Introduction to System

Dynamics
Model-based policy formulation
Models for national
development planning (T21)
Main Objectives
Analytical knowledge and skills:
SD method: Basic knowledge of the System
Dynamics method;
Behavioral analysis: Ability to relate a
systems behavior to the underlying
structure;
Understanding complexity: basic elements of
complexity in common social, economic and
environmental issues.
Main Objectives (2)
Technical knowledge and skills:
Software: Knowledge of basic modeling
techniques with Vensim (www.vensim.com)
Modeling: Ability of representing economic,
social and environmental issues through
simple simulation models;
Simulation techniques: Ability to run and
compare alternative simulation scenarios.
Model-Based
Policy Formulation
Challenges and Guidelines
Outline
1. Setting the context
Public policy and formal models
2. The Process of Policy Formulation
Steps, content and context
3. Model-based policy formulation
Methodologies
Challenges
Guidelines
3. Model-based policy
formulation
3.1 Why are models useful
3.2 Methodologies
Scenarios
Mental models
Formal models
Optimization
Econometrics
Simulation
3.3 Challenges
3.4 Guidelines
3.1. Why are models useful
Accurate predictions about the future would be nice
to have, but can we really get them?
Essentially, all models are wrong,
but some are useful.
Remember that all models are wrong;
the practical question is how wrong do they have to be
to not be useful.
Box, George E. P.; Norman R. Draper (1987).
Empirical Model-Building and Response Surfaces. Wiley.
3.1. Why are models useful (2)
Models can help policymaking in various ways:
Improving understanding of the possible consequences of
policy choices,
Deepening policymakers comprehension of the underlying
problems and issues,
Clarifying decision-makers assumptions and values helping to
build understandable narratives (stories) in support of policy
proposals,
Informing dialogue among stakeholders and policymakers,
Providing a framework for negotiation and consensus building.
Policymaking is about trying to affect the future:
to maintain or improve on the status quo of
public wellbeing.
3.2. Methodologies:
scenarios and mental models
Scenarios: exploration of a wide range of
possible futures.
No attempt to identify the most or least probable
among them, aimed at finding resiliency.
Mental models: someone's explanation of how
something works in the real world.
Psychological biases and cognitive limitations may
undermine the logical application of the model.
3.2. Methodologies:
Formal models
Optimization models, which generate a
statement of the best way to accomplish some
goal (Sterman, 1998), are normative, or
prescriptive, models.
Econometrics measures economic relations,
running statistical analysis of economic data and
finding correlation between specific selected
variables.
Simulation models aim at representing what the
main drivers for the behavior of the system are.
3.2. Why Use a Formal Model?
Model
Perfect
Information
Represented
in a model
Simulation
Alternative
scenarios
Real World
(reality)
Interpretation of
information
Mental
models
Strategy,
structure, decision
rules
Decision
Complexity of dynamic systems (descriptive model);
Bounded rationality and misperceptions of
feedbacks and delays (descriptive model);
Limited information (simulation);
Wrong deductions re. the dynamic behavior of
systems (model validation and analysis);
Defensive routines and personal emotional
involvement (alternative scenarios).
3.3. Challenges: barriers to
learning
Reference: Sterman, 2000
3.3. Challenges: Methodologies
Optimization: correct definition of an objective
function, the extensive use of linearity, the lack
of feedback and lack of dynamics.
Econometrics: full rationality of human behavior,
availability of perfect information and market
equilibrium.
Simulation: correct definition of boundaries and a
realistic identification of the causal relations.
3.3. Challenges:
Model-based policy formulation
There is a need for integrated tools that could
serve as a mean to close the gap between
dynamic and all embracing thinking and
conventional methodologies and models.
Methodologies should be combined to:
Set targets (optimization)
Define a proposal (econometrics)
Refine a bill (system dynamics)
Models for National
Development Planning
Overview
1. What is National Development Planning
(NDP)?
2. From strategy to implementation
3. How can models help?
4. Why System Dynamics?
5. Example: The Threshold21 (T21) model
6. Summary
National Vision
National Development Plan
Yearly Budgets
Mid Term Strategic Plans
1. What is NDP?
1. What is NDP?
Cascade Planning System
National Development Planning is a:
1. Planning process at the central government
level (e.g. Min. Finance)
2. Defines the strategic axes for the countrys
medium/long-term development
3. Based on the long-term objectives and forms
the basis for short-term strategic plans.
