Macroeconomic Modeling for SDGs in Least Developing Economies

Santi Chaisrisawatsuk
School of Development Economics, NIDA
Wisit Chsisrisawatsuk
School of Development Economics, NIDA
Monthien Satimanon
Faculty of Economics, Thammasat Univesity

Introduction

Economic modeling has been the important tool in economic policy formulation. As a
guideline to achieve economic development goals, policy makers always need to understand
how economic variables response to some policy variables. The basic structure of
macroeconomic model includes equations explain the interactions among goods market,
money or financial market and labor market of which the details consideration in each of
these markets indicate the size of the model. As economic structure becoming more
sophisticated through the development process, macroeconomic model also need to
consistently adjust accordingly to the dynamism of the economy. Two different approaches of
modeling have been applied based on general equilibrium and partial equilibrium analysis.
The computable general equilibrium (CGE) model takes into account all the interactions of
various markets in the economy and solve for the steady state. Numbers of the market
considered, most of the time depend on the size of the input-output table used, determine the
size and the complication of the model. In addition, calibrations of some parameters in the
model are also required. The accuracy of the model hence relies on how close the parameters
in the model estimate the actual relationship of variables and markets included in the model.
CGE type of modeling has received great attention in the recent years because of its ability to
deliver estimated impacts of policy shocks. Implementation of economic policy, fiscal policy,
monetary policy, and perhaps exchange rate policy, can be examined on how such policy will
potentially affect other economic variables. However, availability of a rather “large and
complete” set of economic variable data is required. And thus, the model is more popular in a
relative more advance economies where not only for the availability of data but also
economic operation that is better fit with the CGE modeling assumptions. Macroeconometric
modeling, on the other hand, relies on partial equilibrium approach. The core structure of the
economy is set based on generally available macroeconomic data set. The size of the model
can vary depending on the complication of the economic structure and the availability of
macroeconomic data. Additionally, a specific interest of some economic activity can be built
into the model. For instance, in an economy where energy sector is a significant sector to the
economy, an analysis of this particular sector can be established and merge into the core
structure of the model. Therefore, for least developing economies where availability and the
completeness of economic data set is uncertain, it is more appropriate to apply
macroeconometric model approach for economic and policy analysis.
 In recognition of the 2030 sustainable development agenda, some key elements that
have direct interaction with economic activities, policy, and decision can be incorporated into
the model. By doing so, policy makers have to understand better or having a more
comprehensive set of information when economic policies are implemented. In addition,
there are also linkages across the goals to be achieved. Some of the observations in the past
including growth and inequality in various aspects such as gender, health, access to basic
infrastructure, and education, growth and environmental concerns, and growth and
innovation. These conditions are having a profound impact on long-term sustainable growth
which, in the nutshell, refers to persistent economic growth with minimum volatility (or
without unnecessary risks). Economic development in the past focus more on increasing
income through growth and simply assumed that it will carry on and lead to better quality of
living. Unfortunately, the conditions are not guaranteed. Number of developing economies
successfully lift up its average income but not for most of the population and hence, ended up
with income distribution and inequality problems. Perhaps, this is in part contribute to the
obstacles prevent the country's further development. The so call "Middle-income trap"
incident provides us with good examples of the role sustainable development plays in the
development process. Getting from one stage of economic development to another might
require different resources and conditions but to be able to have some concerns in advance
help prevent some of the unnecessary shocks that could delay or in some cases pulling back
the development dynamism. Therefore, as the LDCs moving forward in the development
process, they confront with different economic surrounding compare to the past development
path experienced by some developing economies. It is important that the tool,
macroeconomic model, apply in order to set guideline leading to a successful development
process is inevitably incorporate some of the SDC goals.
In addition to the traditional utilization of macroeconometric modeling mainly for
forecasting and monitoring purposes, the 2030 sustainable development goals added more
challenges for least developed economies to come up with successful economic measures to
fulfill their commitments. Economic measures have been pointed out as important means for
countries to pursue and guarantee sustainable development process. To shed some light on
how and what types of economic policy are necessary and suitable for the economy to follow
and implement are equally crucial. Given a good rationale to the public on any selected
public policy choice always bring about policy transparency and gaining better acceptance
and popularity. Despite a broad consideration of SDG covering both social as well as
economic related issues, macroeconometric model can at least pay attention on certain areas
that are highly related to economic activities and post significant risks for development
process such as poverty reduction, inequality, and quality of life.
Poverty reduction has always been the economic policy objective as it is the primary
condition to pursue better standard of living. Growth stimulated policy by the means of
providing more and better employment and hence, raise income level of a country is welcome
everywhere. Improve the utilization of idle resources especially unemployment has been the
key policy. However, increasing average income of the population does not automatically
imply that the country can get rid of the poor. In fact, in some country, an increasing number
of the poor has been found in association of the country economic growth; i.e., the faster the
economy grows, more people are getting poorer because of their income cannot match with
the rising cost of living. It is also interesting to see that how an increasing numbers of the
poor influences the economy’s growth potential.
Inequality problems are more or less related to poverty reduction issue. It has been
argued that as the economy grow, especially at a high rate, there will always been groups that
can catch up and get access to the greater economic opportunities but there also be some
groups that are lacking behind and having difficult time getting access to all the benefits of
growth. As a result of limited income earning capability, inequality problems emerge and
persist. The longer the problems are overlooked or see as less important by policy makers, it
becomes a greater obstacle for further and sustainable development of the country and over
the long-run getting more and more difficult to solve.
The third group of SDG variables involves improving quality of living along with the
economic development process. It is clear that more advance economy does not refer to only
a country that is having a higher income level. What it actually implied is for a more advance
economy to have a better living standard. Lifting up income level through growth is only one
necessary condition and it also demands other elements to go along with. Having access to
basic infrastructure including telecommunication so that it provides an easy and cost effective
access to information and economic opportunities equally to all is one of the major concerns.
A contradictory incident was found in some LDC where electricity export has been promoted
to generate more income while a large portion of the population of the country still do not
have access to electricity or adequate energy for consumption. Furthermore, environmental
quality and environmental protection has also been creating a wild range of discussions and
conflicting among various stakeholders. Some might argue in a position of a trade-off
between growth and more pollution and try to come up with an optimal solution. The others
on another extreme might perceive that environment need to be protected at all cost. A more
compromise solution where certain degree of environmental quality has to be protected with
some costs trend to gain more acceptance. However, there is also an issue of how of cost
associated with environmental protection, including economic opportunity cost of polluted
activities, can be distributed in the economy. For instance, if a more strict environmental
policy is implemented and it leads to higher production cost and losing competitiveness, the
price of products and thus, the cost of living is higher, what will be the consumer responses?
Whether it is actually better off for the economy to tighten the environment regulations
remains the key question toward sustainable development goal. Hence, the come up with a
tool to provide some assessment of economic impacts would offer a good inside for policy
makers as well as public as a whole to decide on their quality of living.

