Download Achieving the MDGs in Kenya – some aid and

Achieving the MDGs in Kenya – some aid
and reallocation of public expenditures*
Jörgen Levin
Jane Kiringai
Work in Progress
Presentation at Business School,
Nairobi University, August 21, 2008
*Part of this power-point presentation is based on Lofgren, Diaz-Bonilla and Timmer (2007), Presentation for the Public Finance
Analysis and Management Core Course, PREM Learning Week, April 27, 2007
Vision 2030 and MDGs
•
The Government plans to sustain and accelerate GDP growth up to 10 percent by
2012 (Republic of Kenya, 2008).
The strategy essentially involves:
•
–
–
–
–
–
Macro-economic stability
Deepening of various structural reforms including governance
Financial sector reforms
Restructuring and privatizing state-influenced enterprises and
reorienting expenditures towards priority areas.
•
The main focus of the medium term plan is to move decisively towards the
Millennium Development Goals (MDGs).
•
A MDGs status report on Kenya indicates that significant progress has been made towards
achieving the goal of universal primary education.
However, the Government will need to scale-up its efforts substantially beyond the current
momentum, if the other goals are to be realised by 2015.
•
•
The strategy involves achieving: rapid and sustainable economic growth in order
to reduce poverty on a sustainable basis; and reallocate public resources towards
the infrastructure investments and social services.
Policy issues
•
The policy issue we discuss is whether the strategy proposed
by the Government would achieve the MDGs.
We also discuss the impact of additional external resources.
The paper is organised as follows:
•
•
–
–
–
–
–
The second chapter explains the model and the data used in the
study.
In the third section we present and discuss our baseline scenario.
Chapter four discusses alternative financing scenarios and the impact
of additional resources on the achievement of MDGs. In chapter five
we also highlight allocation of public expenditures.
The final section concludes.
The appendix describes the underlying database in more details.
MDG strategies
• Key policy questions for MDG strategies:
– What is the required expansion of public spending?
– What are the effects on the labour market, foreign trade and exchange
rates?
– What are the roles of synergies between different MDGs?
– How does growth in private incomes interact with public spending?
– How do the effects depend on the mix between domestic and foreign
financing?
– What is the impact of back- and front-loading public service expansion?
– If all MDGs cannot be met, what are the trade-offs between human
development (HD) and infrastructure?
Model Structure
•
In this paper we use a version of the MAMS model
(Bourguignon et al, 2007) calibrated for Kenya.
•
MAMS may be described as an extended, dynamicrecursive computable general equilibrium (CGE)
model designed for MDG analysis.
•
Motivation behind the design of MAMS:
–
An economywide, flexible-price model is required.
– Standard CGE models provide a good starting point
–
But Standard CGE approach must be complemented by a
satisfactory representation of 'social sectors'.
MAMS – Maquette for MDG
Simulations
• The MAMS is a dynamic computable general equilibrium (CGE)
model which has been extended to include a module that covers
MDGs related to poverty, health, education, and water-sanitation.
– The within-period module captures the bulk of the production,
consumption, investment and trade decisions of the economy in any given
time period.
– The between-period module provides linkages over time by updating
selected parameters on the basis of exogenous trends and past endogenous
variables.
– The MDG module captures the processes that determine MDG
achievement, most importantly the provision of services in the areas of
education, health, water and sanitation.
Stylized Model Structure
Factor
Markets
Factor
Costs
Activities
Sales
Domestic Private Savings
Wages
& Rents
Intermediate
Input Cost
Gov. Savings
Taxes
Households
Government
Sav./Inv.
Transfers
Commodity
Markets
Exports
Imports
Rest of the
World
Private
Consumption
Government
Consumption
Investment
Demand
Foreign Transfers
Foreign Savings
Modelling MDGs
•
•
•
•
MDG 2 – MDG 7 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.
In education, the model tracks base-year stocks of students and new
entrants through the three 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), household welfare (measure by per-capita household
consumption), and level of public infrastructure, wage incentives and health
status (approximated by MDG 4).
Government sector
•
Government services are produced using labor, intermediate inputs, and
capital
•
Government consumption is classified by function: social services
(education, health, water-sanitation), infrastructure and “other
government”.
•
Government spending is split into
–
Recurrent: consumption, transfers, interest
–
Capital
•
Government spending is financed by taxes, domestic borrowing, “money
printing”, foreign borrowing, and foreign grants.
•
Model tracks government domestic and foreign debt stocks (including
foreign debt relief) and related interest payments.
