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					                                CER – ESCAP Inter-regional seminar on
            «Analysis for Macroeconomic Policy and modeling in Central Asian economics»
                                           20-22 June 2001

                SAM model adaptation to conditions of transition economy in Uzbekistan
                                                 Faizullaev Y.Sh., Sharovatova A.V., Muradova K.M.


            SAM model targets, tasks and purpose. In transitional economies a need arises to ensure
reliable macroeconomic forecasting for long term and short term perspectives. In this connection it seems
promising to use the modern economic-mathematical methods and carry out analysis and assessment of
different variants applicable for social policy implementation.
            So, in view of said above we must state that economic modeling occupies its own separate
niche in world practice, it allows to assess the most probable consequences that may come after a certain
decision has been made and to chose its most optimal development variant.
            In order to achieve practical objectives in macroeconomic forecasting and regulation
Uzbekistan economists turned to SAM (social accounting matrix) model.
            The main purpose leading to design of a macroeconomic model based on SAM matrix is the
elaboration of the efficient analysis instruments providing easy analysis, formation and approval of
macroeconomic policy variants and assessment of their probable consequences for Uzbekistan economy.
            In accordance with the above mentioned target the following tasks were set forth:
            - to form SAM matrix, its coefficient base and exogenous variables taking into account the
macroeconomic statistics;
            - to develop equations for SAM macroeconomic model applicable for Uzbekistan;
            - To test the model imitating qualities by testing it against the actual data;
            - to model the consequences and assess sensitive range of regulators from different types of
macroeconomic policy (tax-budget, credit-monetary, currency and others) influencing different
macroeconomic indices;
            - to work out the scenarios and accomplish the model calculations for developments variants
in Uzbekistan for short term period and prepare suggestions on mechanisms that could allow hitting its
target marks.
           SAM model has the following peculiarities:
             - ability to forecast the GDP based on aggregate demand fluctuations (Keynesian approach);
            - casual links between intermediate and final production sectors (“input-output” table );
between money supply and inflation rate (Kalessky model); between household income and consumption
(based on a model by Stone).
            The main target of the model is the assessment of the impact of macroeconomic policy
changes and short term economic forecasts.
            Calculation of the endogenous variables is based on both stable prices and forecast prices
allowing assessing of GDP deflator, inflation rates and other indicators of financial stability.
            Functional model structure consists of 9 blocks: price, production, income, investment and
savings, final consumption, public revenues and expenditures, foreign trade and SNA.
            Established links between initial and estimated parameters ensure three-dimensional GDP
forecast-as a sum of value-added cost by sectors, as a sum of private consumption and a sum of all factor
incomes. Together with GDP the forecasts for public revenue-expenditures, current account and balance
of payments, household revenues-expenditures are made.
             On the basis of the estimated parameters SAM model ensures the qualitative assessment of
multilevel macroeconomic policy (budget-taxation, credit-monetary, price, investment, foreign trade,
social and currency policies). By adjusted value of regulators a politician can determine the reaction of
economy to the change of the most important macroeconomic indicators. This gives chance to trace
casual links forming in the economy as a respond to change of economic regulators.
             For example, the assessment of wage growth in public sphere might be required, the high
degree of price growth might demand the ensuring of minimum consumption level. Economy respond to
the change of policy will vary.
             On one hand, the wage growth may result in adequate price rise, budget deficit and money
emission. So it will lead to the situation when the increase of actual household income will prove to be
less than the nominal income growth. On the other hand the population revenue growth increase
aggregate demand which in its turn result in GDP growth and enlargement of tax base. Yet additional tax
revenues may fail to cover public expenditures and force the Government to look for additional credits.
             Estimating and analyzing according to SAM model different variants of regulators that
influence economy we can set forth the acceptable targets for policy implementation.
             The database for the SAM model is a square matrix of input-output (Table 1).
This matrix has a form of inter-sectoral balance and demonstrates where goods and services were
produced and used, from where economic agents receive revenues and on what those revenues is spent.
             The model ensures internal equilibrium between production and consumption for goods and
services and between income and expenditures of economic agents.
             In the model the economic management is considered within a consistent framework of the
real sector (industry, agriculture and etc.) and three broad category of economic agents whose decisions
influence the economy: private sector, public sector and foreign one.
             Model structure. The system of equations consists of 9 blocks (See Annex 1): a) price; b)
production; c) income; d) saving and investment; e) private consumption; f) public revenues and
expenditures; g) trade; h) money supply and demand and i) SNA.
             Price block. Price block determines the average sectoral price index for three sectors:
agriculture, industry and construction services. Indices are determined on the basis of material and labor
cost, income and direct taxes per unit of production. Thus, the price received by a producer in a certain
sector for his product is determined by using the income rate for the initial cost of a unit of production or
for the cost of intermediate materials plus wages per unit of production. Indirect taxes are added to the
product’s price.
             Production block. Production of a real sector is determined as aggregate demand
including intermediate demand and final consumption.
             Since the supply of agricultural products is determined in the short term mainly by
weather conditions, it is treated in the model as exogenous. Agricultural exports adjust to keep
demand balanced with supply in this sector.
             Production levels in the industrial and constructional sectors as well as the service sector
are determined by demand. Intermediate demand for goods and services by inclusion of inter-sectoral
flows as in input-output table. Private consumption and demand are determined as functions of
revenue in the consumption block. The other components of final demand are exogenous.
             Income block. Income from wages is determined in this section. Income from wages
depends on wage rate, the level of production and employment levels. Income from profits depends on
the profit rates.
             Saving and investment block. Investment is exogenous and the imported and domestic
components of investments are determined based on a fixed ratio. Savings are determined as a linear
function of income.
            Private consumption block. Consumption is determined as a sum of wages and profits
less savings and other payments. Total consumption is distributed across sectors based on Stone’s
system of linear equations, which sets a threshold level of consumption in each sector and then
determines additional consumption based on prices.

