – ŠP Príspevok ES FondŠpecifická priorita (ŠP)‏ Strategická priorita (SP)‏

17. 2. 10. 2008, Herľany Scenario comparation by volume of total funds in time

18. 2. 10. 2008, Herľany Changes in GDP growth compared to baseline scenario

19. 2. 10. 2008, Herľany Development of cumulative changes of GDP compared to baseline scenario

20. 2. 10. 2008, Herľany Changes in unemployment rate in evaluated scenarios

21. 2. 10. 2008, Herľany Changes in total growth of productivity rate

22. 2. 10. 2008, Herľany Cumulative CSF multiplicator

23. 2. 10. 2008, Herľany Conclusions  Late allocation of NSRR funding has major economic influence  Decrease of long/term multiplicative effects (infrastructure, education)‏  In model case in late allocation is possible to reach maximum only 85% of potential product  Significantly lesser positive influence on development of unemployment

24. 2. 10. 2008, Herľany Conclusions  Late allocation of NSRF brings new risks  Cumulation of greater amounts of fund volume on shorter period markedly decreases effectivity of appliance of these funds  Markedly increase risk of lesser allocation of funds in period  Possible lack of capacities to sudden increase of funds allocation (human, technical)‏

25. 2. 10. 2008, Herľany  Institute for Economic Research  Slovak Academy of Sciences  www.ekonom.sav.sk www.ekonom.sav.sk  Viliam.Palenik@savba.sk  Marek.Radvansky@savba.sk