Impact of the Crisis on the Impact of the Crisis on the MDGs in Latin America:MDGs in Latin America:

A Macro-Micro CGE AssessmentA Macro-Micro CGE Assessment““mini” LINK meetingmini” LINK meeting

St. PetersburgSt. Petersburg4 June 20094 June 2009

Rob VosRob VosUnited NationsUnited Nations

22

Was Latin America on track Was Latin America on track towards the MDGs?towards the MDGs?

10

87

54

187

68

9

97

31

192

77

8

100

21

195

84

5

100

18

47

84

0 50 100 150 200 250

MDG1: Extreme poverty (% livingon less than $1 a day)

MDG2: Primary education (netenrolment rate)

MDG4: Child mortality (underfive deaths per 1,000 live births)

MDG5: Maternal mortality (per100,000 live births) \a

MDG7: People using improvedsanitation (% of total)

19902005

Projection (linear) to 2015Target 2015

probably "on track"

"on track"

"on track"

"off track"

"off track"

33

Some key questions regardiSome key questions regarding MDG strategiesng MDG strategies

Before the crisisBefore the crisis::But trends differ greatly across countriesBut trends differ greatly across countriesAre existing economic and social policies good enAre existing economic and social policies good enough to reach the goals?ough to reach the goals?Need country-specific answers:Need country-specific answers:– What does it take to achieve the MDGs? What does it take to achieve the MDGs? – Do we know how much it will cost and can we afford acDo we know how much it will cost and can we afford ac

hieving the goals?hieving the goals?– What policy options do we have in financing the MDG sWhat policy options do we have in financing the MDG s

trategy? What are the macroeconomic trade offs?trategy? What are the macroeconomic trade offs?

44

Some key questions regardiSome key questions regarding MDG strategiesng MDG strategies

After the crisisAfter the crisis::How much more difficult will it be to achieve the MHow much more difficult will it be to achieve the MDGs by 2015?DGs by 2015?

Will it cost more? How much?Will it cost more? How much?

To what extent would an MDG strategy be counteTo what extent would an MDG strategy be countercyclical?rcyclical?

Are macroeconomic tradeoffs more difficult to maAre macroeconomic tradeoffs more difficult to manage?nage?

55

Crisis: a deep dive, but will Crisis: a deep dive, but will recovery be quick?recovery be quick?

5.2% 5.6%

4.1%

8.5%

4.0%

5.3%

1.7%

3.9%

-1.9%-0.9%

-4.3%

0.7%1.7% 1.9%

1.2%

2.6%

-0.7% -0.5%-1.0% -0.8%

-6%

-4%

-2%

0%

2%

4%

6%

8%

10%

LAC South America Mexico andCentral America

Caribbean

2004-2007 2008 2009 2010 - baseline 2010 - pess

66

Also deceleration in the six Also deceleration in the six countries of studycountries of study

4.0%

4.6%5.0%

7.3%

6.2%

4.0%

5.1% 5.3%

3.2%2.9%

4.0%

3.0%

-0.6%

1.6%

-0.5%-0.8%

-2.0%

-0.5%

2.5%

1.2%

2.2%

1.0%0.5%

1.0%

-4%

-2%

0%

2%

4%

6%

8%

Brazil Bolivia Chile Costa Rica Honduras Nicaragua

2004-2007 2008 2009 2010 - baseline

77

METHODOLOGYMETHODOLOGYUN/DESA-UNDP-World Bank projectUN/DESA-UNDP-World Bank projectModeling frameworkModeling frameworkMAMS: MAquette for MDG SimulationsMAMS: MAquette for MDG Simulations..– Economy-wide (dynamic CGE) simulation model to analyze MDG Economy-wide (dynamic CGE) simulation model to analyze MDG

strategies in different countries.strategies in different countries.– Dynamic MDG moduleDynamic MDG module

Sector analysis of MDG determinants and of Sector analysis of MDG determinants and of interventionsinterventions needed to achieve MDGs in education, needed to achieve MDGs in education, health, water and sanitationhealth, water and sanitation– Microeconomic analysis of determinants of access to schooling, Microeconomic analysis of determinants of access to schooling,

infant mortality, etc.infant mortality, etc.– Costing exercise, considering household behaviourCosting exercise, considering household behaviour

