Simulation of structural changes in the region's economy based on the matrix of financial flows

Economic reforms in Russia are often poorly designed and do not take into account many factors influencing the dynamics of economic processes. State management decisions are often a reaction to an unexpected economic scenario, are forced and inappropriate. The similar situation happened in terms of import substitution program which was a forced measure designed to ensure output of products, the import of which has become impossible because of the complicated foreign policy situation and the introduction of mutual trade and economic restrictions imposed by Russia and several foreign countries. The programs developed and accepted in the shortest terms were not sufficiently elaborated in terms of evaluation of economic effects. In the authors’ opinion, it is necessary to conduct scenario calculations of consequences of government decisions, primarily using economic and mathematical models which are able to answer the question “what happens if..?”

The process of import substitution causes various economic effects which can be divided into direct and indirect. Direct effects are expressed in changes in the cost of goods for Russian consumers. If the price of domestic goods is lower (assuming that their quality is identical to the imported counterparts) the society saves a part of resources which can be spent on other consumption goods or investment. Conversely, if the price of domestic goods is higher, the society as a whole will suffer losses. Indirect effects of import substitution are expressed in the revitalization of related industries, creating additional workplaces, increased final consumption and increases tax revenues [11]. Along with these short-term effects, there also are longer-term effects characterizing the structural changes in the socio-economic system. They include reduced resource intensity of the economy, growth in labor productivity, reduced import dependence and increased financial stability.

One of the most promising tools for quantitative evaluation of the effects caused by government activities is currently a class of economic and mathematical models – computable balance models of general equilibrium built on the basis of social accounting matrix/ cash flow matric (CFM). This class of models helps find approaches to addressing a wide range of objectives related mainly to state regulation of the economy.

It should be noted that the first balance empirical models appeared in the 1920–30s The most well-known works in this sphere of scientific research are works by Nobel Memorial Prize winner in Economic Sciences V. Leontief [5], L.V. Kantorovich [4] R. Stone [21] and a few other outstanding scientists. On the basis of the input-output balance these scientists tried to explain the level and dynamics of goods value and production factors, the dependence of the structure of foreign trade on the level of country’s economy relative supply of main production factors, the impact of technological progress on the economic structure and its development, etc. In the future, the most prevailing model in the foreign practice was the modified input-output model – Social Accounting Matrix (SAM) or, in other words, Cash Flow Matrix. Unlike the standard input-output model in CFM, together with intermediate and final consumption and GVA, it also considers transfer payments between institutional sectors (households, firms and government), as well as distribution of factor payments within each sector [10, p. 65]. The basics of using CFM as an effective tool for studying the structure of the economic system, characteristics of the reproduction process, the formation and distribution of multiplicative effects were laid in the works of R. Stone [21], G. Pyatt, J. Round [17, 18], E. Thorbecke, J. Defourny [14], etc.

Nowadays, of particular importance are research aimed at improving the accuracy and reliability of estimates of CFM structural elements. For these purposes, various methods of statistical analysis, methods of mathematical modeling and simulation economic agents’ behavior are used. In this sphere, most relevant are works by D. Go on the estimation of CFM parameters using Bayes’s cross entropy [15], and the work by P.L Scandizzo [20]. In addition, the sphere of integration of general economic equilibrium models with models of other types. In particular, the team of authors under the supervision of academician Makarov amplified the methodology of input-output models using theoretical and gaming, as well as neural network models of economic agents’ behavior and interaction [6]. This is described in the work by M-K. Kim and T. Harris [16] where CFM-based analysis is amplified by a classic model of linear optimization.