Rationale for Fair’s Model

In this section, we discuss about Fair’s macroeconomic model which we will use as
our base model. Two versions of macroeconometric model introduced by Fair are considered.
First, the full version of Fair’s model, this version consists of 188 identity equations and 30
behavioral equations. The model covers every aspects of U.S. economy, such as demand side,
money market, and supply side (labor market). Second version referred to as Mini Fair’s
model of U.S. economy which we use as our base model because it is small (it does not
require a large and complete set of data)1. The U.S. mini model was estimated and showed a
consistent result that proves to be sufficient in approximating U.S. economy in a number of
important respects despite a number of features was left out of the full version. The income
side has been substantially reduced: there is no labor sector: and there is no wage-price
sector, just a price equation. The U.S. mini is thus not a replacement for the U.S. model, but,
as will be seen, it is useful for making a number of interesting arguments about the use of
macro data.

The Fair mini model consists of 19 identity equations and 10 behavioral equations.
There are 5 sections in the model. This model stresses on the importance of demand side that
are output gap, fiscal policy, foreign sector, and financial sector. In addition, the supply side
will be represented only by price equation.

There are two exogenous fiscal policy variables in Mini model which are government
expenditure (G) and the net tax rate (TAU), two foreign variables; exports (EX), import (IM)
and the price of imports (PIM). The two financial variables are capital gain and losses (CG$)
and housing prices (PHOUSE).

On the demand side, G and EX directly affect aggregate demand. TAU adversely
affects demand by reducing disposable income. Thus, it will negatively affect both
consumption and housing investment. CG$ and PHOUSE positively affect wealth, which in
turn, they will affect consumption and housing investment. In addition, CG$ will further
affects non-residential investment through the cost of capital variable. PIM is related to
demand by affecting imports as well as the domestic price level, P, through price equation and
cost shock variable. The change in P affects the short-term interest rate since the Fed employs
the monetary policy rule. Furthermore, such Fed-rule will affect the mortgage rate, RM,
which will also affect the demand side of the economy. Then, the demand will affect the
economic GAP, which in turn affects P and RS.

1
The rationale of choosing Mini Fair model will be discussed in the next section.
 Figure 1: Flow Chart of US Mini Macroeconomic Model

Source: Fair (2016).

