Notes on a macro-economic model used to project the possible performance of the Jamaican economy 1968-1973

'Rhis paper is preparcd for the Bank's internal use and is not for publication. The views are those of the author and not necessarily those of the Bank. INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPIENT INTERNATIONAL DEVELOPMENT ASSOCIATION Economics Department Working Paper No. 50 NOTES ON A MACRO-ECONOMIC MIODEL USED TO PROJECT THE POSSEIBE PERFORNIUCE OF THE JAM1AICAN ECONOMY 1968-1973 October 21, 1969 This paper explains in detail the implicit methodology and calculations behind the projections con-tained in the Bank MIission report on Jamaica in 1968. It is presented as an example of how such projections might be made in situations wehere there is at least a moderate amount of available data. Prepared by: Nicholas G. Cartber Quantitative Techniques and Analy8is Division  1. lTiis paper is a description of a quantitative economic model, its evolution, ardu its intlegration into a country economic analysis in the World Bank-Y To those who routinely make such a7nalyses wihat is presented here contains nothing particularly novel. The purpose of the paper is not to suggest new methods of making country economic analyses, but rather to make explicit the steps by wihich this type of activity is carried out- (at least by the more quanititative among the count v economists), particularly in situations where the data base is reasonably good. In such situationis the analysis can be a fruitful combination of quantitative and qualitative economics. Thus we try to describe in detail an existing methodology rather than to suggest a new one. 2. Most economic projections involve some kind of model, often very simple and, in the case of the Bank, often implicit. These models, a blend of qualitative and quantitative elements,, usually begin with past, measurable, structure, Te parameters of this structure are then modified by desirable and feasible policy for the future, and comnbined with estimates of probable availabilities of development resources,, such as savings and foreign exchanage, to obtain possible outcomes for the various indicators of economic and social activity. Tnis process is most often carried out in the framework of national income and public sector accounts0 1/ I am indebted to E&K. Hawikins and P.D. Henderson for their helpful comments and criticis.mo, and more particularly to Murray Ross who inspired this paper and provided many helpful comments during its preparation0 I maintain, however,, all responsibility for errors.  The model that forms an integral part of the r'eport of the 1968 Bank mission to Jamaica,3 although possibly somewhat less sophisticated than would be warranted by the data,/ follows these same general lines. I-t is this model which is discussed in the following pages. It should be taken as an example of a methodology, rather than a blueprint or prescribed form for all country economic analysis. 3. At the outset it is important to stress that while the creation of such a model is an integral part of country economic analysis, it must not precede a lnumber of imaportant preliminary phases of the analysis. Simply to create a model of a country and then expect it to be "usedri in the analysis of that country, or by a mission studying the country,' is to be quite naive. Models are of no use unless they are an integral part of the thinking of those involved in the analysis and then only if they are created during the analysis and serve to illuninate arnd check the colnsist- ency of the conclusions and findings of the mission. 4e Ihere are two important poinits here, (1) Almost always -the most recent data are available only to a mission and are not published until sometimie later, Thus a model made a priori from available sources will tend to be dealing wit-h stale information and will inevitably be faced with a gap of at least ttwo to three years bebween the end of the model and the present. A mission oni the other hand can not only get more inforrnation, but- often can get local best estimates of the probable behavior of certain 1/ WI-187, September 1968 (available only to Bank staff). 2/ Jamaica has a well elaborated set of national accounts, and an input- outbput table.  -3- aggrf ates in the nrear future. (2) A more impoftant point is that a model, to be of any use, must have a focus. Usually this will be on the central problems of economic developmnent, pointing to bottlenecks to growth and to their likely magnitudes. From this point the descriptive system can proceed, s1lowing the consequences of particular constraint,s and the likely gains to be made from alleviating them, Tt is hard hoi4ever to identify the specific problems beforehand, Usually the model builder must proceed as a mermiber of the mission, gathering data and information for some time before it becomes apparent to him and to the mission exactly what the focus of the mission and thus of the model should be, Only at this point can the model be made, and as such it serves to quantify the genieral hypotheses and conclusions of the mission and to identify the relative magnitudes of the problems involved. 5e Thus the essential element in projection models is -bo identif-y the key constraint to development. After this has been done, an equation is set up describing this problem, and froom this point the rest of the model is set forth. Once one defines the relevant constraint variable, most other lcey variables are dependent, via the structure of model, upon it. For example, in an economy with a balance of payments corn.straint., the central relationship is the supply of and demand for foreign exchange. Since exports are usually treated as exogenous, the central equation serves to provide the limits for the import equations, and thus for the foreipn Sxc:iinge available for investment and growth. In this fashion an entire riodel can be outlined. Similarly , in a savings constrained economy,, a table setting out the sources and uses of savings (sometimes called ';financing of inve4tmnent i) becomes the central part of the model. Ihat ---- -----.--  is important is that projection models typically procecd from a previously identified crucial constraint to a description of possible performance. 6. In formal sense, one would create a complete simultancous model, with constraint equations for all development resources, and then would supply all the pertinan:ru externaml conditions and then proceed tUo calculate the maximum rate of growtith corn,istent with all these conditions. However, the purpose of project,ion models (at least in the Bank) is illustration and explanation of the non-quantita'Give conclusions of a mission rather than simple mathematical solution0 Therefore, it is very important to detail the model by proceeding from, what is felt to be the key constraint to developnent. 7. In the case of Jamaica, an analysis based solely on information available publicly outside the count.ry appeared to indicate that Jamn-iica t s groTwth was being hind'3red by a possible 'Lack of foreign. exchlaMge. Oiice t;he mission carried out its field work it was apparent that this was not the case and that both foreicn exchange and savings were reasonably abundant. Jamaica was tlhus in the position of having a good supply of the obvious development resources and yet her growth, while good, was not outstanding. In particular it; was notued that the investment ratio was quite high (2%51) and yet t'he growuth w-Tas only just a1bove 5 percent per annum in real. terms. ihrtherr.cre, there were ncticeable shortages in infrastructure such as roads, water and power; and these, it was clear, wiere real constraints to growth. 6o I.ost of theie shortages, upon inspection, could be traced either toV the failure of the public sector to plan and carry oub infrastructure investme:.t or to the failure of that sector to make the necessary polic,  decisions so that the private sector could proceed wvitlh certain inhrest- ments. An inspection of the Independence Plan (1963-1968) showed substan- tial shortfalls in infrastructure investment and also in the inflow of foreign official financing. Such financing is typically best suited for infrastructure in-vestment, and all evidence available from the sources of external finance indicated a far greater potential supply than that which was actually lent. These phenomena all suggested a substantial lack of