# <u>1. SUMMARY AND INTRODUCTION</u><sup>1</sup>

This paper explores the use of fiscal policy to accelerate growth and human development in Pakistan during the period 2013-2022, with a focus on the creation of fiscal space for increased investment in infrastructure, as well as on the impact that this may have on indicators related to macro and sectoral developments, millennium development goals (MDGs), and education. In terms of method, we rely on simulations with a Pakistani version of MAMS (Maquette for MDG Simulations), a CGE model developed at the World Bank for analysis of medium- to long-run country strategies. The model is linked to a 2008 database for Pakistan, including a social accounting matrix (SAM) that is disaggregated into 30 sectors out of which 21 are private and 9 governmental, the latter representing different categories of government services. The simulated scenarios consist of a _base_ scenario, a set of fiscal policy scenarios, and a scenario that explores features and effects of a switch to a high growth trajectory starting from 2013.

The _base_ scenario is designed to represent a business-as-usual projection for Pakistan’s economy up to 2022. It also serves as a benchmark to which other scenarios are compared. Drawing on the current trend and projections, the _base_ annual GDP growth rate averages 4.3 percent, with growth rates between 4 and 5 percent for all aggregate sectors (agriculture, industry, private services and government services). Among the final demand categories (private and government consumption and investment), growth rates range between 4 and 6 percent. The resulting employment growth is sufficient to bring about a moderate decline in the unemployment rate. Government receipts increase by around 1 percent of GDP as the net result of a tax increase and a decline in government borrowing, which is constrained sufficiently to keep current domestic and foreign debt-to-GDP ratios unchanged. As the result of private consumption growth without major distributional changes, the national headcount poverty rate declines from 15 percent to less than 9 percent. Other MDG and education indicators also improve as the result of increased human development services complemented by growth in real household consumption and improvements in government infrastructure.

The main focus of the fiscal policy scenarios is to test the impact of raising government spending on infrastructure with alternative means of creating the needed fiscal space and alternative assumptions regarding the strength of the productivity gains from the infrastructure that is created. Across the sources of fiscal space, the most positive welfare and growth effects from infrastructure expansion are realized if the government manages to curb growth in wasteful spending (i.e., spending without identified positive impacts on productivity, welfare, or human development). If fiscal space alternatively is created via increased taxation or reduced energy subsidies, the effects are more ambiguous (improvement according to some indicators accompanied by deterioration according to others) since the increase in the space for

> 1 The authors would like to thank Jose López-Cálix for valuable comments on earlier versions of this paper and an IFPRI team – Dario Debowicz, Paul Dorosh, Hamza Haider, and Sherman Robinson – for kindly sharing a Pakistan SAM for 2008 that they also adjusted to better meet the needs of our analysis. The authors are indebted to the Knowledge for Change Program (KCP) Trust Fund for funding the basic research that has permitted the development of MAMS.

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