2. 10. 2008, 2. 10. 2008, HerľanyHerľany

Modelling of the NSRF Modelling of the NSRF 2007-2013 impact to the 2007-2013 impact to the Slovak economy Slovak economy – possible alternatives– possible alternatives

Viliam Páleník, Marek RadvanskýViliam Páleník, Marek Radvanský

Institute for Economic Research SASInstitute for Economic Research SAS

2. 10. 2008, Herľany2. 10. 2008, Herľany

MotivationMotivation

Significant delay of NSRF funds Significant delay of NSRF funds spending for years 2007-13spending for years 2007-13

IER SAS as an NSRF evaluatorIER SAS as an NSRF evaluator Use of existing methodologyUse of existing methodology Problem of time changes in Structural Problem of time changes in Structural

funds spending on macroeconomic funds spending on macroeconomic effectseffects

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Presentation structurePresentation structure

MethodologyMethodology Model HERMIN for Slovak economyModel HERMIN for Slovak economy

Modelling of the NSRF 2007-2013 impact to the Slovak economy – possible alternatives

2. 10. 2008, 2. 10. 2008, HerľanyHerľany

Model HERMIN for Model HERMIN for Slovak economy Slovak economy

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HERMIN – basic HERMIN – basic characteristiccharacteristic Basic methodologyBasic methodology

Bradley, Modesto, Sisvilla – Rivero (1995)Bradley, Modesto, Sisvilla – Rivero (1995) Econometric models ISWExxQx and ECM-ISWExxQxEconometric models ISWExxQx and ECM-ISWExxQx

Econometric model:Econometric model: YearlyYearly Demand – supply oriented (CD, CES)Demand – supply oriented (CD, CES) Sectoral disaggregatedSectoral disaggregated Small open economy – relation with foreign countriesSmall open economy – relation with foreign countries

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Model relations describing Model relations describing aggregate supply aggregate supply Industrial sectorIndustrial sector

Output = f1(World Demand, Domestic Demand, Competitiveness, time) Employment = f2(Output, Relative Factor Prices, time) Investment = f3(Output, Relative Factor Prices, time) Capital Stock = Investment + (1-d) Capital Stockt-1 Output Price = f4(World Price * Exchange Rate, Unit Labour Costs) Wage Rate = f5(Output Price, Tax Wedge, Unemployment, Productivity) Competitiveness = National/World Relative Production Cost and Prices

Sector of market servicesSector of market services Output = f6(World Demand, Domestic Demand)Output = f6(World Demand, Domestic Demand) Employment = f7(Employment = f7(Output, Relative Factor Prices, time)) Investment = f8(Output, Relative Factor Prices, time)Investment = f8(Output, Relative Factor Prices, time) Capital Stock = Capital Stock = Investment + (1-d) Capital Stockt-1

Output price = Derived from Unit Labour CostsOutput price = Derived from Unit Labour Costs Wage inflation = Derived from wage inflation in the industrial sector Wage inflation = Derived from wage inflation in the industrial sector

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Model relations describing Model relations describing aggregate supply IIaggregate supply II

Agriculture and non-market services sector:Agriculture and non-market services sector: exogenous, driving variables.exogenous, driving variables.

Job offer and unemploymentJob offer and unemployment Population growth = f9(Natural growth, Migration)Population growth = f9(Natural growth, Migration) Job offer = f10(Population, Measure of participation of Job offer = f10(Population, Measure of participation of

labour force)labour force) Unemployment = Labour force – Total unemployment Unemployment = Labour force – Total unemployment Migration = f11(Relative expected wages)Migration = f11(Relative expected wages)

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Model relations of aggregate Model relations of aggregate demand (absorption) and income demand (absorption) and income distributiondistribution Aggregate demand (absorption)Aggregate demand (absorption)

Consumption = f12(Disposable household income)Consumption = f12(Disposable household income) Home demand = Private and public consumption + Investments + Home demand = Private and public consumption + Investments +

Change of stocksChange of stocks Balance of foreign trade = Total output – Home demandBalance of foreign trade = Total output – Home demand

Incomes distributionIncomes distribution Prices of public sector expenditures = f13(Output prices, Import prices, Prices of public sector expenditures = f13(Output prices, Import prices,

Measure of indirect taxation)Measure of indirect taxation) Income = Total output Income = Total output Disposable household income = Income + Transfers – Direct taxes Disposable household income = Income + Transfers – Direct taxes Balance of an account = Balance of foreign trade + Incomes of foreign Balance of an account = Balance of foreign trade + Incomes of foreign

factorsfactors Public debt = Public sector expenditures – Measure of taxation * Tax Public debt = Public sector expenditures – Measure of taxation * Tax

base base Public debt = (1 + Interest rate) DebtPublic debt = (1 + Interest rate) Debtt-1t-1 + Public debt + Public debt

