Introduction to MAMS – A CGE Model for Developing Country Strategy Analysis

1. Introduction to MAMS – A CGE Model for Developing Country Strategy Analysis Hans Lofgren DECPG, World Bank Presentation for the LCSPE and DECPG training workshop “CGE Modeling for Policy Analysis,” held at the World Bank, Washington, D.C., May 28, 2013

2. Outline • Introduction • Model Design • Model Structure • The MAMS Database • User-Friendly Interface • Applications: Policy Issues and Insights • Yemen Application • References

3. Introduction • MAMS = Maquette for MDG Simulations • Developed at the World Bank, initially for country-level MDG strategies • how should government and aid policies be designed to achieve the MDGs (poverty, education, health, water-sanitation)? • Evolved into a more general framework for country-level, ex-ante, medium-to-long-run development policy analysis.

4. Introduction • The main originality of MAMS is the inclusion of (MDG- and/or education-related) human development (HD) services and their impact on MDGs and other aspects of social and economic performance. • In addition: • endogenous links between education and the labor market. • disaggregation of the government spending by function into current and investment; coverage of government capital stocks • HD services may be produced by the government and the private sector.

5. Introduction • As of May 2013, MAMS applications to around 50 countries – www.worldbank.org/mams • Two main settings: • World Bank country analysis (including Country Economic Memoranda, Public Expenditure Reviews, Poverty Assessments); • UN projects (UN-DESA + UNDP + World Bank + developing country researchers).

6. Model Design • Strict separation between • GAMS: generic model code • Excel: application-specific files that contain the database (general; MDG) and the specification of simulations • A user-friendly interface, ISIM-MAMS, has been developed. • GAMS code covers everything that is common across applications. • Each database controls the model disaggregation, selection of version (core or extended to all or part of modules of MDG versions), the time frame for simulations, and selected assumptions.

7. Model Structure • Open-economy recursive-dynamic real model in the World Bank/Robinson tradition. • Core module + MDG module (in full or only selected parts) and/or poverty module. • MAMS may be solved in “multi-pass” mode (year by year) or in “single-pass” mode (simultaneously for all periods; often faster but less robust). • MCP (Mixed-Complementary Program) solver.

8. Structure of MAMS • The following figure summarizes the payment flows that are captured by MAMS in any year. • Main building blocks: • Activities (producers) • Institutions: Households, Government, Rest of World • Markets: factors, domestic commodities • Most blocks are typically more disaggregated.

10. Activities • Sell their output at home or abroad. • Use their revenues to cover their costs. • Produce to maximize profits  • Factor hiring and other input use depend on wages, input prices, output prices • Output shares exported and sold domestically depend on the relative prices of output in world and domestic markets.

11. Activities • Each activity produces a “commodity” (good or service). • Additional commodities are non-competitive imports (i.e. without domestic production).

12. Households • Earn incomes from (a) factors; (b) transfers and interest from loans to the government (with the interest due to loans from the households to the government); and (c) transfers from the rest of the world net of interest on household foreign debt (tracked by model). • Use incomes for direct taxes, savings, and consumption.

13. Households • Savings shares depend on per-capita incomes. • Consumption decisions change in response to income and price changes. • By construction (and as required by their budget constraints), the consumption value of the households equals their income net of direct taxes and savings.

14. Government • The government • gets its receipts from taxes, domestic and foreign transfers, and foreign borrowing. • uses these for services (=government consumption), investments (providing the capital stocks required to produce these services), transfers to households, and interest payments. • The model tracks of government domestic and foreign debt stocks (including foreign debt relief).

15. Government • Each receipt and spending item follows some rule (with plenty of options – exogenous values, share of GDP or absorption, rates …) • Government follows a “closure rule”, indicating how it remains within its budget constraint (adjusting one or more items on the spending or receipt side).

16. The rest of the world (RoW) • Is represented in the balance of payments. • Provides foreign currency in the context of transfers to government, and households (net of interest payments on foreign debts), FDI, net loans, and exports. • Receives foreign currency in exchange for imports. • Imports take place at exogenous world prices. • For exports, the alternative of an export demand function is available.

17. The rest of the world • Export and import decisions are made by domestic producers and demanders, resp. • Non-trade payments follow specified rules (with different options). • The “budget” of the RoW (the balance of payments) follows a “closure rule”: adjustments in the real exchange rate equalize inflows and outflows of foreign currency (by influencing exports and imports).

18. Private investment financing • It is provided from domestic private savings (net of lending to the government) and foreign direct investment (FDI). • For the private savings-investment balance, the closure rule is either that investment spending adjusts in response to changes in available funding or that savings adjust to an exogenous spending level.

19. Domestic commodity markets • Domestic demanders decide on import and domestic shares in their demands on the basis of the relative prices of commodities from these two sources (foreign and domestic). • Domestic suppliers (the activities) decide on the shares for exports and domestic supplies on the basis of the relative prices received in these two markets (foreign and domestic).

20. Domestic commodity markets • Flexible prices ensure balance between demands for domestic output from domestic demanders and supplies to the domestic market from domestic suppliers.

21. Markets for factors (labor, capital, natural resources, …) • Reach balance between demands and supplies via wage (or rent) adjustments. • Factor demand curves are downward-sloping reflecting the responses of production activities to changes in factor wages. • For most factors, within-period supplies are exogenous.