Microsimulation methodologyMicrosimulation methodology– Translate labour market outcomes of CGE simulations into impact Translate labour market outcomes of CGE simulations into impact

on poverty and income distribution at household level using micro on poverty and income distribution at household level using micro datasetsdatasets

88

MAMS: Determinants of MDG MAMS: Determinants of MDG outcomesoutcomes

MDG

Serviceper capita or student

Consump-tion percapita

Wageincen-tives

Public infra-

structure

Other MDGs

2–Primary schooling

X X X X 4

4-Under-fivemortality

X X X 7a,7b

5-Maternal mortality

X X X 7a,7b

7a-Water X X X

7b-Sanitation X X X

99

Macroeconomic influences on Macroeconomic influences on cost estimatescost estimatesSynergies among MDGs: is achieving all Synergies among MDGs: is achieving all

MDGs simultaneously cheaper than MDGs simultaneously cheaper than pursuing them one by one?pursuing them one by one?

Complementary investment requirements, Complementary investment requirements, especially in infrastructureespecially in infrastructure

Macro analysis: economy-wide effects Macro analysis: economy-wide effects matter for the (relative) cost estimates matter for the (relative) cost estimates (labour costs and constraints, prices, (labour costs and constraints, prices, growth effects) growth effects)

1010

MDG simulations with CGEMDG simulations with CGE BAU: projection without policy changeBAU: projection without policy change

Continued pre-crisis trendsContinued pre-crisis trends

Crisis prolonged during 2009-2010 (gradual recovery after)Crisis prolonged during 2009-2010 (gradual recovery after)

MDG scenarios:MDG scenarios:

– Optimize to reach MDGsOptimize to reach MDGs

Each MDG separatelyEach MDG separately

SimultaneouslySimultaneously

– Different financing strategiesDifferent financing strategies

Foreign aid, Foreign borrowing, Domestic borrowing,Tax Foreign aid, Foreign borrowing, Domestic borrowing,Tax increasesincreases

1111

Is LAC “on track” under pre-crisis Is LAC “on track” under pre-crisis BAU?BAU?

  MDG 1 MDG 2 MDG 4 MDG 5 MDG 7a MDG 7b

Bolivia       --    

Brazil     --

Chile

Costa Rica      

Honduras            

Nicaragua            

LatinAmerican Average      

1212

Impact crisis on MDGs 2 and 4Impact crisis on MDGs 2 and 4(crisis/pre-crisis BAU; 2015)(crisis/pre-crisis BAU; 2015)

-10%

-5%

0%

5%

10%

15%

20%

Bolivia Honduras Nicaragua Brazil Chile Costa Rica

Primary schoolcompletion

Child mortality

1313

Additional public spending needed Additional public spending needed will be higher because of the crisiswill be higher because of the crisis

0.0 1.0 2.0 3.0 4.0 5.0 6.0 7.0 8.0 9.0

Chile

Costa Rica

Brazil

Bolivia

Nicaragua

Honduras

pre-crisis crisis

Required additional social spending needed to meet MDGs 2, 4, 5 and 7

(% of GDP, per year 2010-15)

1414

MDG strategy would be countercyclical, MDG strategy would be countercyclical, but insufficient for economic recoverybut insufficient for economic recovery

GDP growth per year (%), 2010-2015

0.0 1.0 2.0 3.0 4.0 5.0 6.0

Nicaragua

Bolivia

Honduras

Brazil

Chile

Costa Rica

Crisis baseline MDG strategy

MDG plus infrastructure Gap to full recovery

1515

Financing strategies and MDG Financing strategies and MDG costing resultscosting results

Additional spending requirements are Additional spending requirements are generally lower in the case of external generally lower in the case of external finance - through aid or foreign borrowing finance - through aid or foreign borrowing – than in case of domestic resource – than in case of domestic resource mobilizationmobilizationAdditional spending requirements are Additional spending requirements are higher in the case of domestic finance - higher in the case of domestic finance - through borrowing or taxation - owing to through borrowing or taxation - owing to crowding out effects and consumption crowding out effects and consumption compressioncompression