From the above environment, the 19 identity equations are: 1.Total sales equation, 2.
Inventory equation, 3. Stock of inventories equation, 4. Nominal GDP equation, 5. Nominal
personal disposable income equation, 6. Nominal depreciation equation, 7. Nominal net taxes
equation, 8. Nominal household financial saving equation, 9. Real personal disposable
income equation, 10. Stock of durable goods equation, 11. Stock of housing equation, 12.
Non-residential fixed investment equation, 13. Capital stock required to product Y equation,
14. Percentage output gap equation, 15. Nominal financial wealth equation, 16. Real financial
wealth equation, 17. Real housing wealth equation, 18. Real total wealth equation, and 19.
Percentage change in P at an annual rate equation. The 10 behavioral equations are: 1.
Consumer expenditure equation (services), 2. Consumer expenditure equations (durables), 3.
Consumer expenditure equation (non-durables), 4. Housing investment equation, 5. Stock of
capital equation, 6. Production equation, 7. Imports equation, 8. GDP deflator equation, 9.
Treasury bill rate, and 10. Mortgage rate equation.

There are three significant aspects of Fair model that fit into the study of integrating
SDGs to macroeconometric model. The first rationale is that the model cover most of the key
fundamental economic variables in the aggregate sector. The model is capable in mimicking
U.S. economy without disaggregate into too many economic sectors. Thus, the model would
be readily adaptable and adoptable for the developing countries economy since the data
would be limited both in term of economic variables and SDGs variables. Secondly, the
simplistic econometric model would be sufficient in integrating the SDGs into the model,
especially the SDGs that are related to the demand side of the economy.

There are four SDGs variables of our interest and propose in this study. Two possible
ways of integrating these variables into the macroeconometirc model: unidirectional
endogenous variable and simultaneous variable in the system. Inequality and environmental
variables are simultaneously linked with economic growth variables in the model. Poverty
should be endogenous variable since economic development would rather reduce poverty but
not vice versa. Access to infrastructure, such as water and electricity, would enter into the
model as endogenous variable because of its feedback effects, i.e., improve in access and
quality of infrastructure are often associated with income growth and the stage of economic
development.

The first key variable is inequality. Following the Kuznet’s hypothesis, at the earlier
stage of economic development and industrialization, the economy would face an increasing
rate of growth along with high level of inequality. That is, the relationship between such
variables might follow the inverse U-shape pattern. In addition, with growing equality, the
consumption growth will reduce over time. That is, economic growth should nonlinearly
affect the inequality and in turn inequality would adversely affect the consumption growth.

In addition, following the work of Basu (2012) regarding inequality, growth, and
investment, the country with relatively high income inequality might have lower rate of
investment growth. That is, the concentration of income and wealth would increase the
concentration of investment within city or sector. Thus, without widespread investment, the
return to investment would be lower as well as lower the growth rate of the economy.

The second SDG variable considered is environmental quality that would certainly
affect the consumption as well as increase in consumption would simultaneously affect
consumption. In recent years, the study of nexus between economic growth, energy
consumption and CO2 emissions has been flourished. Most of studies found out that the
higher economic growth would lead to higher consumption, energy used, and CO2 emission.
Simultaneously, higher degree of CO2 emissions would rather prompt a country toward
adopting sustainable consumption. Thus, the slower consumption and economic growth is
inevitable. In addition, there might be a relationship between export and environmental
quality. That is, the country with lower degree of environmental degradation would easily
export its goods to the developed market.
 The third key variable is poverty. Following the seminal work by Sen (). He stated
that Economic growth without investment in human development is unsustainable - and
unethical”. Thus, if there is positive and unidirectional relationship between growth and
poverty, then economic development of such country would rather be unsustainable.
Moreover, such relationship can be either concave or convex. That is, growth can increase
poverty at an increasing rate or it could reduce poverty at certain level of economic growth.
Thus, the use of suitable functional form in estimation is crucial in understanding such
relationship.

The last key variable represents “access to infrastructure,” the key conjecture is that if
a positive relationship between economic growth and access to infrastructure exists, the
country is moving toward sustainable development. On the contrary, if economic growth does
not lead to better infrastructure access or negatively affects infrastructural access, such
development would be unsustainable.