22. Markets for factors • Optional endogenous unemployment for labor: a wage curve (a supply curve) is upward-sloping until full employment is reached – see figure. • “Unemployment” is defined more broadly than in official statistics to include un- and under-employment – it should capture the scope for the existing labor force to generate a larger amount of effective labor (if the incentives to work were to improve).

23. Factor market with endogenous unemployment

24. MDG “Production” • The MDGs are “produced” by a combination of determinants (including government social services; see table) using a (reduced) functional form that permits: • replication of base-year values and elasticities • calibration to additional point (typically one possible set of conditions under which the MDG in question is achieved) • imposition of limit (maximum or minimum) • diminishing marginal returns to the inputs

25. MDG outcomes Determinants of MDG Outcomes (X) • For MDG analysis, classification of government demand by function: social services (education, health, water-sanitation), infrastructure, and “other government”.

26. MDG outcomes Logistic function • Two-level functions: • constant-elasticity function at the bottom: Z = f(X) • logistic function at the top: MDG = g(Z) Logistic function

27. Education and Labor • Typically, education is divided into three levels: primary, secondary, and tertiary. • At each level, model generates • enrollment • rates of primary net intake, promotion, dropout, repetition, continuation to next cycle • At each level, outcomes are determined by services per student and other determinants (similar to MDG table).

28. Dynamics: Over time growth is due to … • growth in factor stocks (shifting factor supply curves), determined by • investment and depreciation (capital stocks) • demography and educational system (labor) • exogenous trends (other factors) • growth in total factor productivity (TFP), with components that are • endogenous (government capital stocks, openness to trade); and • exogenous (trend term)

29. Top-Down Poverty Analysis • Microsimulation or built-in poverty module • Built-in poverty module generates poverty and inequality results that are fully integrated with the MAMS simulations: • constant elasticity of poverty with respect to per-capita welfare for each model household • log-normal distribution of per-capita welfare within each model household • distribution of per-capita welfare within each model household follows a real-world household survey.

30. Common simulations • Policies: • Level and composition of government and consumption and related investments. • Levels of foreign grants to government (a tool from the perspective of the rest of the world). • Other financing: taxes, domestic and foreign borrowing. • MDG targeting • Other shocks: technology (including government efficiency), external environment.

31. Data Requirements • SAM in MAMS format (including institutional capital accounts). • Disaggregation of MDG- and education-related services needed for MDG version. • Elasticities for trade, consumption, production. • MDG and education outcome elasticities. • MDG and education calibration points.

32. User-Friendly Interface • ISIM-MAMS = GAMS program + Interface. • The user defines and runs MAMS simulations in an Excel 2007 or 2010 environment. • The MAMS Interface is connected to a database that stores: • data elements specific to the country dataset and/or be needed to define scenarios • set elements: commodities, activities, factors, institutions, etc. • default elasticities and closure and rules/policies

33. User-Friendly Interface • The user-defined scenarios are saved as part of the ISIM-MAMS application Excel file. • Advanced users (“Expert Mode”) can change and create of application datasets for ISIM-MAMS.

34. User-Friendly Interface • ISIM-MAMS = GAMS program + Interface. • The user defines and runs MAMS simulations in an Excel 2007 or 2010 environment. • The MAMS Interface is connected to a database that stores: • data elements specific to the country dataset and/or be needed to define scenarios • set elements: commodities, activities, factors, institutions, etc. • default elasticities and closure and rules/policies

35. User-Friendly Interface: Screen Captures

36. Policy Issues and Insights • Two main types of simulations: • full achievement of key MDGs by 2015 (fix targets year to year; flex policy tool) with alternative financing mechanisms; • alternative scenarios for public spending (in terms of total resource envelopes and sector priorities), financing (domestic and foreign), and efficiency of public service production and delivery

37. Policy Issues and Insights • Spending on HD vs. infrastructure. • Infrastructure has more positive growth impact while also having positive HD effects. • Balanced scenarios more attractive in terms of outcomes and politics. • Income distribution. Scaled-up HD spending raises educated wages except for long run when this reverses.

38. Policy Issues and Insights • Domestic financing vs. foreign aid. Aid pushes difficult trade-offs to the side. • Foreign aid and Dutch disease. Strength of DD effect depends on the marginal import share of government spending; effect is stronger for HD-focused scenarios. • Government allocative efficiency. Strong gains from moderate reallocations of spending growth from areas with small or no returns.

39. Yemen Application: Data • Key elements of the database: • a 2004 Social Accounting Matrix for Yemen • data on MDGs, education, and the labor market (including MOPICs MDG Needs Assessment) • selective estimation of elasticities • MAMS was combined with a microsimulation methodology to estimate poverty and inequality effect using microdata from household survey.

40. Yemen Application: Scenarios

41. Yemen Application: Growth

42. Yemen Application: MDG 4 (U5MR)

43. References • Lofgren, Hans, Martin Cicowiez, and Carolina Diaz-Bonilla, 2013. “MAMS – A Computable General Equilibrium Model for Developing Country Strategy Analysis”. pp. 159–276 in Dixon, Peter B. and Dale W. Jorgenson, (Eds.), Handbook of Computable General Equilibrium Modeling. North Holland, Elsevier B.V. • For more on MAMS, visit: www.worldbank.org/mams