Philippine Institute for Development Studies

Surian sa mga Pag-aaral Pangkaunlaran ng Pilipinas

Millennium Development Goals Scenarios

to 2015 and Beyond: An Integrated
Micro-Macro Modelling Approach
Roehlano M. Briones
DISCUSSION PAPER SERIES NO. 2014-12

The PIDS Discussion Paper Series

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February 2014

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 1

MILLENNIUM DEVELOPMENT GOALS SCENARIOS TO 2015 AND BEYOND:

AN INTEGRATED MICRO-MACRO MODELLING APPROACH
Roehlano M. Briones 1

Abstract. The Philippines has made considerable progress in attaining the Millennium
Development Goals (MDGs). However achieving all the targets remains a daunting
challenge, with goals for poverty, education and maternal mortality unlikely to be attained by
2015. Focus has now shifted to informing the post-2015 development agenda, based on future
scenarios for the macroeconomy and the MDGs. In this study, such assessment is done using
an integrated macro-micro modeling approach, using the Maquette for MDG Simulation
(MAMS), calibrated to Philippine data, over the period 2009 – 2025.
Findings for the scenario analysis are as follows: In the Base or business-as-usual scenario,
MDG targets for household water and sanitation, as well as child health, will be met (or
approximated) by 2015. However, those for education and maternal health will be attained in
2025 and 2021, respectively. The goal for poverty will not be achieved even by 2025. The
national debt follows a downward trajectory over the simulation period.
Meanwhile in the alternative scenarios, significantly higher outlays for primary education,
health, and infrastructure (equivalent to 2% of GDP) leads to earlier attainment of the
education and maternal health goals (2019 and 2016, respectively); likewise significant gains
will be realized in terms of per capita income and poverty reduction by 2025. Tax financing
of higher outlays maintains the debt reduction path in the Base; however financing through
increased borrowing from abroad leads to persistent escalation of foreign debt. Hence,
government should be cautious about proposals for dramatic increases in social spending and
infrastructure to more quickly close development gaps, unless it is able to accompany
increases in spending with commensurate tax effort.
Keywords: Millennium Development Goals, inclusive growth, poverty reduction, human
development, fiscal sustainability, computable general equilibrium

1
Research Fellow, Philippine Institute for Development Studies (PIDS). Research assistance was provided by
Fatima del Prado, Senior Research Specialist, PIDS. The study is part of a project on Strengthening
Macroeconomics and Social Policy Coherence through Integrated Micro-Macro Modelling, supported by the
National Economic Development Authority (NEDA), the PIDS, the United Nations – Department of Social and
Economic Affairs (UN-DESA), and the United Nations Development Program (UNDP). The usual disclaimer
applies.
 2