              Public sector block. It forms the state expenditures and revenues. Within the framework
of the block state expenditures and savings are determined. Revenues from direct and indirect taxes
are determined by tax rates.
              State enterprise revenues and public wages are exogenous. Real public expenditures are
determined exogenously but the nominal level varies with the price level. Budget deficit is set as the
difference between revenues and expenditures.
              Balance of payment block. Exports and imports of consumer goods are exogenous while
imports of intermediate materials used in production are endogenous. It relates to the level of
production through fixed import shares. Calculations result in the determination of trade balance
deficit and current balance account.
              Money demand and supply. The budget and trade deficits are the basis of determining
changes in money supply.
              Money supply is determined as a sum of bank loans to the government, bank credits to
commercial banks and foreign exchange assets minus non-monetary liabilities of the Central Bank.
The new level of M2 then determines, via the system of equations, the new value of the sectoral price
index.
               National Account block. This block consists of equations to calculate the key
macroeconomic indicators. Real GDP is determined as a sum of value added cost by sectors. Nominal
GDP equals the sum of all factor incomes and indirect taxes minus subsidies.
              The ratio of nominal to real GDP is the GDP deflator. The combination of real investment
levels and price changes gives the real value of investments in current prices, which must balance with
savings and the current account deficient in the balance of payments.
                SAM model database. The required data for the SAM model is a list of macroeconomic
statistics reflecting the source and uses of funds for sectors and economic agents.
              Determination of statistics is the basis for designing of initial SAM matrix.
              The sources of data are SNA data, input-output tables, and balance of payment statistics
and household income and expenditures and public budget data. (Table 2).
              Specific requirements are imposed on the structure of coefficient for direct taxes, because
their determination had to be coordinated with the calculation of intermediate consumption in the
SNA.
              Some details of elements of the SAM model are as follows and are shown in Table 1: the
first three items are revenues from the production of goods and services in three sectors-industry,
including construction, agriculture and services.
              Agriculture sector includes crop production and related sub-sectors such as livestock,
forestry and fisheries.
              The industrial and construction sector includes both production of goods and construction
of buildings and other structures.
              The service sector includes services in trade, transport and banking sub-sector as well as
the services produced by public, collective and private entities.
              Data are arranged into the SAM format: for example, the gross industrial output was
intermediate consumption within the industrial sector. The agricultural and services sectors consumed
industrial production. The remaining industrial production was consumed in different categories of
final demand: final consumption, accumulation and depreciation and net exports (i.e. export minus
import).
             Total production and production in the agricultural and services sectors can be interpreted
similarly.
             Total cost in the three sectors are shown in the matrix’s first three columns while the first
three items of the matrix show revenues of the above sectors from other sectors.
             It can be seen that total cost in sectors equal total revenues into sectors. This equilibrium
reflects the balance of revenues and expenditures for each sector of the economy. There is a direct
analogy with the first quadrant of the I-O table (input-output).
             In the same way the income and expenditures of households and private enterprises, the
public sector and foreign trade are described.
             Income and expenditures of households and private enterprises. Households receive wages
and income in the form of wages in exchange for their factor services. The SAM shows that total
income (profit) of the private sector include wage cost and profit of the private enterprises.
             Private income was used for consumption of various goods and services by households,
direct tax payment, other transfers to the public sector and savings. Together these amounts constitute
equilibrium between the income and expenditures of households in the private sector.
             Income and expenditures of the government. The government receives income in the form
of direct taxes, indirect taxes, in the form of the public sector income and from other transfer payments
from the private sector. Public expenditures are classified as final consumption, payment of pensions
and other transfers to households, subsidies and savings.
             Income and expenditures of the foreign sector. The matrix shows components of import
including intermediate import (imported products used for intermediate consumption) and final import.
This amount must equal the total exports of goods and services, transfers, foreign grants, loans and
other payments the distribution of which is shown in the Table.
             In order to maintain equilibrium the SAM also includes balances of savings and investment
in economy. Savings can come from three sources: the private sector including households; the public
sector; and the foreign sector. Gross investment, including both gross fixed capital formation and
change in stocks, must equal the sum of private savings, public saving and foreign savings.
             Adaptation of SAM model to conditions in Uzbekistan could be accomplished in two
ways: by improving and adding details to the data base; and by strengthening the functional
relationships in the model that relate to the overall objective of market reforms.
             Accomplishment of the objectives set for SAM model use will allow:
             - Add to methods of large scale practice for macroeconomic regulation;
             - Heighten the cooperation and efficiency of final results in correction of macroeconomic
policy;
             - Forecast macroeconomic options for the future.
             As a whole the model is the minimal set of equations allowing forecasting of the
significant macroeconomic indices (GDP, inflation and others) on the brand new basis and trace the
relations emerging in economy as a respond for the change of certain regulator.


