Domestic Policies and Foreign Aid:
Alternative Scenarios for Ethiopia, 2006-2010
Hans Lofgren, DECPG, World Bank
and
Rahimaisa Abdula, AFTP2, World Bank
Background paper for the Joint Budget and Aid Review
Draft
May 28, 2006
EXECUTIVE SUMMARY
In this paper, we use an economywide simulation model – MAMS (Maquette for MDG
Simulations) – to explore the macroeconomic effects of alternative scenarios for domestic
policies and foreign aid during the period 2006-2010. The scenarios are designed to
address questions regarding the consequences of (i) alternative allocations of government
spending across different functions, comparing human development [HD], infrastructure
and non-productive activities; (ii) increased government efficiency; and (iii) scaled-up
programs with and without additional foreign aid.
Assuming a 7% annual GDP growth rate for the BASE scenario and a foreign aid
trajectory with gradual increases from the current level of US$0.8 billion to US$1.5
billion in 2010, Ethiopia is able to make considerable progress on MDG 1 (poverty
reduction) but only limited progress on other MDGs, a reflection of that real growth in
MDG-related services falls short of what is required according to Ethiopia’s needs
assessment and earlier analyses of its MDG strategy (FDRE 2005b; Lofgren and Diaz-
Bonilla 2006b).
Under these macro constraints, Ethiopian policymakers can nevertheless make choices
between alternative spending allocations and may also strive to raise government
efficiency. The simulation results indicate that, other things being equal, a reallocation of
government spending from HD toward infrastructure boosts growth in GDP, private final
demands (consumption and investment) and government investment relative to
government consumption. Given a larger import-intensity of government investment
compared to consumption, the exchange rate will depreciate, encouraging more rapid
export growth. Among the MDD indicators poverty declines whereas the MDG indicators
in the HD area (education, health, and water-sanitation) deteriorate.
On the other hand, if the government is able to cut down on its unproductive activities
and/or raise its over-all efficiency (reflected in a smaller quantity of inputs per service
unit produced), then it can expand in all high priority areas, add to growth in GDP and
2
private consumption and make more rapid progress across the full range of MDGs, also
in HD.
Additional foreign aid can contribute positively to economic objectives if the new
resources are targeted to more real services in productive areas and if they can be
managed without any negative impact on over-all government efficiency. Under a
scenario with foreign aid increases 2006-2010 that are twice as large as under the BASE
scenario (with a total aid of US$2.2 billion in 2010), the HD indicators improve
noticeably across the board. However, if the scenario involves a significant increase in
the enrollment of youth that otherwise would have been in the labor force, the positive
impact on GDP growth, private consumption and MDG 1 may be quite limited, at least
during a period that is as short as five years. In a parallel scenario, we test the impact of a
similar expansion in government spending financed by higher direct taxes in the absence
of more foreign aid. The results indicate that government expansion at the expense of the
non-government economy gives rise to difficult trade-offs: HD performance improves at
the same time as private consumption and investment growth declines, with a negative
impact on poverty.
3
INTRODUCTION
In this paper, we use MAMS (Maquette for MDG Simulations) to explore the
macroeconomic effects of alternative scenarios for domestic policies and foreign aid
during the period 2006-2010.1 MAMS is a dynamic CGE (Computable General
Equilibrium) model designed for economywide analysis the impact of policy, including
comprehensive MDG strategies, on poverty and human development (HD). Relative to
other CGE models, MAMS has a detailed treatment of government services (which are
divided into eight different functions). The tax system and other sources of government
receipts are also treated in a relatively detailed manner. The labor market is disaggregated
into three segments on the basis of educational achievement. On the other hand, non-
government production is only represented by a single sector.
The scenarios are designed to help us better understand the consequences of (i)
alternative allocations of government spending across different functions, comparing
human development [HD], infrastructure and non-productive activities; (ii) increased
government efficiency; and (iii) scaled-up programs with and without additional foreign
aid. Among outcome indicators, we focus on monitoring the national account aggregates
(private and government consumption, private and government investment, exports,
imports, and real GDP at factor cost), the real exchange rate, selected MDGs, and the
labor market.
