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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
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
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 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!
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 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
Subsidies are important for the poor (Morocco, Dirham/person/year)
0
.02
.04
.06
.08
.1
Les
parts
des
dép
ense
s
1000 4000 7000 10000 13000 16000
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
.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
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
ct o
n th
e go
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
.3
The
expe
nditu
re s
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 (%)