SDG consistent macroeconometric modeling: Selected case studies

i) Thailand Economy in Brief

Since 2012, Thailand’s economy rebounded from the great flooding that drown
industrial estates, rice field, farmlands, and parts of Bangkok in late 2011. Gross domestic
product (GDP) rose by 6.4% compared with just 0.1% in 2011. However, growth has been
slowed since 2013, given weaknesses in domestic, political turmoil, and poor external
demand, leaving GDP growth down to 4.1% from the same period of 2012. Thai real GDP
growth rate in 2014, 2015, and 2016 are 0.9, 2.9, and 3.2 percent, respectively. However,
given better external market in 2017, Thailand projected GDP growth in 2017 should reach
3.9 percent. On the contrary, GDP per capita (PPP basis) growth has been subpar since 2014.
From 2014 to 2015, the growth rate is only 2.5 percent and reducing to only 2.3 percent in the
year of 2015 to 2016. In addition, the projected growth rate of industrial sector for 2016 is
only 2.1 percent that is equivalent to the rank of 106 in the world (CIA 2017).
Despite poor economic growth, Thailand still maintains a manageable fiscal deficit of
2.7 percent of GDP and keeps its public debt in check at 41.2 percent of GDP. On current
account, Thailand has run a surplus since 2014, given relatively less import of machinery and
capital goods while export of goods growth is relatively small compared growth in tourism
sector. Top three Thai exporting partners in 2016 are US 11.4%, China 11.1%, and Japan
9.6% while top three Thai importing partners in 2016 are China 21.6%, Japan 15.8%, and US
6.2%. Regarding foreign direct investment, Thailand still needs large amount of foreign direct
investment; however, for the past three years the inward FDI flows have been outpaced by
outward FDI flows.
On the structure of economic development, Thailand is a show case of country who
can transform itself from agricultural base economy to manufacturing base economy, and
service base economy with in the span of forty years. From table 1, Thailand shares of
agricultural value added has been declined steadily since 1970s, and it reach a level of 8.7
percent of total GDP in 2016, this exhibits that Thailand has been completely move out of
agricultural base economy to the service base economy. The process of development is
similar to other South East Asian countries; however, given that 30 percent of Thai
households are still mainly received their income from agricultural sector, this lower share of
income than other sectors is a clear sign on inequality and unsustainable economic
development. In addition, the slowdown of industrial value added since 1996 clearly exhibits
the process of deindustrialization and might be considered as one of the main contribution to
middle income trap. For service sector, though the value added share growth is steady, there
are a high concentration of valued added, especially in financial services and retail sector.

Table 1 Economic Structure of Thailand

1976 1996 2016

Agricultural sector 26.7 9.1 8.7
Industrial sector 19.7 25.9 27.6
Service sector, etc. 45.7 53.6 55.8
Source: World Development Indicator

In addition to the problem of inequality that stem from rapid change in economic
structure, the environmental degradation might be the other concerns that originates from
economic development. In Thailand case, the rapid growth of CO2 emission is a proxy of how
economic growth is related to energy consumption as well as environmental problem. From,
figure 1.

Figure 2: Thailand CO2 emission

Source: World Development Indicators

Despite, the two key indicators of failing to achieve SDGs, Thailand economic
development and marcroeconometric model can be used as a good exhibit for Cambodia,
Laos, and Myanmar since Thailand excels in providing necessary and sufficient infrastructure
to its citizen, such infrastructure includes clean water, electricity, road, and internet access.
On the other hands, Thailand has certainly reduced and nearly eliminated the problem of
poverty. Therefore, macroeconomic development as well as macroeconometric model of
Thailand might provide a policy guideline for the neighborhood countries.

Policy Issues
 ADB (2016) stated that Thailand faces several critical policy challenges that are
related to SDGs. The first one, high degree of Thailand inequality undermines social and
political stability that would be associated increasing risks to investor confidence. Inequality
is reflected in rural–urban and regional gaps in incomes and access to social and economic
and infrastructural services as well as bias sectoral growth and policy that lead to sectoral
economic divide within Thailand. Such structural problems are unlikely to be resolved by
simplistic measures to increase incomes through subsidies and tax concessions. That is, any
redistributive policy would rather be labeled populist policy. Hence, more effective targeting
of public investment in social and physical infrastructure will be important for addressing
these concerns and let Thailand out of income trap.
Secondly, inadequate public investment is a problem for the country’s
competitiveness. Thailand’s overall investment and public infrastructure spending is still
lower than prior to the 1997 Asian financial crisis, and is not deemed sufficient to ensure
inclusive and sustainable economic growth. That is, attempts to further develop new rural
infrastructure has been too less and too few in order to both spur an economic growth as well
as reducing regional inequality. Such public investment in water management and clean
energy are needed for economic and social infrastructure to stimulate competitiveness and
productivity. They will foster an inclusive and environmentally sustainable growth path.
Thus, timely mobilizing and effectively managing resources to ensure more equitable,
efficient, and effective delivery of public services, especially in the rural area, is among
Thailand’s most pressing challenges under uncertain global economic condition.
More recently, political power bargaining has interrupted the planning and
implementation of large public investment projects. The government has prioritized spending
on fast-disbursing stimulus programs and tax cut to stimulate more consumption while the
results of public-private partnership projects are uncertain. Large public finance allocations
were directed at incentives for shoppers, salary increases for the public service, tax cuts for
companies, popular measures such as the diesel fuel subsidy, and subsidized agricultural
production.
In medium term, Thai government aims to make the country more developed and
balanced by creating a new generation of infrastructure, as well as advanced and innovative
industries. It has adopted a new 20-year National Strategic Plan (2017–2036) as a key means
of moving the country toward “Thailand 4.0”. The appointed cabinet approved the Eastern
Economic Corridor (EEC) Development Plan in June 2016 to put Thailand 4.0 into action by
area-based development in the established industrial zone of Chonburi and Rayong.
Additionally, the implementation of Thailand’s Transport Infrastructure Development
Strategy, 2015–2022, is continuing as planned to enhance Thailand’s productivity and
competitiveness. The initial construction of 3.5 kilometers high speed railway under Chinese
concession might lay the foundation for sustainable economic growth and social
development. These development plans require massive government-led investment in
infrastructure. Investment financing is expected to come from a variety of sources, including
arrangements, such as borrowing, public–private partnerships (PPPs), and further budget
deficit.
Modeling issues Modifications of Fair’s Model for Thailand and LDCs