On a cautionary note, although we consider as robust our qualitative conclusions, one
should view the specific quantitative results with caution given parameter uncertainty and
the fact that the model provides a highly simplified representation of the Ethiopian
economy. It is also important to bear in mind that, given that many phenomena that are
not considered also will change during the simulation period (consider the impact of
1
For a technical documentation, see Lofgren and Diaz-Bonilla (2006a). In an appendix to this report, we
provide a brief, less technical model description. For other applications of MAMS to Ethiopia, see Lofgren
and Diaz-Bonilla (2006b) and Sundberg and Lofgren (2006).
4
rainfall variability changes in world prices), the model generates counterfactual
projections, not forecasts.
BASE SIMULATION
The main role of the BASE scenario is to provide a benchmark for comparison. Under
this scenario, growth in total factor productivity is set at a rate sufficient to generate an
annual growth rate of 7% for real GDP, i.e. a rate that is optimistic relative to recent
history (with a trend growth rate of 4-5%) but similar to what is assumed in other
documents analyzing Ethiopia’s MDG and poverty reduction strategies (FDRE 2005a and
2005b; IMF 2006).2 Total foreign aid is assumed to remain at the 2005 level of US$0.8
billion also in 2006, after which it will start a period of annual increases of around US$
170-200 million, reaching US$1.5 billion in 2010 – see Table 1. For the simulation
period, most of the aid is in grant form (69%), followed by foreign borrowing (29%) and
a small value for debt relief (2.6%).3 Government domestic borrowing from bank and
non-bank sources is kept at 1% and 3% of GDP, respectively. Unless otherwise noted,
2005 values are maintained for the rates of the different taxes (direct, domestic indirect
and import taxes). The resulting tax revenues depend on growth in incomes, production,
and imports. Within the fiscal space that this policy framework defines, the government
is assumed to expand its spending at a uniform real rate across all functions.4
In the discussion of BASE and the other scenarios, the reader should refer to Table 2 for
scenario definitions and to Table 3 and Figures 1-4 for selected results. (Background data
and additional results are found in Appendix tables.)
2
The full set of simulations was also carried out with a 5% GDP growth rate for the BASE. The qualitative
conclusions from the analysis, which primarily is based on comparisons between scenarios, were not
affected.
3
After the base year, government foreign borrowing is set at levels such that government foreign debt
grows at 7% per year, the rate of GDP growth for the BASE simulation.
4
For public infrastructure (for which all but a small part of government spending is for investment), the
expansion refers to capital stock growth, for the other government functions, it refers to growth in real
government service demand (consumption), which is closely related to output growth). Across all
government functions, growth in output (or demand) is proportional to growth in the capital stock, which is
determined by government investment.
5
As shown in Table 3, most national account aggregates and government services,
disaggregated by function, grow at rates of 5-7%. For one item, public investment,
growth is more rapid, at 11%. The rate of TFP growth is very rapid compared to recent
Ethiopia’s recent history (cf. Easterly 2002, p. 4) (compute the rate ??). The real
exchange rate depreciates marginally. In the labor market, real wage growth is
substantial, close to 10% per year for the small minority with completed tertiary
education and 6-7% for the two labor segments with less education.
Among the MDGs, this performance is sufficient to generate a substantial improvement
for MDG 1 (poverty), and moderate improvements in the other indicators that we monitor
– MDGs 2 (primary school completion), 4 (under-five mortality), 5(maternal mortality),
7a (access to safe water) and 7b (access to improved sanitation). With the possible
exception of MDG 1 (with the poverty rate defined as a function of per-capita
consumption with an elasticity of -1), the growth rates for the MDG outcome
determinants (including government services, per-capita consumption and the availability
of public infrastructure) are not sufficient to achieve the 2015 MDG targets. This is not
only true for the BASE scenarios but also for the other scenarios (see Figure 3).5
GOVERNMENT SPENDING: ALLOCATION AND EFFICIENCY
Under the next scenario, HDCUT, government service growth in the HD area (defined to
include all levels of education, health, and water-sanitation) is cut by half relative to
BASE (i.e. to 2.5% per year).6 The resources that are freed up (within fiscal space limits)
are allocated to spending on infrastructure, permitting 8.5% annual growth in the capital
stock accompanied by growth in real government consumption (covering maintenance) at
the same rate (cf. Table 3). Infrastructure spending is more heavily oriented toward
investment relative to HD. Given this, growth in total government investment accelerates
5
In Figure 3, the share of goal achieved was by definition 0% in 1990 and would be 100% in 2015 for an
MDG that is achieved in full. For MDG 5, the 2005 column is not visible since there was no significant
change between 1990 and 2005.