1616

What are realistic financing options?What are realistic financing options?MDG costs in form of required additional public MDG costs in form of required additional public spending is just one criterion for assessing spending is just one criterion for assessing desirability of a financing strategydesirability of a financing strategyOther criteria: Other criteria: – Debt SustainabilityDebt Sustainability– Other macroeconomic trade-offs (e.g. Dutch disease Other macroeconomic trade-offs (e.g. Dutch disease

effects, crowding out of private investment, squeeze effects, crowding out of private investment, squeeze of private consumption, labour constraints, poverty of private consumption, labour constraints, poverty outcomes)outcomes)

– Institutional constraints and political economy Institutional constraints and political economy considerationsconsiderations

1717

Rising public debt under MDG Rising public debt under MDG strategy with foreign borrowingstrategy with foreign borrowing

(total public debt in 2015)(total public debt in 2015)

0

20

40

60

80

100

120

140

160

180

200

Pu

bli

c d

ebt

(% G

DP

), 2

015

BAU-crisisMDG-pre-crisisMDG-crisis

1818

Required tax increase under MDG Required tax increase under MDG strategy with tax-financingstrategy with tax-financing

(increase income tax, % of GDP, avg 2010-2015)(increase income tax, % of GDP, avg 2010-2015)

-2

0

2

4

6

8

10

12

Bolivia Brazil Chile Costa Rica Honduras NicaraguaReq

uir

ed i

ncr

ease

in

in

com

e ta

x (

% G

DP

), a

ver

ag

e 2

01

0-2

01

5

MDG-pre-crisis

MDG-crisis

1919

LAC: “Feasible” financing optionsLAC: “Feasible” financing options

      Tax increase combined

with foreign aid

Tax increase combined with

foreign borrowing

Foreign aid Tax increase

Bolivia    ?    

Brazil        

Costa Rica      

Honduras  

  ?    

Nicaragua   ?    

Chile *

2020

Conclusions and recommendationsConclusions and recommendations

AffordableAffordable: the cost of reaching MDGs is not : the cost of reaching MDGs is not prohibitive though substantially increase because of crisis, prohibitive though substantially increase because of crisis,

Tax and spend (revisited)Tax and spend (revisited): analysis of : analysis of macroeconomic trade-offs suggest tax reform may still be macroeconomic trade-offs suggest tax reform may still be best strategy in most countries (though because of crisis best strategy in most countries (though because of crisis more will need to consider mixed financing strategies)more will need to consider mixed financing strategies)

Efficiency increases in social Efficiency increases in social spendingspending: MAMS assumes efficient spending on : MAMS assumes efficient spending on MDG services to reach goals, but in practice space to MDG services to reach goals, but in practice space to improve efficiency in public spending to create more fiscal improve efficiency in public spending to create more fiscal spacespace

2121

Conclusions and recommendationsConclusions and recommendations

Socially responsible Socially responsible macroeconomic policiesmacroeconomic policies: broad : broad perspective on macro policies beyond stabilization perspective on macro policies beyond stabilization and inflation targeting: growth, adequate social and inflation targeting: growth, adequate social spending, employment growth and inter-temporal spending, employment growth and inter-temporal objective of human developmentobjective of human development

Structural adjustmentStructural adjustment: need to : need to generate more productive employment and reduce generate more productive employment and reduce inequality: MDG strategy per se insufficient to inequality: MDG strategy per se insufficient to meet poverty reduction target meet poverty reduction target

2222

CaveatsCaveats

Integrated modelling approach: never Integrated modelling approach: never perfect, but provides comprehensive and perfect, but provides comprehensive and consistent pictureconsistent picture– Better costing instrument than alternativesBetter costing instrument than alternatives– Improved identification of “on track” vs “off track”Improved identification of “on track” vs “off track”– Link macroeconomic and social policiesLink macroeconomic and social policies

Need to avoid its use as “black box”, but see Need to avoid its use as “black box”, but see as instrument to help policy dialogueas instrument to help policy dialogue