A definition
1. What is NDP?
1. What is NDP?
Some examples of mid-long term issues:
Poverty
Economic growth
Access to social services
Education
Health
Environmental sustainability
Quality of institutions
Urban planning, land use planning
Disaster risk management
Type of issues at stake
1. What is NDP?
1. What is NDP?
Strategic planning and Policy Development
Budget Preparation
Budget Execution
Accounting, Monitoring and Internal Audit
Reporting and
External Audit
Policy Review
and Revision
Implementation - Generic
2. From Strategy to Implementation
2. From Strategy to Implementation
strategy
objectives
current
situation
decisions
information
feedback
3. How Can Models Help?
3. How Can Models Help?
A Learning Process
strategy
objectives
current
situation
decisions
planning
models
information
feedback
simulated
results
3. How Can Models Help?
3. How Can Models Help?
Role of Planning Models
Formal models provide the possibility to test policies
beforehand and accelerate learning
Necessary characteristics for
medium - long term planning models:
1. Endogenously represent key variables (E)
2. Comprehensive (C)
3. Properly represent dynamic complexity (D)
4. Transparent (T)
Necessary characteristics
Endogenous Key Variables (E)
real gdp at factor cost
4e+012
3e+012
2e+012
1e+012
0
1990 1995 2000 2005 2010 2015 2020 2025
Time (Year)
real gdp at factor cost : MODEL cfa87/Year
real gdp at factor cost : DATA cfa87/Year
Mid-Long Term Short Term
I
N
E
R
T
I
A
F
U
N
D
A
M
E
N
T
A
L

C
H
A
N
G
E
S
GDP
Gov. Revenue Gov. Expenditure
Economy
Society
Environment
Comprehensive (C)
GDP
Gov. Revenue Gov. Expenditure
Economy
Society
Environment
Non-Linearity
0
0.1
0.2
0.3
0.4
0.5
0.6
0.7
0.8
0.9
1
0 0.1 0.2 0.3 0.4 0.5 0.6 0.7 0.8 0.9 1
M
A
J
O
R

D
E
L
A
Y
S
Non-Linearity
0
0.1
0.2
0.3
0.4
0.5
0.6
0.7
0.8
0.9
1
0 0.1 0.2 0.3 0.4 0.5 0.6 0.7 0.8 0.9 1
M
A
J
O
R

D
E
L
A
Y
S
Dynamic Complexity (D)
???
Output
Input
Transparency (T)
Approach
Software E C D T
Disaggregated consistency
MS-EXCEL NO NO NO YES
Macro-econometrics
EVIEWS YES NO YES NO
Computable general eq.
GAMS YES NO YES NO
Integrated simulation
VENSIM YES YES YES YES
Existing approaches to NDP
Why SD models?
1. Focus on endogenous explanation
2. Support multidisciplinary approach
3. Proper representation of complexity
4. Transparent User friendly
Strengths of SD approach
Brief History of Economic Models
Political Economy and conceptual models
Introduction of quantification to Economics
Linear models and Econometrics
Linear accounting frameworks: RMSM
Matrix models: I-O, SAM, and CGE
Broader Systemic models: T21
Linear Models and Econometrics
Look at limited set of relations and variables
GDP = a*INV + c
INV = 1/a * GDP - c
Help understand importance of relationships in
sub-sector mode
Limited range of variables considered
No relation to other economic variables
Linear Accounting Frameworks
Address whole economy in a single framework
GDP = CONS + INV + XP - IMP = CONS + SAV
INV - SAV = XP - IMP
GOV BAL = REV + AID + BOR - EXP - DSER
BoP = XP - IMP + TRANS + NetCap
Help see how whole economy balances
Dominated by exogenous assumptions and
accounting balances
Few internal links and fewer links to other
important factors in development
Matrix Models: Input-Output
Incorporate links among production activities
Help understand how production sectors interact
Linear structure with many exogenous factors
Lack links with other economic factors or the rest
of society
Input-Output Table
Agriculture Industry Services Total
Agriculture 25 53 18 96
Industry 45 87 31 163
Services 26 23 12 61
Total 96 163 61
Matrix Models: SAMs
Incorporate the rest of the economy with SAM
Better view of whole economy with interaction
among agents and equilibrium
Heavy data requirements
Limited relations beyond SAM
Agriculture Industry Services Households Government RoW Total
Agriculture 25 53 18 43 12 19 170