6
Implicitly, this simulation also contains information about the impact of a simulation under which the
reallocation of government spending goes in the opposite direction, away from infrastructure toward HD. A
separate simulation, not reported here, confirmed that the effects are symmetric – the same variables would
be affected to similar extents but in the opposite direction.
6
compared to BASE whereas growth in total government consumption slows down. This
reallocation of government spending priorities results in an increase in real GDP growth
by 0.4% per year (primarily a result of the productivity-enhancing impact of more rapid
growth in the stock of public infrastructure capital), permitting similar increases in total
absorption, private consumption, and private investment (by 0.3-0.4% per year). Given
that government investment is more import-intensive than government consumption,
import growth accelerates, requiring more rapid depreciation, which boosts export growth
and has a dampening impact on import growth. In the labor market, wage growth
accelerates for the unskilled and decelerates for the most skilled.7 Among the MDGs (see
Table 3 and Figure 3), the differences are as expected: poverty reduction is more rapid
whereas the performance for the HD MDGs deteriorates. For primary school completion,
the deterioration is substantial, wiping out the improvement since 2005.
We further explored the trade-offs between HD and infrastructure spending in a series of
simulations where we gradually varied the exogenous real growth rate for HD services
between -100% and +100% compared to BASE (i.e., no growth vs. a doubling of
growth), with endogenous adjustments in infrastructure spending within fiscal space
limits. (The scenario HDCUT is identical to one of these simulations, with a scaling
factor of -50% for HD service growth.) More rapid growth in HD services has a direct
and positive impact on HD MDG outcomes. The gains from a switch toward a more
educated labor force are limited during such a short period. On the other hand, more rapid
expansion in schooling reduces labor force growth, with a negative impact on growth in
GDP and per-capita consumption. Investments in public infrastructure raises TFP in the
different production activities, with a positive impact on growth in GDP and private
consumption and, to some extent, mitigating the negative impact of less direct
government spending on HD services.8 The results, reflecting the combined impact of
these effects, are summarized in Figure 4, which shows alternative outcomes for 2010. In
7
Changes in wage developments reflect the combined impact of more rapid GDP growth, a shift toward
demand for the less skilled (due to slower growth in the production of HD services), and changes in labor
supply growth (more rapid for the unskilled since school enrollment declines and less rapid for the most
skilled as the number of graduates decline).
8
For support of the assumption that additional public infrastructure investments can raise TFP and GDP
growth in the Ethiopian context, see IMF (2006, pp. 6-7).
7
2005, the share of goal achievement was 12.5% for MDG 1 and 21.7% for the HD
MDGs. In the absence of any growth in HD services, the degree of goal achievement is
only 22% for a weighted average of the HD MDGs and but as high as 61% for MDG 1
(poverty). This outcome is driven by accelerations in real GDP and private consumption
growth to 7.7% and 7.2%, respectively. At the opposite extreme, if HD service growth is
doubled, the degree of goal achievement for the average HD MDG reaches 33% while
MDG 1 declines to 45%. For the latter scenario, the growth rates for real GDP and real
private consumption are 5.5% and 5.7%.
HD and infrastructure spending may both be classified as “productive” since they
contribute positively to development outcomes (albeit with scope for efficiency
improvements). On the other hand, the residual government function, other government
(55% of total government spending in 2005) is in part made up of activities that are
unproductive and therefore could be cut, freeing up resources for productive use
elsewhere in the economy (e.g. administrators that enforce regulations without any
positive impact on economic performance). However, it also includes activities that may
be vital to the general well-functioning of the government administration and much of the
rest of the economy (such as maintaining the judicial system and limiting the scope and
incentives for corruption).
For the scenario OGOVCUT, we assume that it is possible to cut growth in the
government’s consumption of “other government services” by half, to 2.5% per year,
without any negative repercussions, reflecting a gradual curtailment of the part of these
services that are unproductive. Detailed analysis of the government administration would
be needed to identify such activities. The resources that are released are used to expand
HD and infrastructure services.
