that, on balance, have zero impact on productivity. The savings are used to scale up investments generating growth for government capital stocks in agriculture, energy, and other areas (including transportation). Drawing on cross-country data, the assumed implicit internal rate of return for these investments is in the range of 12-15 percent.<sup>1617</sup> Compared to the _base_ , the impact of this policy change is marginal but positive across the reviewed indicators. The annual growth rates for GDP at factor cost, absorption, and private final demands all increase by 0.1 percentage points (Table 4.1). As a result of the shift from other government to infrastructure, government consumption growth decreases while government investment growth increases. The real exchange rate stays roughly the same. Slight decreases are registered for unemployment as well as foreign and domestic government debt stocks as shares of GDP (the combined impact of unchanged borrowing and a higher GDP). The 2022 GDP shares for the different receipts in the government budget are virtually unchanged whereas, on the spending side, around 0.7-0.8 percent of GDP has shifted from other government to infrastructure (Table 4.2). Among aggregate private sectors, sectoral growth rates expand by 0.1-0.2 percentage points while, within the government infrastructure sector, growth expands by 1.4 percentage points at the same time as growth for other government contracts by 1.1 percentage points, all in all reducing government service growth by 0.8 percentage points (Table 4.3). In terms of spending, this decline is matched by an increase in government investment (cf. Table 4.2). These changes lead to across-the-board moderate improvements in human development, a result of the fact that all determinants of poverty reduction and human development (MDG and education indicators) improve (Table 4.4).

What would be the impact if the government decided to embark on the same increase in investment but, instead of reducing growth for unproductive government sectors, decided to generate additional financing via increased (effective) tax rates? The results for the scenario _inv-tx_ offer a response to this question. Compared to the _base_ , GDP and absorption is virtually unchanged (Table 4.1). Higher taxes reduce growth in private consumption and private investment growth whereas, for the government, consumption and, especially, investment 16 The computation of the internal rate of return (IRR) mimics what typically is done in cost-benefits analysis. It is computed on the basis of an exogenous total marginal product of each type of capital, a parameter defining the distribution of these output gains (viewed as ceteris paribus TFP gains) across different sectors, simulated valueadded (VA) growth for each sector, depreciation rates of government capital stocks, and the value of current (O&M or operations and maintenance) spending per unit of each capital stock (extracted from the SAM). This information is used to generate, for an additional unit of capital (a) a stream of costs represented by an initial investment cost and a stream of O&M costs that decline in proportion to the depreciation of the stock; and (b) a stream of benefits represented by the gains in VA in different sectors, which depend on the growth rates of each sector and the relative increase in its VA due to the productivity gain; the latter will decrease in proportion to the depreciation of the stock. Given this information and assuming that this process proceeds for 100 years (with the full-period simulated average rate of VA growth), we compute an internal rate of return at which the present values of benefits and costs are equal.

17 Empirical data indicate that internal rate of return (irr) for government investment varies quite widely but that values in the range of 15-20 percent are typical across a wide range of country categories (Foster and BriceñoGarmendia, 2010, p. 71; Estache 2005, p. 13; Prud‘homme 2005, p. 161; IMF 2008, p. 20; and World Bank 2007, p. 65). Values at the lower end may be expected for broader aggregates; for example, on the basis of a cross-country analysis for developing countries, Dessus and Herrera (2000, p. 413) generate an average internal rate of return of 14.2 percent for aggregate government capital.

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