CRP 609; Credit: 3
Spring 2008
Prof. I. Azis (ija1@cornell.edu)
TA: Marcel Ionescu-Heroiu (mi48@cornell.edu)
      Soon Chun Kang (sk479@cornell.edu)

Purpose and Contents
The course is designed to familiarize students with the essence of planning models and equip them with analytical tools to undertake a practical quantitative policy and planning analysis. Two categories of models to be discussed are: (1) economy-wide models that capture complete interactions between economic and social indicators such as income distribution and poverty; and (2) non-Bayesian decision making models that combine intangibles and subjective judgments with statistical data and other tangible factors, and that can also capture feedback influences.

The specific economy-wide technique to be discussed is the social accounting matrix (SAM)-based computable general equilibrium (CGE) model. The emphasis will be on understanding the structure and application of the model for planning and policy analysis, and how to build such a model using a particular program known as GAMS (General Algebraic Modeling System).

The non-Bayesian model focuses on the structure and application of the Analytic Hierarchy Process (AHP) and the Analytic Network Process (ANP), especially for planning and policy analysis. The software used is Super Decision. Students are encouraged to choose examples from actual cases related to planning and policy making in a local, regional, or interregional context.

Requirements
Having some background in macro and microeconomics would be useful to understand fully the contents of the course. Prior knowledge of basic quantitative models and optimization is helpful, albeit not strictly required. Knowledge of calculus and matrix operations is also helpful.

Evaluation
Evaluation will be based on three things: (1) students’ participation in the lab and class discussions: 20%; (2) a set of homework: 30%; and (3) a final project: 50%. The final project should be based on an actual case, using actual data. The report should be no longer than 10 pages, double-space, excluding tables and figures, the summary of which will be presented in class towards the end of the semester (TBA). It is strongly advised that students make their plans early for the topic of final project. The idea is for students to have more time to raise issues and questions related to their selected topic.

Course Outline

Part I: Economy-wide Models (10 weeks)
A. Planning Models (week 1)
   1) Basic concept of Planning Models and their components: Target variables, policy variables, irrelevant variables and data
   2) Examples of Planning Models
   3) Reviews of I-O model: Basic framework, I-O multipliers,
   4) What is missing in I-O model
   5) The importance of social indicators (e.g., household income distribution)
B. Social Accounting Matrix (weeks 2 and 3)
   1) SAM Framework
   - Data system
   - Analytical tools
   2) SAM multipliers
   - Comparison with I-O multipliers
   - Interregional SAM multipliers
C. SAM applications for planning and policy analysis (week 4)
   1) National planning and policy analysis
   2) Regional planning and policy analysis
   3) Interregional and international planning and policy analysis
D. SAM and Structural Path Analysis (week 5)
   1) Introduction to Structural Path Analysis (SPA)
   - Direct influence
   - Total influence
   - Global influence
   2) Examples and applications of SPA
   - National models
   - Regional models
E. Modeling SAM With Behavioral Equations: Introduction to CGE (weeks 6, 7 and 8)
E1. From SAM to CGE
   1) What is missing in SAM models
   2) Basic concept of CGE models
E2. CGE Multiplier
   1) Model Closure
   2) Comparisons between I-O, SAM and CGE multipliers
   3) Model Simulations
E3. Applications
   1) Trade with and without transportation costs
   2) Fiscal Policy
   4) Liberalization and Structural Adjustment
   5) Growth-Environment trade off

S P R I N G B R E A K

F. More on CGE Modeling (weeks 9 and 10)
F1. Calibration and Estimation
F2. Imperfect competition and labor migration
F3. Inclusion of Financial Sector:
   1) Flow-of-Fund
   2) Financial SAM
F3. Computable Financial General Equilibrium (CFGE) Models
   1) How to link the financial sector and real sector in CGE
   2) CFGE closure
   3) Applications and model simulations for planning and policy analysis

Part II: Hierarchical and Network Models (4 weeks)
A. Introduction to Analytic Hierarchy Process: AHP (week 11)
   1) Why hierarchy: goals, criteria, and alternatives
   2) Why ratio scales: pair-wise comparisons matrix
   3) Consistency, eigen-value, and eigen-vector
B. Examples and Applications (week 12):
   1) Forward (forecasting) and backward (planning) models
   2) Incorporating benefits, costs, opportunities, and risks
   3) AHP and Game Theory
C. Introduction to Analytic Network Process: ANP (week 13)
   1) Why network: cluster, element, feedback influence, and dependence
   2) Supermatrix
   3) Synthesis
D. Applications and Comparing AHP and ANP (week 14)

Texts and References
The reading materials below are meant only for reference. They are listed to help those who would seek clarifications or further explanations on certain subjects taught in class.