In recent years, Russia has had a number of publications devoted to the study of Russian regions with the help of CFM. Models of the Kaliningrad [9], Novosibirsk [7], Chelyabinsk and Kurgan oblasts, Khabarovsk [2] and Krasnodar krais and other regions have been developed. The regions’ CFMs were used to address practical issues including assessment of territory’s financial sustainability [8], the impact of federal fiscal policy on the regional economy [10] and the socio-economic situation of households with different level of disposable monthly income [1]. Work by E.A. Zakharchuk and F.A. Pasynkova [3] should be considered as is studies theoretical and methodological possibilities and presents the author’s approach to designing balance models of municipal units. In in foreign practice, CFM is also used to solve a wide range of practical issues. The recent works worth noting are: article by Y. Saafi [19] which assesses the change in income level of different social groups depending on the changes in world oil prices, article by A. Akkmelik [12] which estimates the impacts of domestic electricity price growth, and the already mentioned article by M-K. Kim [16] which estimates the economic impacts of forest fires with the help of CFM.

Despite the fact that theoretical and methodological aspects of CFM development and use are described in detail in the scientific literature, special attention should be given to adaptation of this model to the existing system of regional statistics in Russia. Works [10, 11] present the technique of CFM formation at the regional level; CFM of the Sverdlovsk Oblast is designed.

The article presents the methodology of evaluating multiplicative effects of financial measures of the state program on import substitution. Unlike previous works, the authors suggest that evaluation of government measures implementation is carried out considering not only short-term multiplicative effects, but also changes in the values of multipliers with longer-term consequences. The procedure consists of four stages.

The first stage – analysis of the current economic situation in the region and design of an input-output economic and mathematical model describing the structure, parameters and interaction of institutional sectors. The use of CFM is used for this purpose. CFM integrates statistical data from various public sources (Rosstat, regional statistics institutions, Federal Tax Service, Federal Treasury, etc.). The review of changes in CFM indicators in dynamics helps reveal the reaction of key economic actors to changes in external (exogenous) conditions.

The second stage consists of scenario calculations of the changes in the CFM elements of on the basis of changes in its structure which may occur as a result of implementation of specific government measures on import substitution. The economic system of a region consists of a number of interrelated sectors; each of them is characterized by common production output and a combination of costs necessary for manufacturing these products, including labor costs. Enterprises and organizations belonging to different sectors of the economy use machines, tools and human labor in the process of economic activity for manufacturing final goods from material resources (intermediate consumption). Modernization of buildings and equipment in the framework of import substitution measures affects the production process changing both the composition of costs for manufactured products and the range of products. This process implies that part of the existing buildings, structures and equipment is occasionally replaced in order to increase future production volume. Thus, amid expanding economy, new technology is usually embodied in newly produced capital equipment specially installed for increasing the existing capacities, and, of course, in professional workforce which works with physical capital and other inputs. As a result, modernization of production equipment and introduction of new technologies lead to changes in the technological matrix and the share of intermediate consumption in gross output. The increase in the share of value added in output makes it possible to release a certain amount of production resources (labor and capital) and direct it to manufacturing of final goods or import substitution.

Thus, the second stage evaluates potential changes in the structure CFM – changes in the ratio of value added and intermediate consumption in gross output, the share of imported goods and services in intermediate and final consumption. Based on this evaluation analysis matrix of average propensities is designed.

Technically, the second stage contains the following steps. When scenario calculations are made, one or more matrix parameters are changed reflecting structural changes in the economy of the region caused by public administration activities. Later, the model is substituted with the volume of gross output planned according to the program of import substitution, and the process of conversion is triggered. Iterations are made until the sums of income and expenditures of each CFM match.

In the third stage, the calculated values of CFM indices are compared with the actual values (obtained at the first stage), which helps assess the end result from the implementation of import substitution measures taking into account the multiplicative effects. Any indicator (or combination of indicators) may be considered as the final result of CFM. However, in the authors’ view, the development of state import substitution policy it is necessary to focus on the growth of gross value added, tax revenues of regional budgets, as well as final consumption expenditures.

The fourth stage is comparative evaluation of multipliers of actual and estimated cash flow matrices. Structural changes in CFM affect the size of multipliers. Since the multiplier shows the scale of change of an endogenous factor with a single change in the exogenous factor, higher multiplier values indicate the growing sensitivity/elasticity of the regional economic system and its structural elements to exogenous influences such as change in investment, import/export, and amount of federal financing in the regions of the state import substitution program.