Modeling Thai macroeconometric model is suitable since it requires limited number

of key variables in a yearly format. In addition, Fair model is simple and powerful enough to
mimic U.S. economy and it certainly would be possible to adjust it to Thailand and least
developing countries available data. However, to maintain consistency of the model and the
availability of SDGs data, the time period of study covers from 1980 to 2015. In addition, the
following modification is needed to fit in to developing countries.

- Total wealth variable is approximated by Gross Domestic Saving – data on total

wealth is not available and wealth is mostly held in the form of saving in most
developing economy (data is available in World development Indicators by World
Bank)..
- Data on financial wealth and housing wealth are not available so they are not included
in the model.
- Integration of durable and nondurable consumption by using total final consumption
expenditure (data is available in World development Indicators by World Bank).
- Consumption in service still remains in the model (data is available in World
development Indicators by World Bank).
- Population structure is adjust according to the World Bank database (Fair’s 26-55, 56-
65, 66+) (WB’s 20-49, 50-59, 60+) (Data is available in World development
Indicators by World Bank).
- Depreciation rate is exogenous variable and assumed to be fixed at 6%.
- Capital gain is proxied by total tax on income capital gains and profits – tax on goods
and services.
- Physical depreciation rate of capital stock is assumed to be fixed at 10% (Data
available at NESDB Thailand).
- Export and Government Expenditure are exogenous variable (Data is available in
World Development Indicators by World Bank).
- Residential investment data is not available (not include in the model).
- Import equation remains as in Fair’s model (Data is available in World Development
Indicators by World Bank).
- Housing stock and durable goods stock are not available (not include in the model).
- Inventory investment uses change in inventory variable from the World Bank
database.
- Capital stock variable use data from the World Bank database.
- GDP deflator in the model uses data from the World Bank database.
- Mortgage rate is replaced by lending rate.
- 3-month T-bill rate is replaced by saving rate.
- Financial saving of household sector is replaced by Gross Domestic Saving.
- Tax and Tax ratio are available in the World Bank database.
- Stock of inventory is proxy by change in inventory variable.
- Calculation of Minimum Capital required is based on change in economic structure
instead of peak to peak approach.
- Calculated Potential Output bases on time series method.
Therefore, the modified Mini Fair model for Thailand and developing countries consists
of 7 behavior equations and 10 identity equation. The behavior equations compose Final
Goods Consumption, Service Consumption, Change in capital stocks, GDP potential, Import,
Price, and Saving Rate equation. The identity equation composes of Nominal GDP, Nominal
disposable Income, Growth of disposable Income, Nominal Depreciation, Nominal Tax,
Nominal Saving, Real Disposable Income, Minimum Capital, Output Gap, Inflation, and
GDP Growth equation.

Preliminary Results
Final goods consumption equation

Final goods consumption per capita (LNCFPOP) is a function of population structure

(AG1) (AG2) (AG3), lag of LNCFPOP(-1), change in lag of change of log per capital income
D(LOG(YD/POP), rate of saving(RS), and change in lag of wealth per capita D(LNAAPO(-
1)). By using both standard regression and Newey-West regression, consumption is
significantly and positively related to percentage of working age population (AG3), lag of its
self, and in disposable income, and change in wealth from last year. However, it is negative
and significantly related to saving rate. All of the estimated coefficients are consistent with
the standard macroeconomic theory with robust standard errors. The detail of estimated
equation is as in Appendix 1.a.

Service goods consumption equation

Service goods consumption equation is modeled by the change in per capita service
consumption (DNCSPOP) is a function of population structure (AG1) (AG2) (AG3), lag of
DLNCSPOP(-1), change in lag of change of log per capital income D(LOG(YD/POP), rate of
saving(RS), and change in lag of wealth per capita D(LNAAPO(-1)). By using both standard
regression and Newey-West regression, consumption is significantly and positively related to
percentage of young population (AG1), lag of its self, and in disposable income, but not
significantly related to change in wealth from last year. However, it is negative and
significantly related to saving rate. All of the estimated coefficients are consistent with the
standard macroeconomic theory with robust standard errors. The detail of estimated equation
is as in Appendix 1.b.

