Building Strategy Papers for Human Development (SPAHD) A Monitoring Framework for Niger

1. Building Strategy Papersfor Human Development (SPAHD)A Monitoring Framework for Niger Emmanuel Pinto Moreira Senior Economist, LAC Region, World Bank

2. Joint program of technical assistance; Bank, UNDP, and the Government (CAPED and SRP Team). • Background papers: • Pinto Moreira and Bayraktar (2005); Niger • Agénor, Bayraktar, and El Aynaoui (2005); Ethiopia.. • Agénor, Bayraktar, Pinto Moreira, and El Aynaoui (2005); link between model and MDGs.

3. Issues in Niger and many other low-income countries: • High and sustained growth. • Public investment in infrastrures (low infrastructure indicators). • Governance issues: low indicators. • Foreign aid. • Poverty and MDGs.

4. Issues in Niger and many other low-income countries: • Low human development indicators. • Focus on human development and not only poverty: SPAHD. • Income/asset distribution may not be the critical issue. • There are very good reasons to worry about inequality (social justice, morality), but growth is not one of them.

5. Issues in Niger and many other low-income countries: • Those who advocate a greater role for redistribution (income or assets) are either misreading the evidence… • …or fail to acknowledge the possible adverse effects of redistribution on the poor.

6. Examples: • Lower saving and investment rates (weaker collateral constrains borrowing). • Taxation can discourage the accumulation of skills and/or encourage informality (reduces the capacity to invest). • The consequence may be lower growth in the medium and long run. • In fact, tackling inequality may be easier in a growing economy.

7. Some of these issues are difficult to account for in a macro framework.

8. IMF, Working Paper No. 05/179 (pp. 13-14): • “Once appropriate consideration is taken of the supply-side impact of aid flows, there is no clear presumption as to whether, over the medium term, there will be a real exchange rate appreciation or depreciation or whether the tradable sector will contract or expand.” • Also recognition that the empirical evidence is mixed--some studies of African countries find that aid inflows appear to be associated with a real depreciation.

9. Africa Action Plan, September 2005: • Objective:“Help countries build outcome-driven development strategies… Countries must lead, manage, and monitor progress toward development outcomes such as the MDGs.” • Objective:Closing the infrastructure gap. Explicit recognition of the central role that infrastructure investment should play in a strategy to accelerate growth in Sub-Saharan Africa.

10. Source: Infrastructure and the World Bank: A Progress Report (2005, p. 2).

11. Most studies of “MDG costing” tend to focus only on the direct costs of providing services in the sectors associated with the goals themselves (e.g., education and health)… • …and ignore the need for investments in complementary, growth-oriented sectors such as infrastructure. • Need for a macro approach, to capture the potential externalities associated with infrastructure.

12. The Macro Component

13. The Economy produces one good which is imperfectly substitutable to an imported good. • Domestic production requires effective labor, private capital, and public capital in infrastructure and health. • Public capital in infrastructure improves the productivity of the private factors used to generate output.

14. Public capital in health improves the quality of labor employed in production. • Effective labor is a composite input, produced by the actual stock of educated labor and public capital in health. • Congestion effects in the provision of health services: the stock of public capital in health is scaled by the size of the population.

15. Congestion effects in domestic production: lagged output is used as an indicator of the intensity of use of public services in infrastructure. • Congestion effect in the stock of public capital in education: scaled by raw labor to capture pressure on the education system.

16. Domestic production is allocated between exports and domestic sales. • Income from production is entirely allocated to a representative household. • Disposable income is obtained by subtracting direct taxes from total income. It determines domestic demand.

17. Domestic demand and domestic supply determine domestic prices. • Domestic supply is a combination of domestically produced goods and imported goods.

18. 6 MDGs indicators are integrated: poverty rate, literacy rate, infant mortality, malnutrition, life expectancy, and access to safe water. • Poverty is linked directly to the macroeconomic model through partial growth elasticities (growth rate of real private consumption per capita): -1; -0.5; -1.5 and Ravallion’s adjusted elasticity. • Literacy rate is also a direct output of the model. • . • . • .

19. Literacy rate is also a direct output of the model. • All other MDG indicators (malnutrition, infant mortality, life expectancy, and access to safe water) are linked to the model through cross-country regressions. • Composite index is calculated: unweighted geometric average of all the individual indicators. Useful to provide a synthetic view of progress toward achieving the MDGs. • . • . • . • . • .