            Table 2. Main items of statistics used for SAM model preparation

System of national accounts                      Production account – goods and services
                                                 production, their use for production
                                                 (intermediate consumption), generation of
                                                 added value
                                           Income generation account –generation
                                           of primary income, labor compensation,
                                           gross profit
                                           Income distribution account -
                                           distribution of income as a result of
                                           production.
                                           Income use account -distribution of
                                           income available between end consumption
                                           and savings.
Inter-sectoral     balance       “costs-   1 quadrant of matrix - coefficients of
production”                                intermediate production’s direct cost.
State budget implementation                Incomes – taxes and other revenues.
                                           Expenditures – current transfers, subsidies
                                           and other
Household income –expenditures             Income – wages, pensions, others
balance                                    Expenditures – final consumption, transfer
                                           payments
Foreign economic activities                Trade balance – export and import of
                                           goods and services.
                                           Payment balance
                                                                                                                                     Table 11
                                                   SAM matrix set for Uzbekistan in 1995

                                                                                                                                  (mln soums)
                                                              Distribu- Use of Accu- Change Chan- Final            Food     Direct    Gross
                                                               tion of   the   mulation of stocks nelling import stuff      taxes industrial
                                                               private  public  of the               of            taxes              profit
                                                               sector   sector  main              foreign       (indirect
                                                              income income capital               income          taxes)
                                 Industry Agricul- Services
                                   and     ture
                                 construc-
                                   tion




                                    1       2       3            4         5          6        7        8      9    10       11       12
1. Industry and construction     107265,5 14346,8 50176,5      96902,3         0.,0 57909,5 -54047,2 86151,2    -                   342325,8
                                                                                                          16378.8
2. Agriculture                    50330,4 8798,4 11159,4       27490,9 2541,2       5016,2 27068,0 478,7 -5605,6                    127277,6
3. Services                       54244,2 16542,6 53334,9      24171,4 66521,7         0,0     0,0 8999,0 -4576.8                   222237,0
4. Added value (total)           117264,8 85112,9 100409.                                                                           302787,3
                                                        6
5. Wages (including transfer      27903,8 12062,0 24371,6                24282,4                                                     88619,8
payments)
5.1 Government bodies                      1061,5 23193,7                                                                            24255,2
5.2 Other enterprises and         27903,8 11000,5 1177,9                                                                             40082,2
organizations
6. Income in addition to wages    45199,5 72370,3 76933,7                                                                           194503,5
7. Total private income           73103,3 84432,3 101305.                24282,4                                                    283123,3
                                                        3
8. Indirect tax                   44161,5     0.0 5298,9                                                                             49460,4
9. Subsidies (-)                                  -9662,9                 9662,9                                                         0,0
10. Direct taxes                                       34726,6                                                            34726,6
11. Intermediate import    13220,9   2476,9   7156,6                  37398,7                    26561,2                  86814,3
12. State revenues                    680,6   3468,3 30214,9                                             49460,4 34726,6 118550,8
13. Gross savings                                    66617,2 15542,6                   -8814,6                            73345,2
14. Gross output          342325,8 127277,6 222237, 283123,3 118550,8 100324. -26979,2 86814,3       0,0 49460,4 34726,6
                                                  0                         4
           Scenarios and assumptions for forecast variants based on SAM model .
             SAM model is the instrument that easily traces the casual inter-relations between
macroeconomic indices that are changed on activation of macroeconomic policy.
             Assessment of model results was made by the comparative analysis of the initial data
and results received during the modeling process.
            The following items are exogenous variables chosen for macroeconomic regulation:
            exchange rate,
            taxes
            wages,
            investments
            raw cotton production,
            export volume
            The analysis of the effect of these variables on the basic macroeconomic indices of
republic development is described below.
            The change of 4 variables was studied.