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Industry sectorIndustry sector Industrial sectorIndustrial sector

Raw materials mining (C)Raw materials mining (C) Industrial production (D) Industrial production (D) Civil engineering (F). Civil engineering (F).

log(OTlog(OT1,t1,t) = b1 + b2*log(WD) = b1 + b2*log(WDtt) + b3*log(ULCMAN) + b3*log(ULCMANt t / PMAN/ PMANtt) + ) + b4*log(PDEUb4*log(PDEUt t / PDSKK/ PDSKKtt) + b5*TREND + b6*log(DD) + b5*TREND + b6*log(DDtt)) OTOT1,t1,t - industrial sector production- industrial sector production WDWDtt - foreign demand- foreign demand ULCMANULCMANtt- unit labour costs- unit labour costs PMANPMANtt - price level in industrial sector- price level in industrial sector PDEUPDEUtt - price deflator EU25 (HDP) - price deflator EU25 (HDP) PDSKKPDSKKtt - Slovak price deflator (GDP)- Slovak price deflator (GDP) TRENDTREND - trend component (time, for 1994 = 0)- trend component (time, for 1994 = 0) DDDDtt - domestic demand- domestic demand

2. 10. 2008, Herľany2. 10. 2008, Herľany

Market services sectorMarket services sector

Market services sectorMarket services sector Production of electricity, gas and water (E)Production of electricity, gas and water (E) Wholesale, retail, repairs (G) Wholesale, retail, repairs (G) Hotels and restaurants (H)Hotels and restaurants (H) Transport, storage, post and telecommunications (I)Transport, storage, post and telecommunications (I) Financial factoring (J) Financial factoring (J) Real estates, leasing and commercial activities (K) Real estates, leasing and commercial activities (K)

log(OTlog(OT2,t2,t) = b1 + b2*log(WD) = b1 + b2*log(WDtt) + b3*log(DD) + b3*log(DDtt)) OTOT2,t, 2,t, - production in market services sector- production in market services sector WDWDtt - foreign demand- foreign demand DDDDtt - domestic demand- domestic demand

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Non-market services sectorNon-market services sector

Non-market services sectorNon-market services sector Public administration and defence, compulsory social insurance Public administration and defence, compulsory social insurance

(L)(L) Educational system (M)Educational system (M) Health care and social aid (N)Health care and social aid (N) Other social and personal services (O)Other social and personal services (O) Household activities (P) Household activities (P) Extraterritorial organisations and associations (Q)Extraterritorial organisations and associations (Q)

log(OTlog(OT3,t3,t) = b1 + b2* log(DD) = b1 + b2* log(DDtt )+ b3*TREND )+ b3*TREND OTOT3,t, 3,t, - production in non-market services sector- production in non-market services sector DDDDtt - domestic demand- domestic demand

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Use of ISWE – HERMIN Use of ISWE – HERMIN modelmodel Basic scenario and its derivation in quantity of physical Basic scenario and its derivation in quantity of physical

infrastructure and human capital infrastructure and human capital NSRF – change of physical infrastructure and human NSRF – change of physical infrastructure and human

capital stockscapital stocks Direct or indirect affecting onto production functions changesDirect or indirect affecting onto production functions changes

Cumulative multiplicator – ratio of cumulative increases Cumulative multiplicator – ratio of cumulative increases of GDP to cumulative increase of the NSRFof GDP to cumulative increase of the NSRF

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Modelling of the NSRF 2007-2013 impact to the Slovak economy – possible alternatives

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Evaluation of alternative NSRF Evaluation of alternative NSRF scenarios impact to the Slovak scenarios impact to the Slovak economyeconomy Used approachesUsed approaches

HERMINHERMIN

Two scenarios by two alternatives of funds spendingTwo scenarios by two alternatives of funds spending NSRF proposal from 3 April 2006 and IER SASNSRF proposal from 3 April 2006 and IER SAS Spending up to 11 bil. EuroSpending up to 11 bil. Euro Difference in structure made by doubling the costs for science Difference in structure made by doubling the costs for science

and research in the IER SAS scenario compared to the NSRF and research in the IER SAS scenario compared to the NSRF from 3 April 2006from 3 April 2006

Comparison of balanced and significantly delayed funds Comparison of balanced and significantly delayed funds spendingspending

