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D. Modeling the Macroeconomic Impact of IDPs

D. Modeling the Macroeconomic Impact of IDPs

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KRI: Assessing the Economic and Social Impact of the Syrian Conflict and ISIS

where Yt denotes the exogenous income in year t. The growth rate consists

of a trend growth rate and idiosyncratic shock. Formally,

gt = g + ăt , ă~N(0,ă).

The value of the 2014 growth shock is predetermined, which captures

the effects of recent surge in conflict and canceled public projects as a

result of interruptions in oil revenue transfers from Baghdad. Overall,

however, the exogenous character of the growth process is preserved to

a large extent because hydrocarbon production was not affected by these


Public Sector

KRG captures a portion of the exogenous income in the form of tax and

nontax revenues from the private sector and receives transfers from the

Baghdad government. Total public revenues can, then, be characterized

as a share of exogenous income:

Rt = tt × Yt ,

where Rt is the public revenues at time t, and tt is the revenue share of the

public sector. To reflect the uncertainty in central government transfers,

we assume that this share is also a stochastic process:

tt = t¯ + mt m~N(0, s m)

The shock to revenues in 2014 is imposed arbitrarily to reflect the size

of unexpected disruptions in central government transfers. The budget

constraint of the KRG is given by the following:

Rt + Bt = tt Pt + Gt + g Bt−1,

where B t denotes the public sector debt issuance, t t . is the per

capita  transfer to IDPs, and Gt is the other public expenditures that

eventually are used for providing public goods and services to the people

of KRI. In the absence of reliable data for debt issuances, we assume that

Bt = gt = 0.

Provision of public goods and services is denoted by the following


Φt = At K tα L1t −α ,

Modeling the Macroeconomic Impact of IDPs

where Lt is the employment in provision of public goods and services, and

Kt is the public capital stock, which exhibits the following law of motion:

Kt = (1 − d )Kt−1 + bl Gt,

where d is the rate of depreciation in capital stock, l is the share of

public expenditures that is allocated to public investments (therefore,

(1 − l) percent of them are allocated for recurrent expenditures), and

b   is a parameter that shows the public investment efficiency,

0 < d, l, b < 1. Overall, public capital stock in year t is equal to the last

year’s capital stock net of depreciation and net effective investments

in year t.

Overall, the budgetary shock in 2014 leads to a reduction in provision

of public goods and services as a result of reductions in public investments

and recurrent expenditures. Similarly, a surge in IDP inflow also affects

the public finances by reducing the money allocated to provision of public

goods and services.

Assessment of Impact

The presence of IDPs affects the welfare of the native population in two


• First, the overall provision of public goods and services diminishes

because a portion of public funds is diverted to finance the transfers to

IDPs and

• Second, the native population’s access to public goods and services is

constrained because of congestion, for example, an increase in the

number of beneficiaries.

The first effect is “direct” and can be measured in a relatively

straightforward way. The second observation is based on the following

rationale. Most public goods and services are “public goods” when

atomistic decision making is considered; for example, they are nonrival

and nonexcludable at the microlevel. For example, the birth of one more

citizen does not require additional military expenditures to keep public

security at the original level. However, a 20 percent increase in total

population makes these goods and services rival one another as a result

of congestion. For example, access to public hospitals could significantly

deteriorate if the IDP population in a city is relatively large in comparison

to the native population. These “indirect” effects are typically not captured

in standard macroeconomic impact analyses.



KRI: Assessing the Economic and Social Impact of the Syrian Conflict and ISIS

To capture both direct and indirect effects, we define a “Monetary

Well-Being” function for the native individuals. Formally:

ui =



(1 − t t ) ⋅ Yt +

⋅ Φt .


N t + Pt

The first term on the right-hand side of the above equation denotes

the private disposable income available to each native KRI resident, and

the second term shows the per person access to public goods and services

regardless of origin (IDP or native). This formulation reflects the fact that

we did not consider the effects of IDPs on private consumption, mainly

because the IDP demand for private goods is thought to have no impact

on domestic prices because most consumption goods are imported.

In the absence of the presence of IDPs, the monetary well-being would

be the following:

ui ′ =



⋅ Φ ′t .

(1 − t t ) ⋅ Yt +



The total impact of IDPs on the monetary well-being of native KRI

residents is given by


Φ′ ⎤

⎡ Φt

(ui − ui ′ ) = N t ⋅ ⎢

− t .

⎣ N t + Pt N t ⎥⎦

i =1

Note that this approach provides a measure of contemporaneous

impact, for example, a point in time difference in monetary well-beings,

which is a flow variable. A dynamic impact analysis would compare

the monetary well-being in two different income and public goods and

services provision trajectories going forward. Then the present values of

these two paths would be compared to calculate the impacts in dynamic

form. In KRI, however, such an analysis is not possible because of the

very limited availability of data and projections.


Dohuk Governorate: Internally

Displaced Persons


Dohuk Governorate: Internally Displaced Persons

© International Organization for Migration. Used with the permission of the International Organization for Migration;

further permission required for reuse.

Note: IDPs = internally displaced persons.


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