In order to answer these questions and illustrate key model features, we designed a set of simulations with MAMS applied to an Ethiopian database. The first simulation (Base) corresponds to a simple extrapolation of current trends and will be used essentially as a benchmark for comparison with other scenarios. In that simulation, MDGs are not reached by 2015. On the contrary, the second scenario is designed to reach the MDGs, with foreign aid filling any financing gap. This simulation, entitled MDGBase, provides a first indication of the effects of pursuing an MDG strategy, including its costs and the need for foreign resources. In two variants on this scenario, we explore the impact of less foreign aid combined with heavier reliance on domestic financing through direct taxes (MDG-Mix) and improved government productivity (MDG-Gprd). Finally, in order to explore trade-offs, we analyze the impact of scenarios with less foreign aid and less government spending either on human development or on infrastructure (with MDG-HDcut and MDG-Infcut, referred to in the Tables, as two examples). In the case resources to reach all the MDGs were not available, this permits calculating what is the cost of reaching a specific MDG in terms of the others. Selected results from these simulations are presented in Tables 3.1-3.6 and Figures 3.1-3.4.

Under MDG-Base, we impose full achievement of the education, health and water-sanitation MDG targets. We monitor the evolution of MDG 1 using a simple constant-elasticity relationship between the headcount poverty rate and real GDP per-capita.<sup>12</sup> Foreign aid in grant form is assumed to fill any financing gap. This scenario constitutes a strong and extended economic shock. Tables 3.3 and 3.4 show that achievement of these targets requires very rapid expansion in the provision of the MDG-related government services, and therefore of both current and capital public spending. In water and sanitation, current public expenditures increase at an average annual growth rate of 21 percent, whereas capital spending increases at 40 percent. Both in primary education and infrastructure, the current and capital growth rates are, respectively, 15 and 24 percent. Of course, these rates of growth are also those of inputs in those services, that is, for instance, numbers of teachers and classrooms in primary education. As a result of this acceleration in public spending for the MDGs, the GDP share of the government (measured by the sum of government consumption and investment) is almost doubled, increasing from 29.1 percent in 2005 to 57.6 percent in 2015 – see Table 3.2. Compared to the Base scenario, annual real GDP growth accelerates strongly for government activities (from 4.0 to 8.7 percent) and more moderately but yet substantially for the private sector (from 3.5 to 5.2 percent; see Table 3.2). In comparison with the Base simulation, the Present Value (PV) of total foreign aid over the 2006-2015 period is more than quadrupled, reaching US$31 billion. In the final year, 2015, foreign aid is US$81 per capita or 37 percent

> 12 GDP per capita was preferred to household consumption per capita given that GDP is much less influenced by the level of foreign aid in a given year, i.e., providing a better indicator of the long-run capacity of the economy to sustain a flow of household consumption.

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