Economic Development and Research Center (EDRC) has recently developed a set of macroeconomic models to study the inter-linkages of macroeconomic policy and economic growth with poverty reduction and income inequality objectives. The three models are Macroeconomic Adjustment and Growth Model of Armenia (MAGMA), Growth and Distribution model and Income Distribution Matrix model.
The EDRC modelling approach lays more emphasis on income distribution than economic growth as instruments for poverty reduction. The authors believe there is no trade-off between income distribution smoothing and high sustainable economic growth in Armenia and other transition economies. This contradicts the conventional political economy story. (The story goes that you should lower the tax burden on the rich/business class to induce higher capital investment which will lead to higher economic growth. Thus greater income inequality is associated with higher growth.)
Forecast of employment is based on value added in the economy (in real terms, by branches) and estimations of productivity growth.
EDRC does not model feedback effects from social sectors (education, healthcare, etc) to macro indicators, but takes into consideration the pattern of income distribution and redistribution.
While MAGMA is the base of this framework, the other two models are used to derive income distribution of deciles’ groups (by branches of economy and type of income) and as well as the Gini coefficient and poverty incidence. In contrast with the IMF’s Financial Programming Model that estimates the growth rate from exogenous assumptions on capital and labour, MAGMA enables endogenous modelling of economic growth from behavioural equations about different groups of the population and institutions. It ensures that all accounting identities and sectors balance, thus checking the consistency of policy targets within a macroeconomic environment.
Usefulness for Poverty Reduction
The Income Distribution Matrix traces the flows of separate income components (wage, profits, transfer) between branches of the economy and deciles of the population and can thus calculate Gini coefficients and Lorenz Curves. The disaggregation in MAGMA comes from the decomposition of the marginal propensity to consume of different income groups.
According to EDRC, “Easy manipulation of the values of policy variables allows us to model different scenarios of macroeconomic policy. Three models enable the researchers to trace policy impact on income level, income distribution and, as a result, poverty level. The Growth and Distribution model shows possible poverty incidences derived by disparate GDP real growth rates.”
The members of the macroeconomic team at EDRC are experienced in macroeconomic modelling and analysis and formerly worked with the Ministry of Finance and Economy of Armenian and Central Bank.
MAGMA does not compare different economic schools of thoughts.
MAGMA was developed for medium to long term forecasting.
All variables and links are visible to the user, making interpretation of policy measures and results easier.
It is not clear whether there is scope for participatory influence in the development of the models.
All the models are written in Microsoft Excel and can thus be used by researchers without any special technical training.
MAGMA needs little data.
According to EDRC, “Visually MAGMA is very similar to RMSM-X and other relevant models.”