Motivation – determine the impact of EU funds spending delay to Motivation – determine the impact of EU funds spending delay to effectiveness of their usageeffectiveness of their usage

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Financial allocations proposal Financial allocations proposal MCRD SR from 3 April 2006MCRD SR from 3 April 2006

40 mil. EurERDFFinancial consultancy, controlling... 80 mil. Eur

40 mil. EurERDFPreparation, direction, monitoring...Technical assistance

480 mil. EurESFSupport of employment growth and social inclusion1 152 mil. Eur

672 mil. EurESFModern education for knowledge economyHuman resources

and education

268 mil. EurERDFHealthcare modernization

768 mil. EurERDFResearch and development

384 mil. EurERDFInformatization 1 996 mil. Eur

576 mil. EurERDFSupport of competitiveness of manufacturers and services.Innovation,

informatization and knowledge

economy

1 603 mil. EurERDFLocal infrastructure

1 712 mil. EurKF

16 mil. EurERDFEnvironmental infrastructure

1 712 mil. EurKF

6 402 mil. Eur

1 359 mil. EurERDFTransport infrastructure

Infrastructure and regional

accessibility

Scenario MCRD - SP

Scenario MCRD - SpP

EC contribution

FundSpecific priority (SpP)Strategic priority

(SP)

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Suggestion of allocation by IER Suggestion of allocation by IER SASSAS

40 mil. EurERDFFinančné riadenie, kontrola... 80 mil. Eur

40 mil. EurERDFPríprava, riadenie, monitorovanie... ŠF a KFTechnická pomoc

480 mil. EurESFPodpora rastu zamestnanosti a sociálnej inklúzie

1 152 mil. Eur

672 mil. EurESFModerné vzdelávanie pre znalostnú spoločnosťĽudské zdroje a vzdelávani

e

268 mil. EurERDFModernizácia zdravotníctva

1 468 mil. EurERDFVýskum a vývoj

384 mil. EurERDFInformatizácia spoločnosti 2 696 mil. Eur

576 mil. EurERDFPodpora konkurencieschopnosti podnikov a služieb...Inovácie,

informatizácia a

znalostná ekonomika

1 153 mil. EurERDFLokálna infraštruktúra

1 712 mil. EurKF

16 mil. EurERDFEnviromentálna infraštruktúra a ochrana životného prostredia

1 712 mil. EurKF

5 702 mil. Eur

1 109 mil. EurERDFDopravná infraštruktúra

Infraštruktúra a regionálna dostupnosť

Scenár EU SAV - SP

Scenár EU SAV – ŠP

Príspevok ES

FondŠpecifická priorita (ŠP)Strategická

priorita (SP)

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Scenario comparation by volume of Scenario comparation by volume of

total funds in time total funds in time

0

0 ,2

0 ,4

0 ,6

0 ,8

1

1 ,2

1 ,4

1 ,6

2 0 0 7 2 0 0 8 2 0 0 9 2 0 1 0 2 0 1 1 2 0 1 2 2 0 1 3

Norm

Late

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Changes in GDP growth compared Changes in GDP growth compared

to baseline scenario to baseline scenario

A bsolútne odchýlky K u m ulatívne odchýlky

S cenár M V R R apr í l 2006

Optim alizovaný scenár

S cenár M V R R apr í l 2006

Optim alizovaný scenár

N orm al Late N orm al Late N orm al Late N orm al Late 2007 4,0% 1,3% 4,3% 1,3% 4,2% 1,2% 4,4% 1,3% 2008 0,4% 0,9% 0,5% 0 ,9% 4,6% 2,1% 5,0% 2,2% 2009 3,5% 2,2% 3,7% 2,4% 8,1% 4,2% 8,7% 4,5% 2010 0,4% 2,1% 0,5% 2,3% 8,5% 6,4% 9,2% 6,8% 2011 3,6% 2,8% 3,9% 3,1% 12,3% 9,3% 13,2% 10,0% 2012 0,1% 2,2% 0,2% 2,4% 12,4% 11,6% 13,5% 12,5% 2013 3,9% 2,7% 4,1% 2,9% 16,6% 14,5% 18, 0% 15,7%

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Development of cumulative changes of Development of cumulative changes of

