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Quantitative assessment of the impact of the NDP/NSRF 2007-13 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 1 Report: Table of contents, I 1. Overview about the results 2. Modelling the Czech Economy 3. The HERMIN modelling framework 4. The new HERMIN model for the Czech Republic 4.1 Some characteristics of the Czech Economy 4.2 Some characteristics model results (equations) 2 Report: Table of contents, II 5. The NSRF Evaluation 5.1 5.2 5.3 How to analyse the Structural Fund interventions (demand and supply-side effects) Implementation into HERMIN Some detailed results 6. The future of the Czech NSRF Evaluation A series of technical annexes 3 1. Overview of the results • During the implementation phase 2007-15 (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. 4 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. 5 1. Overview of the results, continued Cohesion policy 2007-2013: indicative financial allocations (million EUR, 2004 prices)1 REGIONAL COMPETITIVENESS AND EMPLOYMENT OBJECTIVE CONVERGENCE OBJECTIVE België/Belgique Ceska Republika Danmark Deutschland Eesti Ellas Espana France Ireland Italia Kypros Latvija Lietuva Luxembourg Magyarorszag Malta Nederland Österreich Polska Portugal Slovenija Slovensko Suomi-Finland Sverige United Kingdom Bulgaria Romania Statistical Phasing in Phasing out Cohesion Fund Convergence 7.830 15.149 10.553 1.992 8.379 18.727 2.838 3.770 1.019 3.289 3.250 5.779 1.434 584 4.495 18.867 388 420 879 363 579 193 1.363 2.034 2.647 3.965 7.589 252 12.654 495 Regional competitiveness and employment 1.268 373 453 8.370 3.133 9.123 261 4.761 45 19.562 2.722 1.239 3.433 39.486 15.240 2.407 6.230 1.865 159 0 1.477 914 254 407 436 491 2.436 2.015 5.769 158 883 399 935 1.446 5.349 3.873 11.143 Not allocated TOTAL 61.558 177.083 12.521 10.385 38.742 EUROPEAN TERRITORIAL COOPERATION OBJECTIVE TOTAL 1 173 346 92 756 47 186 497 775 134 752 24 80 97 13 343 14 220 228 650 88 93 202 107 236 642 2.019 23.697 545 23.450 3.058 18.217 31.536 12.736 815 25.647 581 4.090 6.097 58 22.451 761 1.696 1.301 59.698 19.147 3.739 10.264 1.532 1.682 9.468 159 404 6.047 17.317 392 392 7.750 308.041 Figures result from the application of the methodology agreed by the European Council in December 2005. They are inclusive of all additional provisions decided by the European Council. Technical assistance at the initiative of the Commission is included in the national allocations. Amounts under the "European territorial cooperation" objective include the contribution of the ERDF to the financing of crossborder and seabasin programmes on the external borders of the Union. Figures for Bulgaria and Romania are without prejudice to the date of accession of these countries 6 1. Overview of the results, continued Revised expenditure profile of the NSRF (euro million per year) And as % of the NSRF per year 7 1. Overviewof the results, continued Effects of the NSPF on the real Czech GDP Growth rates effect, as % difference Moderate differences up to one percent during the implementation phase and a significant difference in 2016 Level effect compared to the baseline as %-difference Gradually increasing impact on the level of GDP compared to the baselinescenario (without NSRF), even in 2020 the level about 2% percent higher then without the NSPR 8 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 196.000 and is still 178.000 in 2015. • In 2020 total employment is still 29.000 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. 9 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. 10 3. The HERMIN Modelling Approach A pictorial outline of the model Consumption function Wage bargaining Factor demands Behavioural equations influenced by theory Expenditure (GDE) Income (GDI) [6] Behavioural and identity equations GDP Output (GDP) [1] National accounting Framework Manufacturing (T) Identities adding up, definitional & closure productivity Building (BC) PSBR Output = Expenditure used to determine net trade balance (NTS = GDP - GDA) where GDA = C + G + I + DS HERMIN [2] Output Utilites Market services (N) Other market services [5] Model as integrated system Agriculture Agriculture (A) Output = Income used to determine corporate profits (IYC = GDP - YWI) Fishing General Government Non-market services (G) Public sector Private consumption Borrowing requirement Public consumption Debt accumulation [4] Income [3] Expenditure Investment Stock changes Corporate sector Household sector Health Education Revenue Expenditure Forestry Private sector Exports Imports 11 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 12 What determines sectoral output? • Manufacturing: Local & external demand; competitiveness • Market services: Local demand • Agriculture: Productivity • Government: Public employment 13 What determines production inputs? • Output • Cost of labour compared to cost of capital • Technical progress 14 What determines output prices? • Manufacturing: World prices, labour costs • Market services: Labour costs • Building and construction: Labour costs • Agriculture: Common Agricultural Policy (CAP) 15 What determines wage rates? • • • • Consumer prices Output prices Productivity Unemployment rate 16 What determines labour supply? • • • • Population growth, but more specifically Working age population growth Participation rate Net migration flows 17 What determines household consumption? • Income, but more specifically • Household income, but more specifically • Household disposable income • Wealth?? 18 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 19 What determines general government revenue and expenditure? • Revenue: Tax bases and tax rates • Expenditure: Policy decisions (discretionary) as well as policy rules (automatic) 20 Model calibration • “Old” EU models: Simple econometrics (OLS), using data for period 1980-2004 • Czech national model: Curve-fitting and selective parameter imposition, using data for period 1995-2004 • 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) 21 HERMIN documentation 1. Data-based description of the economy 2. Theoretical underpinnings of the HERMIN modelling framework 3. Calibration of the behavioural equations 4. Model testing: simulations and shocks 5. Data appendix, model listing: public domain 6. Standardised software: 22 Uses of a HERMIN-type model 1. 2. 3. 4. Preparation of economic forecasts General economic policy analysis NSRF-related policy analysis Design/evaluation of national industrial strategies 23 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 24 4. The new HERMIN model for the Czech Republic Shocking the model to test its properties 25 26 27 5. The NSRF Evaluation How to analyse the SF interventions 28 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 29 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 30 Implementation in evaluation versus Use phase • 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 31 Physical infrastructure: PI • Demand-side impacts (implementation): PI IG I (total investment) (Keynesian multiplier) impact on GDP • Supply-side impacts (mainly postimplementation): PI increased stock of infrastructure (KPI) boost to output/productivity 32 Human resources: HC • Demand-side impacts (implementation): HC Income & Public expenditure Keynesian multiplier GDP • Supply-side impacts (mainly postimplementation): HC stock of human capital (KHC) boost to output/productivity 33 Research and Development • Demand-side impacts (implementation): R&D I (total investment) (Keynesian multiplier) impact on GDP • Supply-side impacts (mainly postimplementation): R&D increased stock of R&D (KRD) boost to output/productivity 34 A serious methodological challenge • Ex-ante impact analysis of “yet-to-beimplemented” NDPs • Is the NSRF appropriate? How effective will be the implementation? • Strict monitoring and evaluation can help, but do not guarantee success 35 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 36 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! 37 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 38 5. The NSRF Evaluation 39 40 41 42 43 44 45 46 47 48 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. 49 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. 50 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. 51 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. 52 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/som e quantification Formal/explicit/quantified Treatment of externalities Limited or ignored Included/explicitly modelled 53 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: www.gefra-muenster.de 54 55 56 Annex to the Presentation 57 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 58 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 59 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 60 Porter’s Diamond of competitive advantage 61