Data
• Basic data needs are similar to other CGE models:
– Social Accounting Matrix (SAM); factor and population stocks; shares and
elasticities in trade, production, and consumption
• Data (and model) disaggregation highly flexible outside the
government and the labor market
• Data requirements specific to MAMS:
– In SAM: government consumption and investment disaggregated by MDGrelated functions; labor disaggregated by educational achievement;
– Education parameters: stocks of students by educational cycle; student
behavioral patterns (ex: rates of passing, repetition, dropout); population data
with some disaggregation by age;
– MDG data: base-year indicators; elasticities; service expansion required to
reach MDGs (MDG scenarios)
• Other worksheets
– Ex: debt, foreign debt relief, growth rates
Kenya Model
•
•
Modified Kenya 2003 SAM (Thurlow, Kiringai and Wanjala, IFPRI 2006)
Public MDG sectors:
–
–
–
–
–
–
•
Primary education
Secondary education
Tertiary education
Health
Water and sanitation
Infrastructure
Public non-MDG sectors:
– Other government
•
Private “non-MDG” sectors (MDG 1 only):
– Agriculture
– Industry
– Services
•
Private MDG sectors:
–
–
–
–
Primary education
Secondary education
Tertiary education
Health
Kenya Baseline scenario
Table 3.1: Baseline Scenario Macro-economic Developments
Population
Real Gross Domestic Product (GDP)
Private consumption
Government consumption
Investment
Private
Public
Exports
Imports
GDP per capita
Exchange rate
External debt
Domestic debt
(mn)
(bn 2003 Ksh)
(bn 2003 Ksh)
(bn 2003 Ksh)
(bn 2003 Ksh)
(bn 2003 Ksh)
(bn 2003 Ksh)
(bn 2003 Ksh)
(bn 2003 Ksh)
(2003 Ksh)
(index, Ksh per dollar)
(% of GDP)
(% of GDP)
Note: all macro-economic aggregates are expressed in real terms.
2003
32.7
1009.8
856.9
213.6
179.4
156.7
22.6
280.8
406.5
34879
100.0
45.9
25.2
2010
38.4
1668.3
1401.4
315.0
374.6
283.0
91.7
443.9
665.0
48723
92.9
30.4
25.0
2015
43.0
2519.7
2115.5
454.5
580.4
426.5
153.8
660.9
1003.1
65303
88.4
21.9
23.5
Annual
Growth
2.3
7.9
7.8
6.5
10.3
8.7
17.3
7.4
7.8
5.6
-2.0
-6.0
-1.0
Kenya Baseline scenario
Table 3.2: Baseline Scenario Fiscal Accounts (nominal terms in percentage of GDP)
Government revenue
Direct taxes
Import duties
Other Indirect taxes
Grants
Domestic borrowing
Foreign borrowing
Government spending
Current
Capital
Interest payment
Domestic
Foreign
2003
23.5
7.7
1.8
9.7
1.4
1.4
1.4
23.5
18.7
2.0
2.8
2.1
0.7
2010
27.3
13.4
1.6
8.5
0.9
1.9
1.0
27.3
21.4
4.9
1.0
0.5
0.5
2015
30.5
18.0
1.4
7.8
0.6
1.8
0.7
30.5
24.2
5.5
0.8
0.5
0.3
Kenya baseline scenario
Public spending pattern - baseline scenario
120.0
100.0
80.0
current
60.0
capital
40.0
20.0
er
go
ve
rn
m
en
t
ctu
re
Ot
h
nd
er
a
In
fra
str
u
sa
ni
tat
io
n
lth
He
a
W
at
ati
on
Se
c
on
da
ry
ed
uc
ed
uc
-20.0
ati
on
0.0
Pr
im
ar
y
% average change 2003-2015
140.0
Baseline and MDG results
Table 3.3: Baseline Scenario and MDG targets
2003 2010 2015 Target
National Poverty headcount
(percent)
52.0 42.4 27.0 24.5
Primary education completion rate
(percent)
68.3 79.4 90.3 100.0
Under-5 mortality
(per 1000 children)
115.0 70.6 32.1 33.0
Maternal mortality
(per 100,000 births)
414.0 269.1 135.7 167.5
Access to water
(percent)
49.0 53.6 60.0 74.0
Access to sanitation
(percent)
86.0 87.0 88.4 92.0
Note: Head-count ratio target based on national poverty line. Other MDG targets based on World Bank (2003)
and Republic of Kenya (2005a).
Enrollment primary education
Number of students enrolled - primary education
8600
8400
8200
8000
'000
7800
7600
base
7400
7200
7000
6800
6600
6400
2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
Primary completion rate
Primary completion rate
120.0
100.0
%
80.0
base
60.0
target
40.0
20.0
0.0
2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
Enrollment secondary education
Number of students enrolled - secondary education
3000
2500
'000
2000
1500
base
1000
500
0
2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
Enrollment tertiary education
Number of students enrolled - tertiary education
600
500
'000
400
300
base
200
100
0
2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
Real wages
Annual average changes in real wages
25
20
%
15
base
10
5
0
f-labn
f-labs
f-labt
Unemployment
Unemployment
25.0
20.0
15.0
%
f-labn
f-labs
10.0
5.0
0.0
2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
Achieving the MDGs
• In the baseline scenario there is some progress across
all MDGs but not sufficient to reach all the targets.