Annual growth in HD and infrastructure services accelerates from 5.0% under BASE to
7.1% under OGOVCUT. Among government final demands, investment growth is
boosted relative to consumption growth; this reflects that “other government,” which was
cut, is tilted towards recurrent spending. More rapid growth in infrastructure leads to
8
slightly more rapid growth in GDP, by around 0.2% per year compared to BASE, and a
slight expansion in private consumption and investment. More rapid economywide
growth with some bias toward public investment causes real exchange rate depreciation,
needed to keep the trade deficit in check. In the labor market, wages improve slightly for
the unskilled (among other things a reflection of a shift in government demand from
administrative services to infrastructure investment). MDG indicators improve across the
board.
The efficiency with which government resources are utilized has a direct influence on the
achievement of economic objectives (unless foreign aid is unlimited). Under the scenario
GOVEFF, we assume that government efficiency improves by 2% per year; i.e.,
compared to the previous year, it is in any given year possible to provide the same service
level with 2% less of labor, capital, and intermediate inputs.9 As in the preceding
simulations, the savings are used to expand spending on HD and infrastructure.10
As expected, the effects are salubrious. Real growth in GDP increases by 0.4% per year
whereas real government consumption and investment increase by 1-2% per year – the
bulk of the resources that are freed up go to these areas. The annual growth gains in the
HD and infrastructure areas are 2-3%. For the private sector, real consumption and
investment growth increase slightly. All MDG indicators improve with gains that are
similar to or slightly stronger than those of OGOVCUT.
The main messages that emerge from the simulations reported up to this point is that,
within a given foreign aid envelope, switching spending between HD and infrastructure
involves trade-offs that the policymakers have to confront. On the other hand, if the
government is able to cut down on its unproductive activities and/or raise its over-all
9
Note that, although this has a positive impact on services produced by the government (like health,
education, and infrastructure maintenance), it does not change the efficiency of investments, including the
input needs when producing public infrastructure (since the production of this capital is not carried out by
the general government).
10
Under both GOVEFF and OGOVCUT, the government is able to consume and invest more in high
priority areas. The main difference between the two scenarios is that, under GOVEFF, the source is
increased government productivity whereas, under OGOVCUT, it is thanks to the fact that the government
is able to reduce consumption and investment in unproductive areas.
9
efficiency, then it can expand in all high priority areas and make more rapid progress
across the full range of MDGs, however still without being on track to fully achieve them
by 2015.11 Trade-offs are still present but it may be easier to address these in a setting
where there is room for a general expansion of productive government services.
FOREIGN AID AND GOVERNMENT SERVICE EXPANSION
What are the likely effects of more rapid increases in foreign aid? In the absence of more
foreign aid, what are the consequences of more rapid expansion of government spending?
In order to respond to these questions, we constructed two scenarios. Under the first,
FGEXP, we double the increase in foreign aid in each year (2006-2010) – see Table 2.
This additional foreign aid is entirely in grant form and the resources are used for HD and
infrastructure spending. Under the second scenario, TAXEXP, we impose the same
increases in real government service and capital stock growth but, in the absence of
additional foreign aid, we finance this expansion with an increase in direct taxes.
The addition to foreign aid under FGEXP has a positive impact on components of
domestic final demand (absorption). Given that the resources accrue to the government,
its consumption and investment increase more than private consumption and investment.
For the government, demand growth is particularly strong for investment (increase by
more than 6%) as capital stocks have to grow to accommodate increased service
production in the absence of any efficiency gains (as was the case for the simulation
GOVEFF). The increase in foreign aid increases the trade deficit that Ethiopia can
accommodate, leading to exchange rate appreciation, permitting slower export growth
and more rapid import growth – this increase in the trade deficit is the main factor behind
more rapid growth in total domestic final demand (absorption). The rate of real private
investment growth gets an additional boost from the resulting decline in the price of
investment that appreciation brings about. The increase in real GDP is moderate, as the
positive impact from increased private and infrastructure investment is kept in check by
11
Of course, the fact that across-the-board improvements are possible does not remove the need for the
government to identify the allocation of government spending across functions that, given its effects, is
considered “optimal.”
10
slightly slower labor force growth, a consequence of more rapid growth in enrollment.
The scenario has positive but minor effects on all MDG indicators and wages increase
across the board, especially for the two more educated labor segments.
