Back-loading of investment will also lead to a lower public debt burden. Investments are financed by drawing down of assets, which have been accumulated in recent years because of high oil revenues, and covering any shortfalls through external borrowing. As can be seen in Figure 9, not only does investing later and more gradually with increased productivity lead to higher growth, it also implies lower public external debt in 2025. Especially scenario INF-FL would lead to a rapid depletion of foreign assets.

# 4.3 <u>Improved efficiency without scaled up investment</u>

In an alternative scenario, it is assumed that government efficiency is increased, but without a scaling-up of government investment. Improved efficiency implies that less capital and labor is needed per unit produced. More specifically, it is assumed that, from 2012 and onwards, (i) government service productivity increases by 2 percent annually and (ii) new government capital produced increases by 2 percent annually from a given amount of investment spending. This implies that the same amount of recurrent spending produces 1 percent more services, applying to all inputs (labor, capital and intermediate), thereby reducing investment needs. Starting from a low level, efficiency gains in the short- and medium-term can be expected and could result from improved processes for investment management (project selection and implementation in particular), but also through better cost recovery for the provision of public services (Estache, 2005).

The efficiency gains are then invested in different sectors. Three different scenarios are considered, GOVEFF-INF, GOVEFF-HE and GOVEFF-HE+INF, as defined above.

In terms of reaching the MDGs, the results are mixed. Table 6 shows that more resources dedicated to infrastructure investment lead to lower poverty rates than focusing purely on health and education, while health outcomes are clearly better when more is invested in the health and education sector. Regarding education outcomes, the best performance in terms of net primary school enrolment can be achieved when combining efforts and investing the efficiency gains in both infrastructure and human development, highlighting the links between the sectors.

**Table 6:** Summary of MDG indicators in 2025

||Reference<br>value (2009)|BASE|INF-FL|0|Infrastr<br>backlo<br>15|ucture<br>ading<br>30|45|Increas<br> <br>HE|ed govern<br>efficiency<br>HE+INF|ment<br>INF|
|---|---|---|---|---|---|---|---|---|---|---|
|MDG 1 (Poverty rate, percent)|51|24|21|20|19|18|18|24|20|18|
|MDG 2 - net (Primary school completion rate,<br>net, % of relevant age group)|12|44|49|52|53|55|56|82|72|56|
|MDG 2 – gross (Primary school enrollment rate,<br>gross, % of relevant age group)|102|93|92|92|92|92|92|90|91|92|
|MDG 4 (Under-5 mortality rate,<br>per 1,000 live births)|128|67|64|63|63|62|62|53|56|61|

_Source:_ Authors’ calculations The trade-off between spending on health and education versus spending on infrastructure is also illustrated by Figure 10. Clearly, the highest average growth rates are achieved when using additional resources for infrastructure projects, while best education outcomes result from spending predominantly on health and education. Not focusing exclusively on one sector, but rather allocating the fruits from efficiency gains across both areas leads, thereby benefitting from positive feedback loops between the sectors, can lead to improved outcomes in growth as well as human development.

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