• Additional resources are required to reach the MDGs
and the financing options available to the government
are either to increase taxes (mdg-tax), borrow
domestically (mdg-db), foreign borrowing (mdg-fb)
or grant aid (mdg-fg).
• In practice a combination of the four financing
options is used to finance operations within the public
sector. Here we are interested in the amount of
resources that would be required and the economywide impact of each alternative financing option.
Achieving the MDGs
• The different financing scenarios will have a different impact on GDP
performance in the economy. Taxation and domestic borrowing tends to
withdraw savings and hence lover investments and hence reduce GDP
growth.
• Compared to the baseline scenario public spending does only need to
increase slightly in order to achieve all the MDGs.
• In the case of domestic borrowing the domestic debt-GDP ratio would
increase to 68.6 percent in order to finance the necessary interventions. In
the case of foreign borrowing the debt-GDP ratio in 2015 would stand at
close to 60 percent. Relying on taxation implies that the tax-GDP ratio
needs to increase to around 30 percent. In the case of grant-aid it has to
increase to a level around 2.8 percent of GDP.
• The major risk with a significant increase in grant aid (as well in the
alternative of foreign borrowing) is the possibility of Dutch Disease. In
both externally financed scenarios the real exchange rate appreciates by an
annual average rate of 2.4 percent, which is slightly higher than the
alternative scenario where domestic resource mobilization is used.
Fiscal space?
• It is possible to achieve the MDGs under certain assumptions
on GDP growth and enhanced public spending.
• But is it a feasible strategy, what is the macroeconomic impact
of a scaling-up strategy or can the government create the
necessary fiscal space?
– The macroeconomic impact of enhanced public spending in order to
meet the MDGs was not extremely large.
– Still, undertaking a strategy which would increase the domestic debtratio to close to 70 percent or alternatively a strategy relying on foreign
borrowing seems not to be a viable strategy.
– Foreign grants would be the preferred option and the amount of
resources is not extremely high. In addition, the additional resources
would not have any major impact on the real exchange rate.
Government expenditures
• A strong result coming out from this analysis is that an
efficient and an optimal allocation of public expenditures seem
to be very important whether Kenya will achieve the MDGs or
not.
• How should public expenditures be allocated across functional
categories in order to achieve the MDG targets?
– Increased allocations in all sectors are needed but some sectors would
require a higher share of public resources:
– In the education sector both current and capital expenditures needs to
increase significantly at both secondary and tertiary level.
– Significant amount of resources are needed in the water sector, in order
to achieve the targets.
– Continued high investments in infrastructure will be important, in
particular to increase total factor productivity and growth, which in turn
will reduce poverty.
Government expenditures (% annual
average growth 2003-2015)
350.0
300.0
250.0
200.0
current
capital
150.0
100.0
50.0
er
go
ve
rn
m
en
t
ctu
re
Ot
h
nd
In
fra
str
u
sa
ni
tat
io
n
lth
er
a
W
at
Te
rti
a
ry
He
a
ati
on
ed
uc
ati
on
ed
uc
on
da
ry
Se
c
Pr
im
ar
y
ed
uc
ati
on
0.0
Foreign aid required
80
70
2003 USD
60
50
base total
40
mdg-fg total
30
20
10
0
2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
Future work
• Data issues:
– Improve database (update SAM, labour market, household etc.)
– Poverty methodology (include representative household groups and/or
micro-simulation module in the model)
– Government data
• Applications:
– Regional analysis – allocation of government spending and MDGs at
regional level. This would be a useful exercise as it would be able to
shed some light on regional inequalities in Kenya.
– Allocation of government expenditures – reallocation from MDG
sectors to public administration
– Trade-offs between spending on HD and INFRA
– Vision 2030
Conclusions
• If the Government succeeds in deepening its reform efforts this could
trigger additional aid-flows.
• If the resources are effectively used and targeted to MDG sectors they
could have a substantial impact on whether Kenya would reach the MDGs
or not.
– Some targets seem to be easier to reach than others. The target of 100 percent
completion in primary school can be achieved with some additional resources
targeted to the primary sector.
– However, a substantial increase of resources is needed at secondary and tertiary
level of education to reach other goals set by the Kenyan government.
– Even if higher investment in all MDG-sectors is needed the water sector seems
to be requiring a substantial increase compared to what have been invested in
the past.
– Important is also to scale-down investment in the other government sector and
increase investments in MDG-sectors.
• A clear prioritization would be needed from the Government.