and investment). A series of papers by Fan (see Table 2) use time-series data to estimate the relationship between public expenditure components in rural areas on both rural income growth and poverty reduction. The results suggest that there are large returns to agricultural research with respect to income growth and poverty reduction, though there are significant returns from other types of public spending as well. They examine spatial variations in income growth and poverty reduction and find that spending has the larger effects in poorer regions.

- _Rates of return studies._ Some studies use data drawn from household surveys to test the impact of education on individual earnings (rate of return to education) or aggregate data on public investment, output, and employment to estimate the returns to government investment. There is a large literature on rates of return to education investments (see for example Psacharopolous 1995), agricultural research (Roseboom 2002), infrastructure investments (Canning and Bennathan 2000), and in some cases, health investments (Schultz 1997 and 2002). However, the calculation of rates of return has typically been conducted to compare spending allocation _within_ sectors. To the best of our knowledge, there has not been an attempt to compare these rates of return across sectors within a consistent empirical framework, due to the many technical difficulties inherent in such an exercise.

**II. General equilibrium models** _._ Computable General Equilibrium (CGE) models form a class of models where production activities, factors, and institutions and their links are fully specified. These require both national accounts and survey data. The data are compiled into a single information matrix (social accounting matrix (SAM)), where the links between activities, factors, and institutions are organized and calibrated using countryspecific parameters. Because they are technically demanding and data-intensive, they have been rarely used.

- Jung and Thorbecke (2003) apply and calibrate CGE models for Tanzania and Zambia. Their simulations suggest that a well-targeted education expenditure can be effective for growth and poverty alleviation. They also suggest that a sufficiently high level of physical investment is needed as well as an improved match between educational output and the structure of effective demand for labor.

- A dynamic CGE model of overlapping generations calibrated to Ghana suggests that reducing household costs of obtaining primary education has the largest short-run impact on growth and poverty reduction (Dabla-Norris and Matovu 2002). The effects can be substantial even when higher education spending comes at the expense of infrastructure investment. Once universal basic education is achieved, however, _tertiary_ education spending has the largest impact on growth.

**III. Investment Appraisal** _._ A large literature exists on techniques for evaluating the rate of return to specific investment projects (see Belli (1996) for a review of the literature). Are these useful from a poverty perspective? In assessing the role of project appraisal in World Bank lending, Devarajan, Squire, and Suthiwart-Narueput (1995) advocate a shift away from precise rates-of-return calculation to a broader appraisal of the rationale for public sector intervention; in particular, they suggest a careful assessment of counterfactual private sector supply response, the marginal costs of funds, and the fungibility of lending.

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