and more trade openness which reflects increased competitiveness from the exchange rate and private sector development.

Scenario C: ‘If it worked so well the past, let’s do more of it in the future’. Scenario C represents an accelerated public infrastructure investment scenario. While the direct growth benefits hereof are positive, as illustrated in the benchmarking exercise, this would need to be weighed against a number of growth-inhibiting factors, including private sector crowding-out, more detrimental effects from elevated public consumption and higher inflation, for the above-mentioned reasons.

The three scenarios are highly illustrative and we do not claim a great degree of precision in their identification. The exact numerical specification of each of the scenarios is fraught with a number of difficulties. Chief among these is the lack of quantitative estimates of the policy trade-offs. To illustrate, we do not know with precision the functional relationship between the public infrastructure variable and the private credit-to-GDP ratio.<sup>26</sup> As a result, we do not claim internal consistency within each scenario nor do we pay great attention to the specific numerical results. With those caveats in mind, we find the following results.

All three policy scenarios yield comparable real GDP per capita growth rates of about 4 percent. While there are some nuances in the projected growth rate of each scenario, the differences are not substantial enough to merit attention. A number of insights emerge from this exercise. First, none of the three policy scenarios stand out as superior to the others in terms of growth outcomes, suggesting that either the model has limitations in terms of policy guidance or that there are indeed alternative ways to reach the same outcome. Second, Ethiopia’s growth path is likely to decelerate in the future. Third, the simulations suggest that it will be challenging for Ethiopia to grow at a rate necessary to reach middle-income status by 2025. Fourth, projected per capita growth of about 4 percent is nonetheless a strong performance in light of international experience. Finally, sensitivity analyses indicate a range of per capita growth outcomes in the interval of 3 to 6 percent per year in the three illustrative scenarios. We detail these points below.

All scenarios suggest that it will be challenging for Ethiopia to grow at a rate necessary for reaching middle-income status by 2025. Calculations undertaken by the World Bank (2013) show that Ethiopia would need to grow by 10.7 percent per year until 2025 to reach middle-income status, as measured by GNI per capita (Atlas Method). This would be equivalent to 8.0 percent real GDP per capita growth. Since the growth variable used here is log transformed, we note that the MIC target is equivalent to 6.5 percent per capita. None of the three policy scenarios come close to achieving this growth rate even under assumptions of a more supportive external environment.<sup>27</sup> The intuition behind this result is the presence of policy trade-offs in all scenarios: positive growth effects of high public infrastructure investment are outweighed by negative effects from public consumption increases, private credit and competitiveness. Moreover, where growth benefitted from low government consumption in the past, all three scenarios assume that this variable would have to rise (or stay constant) in the future reflecting a higher public debt burden. In all cases,

> 26 We tried estimating these using the available cross-country data, but this did not produce meaningful results.  Instead, the choice of specific numerical values were based largely on the historical values and relationships observed in Ethiopia complemented with LMIC benchmark values.

> 27 For example, an annual terms of trade improvement of 1.2 percent (similar to Ethiopia’s historical average) would add only another 0.2 percentage points to the annual growth rate.

25