Download Public Policies and the MDGs: Dominican Republic

Public Policies and the MDGs:
The Case of the
Dominican Republic
Carolina Diaz-Bonilla*
Hans Lofgren
Martin Cicowiez
Alajuela, Costa Rica, November 24-25, 2008
II Encuentro Regional Sobre Modelos de Equilibrio General: Sus Aportes en la
Formulacion de la Politica Economica en America Latina y el Caribe
* Presenter
Project Focus
 Can the MDGs in the Dominican Republic be
achieved under current policies and trends?
 If not, what policy changes are needed to
achieve the MDGs and at what cost?

Alternative assumptions about the sources
(domestic and foreign) of the required
additional government financing.
Modeling Framework
 MAMS (Maquette for MDG Simulations)


A dynamic-recursive CGE model with an
additional MDG module that links MDG
indicators to a set of determinants.
To make link, has relatively detailed treatment
of:


Government activities and private health and
education activities; and
MDG outcomes as function of relevant services and
other determinants.
 Microsimulation Model
 Sequential “top-down” approach
Social Accounting Matrix
 SAM base year 2004
 14 Activity/Commodity accounts
 7 Public: 3 education, health, water-sanitation,
other public infrastructure, other government
services
 7 Private: agriculture, industry, services, 3 private
education sectors and 1 private health
 3 Institutions
 3 Savings and Capital accounts
 4 Tax accounts
 8 Investment accounts
Model Closures
 Government: Direct taxes flexible. Foreign
borrowing, foreign grants, and domestic
borrowing fixed. Government Savings adjusts.
Consumption growth fixed. Public investment
grows as required for capital stock.
 Private Savings-Investment: Private investment
endogenous; private savings rates fixed.
 Rest of World: Foreign grants, foreign borrowing
fixed. Transfers from ROW to government and
households fixed. Exchange rate adjusts.
Model Closures (cont.)
 Factor Markets:
 Private capital stocks driven by investment.
 Labor stocks driven by demographic factors
and functioning of educational system.
 Flexible rents clear the market.
 Both unemployment rate and wages adjust,
unless unemployment is at a minimum level (at
which point wage movements clear labor
market)
MDG Key Indicators
1990
2004
2015
MDG 1: Poverty Rate
28.6
43.1
14.3
% population
MDG 2: Primary School Completion Rate
22
53
100
% cohort
MDG 4: Under-five Mortality Rate
58
38
19
Per 1000 births
MDG 5: Maternal Mortality Rate
229
178
57
Per 100,000 live
births
MDG 7a: Access to Safe Water
83
86
92
% population
MDG 7b: Access to Improved Sanitation
60
90
80
% population
Note: Nearest available year if data not available for 1990 or 2004.
Value for Poverty (MDG 1) based on year 1998.
Determinants of non-poverty MDGs: (1) Service delivery; (2) Per-capita household
consumption; (3) Public Infrastructure; (4) Wage incentives; and (5) Other MDGs.
Base Scenario
 Trend GDP growth from Central Bank
historical data for 1970 until the present:
5.6%
 Assume government consumption grows at
similar rate.
 Assume remittances and FDI grow at similar
rate as rest of the economy.
Historical GDP
10
120
8
GDP growth (annual %) (LHS)
100
6
4
80
2
60
0
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
-2
-4
2001
2002
2003
2004
40
GDP at Factor Cost
(bns constant 1990 LCU)
(RHS)
20
-6
-8
0
Baseline results for MDGs
 No targets achieved, but significant
improvements are realized between 2005-2015
GDP growth slowdown?
 Growth slowdown in the U.S. and the global economy for
2006-2007 would have a negative impact

