MEASURING THE WELFARE IMPACT OF SUBSIDY REFORMS PAOLO  VERME  

September  9,  2014  

MENA  Knowledge  Sharing  and  How-­‐To  in  Subsidy  Reform:  Regional  Workshop  

Today’s  PresentaMon  

•  IntroducMon  to  the  microeconomic  foundaMons  of  welfare  measurement  when  prices  change  

•  IntroducMon  to  the  main  models  used  to  esMmate  the  impact  of  subsidies  reforms  

•  IntroducMon  to  SUBSIM:  A  SUBsidies  SIMulaMon  model  

Microeconomic  Founda.ons  

The  Central  QuesMon  •  Subsidies  reforms  essenMally  imply  increases  in  prices  of  subsidized  products  

•  Ques.on:  What  is  the  impact  of  a  price  change  (increase)  on  household  welfare  and  social  welfare?  

•  This  is  one  of  the  most  complex  and  most  controversial  quesMons  in  microeconomic  theory  

•  This  is  one  of  the  major  sources  of  errors  in  empirical  studies    

Microeconomics  FoundaMons  •  Marshall  (1890)  and  Hicks  (1942)  

Five  methods:  –  Consumer’s  Surplus  (CV)  –  Equivalent  VariaMon  (EV)  –  Compensated  VariaMon  (CV)  –  Laspeyers  VariaMon  (LV)  –  Paasche  VariaMon  (PV)  

 Reference:  Araar  and  Verme  (2014)  Prices  and  Welfare,  forthcoming  

Geometric  InterpretaMon  

Small  and  Large  Price  VariaMons  •  All  esMmaMon  methods  tend  to  converge  for  small  price  changes  

•  By  small  price  changes  we  mean  changes  in  between  0  and  5%  and,  under  certain  condiMons,  up  to  10%.  

•  For  small  price  changes,  the  simplest  of  the  formulae  can  be  used:  .  This  corresponds  to  the  Laspeyers  formula,  also  known  as  the  “marginal”  approach.    

•  Most  people  working  on  subsidies  use  this  formula  (including  WB  and  IMF)  

•  For  large  price  changes  (>10%)  the  different  methods  provide  very  different  results  and  the  difference  increases  for  larger  price  changes  

•  One  of  the  peculiariMes  of  subsidies  is  that  changes  can  be  very  large.  Up  to  ten  Mmes  (+1000%)  the  original  price.  In  these  cases,  the  different  esMmaMon  methods  provide  VERY  different  results  and  the  Laspeyers  formula  grossly  OVER  esMmates  the  welfare  effects    

 =>  Most  subsidies  studies  grossly  over  esMmate  the  welfare  effects.  

Large  Price  Changes,  Demand  Curves  and  ElasMciMes  

   p1                p0  

Q1  ‘                              Q1                                                                          Q0  

DD’  

Difference  

Large  Price  Changes  Strategies  •  Demand  modelling:  Try  different  sets  of  demand  schedules:  Linear,  Quasi-­‐linear,  Cobb-­‐Douglas,  IDEAL,  etc.  and  test  differences  

•  Itera.ve  methods:  Taylor’s  approximaMons,  VarMa’s  method,  Breslaw  and  Barry  

•  Elas.city  methods.  SomeMme  informaMon  on  own  price  elasMcity  at  the  market  price  is  known.  This  can  be  used  to  derive  own  price  elasMcity  at  the  subsidized  price.  But  you  cannot  use  local  elasMcity  as  global  elasMcity  when  price  changes  are  large!  

Subsidies  Simula.on  Models  

Three  classes  of  models  

•  Computerized  General  Equilibrium  (CGE)  models  

•  Spreadsheet  General  Models  (SGM)  

•  Microeconomic  ParMal  Equilibrium  Models  (MPE)    

General  Equilibrium  Models  •  Consider  all  markets  (commodiMes,  financial,  labor)  

•  ConsMtuted  by  a  system  of  mulMple  equaMons  

•  Solvers  for  systems  of  mulMple  equaMons  

•  Specific  solware  (ex:  GAMS)  

•  Inputs:  Macroeconomic  and  microeconomic  data,  equaMons’  parameters  including  elasMciMes  

•  Outputs:  Impact  on  household  welfare,  GDP,  government  budget,  forecasts  for  major  macroeconomic  indicators  

