introduction to the pams course - world...

Introduction to the PAMS Introduction to the PAMS CourseCourse

B. EssamaB. Essama--NssahNssahPoverty Reduction Group Poverty Reduction Group (PRMPR)(PRMPR)The World BankThe World BankOctober 11, 2005October 11, 2005

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ForewordForeword

““It is when equals have or are It is when equals have or are assigned unequal shares, or people assigned unequal shares, or people who are not equal, equal shares, that who are not equal, equal shares, that quarrels and complaints break out.quarrels and complaints break out.””

AristotleAristotle(Quoted in Young 1994)(Quoted in Young 1994)

Story LineStory Line

–– What is What is PAMSPAMS ??Poverty Analysis Macroeconomic Poverty Analysis Macroeconomic Simulator Simulator Some Some ““refined snake oilrefined snake oil”” designed to help designed to help ease your analytical troubles with the ease your analytical troubles with the distributional issues stemming from distributional issues stemming from macroeconomic shocks and policies!macroeconomic shocks and policies!

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Story LineStory Line

–– Why bother at all with distributional issues?Why bother at all with distributional issues?Social desirabilitySocial desirability: : MDGsMDGsSocioSocio--Political feasibilityPolitical feasibility: Aristotle.: Aristotle.

–– If distributional issues are important in If distributional issues are important in macroeconomic policy making and macroeconomic policy making and evaluation, how can one go about analyzing evaluation, how can one go about analyzing them?them?

Apply the Apply the logic of policy modelinglogic of policy modelingAccount for Account for interdependenceinterdependence among among stabilization and structural issues as well as stabilization and structural issues as well as among policy instruments, and for among policy instruments, and for heterogeneityheterogeneity of stakeholders.of stakeholders.

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OutlineOutline

ContextContextThe Logic of PAMSThe Logic of PAMSImplementationImplementationPolicy DomainPolicy DomainUpshotUpshotCourse OutlineCourse OutlineHandsHands--OnOnGuest SpeakersGuest Speakers

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ContextContext

The development community has declared The development community has declared poverty eradicationpoverty eradication a basic a basic objectiveobjective ofofdevelopmentdevelopment and therefore a benchmark and therefore a benchmark measure of performance of socioeconomic measure of performance of socioeconomic systems.systems.Distributional issues underpin the political Distributional issues underpin the political dimension of policymaking due to dimension of policymaking due to heterogeneity of the interestsheterogeneity of the interests involved.involved.–– Such heterogeneity stems mainly from Such heterogeneity stems mainly from

differences in taste and in resource differences in taste and in resource endowments.endowments.

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ContextContext

The importance of equity in the process of The importance of equity in the process of development as demonstrated, for instance, by development as demonstrated, for instance, by the focus of World Development Report (WDR) the focus of World Development Report (WDR) 2006 creates 2006 creates a a need for empiricalneed for empirical toolstools to link to link the effects of economic shocks and policies to the effects of economic shocks and policies to induced changes in living standards at the induced changes in living standards at the household level.household level.The Poverty Analysis Macroeconomic Simulator The Poverty Analysis Macroeconomic Simulator or or PAMS is part of an ongoing effortPAMS is part of an ongoing effort at the at the World Bank to provide analysts and policymakers World Bank to provide analysts and policymakers with a variety of tools relevant to the challenges with a variety of tools relevant to the challenges they face in policy design and evaluation.they face in policy design and evaluation.

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The Logic of PAMSThe Logic of PAMS

PAMS is a flexible simulation PAMS is a flexible simulation frameworkframework designed to help analysts designed to help analysts sort out the poverty and, to some sort out the poverty and, to some extent, distributional implications of extent, distributional implications of macroeconomic shocks and policies.macroeconomic shocks and policies.The framework belongs to the class The framework belongs to the class of of policy modelspolicy models to the extent that to the extent that it helps predict some consequences it helps predict some consequences of policy choices.of policy choices.

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The specification of a policy model The specification of a policy model is dictated by the is dictated by the issuesissues at stake, at stake, knowledgeknowledge about the nature of the about the nature of the process involved, the availability and process involved, the availability and reliability of relevant reliability of relevant datadata..Desirable properties of a policy Desirable properties of a policy model (model (QuadeQuade 1982)1982)–– RelevanceRelevance: focus on issues of concern, : focus on issues of concern,

and on politically significant and on politically significant socioeconomic groups and interaction socioeconomic groups and interaction among them.among them.