Under the last scenario, TAXEXP, the same real government expansion is financed with
a direct tax increase in the absence of any additional foreign aid. Relative to GDP, direct
taxes increase from 4.1% in 2005 to 8.8% in 2010. The contrast to the preceding scenario
is quite drastic. Given that the increase in government demand has to be accommodated
in a section with an unchanged trade deficit and unchanged growth in total absorption,
growth in private consumption and investment have to decline, by 1.0% and 1.6%,
respectively. Less private investment growth stifles GDP growth, which is unchanged
relative to the BASE scenario. This scenario shows that attempts to let the government
grow more rapidly then GDP growth in the absence of a parallel increase in foreign aid
brings difficult trade-offs to the fore: human development services and the stocks of
public infrastructure increase more rapidly while leaving households and the private
sector with less resources for consumption and investment.12
REFERENCES
FDRE (The Federal Democratic Republic of Ethiopia). 2005a. “Ethiopia: Building on
Progress: A Plan for Accelerated and Sustained Development to End Poverty (PASDEP)
(2005/06-2009/10),” Ministry of Finance and Economic Development, October, Addis
Ababa.
FDRE (The Federal Democratic Republic of Ethiopia). 2005b. “Ethiopia: The
Millennium Development Goals (MDGs) Needs Assessment Synthesis Report,” Ministry
of Finance and Economic Development, Addis Ababa, December, Addis Ababa.
International Monetary Fund (2006), “The Federal Democratic Republic of Ethiopia:
Selected Issues and Statistical Appendix,” IMF Country Report, No. 06/122, Washington,
DC.
12
We carried out an additional simulation that differed from TAXEXP in that the government expansion
was financed by additional domestic government borrowing (instead of direct taxes), more directly
crowding out domestic private investment. Compared to the TAXEXP, the growth rates are more rapid for
private consumption (6.4% growth rate) but slower for real GDP (6.6% growth rate) and private investment
(-0.8% growth rate, i.e. declining).
11
Lofgren, Hans and Carolina Diaz-Bonilla. 2006a. “MAMS:* An Economywide Model
for Analysis of MDG Country Strategies: Technical Documentation.” Mimeo. World
Bank.
Lofgren, Hans and Carolina Diaz-Bonilla. 2006b. “Economywide Simulations of
Ethiopian MDG Strategies.” Paper submitted for presentation at the Ninth Annual
Conference on Global Economic Analysis, Addis Ababa, Ethiopia, June.
Sundberg, Mark and Hans Lofgren. 2006. “Absorptive Capacity and Achieving the
MDGs: The Case of Ethiopia,” Chapter 6 in Eds. Peter Isard, Leslie Lipschitz,
Alexandros Mourmouras, and Boriana Yontcheva. The Macroeconomic Management of
Foreign Aid: Opportunities and Pitfalls. Forthcoming. Washington, D.C.: International
Monetary Fund.
APPENDIX 1 – DESCRIPTION OF MAMS
MAMS is an economywide simulation model that the World Bank has developed to
analyze development strategies in different countries with an emphasis on the
determination of outcomes for MDG indicators. Many of the policies and foreign aid
flows targeting MDGs have strong effects throughout the economy that feed back on the
MDG indicators through markets for labor, goods, services and foreign exchange.
Therefore, economywide analysis of MDG strategies is a necessary complement to
sectoral studies.
MAMS integrates a relatively standard (recursive) dynamic general equilibrium (GE)
model with an additional MDG module that links specific MDG-related interventions to
MDG achievements. In most applications, the model has a relatively detailed treatment of
government activities, which are classified by function into: education (typically
disaggregated into three cycles), one or more health services, water-sanitation, (other)
infrastructure, and other government. Like other production activities, they use
production factors, and intermediate inputs to produce an activity-specific output (in the
case of the government, different types of services). The factors of production typically
include three types of labor (those with less than high school, high school, and more than
high school education), public capital stocks by government activity (function), and a
12
private capital stock. The government finances its activities from domestic taxes,
domestic borrowing, and foreign aid (borrowing and grants). Provision of education,
health, and water-sanitation services contribute directly to the MDGs. Growth in the
stock of public infrastructure capital (including roads, energy and irrigation) contribute to
overall growth by adding to the productivity of other production activities. In health, the
model accounts for the fact that households, NGOs and the private sector cover part of
spending, service provision and investments. The rest of the economy (representing
agriculture, industry, and other private services) may be very aggregate or highly
disaggregated, depending on the analytical context and data availability. Its output is
exported and sold domestically, competing with imports. Apart from the government, the
institutions of the economy include one or more households, the rest of the world and,
optionally, NGOs.