General  Equilibrium  Models  

Pros  •  Consider  all  markets  •  Account  for  direct  (first  

round)  and  indirect  (second  and  plus  rounds)  effects  

•  Provide  output  results  on  all  markets  including  labor  market  

•  They  are  dynamic  and  can  forecast  results  on  mulMple  years  

Cons  •  Assume  that  all  markets  clear  •  Do  not  disMnguish  between  

direct  and  indirect  effects  •  Heavy  on  macro  and  micro  

data  requirements  •  Heavy  on  baseline  

assumpMons  including  elasMciMes  

•  Use  gross  approximaMons  for  households  and  welfare  

•  Require  Mme  to  calibrate  to  country  contexts  

Spreadsheet  Equilibrium  Models  •  Require  any  spreadsheet  (ex:  Excel)  

•  ConsMtuted  by  a  series  of  sheets  connected  by  formulae  

•  Each  sheet  covers  an  agent  (households,  government,  financial  sector,  producMon  sector)  

•  RelaMons  between  agents  and  markets  are  dictated  by  formulae,  not  inter-­‐related  funcMons  

•  There  is  no  system  of  mulMple  equaMons,  no  solvers  

•  Inputs:  macro  and  micro  data,  assumed  elasMciMes  

•  Outputs:  Impact  on  household  welfare,  GDP,  government  budget,  forecasts  for  major  macroeconomic  indicators    

Spreadsheet  Equilibrium  Models  

Pros  •  Once  constructed,  relaMvely  

easy  to  adapt  to  a  new  country  

•  Cover  all  markets  or  some  markets  as  required  

•  Provide  macro  and  micro  outputs  

•  They  can  be  constructed  and  provide  results  for  several  years  

•  Suitable  for  any  user,  no  need  for  specific  solware  training  

Cons  •  Take  Mme  to  construct  •  Markets  are  not  enMrely  

correlated  through  behavioral  equaMons    

•  Rely  heavily  on  input  assumpMons  (elasMciMes)  

•  Easy  to  make  mistakes  during  use  

•  Economic  foundaMons  not  always  clear  

Microeconomic  ParMal  Equilibrium  Models  

•  Based  on  microeconomic  theory  

•  Based  on  household  budget  surveys  

•  StaMc  models,  short-­‐term  effects  

•  Focus  on  household  welfare  and  derive  social  welfare  by  aggregaMng  households  

•  Require  common  staMsMcal  solware  for  micro  data  analysis  (Stata,  SPSS)  

•  Inputs:  micro  data,  can  be  complemented  with  macro  data  

•  Outputs:  Impacts  on  household  welfare,  social  welfare,  poverty,  inequality  and  government  budget  

Microeconomic  ParMal  Equilibrium  Models  

Pros  •  Once  the  model  is  prepared,  it  

is  quick  to  apply  in  any  country  or  context  

•  Requires  a  minimum  amount  of  data  (one  HBS)  

•  Measures  more  precisely  short-­‐term  and  direct  effects  

•  With  I/O  tables,  it  is  possible  to  esMmate  indirect  effects  separately  from  direct  effects  

•  Allows  for  distribuMonal  analyses  

Cons  •  The  model  requires  Mme  to  be  

prepared  and  adapted  to  subsidies  simulaMons  

•  Not  suitable  for  medium  and  long-­‐term  dynamic  esMmaMons  

•  Considers  only  one  market  at  the  Mme,  usually  only  the  goods  market  

•  Requires  some  knowledge  of  specific  staMsMcal  solware  for  microeconomic  analysis  

SUBSIM  A  SUBsidies  SIMula.on  Model  

SUBSIM  Development  SUBSIM  1.0      June  2012  

 •  Araar  and  Verme  (2012)  Reforming  

Subsidies:  A  Toolkit  for  Policy  Analyses,  World  Bank  Policy  Research  Working  Paper  #6148  

 •  Provides  general  guidelines  for  

pracMMoners  (Part  I)  

•  Based  on  clear  economic  theory  (Part  II)    

•  Stata  model  downloadable  from  the  internet  with  users’  manual  (Part  III)  

•  Few  data  (one  or  two  data  sets)  