1. OVERVIEW
The Philippines has made considerable progress in attaining the Millennium Development
Goals (MDGs). There is high likelihood of achieving targets for child mortality and
household sanitation by 2015. The country has also overcome serious macroeconomic
difficulties since the start of the MDG period, when it still struggled with erratic growth,
inflation, and balance of payments deficits. In the 2000s it entered a period of relatively
stable and moderate growth. Over the past three years, economic growth has accelerated to an
unprecedented pace, with credible signs that high growth can be sustained.
The current government has reaped significant economic pay-offs from governance reforms,
as savings from anticorruption and improved program efficiency were plowed back to
education, health, and food support programs for the poor. As well, government has been
responsive to the infrastructure requirements of a fast-growing economy (NEDA, 2013).
Nevertheless closing all development gaps remains a daunting challenge. By the
government's own reckoning, some of the MDGs are unlikely to be achieved by 2015.
Policymakers and the rest of the development community are aiming at both sustained rapid
growth, and one that is more inclusive, translating increasing wealth to improved quality of
life of the poor. Hence even as 2015 approaches, the post-2015 agenda looms large. A number
of research questions can help inform this agenda:
i) Under current levels of government investment and fiscal performance, what are the
likely scenarios for the social MDGs to 2015 and beyond? Can the government's
expenditure program for inclusive growth be sustained?
ii) What targets will likely be missed? When will they likely be achieved?
iii) Can government significantly accelerate MDG attainment by increasing outlays on
social spending and public infrastructure? What are its implications of this strategy for
public finance?
Conventional analysis to answer these questions generally extrapolates from trends of the
abovementioned variables in isolation, or at most in relation to one or two other variables
(such as fiscal deficit in relation to government spending and revenues). Such a piecemeal
approach has its uses, but cannot guarantee consistency across variables.
To avoid this problem, this study answers these questions using an integrated micro-macro
modeling approach by applying the Maquette for MDG Simulation or MAMS (Lofgren,
Cicowiez, and Diaz-Bonilla, 2013) to the Philippines. This version represents an update over
the first application reported in Briones et al (2013), which contains a detailed discussion of
the construction and calibration of the Philippine data set. As a computable general
equilibrium model, MAMS is able to generate projections over the horizon 2009 – 2025, for
macroeconomic variables such as GDP, government spending and venue, and national debt,
as well as for the various economic sectors, namely: supply (production), demand
(consumption), imports, and exports; together with their respective prices.
As an MDG scenario model, MAMS can project changes in social MDGs, namely:
enrollment rates; child mortality rates; maternal mortality rates; household access to sanitary
toilet; and household access to safe water. Consistency across projections is guaranteed,
subject to accuracy of baseline data and model structure. Lastly, MAMS in combination with
a microsimulation model that is able to translate macro results into in poverty and income
distribution results using survey data.
 3

The basic data of the model corresponds to Philippine economy and households in 2009. It
will be applied to analyze base and alternative scenarios related to the preceding questions
over the horizon 2009 – 2025. The base scenario addresses questions i) and ii) above, and
adopts the policy targets stated in the Philippine Development Plan Results Matrix 2010 –
2016 (NEDA, 2013). The alternative scenarios address question iii), and pertain to increased
government spending to attain the MDGs, while positing alternative sources of financing the
spending increase.

2. THE PHILIPPINE ECONOMY AND THE MDGS: A REVIEW

State of the economy
The Philippines has historically been prone to balance of payments crises, leading to chronic
macro instability (Gochoco-Bautista and Canlas, 2003). GDP growth averaged only 3% in the
1980s and 3.8% in the 1990s. In the 2000s the growth rate rose to 5%; in the past decade
growth has also been more consistent, remaining – well above 3%, except in 2009 due to the
global financial crisis (Figure 1).

Figure 1: GDP in constant 2000 prices, growth rates (%)

9.0

8.0 7.6
6.7 6.6 6.8
7.0

6.0
5.2
5.0 4.8
5.0
4.2
4.0 3.6 3.6

3.0

2.0
1.1
1.0

0.0
2002 2007 2012

Source: NSCB.

Other macro-indicators have likewise improved. The budget deficit, which peaked at 4.4% of
GDP in 2003, fell to 2.3% of GDP in 2012 (Figure 2). This decline was accomplished by
reducing the share of expenditure to GDP, from 18.2% in 2003 to 16.8% of GDP in 2012, and
by raising revenue-to-GDP from 13.8% to 14.5% over the same period. As a result of
improved revenue and growth performance, the government managed to reduce its debt-to-
GDP ratio from a peak of 75% in 2004 to 51% in 2012 (Figure 3). The decline is
concentrated in foreign debt, falling from 35% to just 18% of GDP over the same period. The
share of domestic debt in national debt meanwhile increased from 54% to 63%.
Owing to the improved fiscal space, the government is able to finance its inclusive growth
strategy. This is most clear in the National Expenditure Program of 2013, reviewed in
Manasan (2013): in 2013, programmed expenditure is higher than that of 2012 by 190 billion,
a 10.5% increase, equivalent to 1.8% of 2012 GDP. Fifty-three percent of this expansion is
programmed for increased social services spending, divided as follows: 35% for education;
6% for health; 4% for social welfare spending; and 8% for housing.
 4

Figure 2: Deficit-to-GDP and related ratios, 2001 – 2012 (%)

20.0
18.0
16.0
14.0
12.0
10.0
8.0
6.0
4.0
2.0 5.1 4.4
3.8 3.7 2.6 0.9 0.2 0.9 3.7 3.5 2.0 2.3
0.0
2001 2006 2011

Revenue-to-GDP Spending-to-GDP Deficit-to-GDP

Source: NSCB.