The authors consider the hypothetical examples of using the technique for evaluating multiplicative effects for forecasting changes in key economic indicators – gross profit of the economy, household income, income of the government sector – as a result of influence of modernization which leads to changes in the shares of intermediate consumption and gross value added in gross output, as well as measures in the context the import substitution program, which affect the share of imports in the commodity balance in the region ¹ .

Table 1 shows the CMF of the Sverdlovsk Oblast in 2014 when gross output of all industries in the region at market prices amounted to 3574.1 billion rubles (cell 2.1). The volume of imports amounted to 515.3 billion rubles (cell 10.1). According to the system of national accounts methodology, the total output at market prices is the sum of intermediate consumption, taxes on products (VAT, customs and excise duties) and value added, which, in turn, consists

Table 1. Sverdlovsk Oblast cash flow matrix in 2014*

S о н 03 ОО СП ОО ОО LO ОО СП ОО ОО СП g с9 ОО OJ OJ оо аз со й со оо аз оо Го а 5 о х со СП СМ ОО ОО см ОО LO LO оо OJ аз аз оо g 03 Е S ОО СП ОО g S оо аз оо g ОО С О) "О СМ CSJ g ОО аз ОО g ▻- СП со СП ОО СП ОО ОО CXJ аз оо со аз OJ об Го C\J аз с^ оо аз со g со В) X СО СО СП см СО Го аз оо OJ g о X ОО СП СМ ОО СО со Го аз g ^- S S СП со со S оо об с^ S аз g ОО о СП со с^ СП ю со ю CD оо LO ю а со с^ аз оо оо g см ■О LO ОО со ОО ОО LO аз ОО ОО LO ОО см со СП ОО см см аз оо аз со г^ оо LQ оо g 1- 2 со со LO ОО ОО Го об аз оо аз ОО g 5 со 5 СО 5 со 5 СО 5 СО 5 со 5 со 5 со 5 со 5 СО 5 co II S £ ■о <3" о X о X о) о X ио 5 о X S о н 1- CS1 ОО ю со оо аз а of wages, profit, gross mixed income, and taxes on production (property tax, tax on mineral extraction tax, etc.). In 2014, in the Sverdlovsk Oblast intermediate consumption (calculated by all types of economic activity) amounted to 1836.4 billion rubles (cell 1.2), gross profit and mixed income – 839.2 billion rubles (cell 3.2), wages – 796.5 billion rubles (cell 4.2), taxes on production – 39.1 billion rubles (cell 6.2), taxes on products – 63.1 billion rubles (cell 7.2).

It should be noted that in each industry production process uses a unique set of raw materials and products (intermediate consumption) and a specific list of capital (buildings, equipment) and human resources (specialists of different professions and different skill levels). Obtaining necessary information requires extensive research and observations, which, unfortunately, are currently not held in Russia. However, the designed aggregate CFM of the Sverdlovsk Oblast helps calculate the potential effects of the introduction of new technology entailing an increase in the share of value added in gross output.

The present article uses the model with aggregated accounts “Goods and services” and “Industries”, which does not imply analysis of certain types of economic activity. The possibility of using CFM for sector analysis and calculation of multipliers is presented in the authors’ previous work [12].

Suppose that as a result of production modernization and introduction of new technology the share of intermediate consumption (IC) in gross output (GO) in the Sverdlovsk Oblast will reduce from 51.4% to 50.4%. Since this figure is the result of correlation of two indicators, it can be changed either through faster GO growth compared to IC, or through faster reduction in GO compared to IC.

The authors consider the scenario in which intermediate consumption is reduced and gross output is unchanged. Such development of the economy is possible in case of active introduction of power-saving technologies. The reduction in the share of IC means an equal increase in value added. The results of model calculations of changes and transformed CFM are represented in Table 2 .