Import equation

In this study import of good (LNIMPOP) is a function of its lag, total consumption
per capita LOG((CS+CF)/POP) and lag of import price (LNPPIM(-1). Only lag of import and
consumption per capita are positively related to the import while the lagged in price of import
is negative and not significantly related to import. The detail of estimated equation is as in
Appendix 1.c.

Change in Capital stock equation

The change in capital stock (DLNKK) is estimated as a function of lag of minimum

capital requirement to produce output (LNKKKMIN(-1)), lag of change in capital stock
(DLNKK(-1)), and change in production of the last period (DLOG(Y)(-1)). The estimated
results show that is negatively but significantly related to the capital requirement since the
lower the capital requirement implies less necessity to accumulate more capital for
production. In addition, both lagged of change of capital and production growth would lead to
further positive and significant change of capital. That, is the higher the economic growth
leads to higher capital accumulation within the economy. The detail of estimated equation is
as in Appendix 1.d.

Price equation
 The price (LNP) equation in this study is a function of Tax(T), lag of price (LP(-1)),
price of import (LOG(PIM)), and output gap(GAP). By using both standard regression and
Newey-West regression, only lag of price has a positive and significant relationship with
price in the current period. The detail of estimation is in appendix 1.e.

Saving rate equation

Saving rate (RS) is modeled as a function of its lag (RS(-1)), percentage change in
price (PCP), output gap (GAP) and change in output gap (DGAP). The estimated results
show that only lagged saving rate and change in price are positively and significantly related
to saving rate. However, both output gap and its lagged are negative and insignificantly affect
saving rate. Detail of estimated equation is in appendix 1.f

Potential GDP equation

Potential GDP equation (LOG(Y)) depends on the lag of itself (LOG(Y(-1)), export
(LOG(X)), and change in inventory (V). The estimated results show that only lagged of
potential output and export are positively related to Thailand potential GDP, while change in
inventory is not significantly related to the potential output. This posits that Thailand has
employed the export-led growth strategy during the period of study. The detail of estimated
equation is in appendix 1.g.

ii) Lao ’s EconomyPDR

The Lao economy has been growing consistently at 6.9% average growth over the last
five years while income per capita has an average growth equal to 8.3%. However, the
dragging problems for Laos PDR economic growth current account deficit (accounted for
about 18% of GDP) and the budget deficit (the deficit keep increasing unit recent year and it
is about 3.9% of GDP in 2016). Therefore, the public debt is very high. The ratio of public
debt to GDP is about 94.2% and the ratio of foreign debt to GDP is about 67%. Both ratios,
public debt and foreign debt, have tendency to increase. The Expectation for them in the next
five years would be 91.8% and 75% respectively. Inflation should be monitored because it is
fluctuate. In 2012, the inflation rate is 4.3% and it is 1.6% in year 2016. The exchange rate is
stable about 8,133 Lao Kip (LAK) per dollar.

For the last 20 years, the structural of Lao economy has changed dramatically. The
economy moving away from the agriculture based more into industry and service sectors. The
share of agriculture, industrial, and service sector to GDP in 1996 were 53.3%, 21.1% and
25.5% respectively. These ratios changed to 19.5%, 32.5% and 48% in 2016 respectively.

Figure 1.1: Lao PDR Economic Structure

Unit: Percentage of GDP

Source: The World Bank database.

About international trade, Lao PDR’s current account is deficit a lot. The export of
Lao PDR was 3.2 billion dollars in 2016 which was decrease about 15% compare to year
2015. The value of import was 3.9 billion dollars in 2016. The important export goods are ore
and copper which have the average five years growth rate at 12%. The others export products
such as coffee and dry foods do not have a significant growth rate. Therefore, it is more likely
that Laos DPR should emphasis in export service especially travel or labor. The important
export partner countries are China, Thailand and Vietnam. The important import goods are
petroleum, vehicle and electronics. The important import partner are Thailand, China and
Vietnam.

Foreign direct investment (FDI) is decrease. During 2005-2010, the value of FDI was
about 9,130 million US$ compare to only 6,482 million US$ from 2011 to 2015 accounted
for about 29% decline. China has been major investors in Lao PDR in the past couple
decades. Mostly, they invest in infrastructure sector and most of the project involve
cooperation with the government agency. Foreign investors are likely to invest more in
agriculture and electricity generation industry.

Money system in Lao PDR mostly still involve in banking. The commercial bank still
does not have well distribution. There are 41 bank in Lao PDR consist of 3 government
banks, 1 special bank, 3 joint venture banks, 7 private banks, 9 foreign banks, and 18 foreign
bank’s branch. Thirty six banks out of 41 are in the capital city of Lao (Vientiane).

