rafmacalaba/datause-encoder-data huggingface dataset:
Quantitative approaches to fiscal
            sustainability analysis : a new World Bank tool applied to Turkey
WPS4169

# **Quantitative Approaches to Fiscal Sustainability Analysis**

**A New World Bank Tool Applied to Turkey**<sup>**1**</sup>

Nina Budina World Bank nbudina@worldbank.org and Sweder van Wijnbergen University of Amsterdam s.j.g.vanwijnbergen@uva.nl

## **Abstract**

Fiscal sustainability analysis (FSA) is an important component of macroeconomic analysis. This paper reviews various quantitative approaches to FSA with a major objective to bring these approaches together and to present a user-friendly tool for FSA that reflects modern developments. We combine a dynamic simulations approach with a simplified version of the steady state consistency approach. We also incorporate two different methods to deal with uncertainty: user-defined stress tests and stochastic simulations. The tool goes further by evaluating the required fiscal adjustment as a consequence of the stochastic realizations of the exogenous variables. Furthermore, the FS tool incorporates an endogenous debt feedback rule for the primary surplus, a fiscal policy reaction function. Besides outlining the theoretical framework, we also present a case study for Turkey.

World Bank Policy Research Working Paper 4169, March 2007 _The Policy Research Working Paper Series disseminates the findings of work in progress to encourage the exchange of ideas about development issues. An objective of the series is to get the findings out quickly, even if the presentations are less than fully polished. The papers carry the names of the authors and should be cited accordingly. The findings, interpretations, and conclusions expressed in this paper are entirely those of the authors. They do not necessarily represent the view of the World Bank, its Executive Directors, or the countries they represent. Policy Research Working Papers are available online at http://econ.worldbank.org._ 1 This paper is to be used together with the technical instruction manual (WPS 4170), which provides step-by-step technical instructions for running the FSA tool, and includes mathematical appendices and a glossary.
Regional disparities in labor market
            performance in Croatia : the role of individual and regional
            structural characteristics
The labor market performance in Croatia
            failed to keep pace with the moderately good overall
            macroeconomic development in the past few years. Youth, the
            less well-educated, and women face more difficulties in
            getting a job with a decent salary. A large part of the
            difference in regional labor market performance is
            associated with the difference in the human capital
            endowment. With a stagnant total employment rate, the large
            disparities in employment and earnings across individual
            groups and regions have become one of the concerns for the
            long-term sustainable development of the economy. Using
            Labor Force Survey (LFS) data from 2002-04, this paper
            studies the labor market performance in Croatia at the
            national and regional levels. The results show that both
            one's individual characteristics (including age,
            education and gender) and where he or she works plays a role
            in his or her employment and earnings. Regional differences
            in employment and earnings are reduced to a large extent
            when accounting for differences in individual
            characteristics. The simulations shed light on the
            effectiveness of the nationwide education policy and
            regional specific labor market policy, and suggest that
            improving human capital endowment and adjusting labor market
            structure are both important to rebalance regional
            development and enhance total welfare.
Pathways out of poverty during an
            economic crisis : an empirical assessment of rural Indonesia
Most poor people in developing countries
            still live in rural areas and are primarily engaged in low
            productivity farming activities. Thus pathways out of
            poverty are likely to be strongly connected to productivity
            increases in the rural economy, whether they are realized in
            farming, in rural nonfarm enterprises, or by way of
            rural-urban migration. The authors use cross-sectional data
            from the Central Statistical Board for 1993 and 2002, as
            well as a panel data set from the Indonesia Family Life
            Survey for 1993 and 2000, to show which pathways out of
            poverty were most successful over this period. The findings
            suggest that increased engagement of farmers in rural
            nonfarm enterprises is an important route out of rural
            poverty, but that most of the rural agricultural poor that
            exit poverty still do so while remaining rural and
            agricultural. So changes in agricultural prices, wages, and
            productivity still play a critical role in moving people out
            of poverty.
Enterprises, workers, and skills in
            Urban Timor-Leste
Like many low-income countries,
            Timor-Leste faces challenges in providing employment for and
            increasing the skills of its labor force-challenges made
            more acute by high fertility rates, a very young population,
            and the capacity constraints of a new nation. However, there
            is limited information for policymakers to formulate
            appropriate policies. The paper presents findings of the
            first urban enterprise survey in independent Timor-Leste. It
            explores several aspects of the Timorese urban labor market,
            including the profile of formal and informal enterprises,
            their behavior in terms of employment and wage-setting
            practices, and constraints on firm growth. It also presents
            findings on the skills and training needs of urban
            employers, and constraints faced in overcoming skills
            shortages. It finds a highly informal urban enterprise
            scene, where even "formal" enterprises are largely
            micro-enterprises. While there has been considerable action
            in terms of new firm creation since independence, there is
            already surprisingly low job creation or destruction. This
            is driven by a number of constraints inside and outside the
            labor market. With respect to wages, the impacts of the
            informal minimum wage policy inherited from the interim
            international administration suggest the need for caution in