A 1% decrease in IC (35.7 billion rubles) (cell 1.2) leads to the growth of value added by the same amount. Additional value added is distributed among the main factors of production, labor and capital, as well as taxes in the proportion prevailing in the economic system of the Sverdlovsk Oblast. Thus, the amount of profit, wages and tax revenues will increase by 17.9 billion rubles (cell 3.2), 10.7 billion rubles (cell 4.2), 7.1 billion rubles (total of cells 6.2 and 7.2) respectively. In the future, these figures will continue to move along chains of correlation between institutional sectors in proportions established

Table 2. Analysis CFM of the Sverdlovsk Oblast designed as a result of a 1% increase in the share of value added in gross output, million rubles*

S о н ГО ГО ОО СП ОО го от го CD от Го СП ОО от О от СП го о ОО го го го го го СП го го CD го го от го от го от го ОО от а 5 о х от СП ГО ОО CD со CD го СП ОО ОО CD от го от го ОО ГО Е СП ГО ОО ОО го го от го ОО 5 го CD го CD ОО го CD ▻- ю -1? СП го СП ОО СП CD от го го го CD СП СП го § CD го от ГО го со •в>-° X -° го го ГО го го ГО ОО го го со X со го го го СО Го го го го ГО от от го го о ^- го го го со ОО СП СП ОО го го го ОО О ГО о го го го со го СП го со СП го го со от го от ОО ОО го ОО го ■О от от СО от Го СП ОО от О го го го го го го го го го от го CD 1- о о 00 го от го CD от го от го ОО ОО го го ОО ГО ОО X о) X о) X о) X о) X о) X о) X о) X о) X о) X о) X о) <3" о X о X о) о X ио 5 о X S о н 1- CS1 го го го ОО го О in the economic system. I.e., the additional amount of labor remuneration received as a result of production modernization will be divided by the amount available to households – 8.2 billion rubles (cell 5.42), extra-budgetary funds – 2.5 billion rubles (cell 8.4). A similar process will take place with additional profit, a part of which will be at the disposal of households – 12.6 billion rubles (cell 5.3), the other part – at the disposal of the public administration sector in the form of income tax – 1.3 billion rubles (total of cells 6.3 and 7.3). As a result of these changes, the total amount of disposable income of households will increase by 20.8 billion rubles (cell 5.11) and the volume of final consumption funded by households will increase by 18.4 billion rubles (cell 1.5). Regional budget revenues will increase by 6.1 billion rubles (cell 6.11), which will cause an increase in expenditures on final consumption financed regional authorities by 5.4 billion rubles (cell 1.6). At the same time, the volume of investments will increase – 5.7 billion rubles (cell 1.9).

The considered scenario assumes that gross output remains unchanged. This means that a decrease in intermediate product output caused by technological progress is replaced by output of final consumption product with the entire increase in consumption met at the expense of local production.

The authors consider another scenario as an example, in which the implementation of the import substitution policy related to technological changes is associated with the increased share of intermediate consumption in gross output.

For comparison: as in the previous scenario, suppose a 1% increase in the share of intermediate consumption in gross output – from 51.4% to 52.4%. The results of calculating changes and the transformed matrix are presented ³ in Table 3 . The gross profit will be reduced by 14.3 billion rubles (cell 3.2), the total amount of wages – by 14.3 billion rubles (cell 4.2). These changes lead to the reduction in the total amount of disposable resources of household by 21.1 billion rubles (cell 5.12), of regional budget revenues – by 5.5 billion rubles (cell 6.12) and the volume of investment by 4.9 billion rubles (cell 1.9). The presented changes will lead to the reduction in the total final consumption by 23.5 billion rubles (total of cells 1.5 and 1.6).

This scenario, like the previous one, assumes that the value of total gross output remains unchanged. To maintain the total GVA at the same level with a 1% increase in the share of intermediate consumption in gross output gross output should be increased by 63.7 billion rubles. Therefore, if the

Table 3. CFM of the Sverdlovsk Oblast designed as a result of a 1% decrease in the share of value added in gross output, million rubles*

Table 4. CFM of the Sverdlovsk Oblast designed as a result of a 1% decrease in the share of inports in gross output, million rubles*