SDG-consistent macroeconometric model for Lao PDR will follow the Thai model as
much as possible while considering the availability of data from World Bank and UN since
the study would rather maintain consistency of data source across countries.

iii) Myanmar’s Economy

Myanmar’s economy is growth consistently. The gross national product (GDP) in

2016 of Myanmar was 66.3 billion US$ at growth rate 6.3%. The income per capital is
increasing. It is 1,269 US$ in 2016 and 1,355 US$ in 2017 respectively. The expectation of
income per capital in the next 4 year is 2,123 dollar. In the part two-three year, Myanmar’s
trade and investment are rapidly increase. The political reform has a lot positive impact on
Myanmar economy because it increases investor confidence. The government promotes trade
and investment by many regulation reforms, relaxing some obstruction regulation and issuing
new investment law. Myanmar’s economy has problems in deficit of current account and of
government budget. The deficit of current account is 7.3% of GDP in 2016. The deficit of
government budget is 4.3% of GDP.

In the past 20 years, Myanmar’s economic structure has been changed from
agriculture to industry and service. The share of agriculture, industry and service in GDP in
1995 are 63%, 8.9% and 28.1% respectively. These ratios have been changed to 28.2%,
42.3% and 29.5% in year 2016

Figure 1.2: Myanmar Economic Structure

Unit: Percentage of GDP

Source: World Bank database

About international trade, Myanmar’s current account was in large deficit worth US$
4,023 in 2016. The first five export goods are natural gas, nut, sugar, gem and rice
respectively. The first three are significant which have value about 1,000-3,000 million
dollars where natural gas has proportion of 27.7% of total export. The next two have the
value only about 300-400 million dollars. The first five import goods are sugar, petroleum,
metal, equipment and motorcycle. Myanmar export markets are China, Thailand, India, Japan
and South Korean respectively. The value of export to China is 4,153 million dollar and the
value export to Thailand is 2,367 million dollars. Mostly Myanmar import goods from China,
Thailand, Singapore, Japan and India. The value of import from China is 5,403 million US$
and the value of import from Thailand is 4,145 million US$.
 Foreign direct investment (FDI) is 2,000-4,000 million US$ per year. The foreign
direct investment was jumped in 2010. It was almost 20,000 million dollars because there
were an investment in gas industry for 10,179 million US$ and an investment in energy
industry for 8,218 million US$. Foreign investors in Myanmar invest more in transportation
and communication industry with a share of 46.3% of total foreign investment. The share of
investment in manufacturing is 25.1% and the share of investment in energy is 17.2%.
Among foreign investment in Myanmar, China investment accounted about 27.5% of the
total FDI which is the most by far. Next are investment from Singapore (23.3%) and Thailand
(15.8%) respectively.

Money system in Myanmar mostly still involve in banking. However, the banking
system in Myanmar has a low level of development. The ratio of load to GDP is low about
25% but it is increasing same as the ratio of deposit to GDP. There are 4 types of bank in
Myanmar which are 7 government banks, 4 joint venture banks, 17 private banks, and 12
foreign banks. The Myanmar commercial banks have low capital and transactions via the
banking system are rather complicate (involve in many unnecessary procedures) and hence,
financial services provide by the banking system are inefficient (slow) and costly. The interest
rate for loan is high about 13% and the interest rate of foreign bank is lower.

For our Myanmar macroeconometric model, the study will follow the Thai model as
much as possible while considering the availability of data from World Bank and UN since
the study would rather maintain consistency of data source across countries.

iv) Cambodia’s Economy

Cambodia’s economy is growth consistently. The average five years growth of gross
domestic product (GDP) (2012-2016) is 7.2%. The GDP in 2016 was 19.9 billion dollars. The
income per capital is increasing. It is 1,259 dollars in 2016 and 1,365 dollars in 2017. The
expectation of income per capital in the next 2 year is 1,581 dollars. Inflation rate is about 3-
3.5% per year. The two problems of Cambodia’s economy are deficit of government budget
and deficit in current account. The government has a deficit at 2.8% of GDP in 2017 and
would be continue at 2.2-2.7% for 2018-2021. The deficit in current account will slightly
decrease. Current account deficit is 9.1% of GDP in 2017 and the expectation in 2018-2021 is
about 8.5%-9.0% of GDP.

Economic structure of Cambodia has been changed for the last 20 years. It changes
from agriculture economy to industry and service. The share of agriculture industry and
service in GDP in 1996 are 50.1%, 15% and 35% respectively. The share of agriculture
industry and service in GDP in 2016 are 26.7%, 31.7% and 41.6% respectively.

