Riga 18th June 2008

EU funds macroeconomic impact assessment for Latvia

Alf VanagsBICEPS

Riga 18th June 2008

The project

• To evaluate the macroeconomic impact of the structural funds using best international practice

• Evaluation for two time periods:– 2004-2006 programming period – 2007-2013 programming period

• Two phases:– Partial equilibrium– General equilibrium (modelling)

Riga 18th June 2008

Data issues

• Funds financial data comes in administrative form

• Not very useful for economic analysis

• Requires transformation into economic categories

• Production function approach

Riga 18th June 2008

Expenditures that enter the production function

Y = AF(K,L)

K: Physical capital: expenditures that augment the stock of capital

L: Human capital: expenditures that augment skills and are embodied in people. L = NxH

A: Expenditures that enhance total factor productivity: but are not embodied in physical capital or people

F: Expenditures that change technology: expenditures that change the way output is produced eg shift to wind power, and correspond to changes in F.

Riga 18th June 2008

A F K L

1.

Infrastructure 99.31% 0.00% 0.69% 0.00%

2.

Productive environment 12.52% 8.22% 79.26% 0.00%

3.

Human resources 0.00% 0.00% 0.00%

100.00%

4.

Agriculture and fishery 18.73% 0.00% 80.16% 1.12%

5.

Technical assistance

100.00% 0.00% 0.00% 0.00%

Comparison of SPD priorities and economic categories

(2004-2006)

Riga 18th June 2008

The model

• Five sector model of the Latvian economy– Manufacturing (tradable goods)– Private (market) services– Construction– Agriculture– Public services (health, education)

• For 2004-2006 funds are subtracted from actual to get no funds scenario

• For 2007-2013 funds added to a no funds base line

Riga 18th June 2008

The economics of the model

• Demand– Keynesian– Distributed across sectors through input/output

relationships• Supply

– All sectors except public services explicitly modelled with Cobb-Douglas production functions

• External balance– Imports and exports not explicitly modelled– Balance = Output -Expenditure

Riga 18th June 2008

Key indicators of interest

• GDP

• Inflation

• Productivity

• Budget balance

• Efficiency of funds

Riga 18th June 2008

Interpretation• Results are NOT a forecast!!

• They represent the difference between with and without funds

• Some important uncertainties– Crowding out– Here we report 30% crowding out– Crowding out can include ‘rent seeking’ and

other ‘wasted resources’

Riga 18th June 2008

0.6

4.3

6.7

8.3

21.8

11.7

0.5

4.8

0

1

2

3

4

5

6

7

8

9

2004 2005 2006 2007

0

5

10

15

20

25

Change in GDP growth rate

Change in GDP level(secondary axis)

Impact on GDP 2004-2006 programming period

Riga 18th June 2008

0.0

0.7

0.3

0.4

0.7

0.0

1.0

1.4

0

0.1

0.2

0.3

0.4

0.5

0.6

0.7

0.8

2004 2005 2006 2007

0

0.2

0.4

0.6

0.8

1

1.2

1.4

1.6

Change in consumer pricegrowth rateChange in consumer pricelevel (secondary axis)

Impact on prices 2004-2006 programming period

Riga 18th June 2008

1.1

5.2

4.6

6.8

5.4

3.8

2.9

1.9

4.9

42.6

40.0

36.1

31.3

25.3

19.1

11.4

1.0

6.6

0

1

2

3

4

5

6

7

8

2007 2008 2009 2010 2011 2012 2013 2014 2015

0

5

10

15

20

25

30

35

40

45

Change in GDP growth rate

Change in GDP level(secondary axis)

Impact on GDP 2007-20013 programming period

Riga 18th June 2008

0.1

1.6

0.7

1.01.1 1.1

0.8

0.6

1.1

7.3

6.8

6.0

5.0

4.0

3.0

2.2

0.1

1.5

0

0.2

0.4

0.6

0.8

1

1.2

1.4

1.6

1.8

2007 2008 2009 2010 2011 2012 2013 2014 2015

0

1

2

3

4

5

6

7

8

Change in consumer pricegrowth rateChange in consumer pricelevel (secondary axis)

Impact on prices 2007-2013 programming period

Riga 18th June 2008

-5

-4

-3

-2

-1

0

1

2

3

2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

2007-2013 programming period2004-2006 programming period

Impact on the trade balance

Riga 18th June 2008

-0.5

0.0

0.5

1.0

1.5

2.0

2.5

3.0

2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

2007-2013 programming period2004-2006 programming period

Impact on the budget balance

Riga 18th June 2008

-5

0

5

10

15

20

25

2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

2007-2013 programming period2004-2006 programming period

Impact on productivity

Riga 18th June 2008

Results for the 2004-2006 programming period

2004 2005 2006 2007

GDP cumulative 0.5 4.8 11.7 21.8

Inflation (cumulative increase in price level)

0.0 0.7 1.0 1.4

Employment (cumulative)

0.5 4.2 7.1 12.0

Budget % of GDP 0.6 1.7 1.7 2.5

Trade balance % of GDP

-2.4 -4.4 -4.1 -2.6

Productivity (cumulative)

- 0.4 -0.5 3.0 7.1

Riga 18th June 2008

Results for the 2007-2013 programming period

2007

2008

2009

2010

2011

2012

2013

2014

2015

GDP cumulative increase 1.0 6.6

11.4

19.1

25.3

31.3

36.1

40.0

42.6

Employment 0.9 6.7 6.6

11.3

13.0

15.3

16.4

17.0

16.9

Labour productivity -0.8 -1.1 3.4 5.9 9.8

12.8

16.0

18.8

21.4

Consumer price level 0.1 1.5 2.2 3.0 4.0 5.0 6.0 6.8 7.3

Government budget balance, percentage points of GDP 1.2 2.3 1.2 1.6 1.1 0.9 0.5 0.2 -0.3

Trade balance, percentage points of GDP -4.2 -3.4 -2.6 -1.7 -0.5 -0.2 0.4 0.8 2.1

Riga 18th June 2008

Efficiency of funds

• A standard measure:– Cumulative policy multiplier – (cumulative change in real GDP)/(cumulative

share of funds in nominal GDP)

• Represents the return of the funds measured in terms of the overall GDP impact

• Results:2004-2007 1.62007-2015 1.7

Riga 18th June 2008

Some final remarks

• Overall positive effect of funds confirmed

• Limited impact on macroeconomic imbalances of recent years

• Results still preliminary … robustness checks ongoing

• Delay in implementing new funds may prove fortuitous