# **I. Methodological approach**

The main challenge in fulfilling the objectives stated above is to find a way of translating these economic and demographic shocks into the consumption distribution. The traditional solution is to extrapolate poverty measures by estimating an “elasticity” of poverty to output or GDP. The elasticity approach uses historical trends of output and poverty to determine the responsiveness of poverty rates to growth in output (and consumption), which is then combined with macroeconomic projections to estimate the impact of future growth on poverty. Although this method is easy to implement, it is limited in its predictive capability since it yields only aggregate poverty impacts, with no indication of the broader distributional effects. It may also prove deficient in predicting poverty impacts during a macroeconomic event that affects output growth in a way that is not entirely consistent with the recent growth experience in Iraq. In addition, measured poverty has in recent times been very inelastic with respect to increases in GDP growth (as measured), so that elasticity approaches would imply little poverty impact of such a massive economic shock.<sup>8</sup> The estimates and analysis presented in this paper uses a micro‐simulation model to evaluate the welfare and distributional impacts of the IDPs and macro (oil price and non‐IDP IS‐related) crisis in Iraq during 2014. The micro‐simulation model superimposes macroeconomic projections on behavioral models built on last available household survey (Iraq Household and Socio‐ Economic Survey, or IHSES 2012). The model is loosely based on previous approaches to micro‐simulation described in Bourguignon, Bussolo and Pereira da Silva (2008) and Ferreira, et al. (2008) – with an important simplification of omitting the computable general equilibrium (CGE) component, which is difficult to employ in most developing countries. Instead the approach described here links the behavioral model to sectoral and aggregate macroeconomic data for Iraq, and extrapolates the microeconomic snapshot of a future scenario from this projection.<sup>9</sup> This approach has been extended to explicitly take into account large scale population movements, which in the case of Iraq, is the internal forced displacement of people from the IS‐affected provinces (or governorates).

This micro‐simulation model accounts for multiple transmission mechanisms and captures impacts at the micro level across the income and consumption distribution. In particular, the model can take into account large changes in population over time and space; labor market adjustments in employment and earnings or a combination of both; non‐labor incomes including public and private transfers; and price changes (including variations in food and non‐food prices). These changes can be positive or negative, depending on the trends outlined by the macroeconomic inputs.

In the following subsections, we present a brief discussion about the micro‐simulation model and each step in which this method is based ‐i.e. baseline, simulation and assessment‐ and we end the section with a discussion of the limitations and assumptions of this methodological approach.

> 8 World Bank (2015)

> 9This approach was conceptualized, refined and tested in a diverse mix of countries not only during the financial crisis (such as Bangladesh, The Philippines, Mexico, Poland, and Mongolia) but also after the crisis (such as Costa Rica, Panama, Uruguay, Serbia, Armenia, Belarus, Kyrgyz Republic, Moldova, Poland, Romania, and Ukraine).

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