Figure 1.3: Cambodia Economic Structure

Unit: Percentage of GDP

 Source: World Bank database

In 2016, Cambodia export value is US$ 16,897 million and import value is US$
13,851 with a trade deficit of US$ 3,046 million. The most important export sector is garment
and shoes with share of 70.2% in total export. Major import goods are textile, gas, vehicle
and cigarette. Export partners of Cambodia are Unite State of American, German, Singapore,
England and Japan. The first five country Cambodia import goods from are Thailand, China,
Hong-Kong, Singapore, and Taiwan.

Cambodia’s foreign direct investment is increasing from 867 million US$ per year in
2007 to 1,701 million US$ per year in 2015. According to cumulate FDI, China has the most
share of FDI in Cambodia at 16% following by Vietnam, Japan, England, and Hong-Kong
with shares of FDI at 12.7%, 7.4%, 6.6% and 6.1% respectively. Textile and shoes industry
are the popular industries for foreign investment. Rubber is popular in agriculture sector.
About 50% of foreign investment in agriculture sector goes to rubber plantation.

Banking system plays an important role in Cambodia’s financial sector. Financial

institution in Cambodia are national bank of Cambodia, 28 domestic commercial banks, 8
foreign bank branches, 15 specialized banks, 69 microfinance institutions, 9 leasing
companies and credit bureau and 2,010 money changers. The National Bank of Cambodia
issued tight monetary policy to create stability of financial sector and the economy over the
years. In addition, the National Bank of Cambodia has also implemented a policy to promote
the use of Cambodia currency (Cambodia Riel (KHR)).

For our Cambodia macroeconometric model, the study will follow the Thai model as
much as possible while considering the availability of data from World Bank and UN since
the study would rather maintain consistency of data source across countries.

Concluding remarks and the way forward

Please write few paras in line of these points

To integrate SDGs indicators such as inequality, employment, CO2 in the

equations in the models for a better understanding of policy implications
and coherence.

Please write few paras in line of these points

*Challenges:
a) understanding of structural differences across LDCs
b) Data availability

Implications:
a) Raising policy coherence at the level of ministries involved in SDGs
implementation
b) Creating links with Statistical offices as well as Planning Agenccies

Way forward:
a)
Set up group of modelers/experts to address the issue of SDGs within
the macroeconometric modeling in the Asia-Pacific region, including
in LDCs.
b)
Bring other think-tanks and regional institutions to work under the
aegis of UN ESCAP to move forward this regional initiatives (see
ESCAP Resolution (E/ESCAP/RES/72/6) on “Committing to the
effective implementation of the 2030 Agenda for Sustainable
Development in Asia and the Pacific ”, which included the issues of
models and tools to support increase capacity building of
policymakers)

Use proceedings from the workshop

1) http://www.unescap.org/events/regional-capacity-building-workshop-
sustainable-development-goals-modelling-least-developed

2) http://www.unescap.org/events/workshop-macroeconomic-modelling-
asia-and-pacific
 Appendix 1

Thailand
1.a. Final goods consumption equation

1.b. Service goods consumption equation

1.c. Import Equation

1.d. Change in capital equation

1.e. Price equation

1.f. Saving rate equation

1.g. Potential GDP equation
 Appendix 2

List of variables and descriptions

Variables Description
AA Total asset that is represented by total saving from World Bank
AG1 Percentage of population 20-49 from World Bank
AG2 Percentage of population 50-60 from World Bank
AG3 Percentage of population 60+ from World Bank
Beta Ratio of Depreciation from NESDB
CF Final consumption from World Bank
CG Capital Gain from World Bank
CS Service Consumption from World Bank
DELK Physical depreciation rate from NESDB
DEP Capital Depreciation from NESDB
EX Export from World Bank
G Government Expenditure from World Bank
IM Import from World Bank
IV Change in Inventory from World Bank
KK Stock of Capital from World Bank
KKMIN Minimum required Capital to produce Output from World Bank
MUH Per unit capital output from World Bank
P GDP deflator from World Bank
PCP Change in P from World Bank
PIM Import Price from World Bank
RM Lending Rate from World Bank
RS Saving Rate from World Bank
SHN Financial Saving from World Bank
T Time period
TAU Ratio of tax from World Bank
TAX Net Tax from World Bank
V Change in Inventory from World Bank
X Total sales from World Bank
Y GDP at current price from World Bank
YD Disposable Income at base year price of 2010 from World Bank
YDN Current Disposable Income from World Bank
YS Potential Output: Author’s calculation from NESDB data
STATP Statistical Discrepancies.
 Appendix 3

Identity Equations

Total Sales Equation

(1)

Inventory Equation

(2)

Nominal per capita income

(3)

Nominal disposable income

(4)

Depreciation

(5)

Tax

(6)

Financial Saving Equation

(7)
Disposable Income

(8)

Minimum capital requirement equation

(9)

Output gap equation

(10)

Inflation or price change

(11)