            future wage policy development. While employers identify
            many skills gaps, basic literacy, numeracy, and language
            skill needs dominate, and employers appear to value short
            courses and less formal modes of skills training to address
            their needs. The paper concludes with suggestions for
            addressing the key constraints identified.
The role of services in rural income
            : the case of Vietnam
This paper investigates the role of
            services in the household response to trade reforms in
            Vietnam. The relative response of the households and income
            growth after a major trade liberalization in rice are
            analyzed aiming to answer the following questions: What type
            of households, in which locations, having access to what
            type of services, benefited more from the reforms? It
            focuses on services that have an impact on transaction costs
            (roads or quality of roads, public transportation, access to
            credit, extension services, and availability of markets in
            communication services) because transaction costs are often
            cited as a barrier to rural households in responding to the
            price changes and increased incentives offered by trade and
            other policy reforms. The results suggest that availability
            of production related services contributes positively to the
            impact of trade reforms. Although most of the service
            variables have a positive and significant effect on growth
            in income, some that are expected to have an impact are not
            significant. This may be explained by the exceptional
            coverage of infrastructure services in Vietnam even before
            the reforms. When service availability is very similar
            across different localities, household characteristics
            become more important in determining the response.
Export promotion agencies : what
            works and what doesn't
The number of national export promotion
            agencies (EPAs) has tripled over the past two decades. While
            more countries have made them part of their national export
            strategy, studies have criticized their efficiency in
            developing countries (Hogan, Keesing, and Singer 1991).
            Partly in reaction to these critiques, EPAs have been
            retooled (see International Trade Centre, ITC, 1998 or 2000,
            for example). This paper studies the impact of existing EPAs
            and their strategies based on a new data set covering 104
            industrial and developing countries. Results suggest that on
            average they have a strong and statistically significant
            impact on exports. For each $1 of export promotion, the
            paper estimates a $40 increase in exports for the median
            EPA. However, there is heterogeneity across regions, levels
            of development, and types of instruments. Furthermore, there
            are strong diminishing returns, suggesting that as far as
            EPAs are concerned, small is beautiful.
How good a map Putting small area
            estimation to the test
The authors examine the performance of
            small area welfare estimation. The method combines census
            and survey data to produce spatially disaggregated poverty
            and inequality estimates. To test the method, they compare
            predicted welfare indicators for a set of target populations
            with their true values. They construct target populations
            using actual data from a census of households in a set of
            rural Mexican communities. They examine estimates along
            three criteria: accuracy of confidence intervals, bias, and
            correlation with true values. The authors find that while
            point estimates are very stable, the precision of the
            estimates varies with alternative simulation methods. While
            the original approach of numerical gradient estimation
            yields standard errors that seem appropriate, some
            computationally less-intensive simulation procedures yield
            confidence intervals that are slightly too narrow. The
            precision of estimates is shown to diminish markedly if
            unobserved location effects at the village level are not
            well captured in underlying consumption models. With well
            specified models there is only slight evidence of bias, but
            the authors show that bias increases if underlying models
            fail to capture latent location effects. Correlations
            between estimated and true welfare at the local level are
            highest for mean expenditure and poverty measures and lower
            for inequality measures.
Financial services and trade
            agreements in Latin America and the Caribbean : an overview
The authors review the international
            framework governing trade in financial services, describe
            the treatment of financial services in recent trade
            agreements involving Latin America and Caribbean countries,
            and analyze the liberalization commitments made in three
            selected country case studies-Chile, Colombia, and Costa
            Rica. They give emphasis to free trade agreements because of
            the generally deeper level of liberalization and rule-making
            achieved to-date. The authors discuss some of the causes and
            potential implications of their findings.
The welfare effects of a large
            depreciation : the case of Egypt, 2000-05
The Egyptian pound depreciated sharply
            between 2000 and 2005, declining by 26 percent in nominal
            trade-weighted terms. The author investigates the effect of
            the large depreciation on household welfare operating
            through exchange rate-induced changes in consumer prices. He
            estimates exchange rate pass-through regressions using
            disaggregated monthly consumer price indices to isolate the
            impact of the exchange rate changes on consumer prices. Then
            he uses household-level data from the 2000 and 2005 Egyptian
            household surveys to quantify the welfare effects of these
            consumer price changes at the household level. The average
            welfare loss due to exchange rate-induced price increases
            was equivalent to 7.4 percent of initial expenditure.
            Stronger estimated exchange rate pass-through for food items
            imply that this effect disproportionately affected poorer households.
The welfare effects of a large
            depreciation : the case of Egypt, 2000-05
# WPS4182