The model is intended to capture key interactions between the pursuit of the MDGs and
economic evolution. To keep it relatively simple, it does not cover all MDGs. It focuses
on the ones with the greatest cost and the greatest interaction with the rest of the
economy: universal primary school completion (MDG 2; measured by the net primary
completion rate), reduced under-five and maternal mortality rates (MDGs 4 and 5),
halting and reducing the incidence of HIV/AIDS (part of MDG 6), and increased access
to improved water sources and sanitation (part of MDG 7). We also address achievements
in terms of poverty reduction (MDG 1).
These different MDGs are covered in an additional set of functions that link the level of
each MDG indicator to a set of determinants. The determinants include the delivery of
relevant services (in education, health, and water-sanitation) and other indicators, also
allowing for the presence of synergies between MDGs, i.e. the fact that achievements in
terms of one MDG can have an impact on other MDGs. Outside education, service
delivery is expressed relative to the size of the population. In education, the model tracks
base-year stocks of students and new entrants through the different cycles. In each year,
students will successfully complete their grade, repeat it, or drop out of their cycle.
Student performance depends on educational quality (quantity of services per student),
13
household welfare (measure by per-capita household consumption), the level of public
infrastructure, wage incentives (expressed as the ratio between the wages for labor at the
next higher and current levels of education for the student in question; an indicator of
payoff from continued education), and health status (proxied by MDG 4). The
achievement of MDG 2 requires that (very close to) all students in the relevant age cohort
enter the primary cycle and successfully complete each year within this cycle. The
functions for education and the other MDGs have been calibrated to assure that, under
base-year conditions, base-year performance is replicated and that, under a set of other
conditions identified by sector studies, the target is fully achieved.
APPENDIX 2 – ADDITIONAL TABLES
See below.
14
Table 1. Simulation definitions
Name Description
BASE Uniform growth across all government functions within fiscal space limits;
projected moderate (exogenous) increase in foreign aid
HDCUT Same as BASE except for 50% growth cut for human development and
expansion of infrastructure within fiscal space limits.
INFCUT Same as BASE except for 50% growth cut for infrastructure and
expansion of human development within fiscal space limits.
OGOVCUT Same as BASE except for 50% growth cut for other (unproductive)
government and expansion of human development and infrastructure
within fiscal space limits.
GOVEFF Same as BASE except for 2% additional growth in government efficiency
and expansion of human development and infrastructure within fiscal
space limits.
FGEXP
Same as BASE except for: doubled foreign aid increase and expansion of
human development and infrastructure within fiscal space limits.
TAXEXP Same expansion of government as FGEXP and same foreign aid as BASE;
government expansion financed by extra direct taxes.
Table 2. Simulation assumptions: Foreign aid (bn US$)
Simulation* 2005 2006 2007 2008 2009 2010 2005-2010
All except fgexp 0.791 0.804 1.005 1.172 1.339 1.507 6.618
fgexp 0.791 0.817 1.219 1.554 1.888 2.223 8.491
*The simulations are defined in Table 1.
15
Table 3. Summary of simulation results
Simulations*
Indicator 2005 base hdcut ogovcut goveff fgexp taxexp
bn birr % annual growth 2006-2010
Real Absorption 117.85 6.97 7.32 7.13 7.42 7.90 6.93
macro Private consumption 79.00 6.66 6.98 6.78 6.83 6.81 5.68
Private investment 14.69 7.27 7.64 7.38 7.39 7.69 5.69
Government consumption 13.78 4.99 4.32 3.97 5.89 5.51 5.51
Government investment 10.37 11.12 12.68 12.75 13.21 17.52 17.52
Exports 15.81 7.59 8.52 8.13 8.26 5.95 8.06
Imports 37.77 7.25 7.65 7.48 7.54 8.99 7.45
GDP at factor cost 87.83 6.98 7.43 7.19 7.36 7.11 6.98
Real exchange rate 100.00 -0.17 0.07 0.04 0.47 -0.81 0.24
bn birr % annual growth 2006-2010
Real gov- Primary education - 1st cycle 1.05 4.99 2.50 7.06 7.94 6.68 6.68
ernment Primary education - 2nd cycle 0.75 4.99 2.50 7.06 7.94 6.68 6.68
services Secondary education 0.62 4.99 2.50 7.06 7.94 6.68 6.68
Tertiary education 0.57 4.99 2.50 7.06 7.94 6.68 6.68
Health 0.69 4.99 2.50 7.06 7.94 6.68 6.68
Water-sanitation 0.39 4.99 2.50 7.06 7.94 6.68 6.68
Public infrastructure** 44.68 4.67 8.55 6.25 6.89 5.74 5.74
Other government 9.57 4.99 4.99 2.50 4.99 4.99 4.99
'000 birr % annual growth 2006-2010
Annual < Secondary education 0.139 6.56 6.89 6.72 6.89 6.85 6.50
wages by Secondary education 0.358 6.84 6.94 6.49 6.43 7.23 6.89
education Tertiary education 1.570 9.87 9.36 8.91 8.48 10.50 10.15
rate rate in 2010
MDG 1 (headcount poverty 0.360 0.278 0.271 0.276 0.275 0.275 0.298
indicators 2 (1st cycle primary completion) 0.335 0.349 0.311 0.391 0.408 0.374 0.371
4 (Under-5 mortality) 0.127 0.117 0.117 0.115 0.113 0.115 0.117
5 (Maternal mortality) 0.871 0.752 0.757 0.729 0.700 0.735 0.748
7a (Improved water access) 0.400 0.414 0.401 0.425 0.430 0.423 0.423
7b (Improved sanitation access) 0.120 0.143 0.128 0.157 0.163 0.155 0.153
*The simulations are defined in Table 1.