Due to the importance of exports in the DR’s outlook.
 Increase in oil prices.
 However, may be mitigated by the PetroCaribe treaty signed
with Venezuela.
 Entrance of China into the world market
 Possible loss of competitiveness in the DR’s Free Trade
Zones for the textile sector.
 Free Trade Agreement, RD-CAFTA, will only serve to partially
compensate these potential losses.
 Effect itself of the RD-CAFTA coming into existence?
 Given these factors, simulations are re-run under lower
growth scenario (4%) for comparison.
MDG Simulations
 Target: MDG 2, MDG 4 & 5, MDG 7a & 7b, or
all of the above together.
 Carried out with four alternative sources of
marginal government financing:

Foreign grants, foreign borrowing, domestic
taxes, and domestic borrowing.
 Different MDGs targeted via endogenous
variations in government demand
(consumption) of relevant services.
 Under BASE, government demand growth was
exogenous.
MDG Results
 Combined government consumption and
investment growth of 6.8-10% annually as
opposed to 4.7-5.3% for BAU.
 Health most expensive for DR; grows
steadily, becoming more expensive in second
half.
 Education requires a lot of up-front spending;
need to reach 2008 target.
 Need for MDG service expansion mitigated
by synergies under simulations with full MDG
achievements.
Figure 10: Government Expenditure on Health
Baseline and MDG Simulations (bns DR Pesos)
60
base
mdg45-fb
mdg45-db
mdg-fb
mdg-db
50
40
30
20
10
0
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
Note: "mdg2" targets only educ; "mdg" targets all MDGs; fb = foreign borrowing; db = domestic borrowing
Figure 9: Government Expenditure on Primary
Education (bn DR Pesos)
Baseline and MDG Simulations
14
base
mdg2-fb
mdg2-db
mdg-fb
mdg-db
13
12
11
10
9
8
7
6
5
4
2004
2005
2006 2007
2008
2009 2010
2011
2012 2013
2014
2015
Note: "mdg2" targets only educ; "mdg" targets all MDGs; fb = foreign borrowing; db = domestic borrowing
MDG Results
 Under domestic financing scenarios, GDP
growth suffers:



5.6% for BASE
5.4% for MDG-tax
4.4% for MDG-db
 Due to combination of:

lower private capital accumulation


lower private post-tax incomes and savings;
government diverting large part of savings to its own
investments;
reallocation of resources to sectors with lower
TFP growth.
Figure 11: Real GDP at Market Price
Baseline and MDG Simulations (bns 2004 DR Pesos)
1450
base
mdg-fg
mdg-tax
mdg-fb
mdg-db
1350
1250
1150
1050
950
850
750
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
MDG Results (cont)
 Wages grow more rapidly for all full MDG
scenarios (except domestic borrowing scenario)
 Expansion in primary education reduces supply of
unskilled labor – more students stay in school.
 MDG-related public sectors that expand rapidly
when all MDGs are targeted require even less
unskilled and more semi-skilled and skilled labor.
Conclusions
 In spite of considerable progress across the
board, the DR cannot achieve its MDGs under
current policies and investment levels.
 Very difficult to achieve all MDGs, especially in
health and to a lesser extent in primary education.
 However, the DR government allocates a
relatively small share of GDP to social sectors as
compared to other countries in LAC.
 Yet, effect of large expansion in government
services very much depends on the financing
mechanism.
Conclusions (cont.)
 If marginal financing needs met by grant aid or
foreign borrowing, then no trade-off between
poverty reduction and growth promotion versus
achievement of non-poverty MDGs.
 However, DR not likely candidate for sufficient
amounts of grant aid and is unlikely to further
raise its foreign debt and debt-servicing burden.
 If marginal financing needs met by domestic
sources, it is important that private investment is
not crowded out to such an extent that growth
suffers.
Conclusions (cont.)
 Rapid growth is crucial for achievement of the
MDGs.
 Best way forward may be to opt for a combination
of gradual expansion of targeted social services,
as well as measures to raise government
efficiency and reallocate spending to high-priority
areas, if needed financed with domestic taxes.
 As always, crucial to identify and expand growthpromoting programs and policies, especially if
they can be designed so that the poor capture
most of the payoffs.
Thank you