For Reviews on Input-Output, SAM Models and Structural Path Analysis
1) Input-Output Analysis: Foundations and Extensions, by R.E. Miller and P.D. Blair. Published in 1985 by Prentice-Hall. This is a good place to review input-output method
2) Interregional Input Output Analysis of Asean USA and Asean Japan Interrelations, by Iwan Azis, in Jomo (ed), Asean Economies: Crisis & Response, published by MEA, Kuala Lumpur, 1985. The application of interregional IO model is shown in this paper
3) Planning Techniques for a Better Future, by Pyatt, G and E. Thorbecke, ILO, Geneva, 1976. This is an introduction to comprehensive planning models. It is an easy-to-read book on social accounting matrix.
4) Structural Path Analysis and Multiplier Decomposition Within A Social Accounting Matrix Framework, by Jacques Defourny and Erik Thorbecke, in The Economic Journal, 94 (March 1984), 111-136. The first part of this article presents the concept of SAM in a succinct way. The second part, on “structural path analysis,” shows further extensions of SAM.
5) Measuring Economy-wide Impacts of A Financial Shock, by Iwan J Azis & Yuri Mansury, in ASEAN Economic Bulletin, Volume 21, Number 2 (August, 2003). This paper demonstrates two things: (a) how financial sector is incorporated into SAM; and (2) how SAM multiplier and SPA can be applied to financial and social issues in a coherent and consistent manner.

For SAM and CGE Models and Applications
1) The Two-Sector General Equilibrium Model: A New Approach, by C. L. Dinwiddy & F.J Teal, Philip Allan/ St. Martin’s Press, 1988. This is an elementary book on the concept of CGE models. It is easy to read, even for those with no strong mathematical knowledge and economics background.
2) Quantitative Development Policy Analysis, by E. Sadoulet & Alain de Janvry, John Hopkins University Press, 1995. This is a relatively complete text book on policy modeling, including CGE modeling, although only few chapters are relevant for the class.
3) Cameroon General Equilibrium Model Using NLP. This model is a blueprint of a basic CGE model that follows closely the CGE model of Dervis, De Melo and Robinson in the late 1970s.
4) Macroeconomics, Financial Variables, and Computable General Equilibrium Models, by Sherman Robinson, World Development, 19(11), pp 1509-1525, 1991. This article shows how the financial sector is incorporated into a standard real-sector CGE model.
5) Simulating Economy-wide Models to Capture the Transition from Financial Crisis to Social Crisis, by Iwan Azis, The Annals of Regional Science, Vol. 34, Issue 2, 2000. This article demonstrates the use of SPA and CGE models to measure the impact of a financial shock on income distribution.
6) Linking Pollution and Macroeconomic Variables, by Iwan J. Azis, in M. Chatterji & Yang Kaizhong (eds) Regional Science in Developing Countries: Perspectives for the Future, Macmillan and St Martin’s Press, 1997. This is an example of the use of a CGE model using IO Table (without SAM) to analyze the tradeoffs between growth/efficiency and pollution/environment.
7) Applied General Interregional Equilibrium, by Walter Isard & Iwan Azis, in Walter Isard et.al, Methods of Interregional and Regional Analysis, Ashgate, England, 1999, pp 333-400. This provides various important issues of interregional CGE modeling with transportation costs and some possible extensions.
8) Development Performance and Future Scenarios in the Context of Sustainable Utilization of Natural Resources, by Iwan Azis and Emil Salim, in Budy, P.R (ed) The Politics and Economics of Indonesia’s Natural Resources, Institute of Southeast Asian Studies, p 125-142. This shows the application of dynamic CGE model in the context of sustainable development.
9) A Drastic Reduction of Fuel Subsidies Confuses Ends and Means, by Iwan Azis, in ASEAN Economic Bulletin, April, 2006. This demonstrates the planning and policy analysis of fuel subsidy and domestic debt based on CFGE model
10) China's Urban-Rural Disparity Under Alternative Financial and Fiscal Policies, by Iwan Azis, Wing Thye Woo, Zhai Fan, and Chanin Manopiniwes, in ICFAI Journal of Applied Economics, May, 2006. This shows how CFGE model can be applied for planning and policy analysis in China’s current policy dilemma
11) The Relevance of Price Endogenous Models, by Iwan Azis, in Regional Science Review, Vol 17, 1998, p.1-20. This shows how a CGE model can be used to analyze economic reform, and it also show the difference between SAM multiplier and CGE multiplier
12) A New Approach to Modeling the Impacts of Financial Crises on Income Distribution and Poverty, by Iwan Azis, ADB Institute Research Paper, No 35, March 2002