**Measured by the size of the capital stock.
16
Figure 1. Macro indicators -- deviation from BASE growth
7
6
5
hdcut
4
ogovcut
3
%
goveff
2
fgexp
1
taxexp
0
-1
-2
Abs C-prv I-prv C-gov I-gov Exp Imp GDP Rexr
Note: For BASE simulation growth rates, see Table 3.
Figure 2. Government services -- deviation from BASE growth
5
4
3 hdcut
2 ogovcut
%
1 goveff
0 fgexp
-1
taxexp
-2
-3
Edu-p1 Edu-p2 Edu-s Edu-t Health Wat- Oth- Other
San Infra
Function
Note: For BASE simulation growth rates, see Table 3.
17
Figure 3. MDG Indicators
80
2005
% of goal achieved
70
60 base
50 hdcut
40 ogovcut
30 goveff
20 fgexp
10 taxexp
0
mdg1 mdg2 mdg4 mdg5 mdg7a mdg7b
Indicator
Note: For each MDG, [% of goal achieved] = 100*[2010 value - 1990 value]/[2015 target - 1990 value]
Figure 4. Poverty - Human Development Trade-Offs
Avg. % of HD goals achieved
32
30
28
26
24
22
45 47 49 51 53 55 57 59 61
% of poverty goal achieved
Note: For each MDG, [% of goal achieved] = 100*[2010 value - 1990 value]/[2015 target - 1990 value]
In the computation of the HD average, equal weights are given to education (MDG 2), health (MDGs 4 and 5),
and water-sanitation (MDGs 7a and 7b).
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Table A-1. Basic MDG data (%)
MDG Explanation 1990 2005* goal 2015
1 Poverty rate 38.40 36.00 19.20
2 1st cycle primary net completion rate 24.00 33.47 100.00
4 Under-five mortality rate 20.40 12.68 6.80
5 Maternal mortality rate 0.87 0.87 0.22
7a Water access 25.00 40.00 62.50
7b Sanitation access 8.00 12.00 54.00
*2005 or most recent year available.
Source: World Bank.
Table A-2. Simulation results: Macro aggregates (% of nominal GDP)*
2010
Indicator 2005 base hdcut ogovcut goveff fgexp taxexp
Absorption 122.9 122.7 122.5 122.8 122.8 126.3 123.2
Consumption - private 82.4 79.5 79.4 79.5 79.5 79.1 76.2
Consumption - government 14.4 15.0 14.2 14.1 13.8 15.3 15.4
Investment - private 15.3 15.3 15.4 15.3 15.4 15.2 14.4
Investment - government 10.8 12.9 13.6 13.8 14.1 16.6 17.2
Exports 16.5 16.8 17.4 17.3 17.4 15.0 17.5
Imports -39.4 -39.6 -39.9 -40.0 -40.2 -41.3 -40.7
GDP at market prices 100.0 100.0 100.0 100.0 100.0 100.0 100.0
Net indirect taxes 8.4 8.2 8.2 8.2 8.3 8.3 8.2
GDP at factor cost 91.6 91.8 91.8 91.8 91.7 91.7 91.8
Foreign savings 3.8 3.6 3.6 3.6 3.6 3.5 3.7
Gross national savings 22.3 24.6 25.4 25.5 25.8 28.4 27.9
Gross domestic savings 2.5 4.7 5.7 5.7 6.0 4.9 7.7
*The simulations are defined in Table 1.