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Desirable properties (Desirable properties (contdcontd))–– ReliabilityReliability: based on sound analytical linkages : based on sound analytical linkages

between available policy instruments (part of between available policy instruments (part of exogenous variables) and relevant outcomes exogenous variables) and relevant outcomes (part of the endogenous variables) to ensure (part of the endogenous variables) to ensure high degree of confidence in model high degree of confidence in model predictions.predictions.

Use of aUse of a modular approachmodular approach to account for to account for interdependence between macro, interdependence between macro, structural and distributional effects of structural and distributional effects of shocks and policies. (Recursive interaction shocks and policies. (Recursive interaction among modules: topamong modules: top--down).down).

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Use of Use of incidenceincidence framework for framework for distributional analysis: share of distributional analysis: share of burden or benefit associated with a burden or benefit associated with a shock or policy is assigned to a shock or policy is assigned to a household according to some household according to some allocation mechanismallocation mechanism that accounts that accounts (in principle) for relevant (in principle) for relevant characteristics. characteristics.

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ImplementationImplementation

Current version of PAMS developed in the Current version of PAMS developed in the context of context of INDOPOVINDOPOV (Extended Poverty (Extended Poverty Study for Indonesia). Two basic modules: Study for Indonesia). Two basic modules: CGE + Lorenz.CGE + Lorenz.–– Flexible framework that can be fitted to a Flexible framework that can be fitted to a

variety of data situations.variety of data situations.In the context the development of In the context the development of INDOPAMSINDOPAMS we we have following illustrations:have following illustrations:

–– A macro CGE linked to a single Lorenz curve A macro CGE linked to a single Lorenz curve representing the overall distribution of representing the overall distribution of economic welfare.economic welfare.

–– A threeA three--sector CGE linked to two sector CGE linked to two representative households: Rural and Urbanrepresentative households: Rural and Urban

–– An aggregate growth model of an open economy An aggregate growth model of an open economy linked to the national Lorenz curve.linked to the national Lorenz curve.

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ImplementationImplementation

Year HDC PVG SPG

2002 52.42 15.23 5.79 2003 50.54 14.34 5.34 2004 48.12 13.24 4.80 2005 45.54 12.12 4.26 2006 42.52 10.86 3.68 2007 39.15 9.53 3.09 2008 35.83 8.28 2.56 2009 32.56 7.13 2.09

Poverty Line: $2/Day

Table 1. Poverty Implications of the Current Macroeconomic Framework for Indonesia

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Policy DomainPolicy Domain

Poverty Implications of Terms of Trade Poverty Implications of Terms of Trade Shocks and Design of Mitigating Shocks and Design of Mitigating Interventions.Interventions.Poverty Incidence of Budgetary Policies:Poverty Incidence of Budgetary Policies:–– Income taxIncome tax–– Indirect taxesIndirect taxes–– TransfersTransfers

Poverty Implications of Economic GrowthPoverty Implications of Economic GrowthLimitations: Heterogeneity not fully Limitations: Heterogeneity not fully accounted for.accounted for.

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UpshotUpshot

PovertyPoverty--focused development implies povertyfocused development implies poverty--focused design and evaluation of public policy.focused design and evaluation of public policy.Need for appropriate policy models linking Need for appropriate policy models linking poverty outcomes to economic shocks and poverty outcomes to economic shocks and policies.policies.Building valid policy models requires a sound Building valid policy models requires a sound understanding of the issues at stake and understanding of the issues at stake and prevailing institutional arrangements.prevailing institutional arrangements.PAMS offers a simple and flexible framework PAMS offers a simple and flexible framework for assessing the poverty impact of for assessing the poverty impact of macroeconomic events.macroeconomic events.The current version better accounts for The current version better accounts for interdependence among policy issues, but could interdependence among policy issues, but could do better in accounting for heterogeneity of do better in accounting for heterogeneity of stakeholders.stakeholders.

