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GTAP Resource #1979

"Millennium Development Goals for Honduras: Current Achievements and Forthcoming Challenges"
by Bussolo, Maurizio and Denis Medvedev

The progress on many Millennium Development Goals (MDGs) in Honduras lags behind other countries in Latin America, and, if current trends continue, none of the MDGs are likely to be reached by 2015. Using a dynamic general equilibrium model extended to include explicit ‘production functions’ for MDGs (the MAMS model), a Business-as-Usual (BaU) scenario is contrasted with several alternative scenarios. The BaU case shows only modest improvements in the poverty, education, health, and water-sanitation MDGs, despite assuming per capita growth rates well above the past decade averages and significant expansion of public provision of social services. Our simulations demonstrate that reaching the MDGs will require public expenditure in related service categories to more than double from business-as-usual levels, although significant cost savings are likely to be realized from various synergies across the MDGs.
Our modeling approach highlights that targeting MDGs has significant general equilibrium effects. One of these is the competition over scarce resources between MDG services and other sectors; another is the interaction between MDG service provision and the rest of the economy via the labor market. In all cases, the large sustained increases in government consumption and investment crowd out private spending, although the relative size of the effect depends on the source of MDG financing. The labor market channel is particularly important for Honduras, where almost 45 percent of the total population is 16 years old or younger. Even under BaU conditions where the education target remains unreachable, the share of unskilled labor declines as children remain in the school system instead of entering the labor market. The hypothetical scenario where the MDGs are attained brings about even larger changes in the labor force structure, as the composition of the labor supply makes a significant shift towards more skilled labor. Without faster growth and more demand for skilled labor, the absorptive capacity of the labor market is severely strained. The overall effect of MDG achievement on the labor market is a 7 percent decline in total labor supply by 2015, which penalizes growth, at least in the timeframe considered in our simulations.
The source of MDG financing determines whether the economy suffers from pronounced Dutch disease effects (foreign grant financing) or whether private consumption and growth are seriously penalized and poverty rises (domestic tax financing).
Overall, our results show that a large, sustained increase in public HD spending can lead to the achievement of MDGs, although the financing requirements are large and would necessitate a remarkable increase in foreign aid (even if part of the expenditures is financed domestically). However, without a complimentary increase in real GDP growth, the poverty target will remain elusive.

Resource Details (Export Citation) GTAP Keywords
Category: 2006 Conference Paper
Status: Published
By/In: Presented at the 9th Annual Conference on Global Economic Analysis, Addis Ababa, Ethiopia
Date: 2006
Created: Bussolo, M. (4/25/2006)
Updated: Bussolo, M. (4/25/2006)
Visits: 3,391
No keywords have been specified.

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