GDP compared to baseline scenarioGDP compared to baseline scenario

0,0%

2,0%

4,0%

6,0%

8,0%

10,0%

12,0%

14,0%

16,0%

18,0%

2007 2008 2009 2010 2011 2012 2013

MV RR_norm

MV RR_late

OPT_norm

OPT_late

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Changes in unemployment rate in Changes in unemployment rate in

evaluated scenariosevaluated scenarios

A bsolútne odchýlky M iera nezam es tnanos ti

S cenár M V R R apr íl 2006

Optim alizovaný scenár

S cenár M V R R apr íl 2006

Optim alizovaný scenár

N orm al Late N orm al Late N orm al Late N orm al Late 2007 0,0% 0,0% 0,0% 0,0% 16,3% 16,2% 16,3% 16,2% 2008 1,3% 0,2% 1,4% 0,3% 14,4% 15,4% 14,3% 15,4% 2009 0,9% 0,4% 1,0% 0,4% 14,0% 14,5% 13,9% 14,5% 2010 2,2% 1,0% 2,4% 1,0% 11,5% 12,8% 11,4% 12,7% 2011 1,7% 1,4% 1,9% 1,5% 11,0% 11,3% 10,9% 11,2% 2012 3,1% 2,1% 3,4% 2,3% 8,9% 9,9% 8,6% 9,8% 2013 2,5% 2,5% 2,7% 2,7% 8,9% 8,9% 8,7% 8,7%

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Changes in total growth of Changes in total growth of

productivity rate productivity rate

A bsolútne odchýlky K u m ulatívne odchýlky

S cenár M V R R apr íl 2006

Optim alizovaný scenár

S cenár M V R R apr íl 2006

Optim alizovaný scenár

N orm al Late Norm al Late N orm al Late N orm al Late 2007 4,1% 1,3% 4,4% 1,3% 4,2% 1,2% 4,5% 1,3% 2008 -1,2% 0,6% -1,2% 0,6% 3,1% 1,8% 3,3% 1,9% 2009 3,9% 2,1% 4,2% 2,2% 7,0% 3,8% 7,5% 4,0% 2010 -1,2% 1,4% -1,2% 1,5% 5,7% 5,2% 6,2% 5,6% 2011 4,3% 2,3% 4,5% 2,5% 10,1 % 7,5% 10,9% 8,1% 2012 -1,5% 1,4% -1,5% 1,5% 8,5% 9,0% 9,3% 9,7% 2013 4,7% 2,2% 4,9% 2,4% 13,5% 11,3% 14,5% 12,2%

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Cumulative CSF Cumulative CSF

multiplicatormultiplicator K u m ulatívny podiel C S F na H D P K u m ulatívny C S F m ultiplikátor

S cenár M V R R apr íl 2006

Optim alizovaný scenár

S cenár M V R R apr í l 2006

Optim alizovaný scenár

N orm al Late N orm al Late N orm al Late N orm al Late 2007 6,9% 1,3% 6,6% 1,3% 0,60 0,92 0,67 0,96 2008 6,4% 2,4% 6,1% 2,4% 0,66 0,87 0,74 0,92 2009 5,8% 4,5% 5,8% 4,5% 0,88 0,91 0,97 0,97 2010 5,6% 6,3% 5,5% 6,2% 1,02 0,96 1,13 1,02 2011 5,2% 6,8% 5,3% 6,8% 1,26 1,09 1,38 1,17 2012 4,9% 6,9% 5,1% 6,8% 1,44 1,23 1,57 1,33 2013 4,6% 6,4% 4,9% 6,4% 1,69 1,42 1,83 1,54

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ConclusionsConclusions

Late allocation of NSRR funding has major Late allocation of NSRR funding has major economic influenceeconomic influence

Decrease of long/term multiplicative effects Decrease of long/term multiplicative effects (infrastructure, education)(infrastructure, education)

In model case in late allocation is possible to In model case in late allocation is possible to reach maximum only 85% of potential productreach maximum only 85% of potential product

Significantly lesser positive influence on Significantly lesser positive influence on development of unemploymentdevelopment of unemployment

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ConclusionsConclusions

Late allocation of NSRF brings new risks Late allocation of NSRF brings new risks Cumulation of greater amounts of fund Cumulation of greater amounts of fund

volume on shorter period markedly decreases volume on shorter period markedly decreases effectivity of appliance of these fundseffectivity of appliance of these funds

Markedly increase risk of lesser allocation of Markedly increase risk of lesser allocation of funds in periodfunds in period

Possible lack of capacities to sudden increase Possible lack of capacities to sudden increase of funds allocation (human, technical)of funds allocation (human, technical)

2. 10. 2008, Herľany2. 10. 2008, Herľany

Institute for Economic ResearchInstitute for Economic Research Slovak Academy of SciencesSlovak Academy of Sciences www.ekonom.sav.skwww.ekonom.sav.sk

Viliam.Palenik@savba.skViliam.Palenik@savba.sk Marek.Radvansky@savba.skMarek.Radvansky@savba.sk