For Analytic Hierarchy Process
1) Decision Making in Economics Political, Social and Technological Environments With the Analytic Hierarchy Process, by Thomas L. Saaty (1994). vol VII, RWS Publications. This is a basic source for understanding AHP
2) Fundamentals of Decision Making and Priority Theory With The Analytic Hierarchy Process, by Thomas L. Saaty, RWS Publication, Pittsburgh (1996). This is another basic reading for understanding AHP
3) Analytic Hierarchy Process in the Benefits/Cost Framework, by Iwan J A, European Journal of Operational Research, Sep¬tember 5, vol 48, number 1 (1990). This shows the application of AHP for regional planning and impact analysis
4) The Use of the Analytic Hierarchy Process in Conflict Analysis and An Extension, by Iwan J Azis and Walter Isard, Peace Economics, Peace Science and Public Policy, Vol 3, No 3 (1990). This shows the step-by-step computing procedure of generating eigen vector for AHP
5) New Conflicts Between Developed and Developing Countries, by Iwan J Azis, Peace Economics, Peace Science and Public Policy, Vol 3, No 1 (1996). This shows how AHP and game theory can be combined in a conflict analysis
6) Resolving Possible Tensions in ASEAN’s Future Trade: Using Analytic Hierarchy Process, by Iwan J. Azis, ASEAN Economic Bulletin, Vol 12, No. 3, March, Singapore, 1996. This is another example of combining AHP and game theory
7) A Cooperative Analysis Approach for Use by Diplomats and Negotiators With a Proposed Step for Resolving Conflict on the Korean Peninsula, by Walter Isard and Iwan Azis, in Peace Science and Public Policy Vol 5, No 1, 1999, pp 1-22. This article is downloadable for free (after you register) from:
http://www.bepress.com/cgi/viewcontent.cgi?article=1016&context=peps
This is a practical example of using AHP for conflict analysis in the Korean Peninsula
8) IMF Perspectives and Alternative Views on the Asian Crisis, by Iwan Azis, in in P. Gangopadhyay and M. Chatterji (eds) Economics of Globalisation, Ashgate, England, 2005. This demonstrates how a joint-policy is achieved in a conflict situation by using AHP.

For Analytic Network Process
1) Diagnosis With Dependent Symptoms: Bayes Theorem and the Analytic Hierarchy Process, by Thomas L. Saaty and Luis Vargas, Operations Research 46, No. 4, July-August, 491-502. This explains the difference between AHP/ANP and the Bayesian models
2) Decision Making With Dependence and Feedback: The Analytic Network
Process, by Thomas L. Saaty, RWS Publication, Pittsburgh (2001). This is for basic understanding of ANP and its mathematical foundations.
4) A Regional Cooperation To Support Financial Crisis Management and Prevention: An Application of A Model With Uncertainty and Feedback Influences, by Iwan Azis, in International Journal of Organizational Analysis, Vol 13, No 3 (2005). This shows how ANP is used to analyze a regional cooperation.
5) Articulating the Benefits and Costs of Regional Financial Arrangement in East Asia, by Iwan Azis, in Global Imbalances and Their Impacts on Emerging Market Economies, a proceeding jointly published by the IMF-ADB-BI. This is another application of ANP in regional cooperation. It also shows the difference between AHP and ANP
6) Analytic Network Process With Feedback Influence: A New Approach to Impact Study, by Iwan Azis, University of Illinois at Urbana-Champaign, November , 2003. This demonstrates the difference between the results of regional impact analysis using AHP and ANP

Other relevant references may be announced in class.

Each student in this course is expected to abide by the Cornell University Code of Academic Integrity. Any work submitted by a student in this course for academic credit will be the student's own work. "In compliance with the Cornell University policy and equal access laws, I am available to discuss appropriate academic accommodations that may be required for students with disabilities. Requests for academic accommodations are to be made during the first three weeks of the semester, except for unusual circumstances, so arrangements can be made."