Industry 45 87 31 65 28 40 296
Services 26 23 12 24 27 13 125
Households 48 55 40 13 12 168
Government 15 34 12 15 24 100
RoW 11 44 12 21 20 108
Total 170 296 125 168 100 108
Matrix Models: CGEs
Convert SAM entries into equations
Non-linear relations, but static solutions from black box
Require all markets to clear in equilibrium
Lack links with social and environmental factors which
affect economy, e.g. MDGs
Agriculture Industry Services Households Government RoW Total
Agriculture A1=f(K,L,ais) I1=f(K,L,ais) S1=f(K,L,ais) Dag=f(Inc,Pref) Dgag=F(bud) AgX=f(ForD) Sum Ag
Industry A2=f(K,L,ais) I2=f(K,L,ais) S2=f(K,L,ais) Din=f(Inc,Pref) Dgin=F(bud) InX=f(ForD) Sum In
Services A3=f(K,L,ais) I3=f(K,L,ais) S3=f(K,L,ais) Dse=f(Inc,Pref) Dgse=F(bud) SeX=f(ForD) Sum Se
Households AW=f(K,L,ais) IW=f(K,L,ais) SW=f(K,L,ais) Trans=f(bud) Rem=f(Emig) Sum HH
Government Atax=f(Ag) Itax=f(In) Stax=f(Se) Hhtax=f(Inc) Aid=f(ForAid) Sum Gov
RoW AgM=f(AG) InM=f(In) SeM=f(Se) DM=f(Inc,Exr) Gpay=f(debt) Sum RoW
Total Sum Ag Sum In Sum Se Sum HH Sum Gov Sum RoW
Broader Systemic Models: T21
Addresses the WHOLE system, including, economic, social and
environmental factors
Takes account of interactions across the WHOLE system
Generates long-term scenarios to show effects over time
Helps users analyze and understand how national systems function
Production
Investment
Capital
Income
Consumption
Loans/debt
Health, Edu., Fam.
Planning
Education
level
Population
Labor force
Labor productivity
Live
expenctancy
Pollution control
Resource
conservation
Architecture
37
Step 1: Refinement of focus issues
Step 2: Discussion on key elements to be considered,
via a series of open sessions
Step 3: Elaboration of results from open sessions into a
simulation model
Step 4: Testing and validating the model
Step 5: Analysis and discussion of results
Implementation process outline
Implementation process outline
38
Key
Key
Success
Success
Factors
Factors
1. Solid Model
a) Data
b) Participation
2. Local Modeling Capacity
a) Training
b) Practical use
3. Local Ownership
a) Commitment
b) Ongoing Development and Use
39
Looking More Closely at T21
Original systemic model applied to sustainable
development
More applications and experience adapting
transparently to countries
Includes deeper coverage of important non-
economic social factors, environment, MDGs,
poverty accounting
Easier to use and less expensive
T21 Fits into Planning Toolkits
Macro models
Provide Macro Balances, MTEF, IFI discussions
Short term -- need longer-term, x-sector validation
CGE Models
SAM, Detailed relations, Optimum effects
Comparative static -- need more transparent paths
Threshold 21
Long term, Cross sector links, Transparent results
Not as detailed, builds on local data and input from
other tools
The model was originally built for serving three
purposes:
(1) Studying mid-long term development issues
(2) Testing alternative policies
(3) Enhancing learning about system
=> Support mid-long term planning through
understanding of the system
Focus of the Threshold 21
5. Example: T21
5. Example: T21
1. Consistency check of data and
assumptions
2. Identification of future potential
issues
3. Identification of alternative strategies
4. Basis for monitoring and evaluation
Benefits from using T21
5. Example: T21
5. Example: T21
Mid-long term approach: does not focus on short-
term dynamics
National perspective: does not consider diversity
among different regions
Medium-high level of aggregation: parameters are
averaged by sector
Requires active involvement of client in definition
of models structure
Limitations of T21 approach
5. Example: T21
5. Example: T21
Key Messages (1)
NDP is a medium to long term planning activity
NDP needs formal models to speed-up
learning process
NDP models should:
endogenously represent key variables;
be comprehensive;
properly represent dynamic complexity;
be transparent.