S о н СП ГО СП ОО CD го ОО ОО ОО ОО СП го го СП СП го СП го го ОО го со го ОО ГО го го го ОО го CsJ CD ОО ОО ОО ОО ОО ОО ОО го ОО ОО о 5 о х го СП го го со CD го ОО го ОО CD го ГО ГО ГО Е го ОО ОО ОО ОО ОО го го ОО го ОО 5 го CD со CD го CD ▻- ю -1? СП го СП ОО СП CD го ОО ГО CD ГО го CsJ oj § CD го ОО со •в>-° X -° го СП го го го CsJ ОО ОО с^ го го го ГО го X ОО СП со со ГО OJ ГО S ОО го го ^- го го СО го го ОО ГО ОО oj го го ГО о го го го го го го го го го го ГО го го го ОО го ГО § го го СП СП LO го го ■О го ОО го ОО о СП го го СП СП го СП СП го го го го го ОО ОО го 5 го го го ОО 1- о о 00 го го ОО ОО СО го го ОО го го ОО CD X о) X о) X о) X о) X о) X о) X о) X о) X о) X о) X о) <3" о X о X о) о X ио 5 о X S о н 1- CS1 ОО го го ОО го О implementation of the import substitution policy leads to an increase in the share of intermediate consumption thus ensuring the growth of gross output in the amount sufficient to preserve the value of gross value added in absolute terms at the same level, it can be considered costeffective.

The implementation of the import substitution policy does not only lead to structural changes, but also affects the share of imports in the overall balance of goods and services of a territory. In 2014, in the Sverdlovsk Oblast the share of imports in the total volume of goods and services amounted to 12.6% (cell 10.1, table 1). To reduce this index by 1 percentage point – to 11.6% – it is necessary to replace 40.9 billion rubles of imported products by products of resident enterprises of the region. Let us consider this scenario. The results of structural changes and transformed CFM are represented in Table 4. An increase in gross output by 40.9 billion rubles will lead to creation of 19.8 billion rubles of value added (total of cells 3.2, 4.2, 6.2 and 7.24) , including 9.6 billion rubles of income and 9.1 billion rubles of wages, 1.1 billion rubles of taxes . The change in the total value added leads to an increase in disposable income of institutional sectors. In particular, the disposable income of households will increase by 13.8 billion rubles (cell 5.11), the revenues of regional governments will increase by 2 billion rubles (cell 6.11), and investments – by 3.1 billion rubles (cell 9.11). The total increase in final demand in the economy of the territory will reach 13.9 billion rubles (total of cells 1.5 and 1.6).

It is obvious that import substitution requires that a certain amount of investment is ejected. It is necessary to invest in creation of new and expansion of the existing businesses, to train new staff. Transition of Russian enterprises to using domestic products will also require investment. In order to judge the benefits of import substitution, it is necessary to correctly assess the resources required for its implementation and the amount of potential benefits.

Changes in the CFM structure lead to changes in the value of CFM multipliers (Table 5).

The decrease in the share of intermediate consumption in gross output (column 2) leads to the declining multipliers of gross output and production of resident enterprises of the region (lines 1 and 2), however, it results in the increase in the value of multipliers of gross value added in the form of profits and wages (lines 3 and 4). The opposite situation is observed if the share of intermediate consumption in gross output is increased (column 3). These changes result in the growing value of multipliers of aggregate demand and output of resident enterprises of

Table 5. Changes in multipliers of CFM gross output of the Sverdlovsk Oblast*

		Multiplier value
		Actual 2014	At a 1% decrease in the share of IC in GO	At a 1% increase in the share of IC in GO	At a 1% decrease in the share of imports in product balance
		1	2	3	4
1	Goods and services	3.937	3.892	3.984	4.073
2	Industries	3.441	3.401	3.482	3.601
3	Capital	0.808	0.816	0.804	0.845
4	Labor	0.767	0.768	0.762	0.802
5	Households	1.159	1.165	1.152	1.213
6	Regional budget	0.165	0.169	0.162	0.173

*Calculated by the authors on the basis of Tables 1, 2, 3, 4.

with different financial status, as well as flows of interregional trade, migration and capital circulation. The authors note that these

studies should be of a systematic character, which will help track the dynamics of processes and identify causal relations.