## **The Welfare Effects of a Large Depreciation: The Case of Egypt, 2000-05**

Aart Kraay The World Bank

**Abstract** :   The Egyptian pound depreciated sharply between 2000 and 2005, declining by 26 percent in nominal trade-weighted terms.  This paper investigates the effect of the large depreciation on household welfare operating through exchange rate-induced changes in consumer prices.  I estimate exchange rate pass-through regressions using disaggregated monthly consumer price indices to isolate the impact of the exchange rate changes on consumer prices.  I then use household-level data from the 2000 and 2005 Egyptian household surveys to quantify the welfare effects of these consumer price changes at the household level.  The average welfare loss due to exchange rateinduced price increases was equivalent to 7.4 percent of initial expenditure.  Stronger estimated exchange rate pass-through for food items imply that this effect disproportionately impacted poorer households.

### World Bank Policy Research Working Paper 4182, April 2007

The Policy Research Working Paper Series disseminates the findings of work in progress to encourage the exchange of ideas about development issues. An objective of the series is to get the findings out quickly, even if the presentations are less than fully polished. The papers carry the names of the authors and should be cited accordingly. The findings, interpretations, and conclusions expressed in this paper are entirely those of the authors. They do not necessarily represent the view of the World Bank, its Executive Directors, or the countries they represent. Policy Research Working Papers are available online at http://econ.worldbank.org.

