concurrent economic reforms could not have been a major driver of the growth acceleration precisely because the reform effort slowed down in this period. Annex Figure A.1 illustrates the slow pace of structural economic policy reform in Ethiopia in the early 2000s in contrast with the five regional peers (SSA5) using the index developed by Prati _et al._ (2014) for reforms in six reform areas (agriculture, domestic finance, trade, capital accounts, networks, and current account).

The motivation for this paper is to contribute to a systematic and rigorous explanation of Ethiopia’s growth acceleration and to identify critical factors to sustain it. Apart from regional or sub-regional studies, including IMF (2013a), Ethiopia’s growth acceleration has not achieved much attention in the literature.<sup>3</sup> Our paper, and the report to which it contributes, seeks to fill this gap by addressing two key questions: What explains Ethiopia’s growth acceleration since 2004? And which growth policies offer Ethiopia the best opportunity of sustaining high growth to attain middle-income status? To address them, we employ a cross-country System Generalized Method of Moments (GMM) regression model developed by Brueckner (2013).<sup>4</sup> This approach facilitates a systematic classification of growth drivers into three broad categories: structural factors, stabilization policies, and external conditions.

Our key findings are summarized as follows: Overall, the model provides good predictions of Ethiopia’s growth performance since 2000 and our results offer plausible quantitative explanations for key economic trends and policy developments over this period. We find evidence that public infrastructure investment ‒ financed in part by restrained government consumption ‒ was the key structural driver of growth. While this policy mix enjoys broad support among mainstream macroeconomists, heterodox policies pursued by the Ethiopian government such as financial repression, an overvalued real exchange rate, and monetary policy induced inflation (including ‘printing money’ to finance public spending) are more controversial. Interestingly, the empirical results show that the growth dividend of the former set of policies outweighed the drag from the latter. This helps shed light on the question of how Ethiopia could achieve high economic growth in the presence of seemingly growth-inhibiting macro-financial policies. Looking ahead, model simulations under alternative policy scenarios are indicative that growth is likely to decelerate in the coming decade making it challenging for Ethiopia to attain its middle-income country target by 2025. Although simulated growth rates do not vary much by policy scenario, we discuss some of the emerging risks associated with a continued reliance on the current infrastructure financing model and potential future adjustments.

The remainder of this paper is structured as follows: Section 2 outlines the methodology. Section 3 uses model results to explain Ethiopia’s recent growth performance distinguishing between structural, stabilization, and external factors. Section 4 examines model accuracy and robustness. Section 5 uses benchmarking to examine which individual policies would have the highest growth payoff. Section 6 simulates alternative policy scenarios and assess their implications for future growth. Section 7 discusses the results. Section 8 concludes.

> 3 Aside from the background papers prepared for a forthcoming World Bank report on the same topic by Dogo and Merotto (2014), Ghani and O’Connell (2014), Kray and Eden (2014ab), Martins (2014; 2015), and Yusuf (2014). 4 The System GMM method has been used in cross-country growth studies for the past 15 years.  See Bazzi and Clemens (2013) for references to some of the leading applications and a critical discussion.

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