20. Simulating the Impactof an Increase in Aid

21. Aid are defined as grants only and is accounted for as an item “above the line”. It is therefore a potential substitute to domestic sources of revenue. • Public investment is positively related to both tax revenue and foreign aid. • Maintenance expenditure are accounted for and related to depreciation of stocks of public capital. • .

22. Efficiency of public investment is accounted for: possibility that a fraction of resources invested in investment projects may be wasted and may not have a positive impact on the public capital stock (Prichett 1996).

23. Assumptions for baseline scenario: • Calibration on 2004. • Constant aid-GDP at 10.7%. • Allocation of public investment: according to initial shares. • No terms-of-trade effects. • Limited domestic financing, highly concessional external borrowing. • Note: no account of the volatility of aid flows (see Bulir and Hamann (2005)).

24. Assumption for the initial experiment: investment is fully efficient. • Specification of the Perpetual Inventory Method to calculate the public capital stock in category h: Kh(t) = (1 - h)K(t-1) + hIGh(t-1) • h (0,1): depreciation rate; IGh: investment in h. • h (0,1): efficiency of investment in h.

25. Two cases: • h = 1, h: investment is fully efficient in all sectors. • h < 1: investment is partly wasted in sector h. • Pritchett (1996): half of capital outlays do not serve to accumulate public capital. • Arestoff and Hurlin (2005), for total public capital stock:  varies between 0.4 and 0.6.

27. Poverty decreases in the best case by 21 percentage points (from 63% in 2003 to 42.3 in 2015). But in the case of -0.5 (Besley-Burgess case), poverty drops by only 8.3 percentage points. • Literacy rate increases from 11.4% in 2003 to 25.7% in 2015. • Infant mortality drops from 191 per 1,000 in 2002 to 125 in 2015.

28. Malnutrition prevalence drops only slightly from 42.6 % in 2000 to 37.5% in 2015. • Life expectancy increases from 42.1 years to 49.9 years. • The percentage of population with access to safe water rises from 53% in 2000 to 66.1% in 2015. • Composite MDG indicator improves. • But Niger will not be able to achieve the MDGs.

30. Poverty decreases in the best case by 10 percentage points compared to the baseline (from 42.3% to 32%). But in the case of -0.5 (Besley-Burgess case), poverty drops by only 4.6 percentage points compared to the baseline (55.3% to 50.7%).

31. What Happens with Inefficient Public Investment?

32. Alternative case: investment is only partly efficient. • Case shown:  = 0.5; mid-point value estimated by Arestoff and Hurlin (2005). • Good approximation for Niger? Open for debate. • But if so: results are quite telling. • Without deep reforms aimed at improving the management of public resources, aid inflows would have to rise to considerably higher levels.

34. Baseline: Poverty decreases from 63% in 2003 to 47.7 in 2015 in the best case. But in the case of -0.5 (Besley-Burgess case), poverty drops only from 63% to 57.5%.

36. Poverty decreases by 8 percentage points compared to baseline in 2015 (from 47.7 to about 40%) in the best case. But in the case of -0.5 (Besley-Burgess case), poverty drops only by 3.3 percentage points compared to baseline (from 57.5% to 54.2%). So the poverty rate drops from 63% in 2003 to only 47.7% (best case) or to 54.2% (worst case) in 2015.

37. Linking Public Investment Programs and Macro Models:A “bottom up” Approach

38. “IMF and Bank contributions to developing a better understanding of country-specific micro-macro linkages have been fairly limited. Although both institutions place greater emphasis than before on poverty and social impact assessment (PSIA), they have not yet devised a way to ensure that the priorities for such assessments (especially in the area of macroeconomic policy) will reflect the strategic priorities of the PRSP.” • Joint World Bank OED-IMF IEO Report (2005, pp. 6-7).

39. Declaration adopted at the UN World Summit: • All countries “…agree to adopt, by 2006 and implement comprehensive development strategies to achieve the internationally agreed development goals and objectives, including the MDGs.” • What it means: country needs, based on their development goals (MDGs), should determine aid. • However, reality checks are needed (potential absorption problems). • Process should be viewed as iterative.