•  Incidence  and  impact  analyses  

•  Linear  and  non-­‐linear  pricing  

SUBSIM  2.0      June  2013  

•  Automated  analysis  

•  Behavioral  effects    •  Two  types  of  users’  

interfaces  

•  Expanded  outputs  (30  tables  and  10  graphs  of  standard  output)  

 •  Three  days  for  analysis  and  

reporMng      •  English  and  French  version  

•  Improved  microeconomic  foundaMons    -­‐  Araar  and  Verme  (2014)  Prices  and  Welfare  

•  Direct  and  Indirect  Effects  

•  Effects  of  compensatory  cash  trasnfers  

 •  Expanded  outputs  

•  Book  preparaMon  on  the  SUBSIM  experience  in  the  MENA  region  

   

SUBSIM  3.0      June  2015  

SUBSIM  AcMviMes  •  Country  support  to  subsidies  reforms:  

–  Morocco:  Support  to  the  Ministry  of  General  Affairs  for  the  design  of  subsidies  reforms  (with  HD)  

–  Tunisia:  Support  to  an  inter-­‐governmental  commiqee  working  on  subsidies  reforms  (with  HD)  

–  Egypt:  Support  to  the  MoF,  IMF  and  WB  DPL  informing  discussion  on  subsidies  (with  HD  and  SD)  

 –  Jordan:  Support  to  the  Ministry  of  Planning,  MoF  and  CB  on  subsidies  reforms  (with  HD)  

–  DjibouM:  Support  to  the  staMsMcal  agency  and  Ministry  of  Finance  for  the  simulaMon  of  subsidies  reforms  (with  HD)  

–  Yemen:  Support  to  the  WB  country  team  with  simulaMon  of  subsidies  reforms  

•  Training:    

–  Ministry  of  Finance  in  HaiM  –  World  Bank  staff  –  Model  now  used  by  Ministries,  Unicef  and  universiMes  

 

www.subsim.org  

SUBSIM  Interface  

SUBSIM  Interface  

SUBSIM  Output  

SUBSIM  Output  

Subsidies  are  important  for  the  poor  (Morocco,  Dirham/person/year)  

0

.02

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.1

Les

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des

dép

ense

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Les dépenses totales per capita

Butane

Essence et Gasoil

Farine

Sucre

Figure 01: Dépenses sur les produits subventionnés par rapport aux dépenses totales (%)

Energy  subsidies  are  pro-­‐rich    (Morocco,  Dirham/person/year)  

0

200

400

600

800

1000 4000 7000 10000 13000 16000

Les dépenses totales per capita

Butane

Essence et Gasoil

Sucre

Farine

Figure 02: Bénéfices annuels par tête via les produits subventionnés (monnaie locale)

Removing  Subsidies  Increases  Poverty  but  not  always,  equally  or  linearly  (Tunisia)  

0

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.4

.6

.8

The

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Increase in price in %

Gasoline

Diesel

Gas LPG

Kerosene

Figure 04: The impact of price increasing on poverty (%)

Removing  Subsidies  Benefits  the  Budget  but  not  always,  equally  or  linearly  (Tunisia)  

0

1.00e+08

2.00e+08

3.00e+08

4.00e+08

5.00e+08

The

impa

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vern

emen

t rev

enue

0 20 40 60 80 100

The increase in prices (in %)

Gasoline

Diesel

Gas LPG

Kerosene

Figure 05: Price changes and the impact on the governement revenue

Same  products,  different  incidence  across  countries  (Gas  GPL,  USD/PPP)  

0

.1

.2

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The

expe

nditu

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hare

s

100 900 1700 2500 3300 4100

The total expenditures per capita

Egypt

Morocco

Tunisia

Figure 01: The expenditures on the subsidized good relatively to the total expenditures (%)

Same  products,  different  impacts  across  countries  

Morocco   Tunisia  

0

.5

1

1.5

2

The

impa

ct o

n po

verty

hea

dcou

nt

0 20 40 60 80 100

Increase in price in %

Gasoline

Diesel

Gas LPG

Figure 04: The impact of price increasing on poverty (%)

0

.2

.4

.6

.8

The

impa

ct o

n po

verty

hea

dcou

nt

0 20 40 60 80 100

Increase in price in %

Gasoline

Diesel

Gas LPG

Figure 04: The impact of price increasing on poverty (%)