SD is well suited to develop models in
accordance to the above criteria.
T21 is built using the SD approach, and it is
rapidly diffusing worldwide.
6. Summary
6. Summary
Key Messages (2)
T21 is the results synthesis of best models and
internal
T21 is innovative in the way sectors are linked
together
T21 is useful at four levels in the planning
process:
Check of data and assumptions
Identification of future potential issues
Identification of alternative strategies
Basis for monitoring and evaluation
6. Summary
6. Summary
Introduction to
System Dynamics
Introduction to System
Dynamics
The objective of System Dynamics is:
To improve our understanding of the
interdependencies existing between the
structure of a system and its behavior and
the extent to which various policies
influence its functioning mechanisms.
Such policies can then eventually be used
as levers for future development.
Models and Methodologies
Type of models:
Econometric;
Geographical maps;
Behavioral;
Language;
Mental;

Mental Models
Within System Dynamics, a mental model is
defined as:
Our beliefs and theories on causes and effects
that define and underlie the structure and
behavior of a system,
with the limitations/boundaries of the model.
Foundations of System Dynamics
and T21: Stocks and Flows
Stock and Flows
Stock: accumulations ruled by a flow;
Flow: the rate of change of a stock.
Examples
Population (stock);
Fertility rate (positive flow);
Mortality rate (negative flow).
Money in a bank account (stock);
Interest rate on the same account (flow).
Stocks and flows
The stock describes the actual situation
The flow changes the stock and
the actual state of the system
Applications Worldwide
T 21 Countries
MI Partner
MI Head Office
MEG Countries
Why Take a Systemic View?
To Avoid Unexpected Results!
Delays
Velocity
Strength
Vensim interface
Vensim interface
Vensim interface
Motivation for this study
There is a need for integrated tools that could
serve as a mean to close the gap between
dynamic and all embracing thinking and static
available models;
These tools are required when facing critical
issues such as the upcoming energy transition
and climate change, because conventional
modeling tools do not examine their broader
causes and impacts.
Contextualizing issues
The approach proposed includes:
(1) the analysis of the context in which energy
issues arise, whether they are global, regional and
national, and
(2) the study of various policy options that are
being considered for solving energy,
environmental and national security issues
(which are normally implemented at the national level
and have narrow boundaries).
Core Capabilities
Illustration of the synergies and implications of
different options across a broad framework
Provision of a basis for productive long-term
planning and unite various parties around
consistent policies
Deeper understanding of the interrelations existing
among critical issues
Support for the creation of cooperation among
stakeholders at the planning and technical level
Some results
Emergence of various unexpected side effects is likely;
Elements of policy resistance arise over the medium
and longer term due to the interrelations existing
between energy and society, economy and
environment;
Side effects or unintended consequences may arise
both within the energy sector and in the other spheres of
the model; nevertheless, these behavioral changes
influence all society, economy and environment
spheres.
T21-Ecuador - Sectors
Concept Energy Sector
Macro Feedbacks Energy Sector
Policies Analyzed
Subsidizing electricity prices
To reduce households costs
Investing 1% of GDP in energy efficiency
To reduce electricity demand and energy costs
Investing in Renewable Energy
To reduce thermal electricity generation and GHG
emissions from the power sector and export more oil
Increasing Electricity Imports
To further reduce domestic thermal generation and
export oil, also to reduce natural gas trafficking
Some Results
A: Investing 1% of GDP in energy efficiency
Higher income
Higher gov. revenues (from oil) and GDP
Lower energy demand, but increasing
Lower emissions
B: A + Investing in renewable energy
Same income and GDP
Higher employment and lower emissions
Avoided costs and added gov. revenues are
reinvested in social services (edu and infrastructure)
GHG Emissions
Why new insights?
Side effects or unintended consequences arise from within the
energy sector and influencing both the same sector as well as
society, economy and environment.
Results emerge from a combination of:
Four integrated spheres;
The representation of feedback, nonlinearity and delays;
A participatory and transparent approach.
The approach used contributes to the representation and
understanding of the context (social, economic, environmental and
political) in which issues arise and within policies are formulated
and implemented.