Course OutlineCourse Outline

Purpose: provide the participants with a Purpose: provide the participants with a sound understanding of both the analytics sound understanding of both the analytics and empirics underlying a variety of tools and empirics underlying a variety of tools (including PAMS) relevant to the challenges (including PAMS) relevant to the challenges analysts and policy makers face in policy analysts and policy makers face in policy design and evaluation.design and evaluation.ModulesModules–– The Universe of EViews.The Universe of EViews.–– Building an Applied General Equilibrium Model.Building an Applied General Equilibrium Model.–– The Poverty Impact of Macro Shocks and Policies.The Poverty Impact of Macro Shocks and Policies.


The Universe of EViewsThe Universe of EViews–– Object ContainersObject Containers–– Objects, Views, and ProceduresObjects, Views, and Procedures–– Elements of ProgrammingElements of Programming–– Maximum Likelihood EstimationMaximum Likelihood Estimation–– The model ObjectThe model Object


Building an Applied General Building an Applied General Equilibrium ModelEquilibrium Model–– The Logic of General Equilibrium The Logic of General Equilibrium

ModelingModelingDefinition of a GE ModelDefinition of a GE ModelBasic Walrasian FrameworkBasic Walrasian FrameworkCircular Flow of Economic ActivityCircular Flow of Economic ActivitySocial Accounting Matrix (SAM)Social Accounting Matrix (SAM)


Building an Applied GE ModelBuilding an Applied GE Model–– A twoA two--Sector Model of An Open Sector Model of An Open

EconomyEconomyStructureStructureNumerical ImplementationNumerical Implementation

–– ClosureClosure–– CalibrationCalibration–– ValidationValidation


The Poverty Impact of The Poverty Impact of Macroeconomic Shocks and PoliciesMacroeconomic Shocks and Policies–– The Lorenz Model of the Size The Lorenz Model of the Size

Distribution of IncomeDistribution of Income–– Linking Poverty Outcomes to Shocks Linking Poverty Outcomes to Shocks

and Policiesand PoliciesThe Dutch DiseaseThe Dutch DiseaseChanges in the Terms of TradeChanges in the Terms of TradeBudgetary Policy Budgetary Policy

HandsHands--ONON

Value MapsValue MapsMatch MergingMatch MergingMaximum Likelihood Estimation of Binary Maximum Likelihood Estimation of Binary Response ModelsResponse ModelsLimited and Full Information Estimation Limited and Full Information Estimation of Kleinof Klein’’s Model Is Model IBuilding a ReducedBuilding a Reduced--Form version a TwoForm version a Two--Sector Model of an Open EconomySector Model of an Open EconomyUsing the ReducedUsing the Reduced--Form Model to Track Form Model to Track Structural Implications of Shocks Structural Implications of Shocks

Guest SpeakersGuest Speakers

Hans Hans LLööfgrenfgren: : MaquetteMaquette for MDG for MDG Simulations (MAMS)Simulations (MAMS)Paul Paul DoroshDorosh: SAM Multiplier Analysis: SAM Multiplier AnalysisMartin Martin RavallionRavallion: Winners and Losers : Winners and Losers from Trade Reformfrom Trade ReformFrancisco Ferreira: ExFrancisco Ferreira: Ex--Ante Evaluation of Ante Evaluation of Policy ReformsPolicy ReformsDelfinDelfin Go: MacroGo: Macro--Micro Modeling for Micro Modeling for South AfricaSouth Africa

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ReferencesReferences

DevarajanDevarajan ShantayananShantayanan, Jeffrey D. Lewis, and Sherman , Jeffrey D. Lewis, and Sherman Robinson. 1990. Policy Lessons From TwoRobinson. 1990. Policy Lessons From Two--sector sector Models. Journal of Policy Modeling 12 (4): 625Models. Journal of Policy Modeling 12 (4): 625--657.657.EssamaEssama--Nssah, B. 2005. The Poverty and Nssah, B. 2005. The Poverty and Distributional Impact of Macroeconomic Shocks and Distributional Impact of Macroeconomic Shocks and Policies: A Review of Modeling Approaches. World Policies: A Review of Modeling Approaches. World Bank: Policy Research Paper N. 3682.Bank: Policy Research Paper N. 3682.QuadeQuade, E. S. 1982. Analysis for Public Decisions. New , E. S. 1982. Analysis for Public Decisions. New York: NorthYork: North--Holland.Holland.Young, H. Peyton. 1994. Equity: In Theory and Young, H. Peyton. 1994. Equity: In Theory and Practice. Princeton: Princeton University Press .Practice. Princeton: Princeton University Press .

THE ENDTHE END

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