ETHIOPIAN DEVELOPMENT RESEARCH INSTITUTE

General Equilibrium Effects of PSNP in the Small and in the LargeMateusz Filipski1 ; Getachew Ahmed Abegaz 1; Tadele Ferede2 ; J. Edward Taylor 3 ; Xinshen Diao1 ; Alemayehu Seyoum Taffesse1

1: IFPRI 2 : Addis Ababa University3: UC-Davis

Ethiopian Economics Association 13th International Conference on the Ethiopian EconomyJuly 23-25, 2015Addis Ababa

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Motivation

• PSNP has two components: Cash Transfer (CT) and Public Works (PW)– Soil & water conservation (SWC), irrigation, roads, schools, clinics…

• Most evaluation focuses on recipient households • But impacts may spread far beyond recipients:

– Cash Recipients spend their money within their economy– Public works affect agro-ecological and economic environment

Þ Need to evaluate the FULL impactÞ We evaluate full impacts locally, and nationwide

Cash transfer

Rest of Zimbabwe

Rest of World

Treatment household

Market

Public Works

Rest of Zimbabwe

Rest of World

PSNP village

Other village

Market

Rest of the country

Village-wide yield shock

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PSNP woredas in Tigray, Amhara, Oromia and SNNPR

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Economy-wide Modeling

• System of equations defining all economic flows– Production output, factor and input demands– Household incomes and expenditures– Trade flows– Taxes and transfers– Etc.

• Can model the full impact of a shock• Applicable to economy of any scale– Single country – Several countries, Region, Village, Household– Kebele

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3-step evaluation

• Step 1: Econometrics – Estimates the average impacts of PW projects on production – Grounds simulations in reality

• Step 2: Local impacts: LEWIE model – Kebele scale: Local Economy-Wide Impact Evaluation– Provides detail

• Step 3: National impacts: CGE model– Computable General Equilibrium – Provides the big picture

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PSNPCash transfersProductivity

Direct impactYield estimates,

Transfers

Econometrics and Statistics

National CGE model

LEWIEmodels

Local GE ImpactsProduction, Incomes, Consumption, Wages,

Market sales etc.

National GE ImpactsProduction, Incomes,

Consumption, Wages, Trade, GDP

etc.

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LEWIE models CGE ModelKebele level

(8 such models)National

15 commodities5 factors

3 household types

69 commodities20 factor types

20 household types4 agro-climatic zones

Distinguishes PSNP recipients (Public works, Direct support, non-

recipients)

Distinguishes PSNP areas(land accounts, activity accounts,

household accounts)Bottom up calibration from

household dataTop-down calibration from

National accounts

Static, 1-year Static, 1-year

Comparing models

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Step 1 – Econometric Estimations

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Econometric Estimations• (Relates to the work presented by Dr. Alemayehu)• Figure out impact of project on yields – NB: other impacts will be future work– ex: transport costs, education, health

• Empirical strategy: – Regress yield on number of projects (Fixed effects, GMM-IV)

• Results: – Grain yields increase by 2.8% per year (SWC projects)– Vegetable yield increase by 12% per year (irrigation projects)– Other crops not significantly affected

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From econometrics to simulations

• Take econometric results and use them to simulate PSNP in an economy-wide model

• Change parameters of the model• Here, I report results for joint simulations – Increase in grain yields– Increase in vegetable yields – Cash transfer

=> Model solves for “full impact”

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Step 2 – Local impacts LEWIE modeling

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Enderta (Lemlem & Felege Mayat)

Ambasel (Joro Geta & Kolet)

Fentale (Lege Benti & Fate Ledi)

Shebedino (Fura & Rameda)

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Shocks we simulate

• 2.8 % increase in grain yields (from SWC)• 12% increase in vegetable yields (from irrigation)• 18% transfer income for PSNP recipient households

• Model simulates the impact in a single year of PSNP

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Results – Production Output

Lege Fate Fura Leml Kole Joro Rame Fele0

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% change in total output in 8 kebeles

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0.25 0.3 0.35 0.4 0.45 0.5 0.550

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% change in total output

Market Integration Index

Economic structure shapes results

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Results - Income

Lege Fate Fura Leml Kole Joro Rame Fele0

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10

15

20

25

30

35

% change in real income by recipient status

Non-recipients PW DS

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Results at local scale

• PSNP increased production in all Kebeles– But size of total impact differs– Structure of the economy matters

• Positive spillovers– Non-recipients also benefit– Pathways: increased yields and increased demand

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Step 3 – National ImpactsCGE modeling

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Shocks we simulate

• 2.8 % increase in grain yields (from SWC)• 12 % increase in vegetable yields (from irrigation)• 18 % transfer income for PSNP recipient households

(=3.7% for the PSNP area)

Model simulates the impact in a single year of PSNP

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Results – National Level

All Agriculture Grains0.000.501.001.502.002.503.003.50

% change in output

All PSNP areas Non-PSNP areas

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4

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% change in Household Income

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Results – National Level

Nominal GDP Real GDP0

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1.5

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2.5GDP % change

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Conclusions• Local impacts are positive but differ across area– Depend critically on the structure of the local economy– We have the LEWIE tool to analyze those impacts

• Nationwide economic impact of PSNP is far from trivial – 0.88% real GDP growth (bounds at 0.61% – 1.22%)

• PSNP has far-reaching impacts– Benefits from combining Protection + Production– Stimulates supply and demand simultaneously– Need General Equilibrium framework to reveal full benefits

• There are also long-term impacts: needs more research

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Thank You