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Finance

News

Can economic models bridge the policy gap?

2 February 2004

Top researchers met in Washington last October to discuss the ‘state of the art’ in modeling the poverty impact of macroeconomic policies. Many found that models are still a long way from being able to recommend specific policies to reduce poverty.

This is despite many technical improvements in ground-breaking new models, disaggregating information and including economic traits that matter most for poverty reduction. Income distribution, for example, features in most new models as a key way to predict how economic growth will reach the poor. The good news is that modeling poverty-impacts of the macroeconomy has now captured the attention of top research institutions internationally.

But how to translate a model’s results into policies remains elusive. One reason for this is that modeling is still predominantly an academic exercise. When questioned what advice they would give a finance minister based on simulated results of their model, several experts answered that models “must be used only to analyse policies, not to inform them.” This is such a fine line, that in practice it is often invisible. According to an IMF official, it is the job of the Directors of Research at the IFIs to narrow the yawning ‘theory-policy’ gap.

Several links between the macroeconomy and the poor – informal employment, gender inequity, implementation failures – have not been absorbed by macro-models. Macro-models cannot by and large interpret progress toward Millennium Development Goals or account for the poverty impact of privatisation and other structural policies because they have ‘intangible’ effects or are limited to a certain sector. The input from policy analysts in these areas is key to improving macro-models.

A number of NGOs and research institutes have begun to exchange information on the content of models and their relevance for policy work. A short briefing setting out the key features of the major models being used in this area has been commissioned by EURODAD and Bretton Woods Project, with support from Oxfam GB.

Contact Bretton Woods Project to be sent a copy of the report when it becomes available.