1. Riga 18th June 2008 EU funds macroeconomic impact assessment for Latvia Alf Vanags BICEPS

2. Riga 18th June 2008 The project To evaluate the macroeconomic impact of the structural funds using best international practice Evaluation for two time periods: –2004-2006 programming period –2007-2013 programming period Two phases: –Partial equilibrium –General equilibrium (modelling)

3. Riga 18th June 2008 Data issues Funds financial data comes in administrative form Not very useful for economic analysis Requires transformation into economic categories Production function approach

4. Riga 18th June 2008 Expenditures that enter the production function Y = AF(K,L) K: Physical capital: expenditures that augment the stock of capital L: Human capital: expenditures that augment skills and are embodied in people. L = NxH A:Expenditures that enhance total factor productivity: but are not embodied in physical capital or people F:Expenditures that change technology: expenditures that change the way output is produced eg shift to wind power, and correspond to changes in F.

5. Riga 18th June 2008 AFKL 1.1. Infrastructure99.31%0.00%0.69%0.00% 2.2. Productive environment12.52%8.22%79.26%0.00% 3.3. Human resources0.00% 100.00% 4.4. Agriculture and fishery18.73%0.00%80.16%1.12% 5.5. Technical assistance100.00%0.00% Comparison of SPD priorities and economic categories (2004-2006)

6. Riga 18th June 2008 The model Five sector model of the Latvian economy –Manufacturing (tradable goods) –Private (market) services –Construction –Agriculture –Public services (health, education) For 2004-2006 funds are subtracted from actual to get no funds scenario For 2007-2013 funds added to a no funds base line

7. Riga 18th June 2008 The economics of the model Demand –Keynesian –Distributed across sectors through input/output relationships Supply –All sectors except public services explicitly modelled with Cobb-Douglas production functions External balance –Imports and exports not explicitly modelled –Balance = Output -Expenditure

8. Riga 18th June 2008 Key indicators of interest GDP Inflation Productivity Budget balance Efficiency of funds

9. Riga 18th June 2008 Interpretation Results are NOT a forecast!! They represent the difference between with and without funds Some important uncertainties –Crowding out –Here we report 30% crowding out –Crowding out can include ‘rent seeking’ and other ‘wasted resources’

10. Riga 18th June 2008 Impact on GDP 2004-2006 programming period

11. Riga 18th June 2008 Impact on prices 2004-2006 programming period

12. Riga 18th June 2008 Impact on GDP 2007-20013 programming period

13. Riga 18th June 2008 Impact on prices 2007-2013 programming period

14. Riga 18th June 2008 Impact on the trade balance

15. Riga 18th June 2008 Impact on the budget balance

16. Riga 18th June 2008 Impact on productivity

17. Riga 18th June 2008 Results for the 2004-2006 programming period 2004200520062007 GDP cumulative0.54.811.721.8 Inflation (cumulative increase in price level) 0.00.71.01.4 Employment (cumulative) 0.54.27.112.0 Budget % of GDP0.61.7 2.5 Trade balance % of GDP -2.4-4.4-4.1-2.6 Productivity (cumulative) - 0.4-0.53.07.1

18. Riga 18th June 2008 Results for the 2007-2013 programming period 200720082009201020112012201320142015 GDP cumulative increase 1.06.611.419.125.331.336.140.042.6 Employment 0.96.76.611.313.015.316.417.016.9 Labour productivity -0.8-1.13.45.99.812.816.018.821.4 Consumer price level 0.11.52.23.04.05.06.06.87.3 Government budget balance, percentage points of GDP 1.22.31.21.61.10.90.50.2-0.3 Trade balance, percentage points of GDP -4.2-3.4-2.6-1.7-0.5-0.20.40.82.1

19. Riga 18th June 2008 Efficiency of funds A standard measure: –Cumulative policy multiplier –(cumulative change in real GDP)/(cumulative share of funds in nominal GDP) Represents the return of the funds measured in terms of the overall GDP impact Results: 2004-20071.6 2007-20151.7

20. Riga 18th June 2008 Some final remarks Overall positive effect of funds confirmed Limited impact on macroeconomic imbalances of recent years Results still preliminary … robustness checks ongoing Delay in implementing new funds may prove fortuitous