            Scenarios assume that all instrumental variables will be increased by 10%
            Assessment of the Consequences of Growth of Investment in Fixed Assets
   Deficit of savings will demand the investment growth and growth of imports. Imports will
    rise by 5.5% reducing foreign exchange reserves. Money supply contracts as a result.
   Money supply falls 11% down.
   Inflation decreases by 2% due to the reduction of money supply.
   Added value in non-agricultural sectors will rise: in industry-by 2.9%, construction –by
    6.2%, transport and communications –2.4%, GDP will grow by 2.6%.
   Total consumption level will grow by 1.7% with dominating development of the private
    sector, public consumption practically remains at the same level.
   Budget revenues will increase by 0.2% while the expenditures go 1.9% down.
   Foreign trade deficit growth initiated by import rise, will be compensated from foreign
    exchange reserves.
    Reduction of foreign assets by almost 20%.

                   Assessment of the Consequences of an Increase in Wages (by 10%)
   Money supply rise by 2.1% will put upward pressure on prices in economy (6.4%).
   Price rise will result in drop of demand.
   Real GDP will glide 0.1% down.
   Drop of demand will make a negative impact on savings. Investments will shrink by 10%.
   Final consumption cost (mainly on account of public sector expenditures growth)-by 1.06%.
   Increase of budget expenditures, in future – growth of revenues. Government total
    expenditures rise by 7% while revenues –by 6%. Tax income will increase due to the wider
    taxation base though tax rates remain the same.
   The private sector consumption will demand the increase of expenditures by 0.3%.
   Bank credits aimed to cover budget deficit will grow by 18.2%.
   Slight downfall of import (by 0.04%) as a result of slowdown of economic activity and real
    growth of GDP.
           Assessment of Consequences of Current Exchange Rate (by 10%)
            - Devaluation of national currency will put pressure on inflation growth in economy.
Overall prices will grow by 3.7%.
            - Rise of current rate will initiate the development of export oriented sectors and
export. As a result added value in industry will increase by 0.6%, in agricultural sector and
transport and communications-up by 0.4%, trade-0.6%. In total GDP will go 0.4% up.
           - Export of goods and services will grow by 1.7% though the price rise will restrain
import.
           - Import cost will be cut by 3.7%. Import reduction will worsen the production
processes as imports consist as a rule of investment and intermediate (consumed in production.)
products.
           - Trade balance will improve.
            -Price growth will limit expenditures for final consumption. Public consumption will
be cut by 1.1%, the private consumption will experience minimum reduction.
           -Savings will increase.
           -enlargement of taxation base will result in budget income growth by 4.4%.
           -Budget expenditures will rise by 3%, caused by imminent increase of wages for
public employees as balance for price growth.


           Assessment of Consequences of Raw Cotton Production Increase by 10%
          This scenario allows to assess the effect of raw cotton production on economic
development in Uzbekistan and the state of macroindices.
         -Added value growth in agricultural sector by 2.1%, in industry, transport and
communications-by 0.9%,in trade –0.8% up. It will result in real GDP increase by 1.1%.
           -Added value growth will provide resources for private sector consumption increase
(o.8%) while the public consumption remains practically unchanged.
           -investments will rise only by 0.1%
           -The price level changes insigniffically comparing with the real increase of money
supply (up 1.7%).
           -Budget income growth on wider taxation base will outstrip rise of expenditures.
           -Budget deficit will reduce significantly.
             -Export growth(2.6%) as compared with import (0.6%) will favor the foreign trade
deficit cut (down 16.6%)
           -Foreign assets will increase.

            Results of model estimations can be used in the decision making process for inserting
corrections in macroeconomic policy, we used them for designing instrumental variables for
RMSM-X model.

				
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posted:10/5/2012
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