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Table A-3. Simulation results: Government revenue and spending (% of nominal GDP)*
2010
Indicator 2005 base hdcut ogovcut goveff fgexp taxexp
INCOMES
Net private sector transfers 3.1 3.1 3.1 3.1 3.1 3.1 2.9
Official transfers from RoW 4.6 7.2 7.1 7.2 7.2 11.3 7.3
Direct taxes 4.1 4.0 4.0 4.0 4.0 4.0 8.8
Import tariffs 6.0 5.9 5.9 5.9 5.9 5.9 5.8
Other indirect taxes 2.4 2.3 2.4 2.4 2.4 2.3 2.3
Domestic borrowing 3.6 4.0 3.9 4.0 4.0 4.0 4.0
Foreign borrowing 2.5 2.4 2.4 2.4 2.4 2.3 2.5
Total 26.3 28.9 28.8 28.9 28.9 32.9 33.6
SPENDING
Government consumption
Educ - 1st cycle primary 1.1 1.3 1.1 1.4 1.2 1.4 1.4
Educ - 2nd cycle primary 0.8 0.9 0.8 1.0 0.9 1.0 1.0
Educ - secondary 0.6 0.7 0.6 0.8 0.7 0.8 0.8
Educ - tertiary 0.6 0.6 0.5 0.7 0.6 0.7 0.7
Health 0.7 0.7 0.6 0.7 0.7 0.7 0.7
Water-sanitation 0.4 0.4 0.4 0.5 0.4 0.5 0.5
Public infrastructure** 0.2 0.2 0.2 0.2 0.1 0.2 0.2
Other government 10.0 10.2 10.0 8.9 9.1 10.1 10.2
Domestic interest payments 0.6 0.5 0.5 0.5 0.5 0.5 0.5
Foreign interest payments 0.5 0.5 0.5 0.5 0.5 0.5 0.5
Government investment
Educ - 1st cycle primary 0.4 0.5 0.2 0.7 0.6 0.7 0.7
Educ - 2nd cycle primary 0.3 0.3 0.2 0.5 0.4 0.5 0.6
Educ - secondary 0.5 0.7 0.3 1.0 0.8 1.0 1.1
Educ - tertiary 0.8 0.9 0.5 1.3 1.1 1.4 1.4
Health 0.5 0.7 0.3 1.0 0.8 1.0 1.1
Water-sanitation 1.0 1.2 0.6 1.8 1.5 1.9 2.0
Public infrastructure** 2.6 3.0 6.0 4.3 4.9 4.3 4.5
Other government 4.7 5.7 5.4 3.3 3.8 5.7 5.9
Total 26.3 28.9 28.8 28.9 28.9 32.9 33.6
*The simulations are defined in Table 1.
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Table A-4. Simulation results: Balance of payments (% of nominal GDP)
2010
Indicator 2005 base hdcut ogovcut goveff fgexp taxexp
OUTFLOWS
Imports -- non-investment 25.4 24.5 24.4 24.4 24.4 24.3 23.7
Imports -- government investment 8.8 9.5 9.8 9.8 10.0 10.7 10.7
Imports -- private investment 5.2 5.6 5.7 5.8 5.8 6.3 6.3
Interest income of RoW 0.5 0.5 0.5 0.5 0.5 0.5 0.5
Total 39.9 40.1 40.4 40.5 40.7 41.8 41.2
INFLOWS
Exports 16.5 16.8 17.4 17.3 17.4 15.0 17.5
Capital income 0.2 0.1 0.1 0.1 0.1 0.1 0.1
Net private transfers from RoW 14.8 12.3 12.2 12.3 12.3 11.9 12.5
Net official transfers from RoW 4.6 7.2 7.1 7.2 7.2 11.3 7.3
Government borrowing 2.5 2.4 2.4 2.4 2.4 2.3 2.5
Non-government borrowing
FDI 1.4 1.2 1.2 1.2 1.2 1.2 1.2
Total 39.9 40.1 40.4 40.5 40.7 41.8 41.2
*The simulations are defined in Table 1.
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