__________________________________________ 1818 H Street N.W, Washington, DC, 20433, akraay@worldbank.org, <u>http://econ.worldbank.org/staff/akraay. This paper was prepared as background for the 2007</u> Egypt Poverty Assessment. I would like to thank without implication Sherine El-Shawarby, Heba El-Laithy, Faika El-Refaie, Francisco Ferreira, Jed Friedman, Michael Lokshin, Martin Ravallion, Luis Serven, and conference participants at the Egyptian Center for Economic Studies for helpful discussions.
Youth unemployment, labor market
            transitions, and scarring : evidence from Bosnia and
            Herzegovina, 2001-04
Relatively little is known about youth
            unemployment and its lasting consequences in transition
            economies, despite the difficult labor market adjustment
            experienced by these countries over the past decade. The
            authors examine early unemployment spells and their
            longer-term effects among the youth in Bosnia and
            Herzegovina (BiH), where the labor market transition is made
            more difficult by the challenges of a post-conflict
            environment. They use panel data covering up to 4,800
            working-age individuals over the 2001 to 2004 period. There
            are three main findings from their analysis. First, youth
            unemployment is high-about twice the national
            average-consistent with recent findings from the BiH labor
            market study. Younger workers are more likely to go into
            inactivity or unemployment and are also less likely to
            transition out of inactivity, holding other things constant.
            Second, initial spells of unemployment or joblessness appear
            to have lasting adverse effects on earnings and employment
            ("scarring"). But there is no evidence that the
            youth are at a greater risk of scarring, or suffer
            disproportionately worse outcomes from initial joblessness,
            compared with other age groups. Third, higher educational
            attainment is generally associated with more favorable labor
            market outcomes. Skilled workers are less likely to be
            jobless and are less likely to transition from employment
            into joblessness. But there is evidence that the penalty
            from jobless spells may also be higher for more educated
            workers. The authors speculate that this may be due in part
            to signaling or stigma, consistent with previous findings in
            the literature.
Youth well-being in Brazil : an
            index for cross-regional comparisons
This study constructs three indices to
            measure how well Brazil's young people are surviving
            their transition to adulthood. Youth development is
            difficult to quantify because of the multi-dimensionality of
            youth behavior. Most monitoring use individual indicators in
            specific sectors, making it difficult to track overall
            progress. The study adapts to the Brazilian case a
            methodology developed by Duke University to measure the
            well-being of U.S. children and youth. It uses readily
            available data to construct three indices for each Brazilian
            state based on 36 indicators encompassing the health,
            behavior, school performance, institutional connectedness,
            and socioeconomic conditions. The indices conclude that
            young people in the states of Santa Catarina and the Federal
            District are doing particularly well and those in Alagoas
            and Pernambuco are the worst off. While these rankings are
            expected to continue into the next generation, young people
            in other states have a brighter (Espiritu Santo) or more
            dismal (Rio Grande de Sul, Tocatins) future due to
            underinvestment in today's children. Still others (Rio
            de Janeiro) are underutilizing their resources so their
            young citizens are in a worse situation than they could be
            if the state were to invest more. The hope is that the
            methodology can be used in Brazil as it has been used in the
            United States to estimate the indices annually, thus
            allowing policymakers, young people, and society to track
            the well-being of youth in each state over time.
The aftermath of civil war
Using an "event-study"
            methodology, this paper analyzes the aftermath of civil war
            in a cross-section of countries. It focuses on those
            experiences where the end of conflict marks the beginning of
            a relatively lasting peace. The paper considers 41 countries
            involved in internal wars in the period 1960-2003. In order
            to provide a comprehensive evaluation of the aftermath of
            war, the paper considers a host of social areas represented
            by basic indicators of economic performance, health and
            education, political development, demographic trends, and
            conflict and security issues. For each of these indicators,
            the paper first compares the post- and pre-war situations
            and then examines their dynamic trends during the
            post-conflict period. The paper concludes that, even though
            war has devastating effects and its aftermath can be
            immensely difficult, when the end of war marks the beginning
            of lasting peace, recovery and improvement are indeed achieved.
Post-conflict justice and
            sustainable peace
No systematic study has examined the
            effect of post-conflict justice on the duration of peace on
            a global basis. This paper attempts to fill that void by
            building on a newly constructed dataset (Binningsbo, Elster,
            and Gates 2005), which reports the presence of various forms
            of post-conflict justice efforts (trials, purges, reparation
            to victims, and truth commissions) as well as processes
            associated with abstaining from post-conflict justice
            (amnesty and exile). It investigates the long-term effects
            of post-conflict justice on the duration of peace after
            conflict. It uses a Cox proportional hazard model to analyze
            the influence of the various types of post-conflict justice
            on the length of the peace period before the recurrence of
            violent conflict. Post-conflict trials as well as other
            types of justice do lead to a more durable peace in
            democratic as well as non-democratic societies, but the
            results are weak and are therefore difficult to generalize.
            Forms of non-retributive justice (that is, reparations to
            victims and truth commissions), however, are strongly
            associated with the duration of peace in democratic
            societies, but are not significant for non-democratic
            societies. Amnesty tends to be destabilizing and generally
            associated with shorter peace duration, but exile tends to
            lead to a more durable peace.
Ethnic polarization and the duration
            of civil wars
The authors analyze the relationship
            between ethnic polarization and the duration of civil wars.
            Several recent papers have argued that the uncertainty about
            the relative power of the contenders in a war will tend to
            increase its duration. In these models, uncertainty is
            directly related to the relative size of the contenders. The
            authors argue that the duration of civil wars increases the
            more polarized a society is. Uncertainty is not necessarily
            linked to the structure of the population but it could be
            traced back to the measurement of the size of the different
            groups in the society. Given a specific level of measurement
            error or uncertainty, more polarization implies lengthier
            wars. The empirical results show that ethnically polarized
            countries have to endure longer civil wars than ethnically
            less polarized societies.