Figure 3: Debt-to-GDP ratios, 2001 – 2012 (%)

80
70
60
36 35
32 30
50 27
29
22 23 24 22 19
40 21
30
20 38 39 38
32 35 34 32 31 31 30 33
30
10
0
2001 2006 2011

Domestic Foreign

Source: Bureau of Treasury.

Progress towards the MDGs

MDG 1 pertains to both income poverty and hunger. The subsistence incidence (indicator of
extreme poverty) was 16.1% in 1991, declining to 10.4% by 2012, around two percentage
points away from half of its baseline value (Figure 4). The PDP target is stated in terms of the
official (or moderate) poverty incidence. The target is 16.6% in 2015, half of its 1991 value
of 33.1%, and 8.6 percentage points below the 2012 poverty incidence. Note there was a "lost
sexennial" (2003 – 2009) in which poverty incidence rose by 1.9 percentage points despite an
average GDP growth of 5.6%, a serious setback in the country's poverty reduction drive.
From 1991, the reduction in official poverty averages just 0.37 percentage points per year;
hence closing the 8.6 percentage point gap by 2015 is highly unlikely.
In relation to MDG 2, Table 1 presents the cohort survival rate, which is the percentage of
new entrants of primary school who reach the final grade. The current levels remain far
below the target level of 85%, though it has climbed up to 75.4% in 2009, from just 66.5% in
1990. NEDA (2010) evaluates the likelihood of reaching MDG 2 as Low. Meanwhile the on-
time completion rate for primary education in 2009 estimated from Basic Education
 5

Indicators System (BEIS) data is only 25.1%, owing to low enrollment of children aged six
(the mandatory age of entry into primary school).

Figure 4: Extreme and moderate poverty incidence of the population, 1991 – 2012 (%)

35 33.1

30
26.4 26.5 25.2
24.9
25 16.6

20 14.7
13.8 15.7 14.8
15

10
16.5
5 11.1 11.7 10.8 10.4

0
1991 2003 2006 2009 2012

Extremely poor Moderately poor Total poverty

Source: NSCB

Table 1: Indicators for the Social MDGs, 1990, 2009, and target
1990 2009 2015 (target)

Cohort survival rate at primary level (%) 66.5 75.4 84.7

Under-5 mortality rate (per 1,000 live births) 80.0 30.0 26.7
Maternal mortality rate (per 100,000 live births) 209.0 130.0 52.2
Households with access to potable water (%) 73.8 88.6 86.9
Households with sanitary toilet (%) 71.8 81.4 85.9
Note: The figure for maternal mortality an interim estimate; one survey (e.g. the 2011 Family Health Survey)
gives an estimate of 211 deaths per 100,000 .

Sources: NEDA (2010, 2012)

For MDG 4, the Table reports number of deaths for children aged five and below, per 1,000
live births. In contrast to the education goal, the country is approaching its under-5 mortality
target of 26.7 per thousand live births. On the other hand, the country is far from its maternal
mortality rate target of 52.2 maternal deaths per 100,000 live births. Lastly, as with the child
mortality goal, the likelihood of reaching housing sanitation goals is rated High by the most
recent MDG Progress Report (NEDA , 2010), whether for drinking water or access to
sanitary toilet.

3. DATA AND SPECIFICATION OF SCENARIOS

Data
The basic data for the Philippines application of MAMS is summarized in a 2009 Social
Accounting Matrix (SAM) for the Philippines. A SAM is a set of accounts that shows the
flows and payments across sectors and institutions of the economy. The institutions of the
SAM are: government, households, business firms, and the rest of the world. The sectors of
the SAM are listed as follows:
 6

1) Beverages and tobacco 22) Meat

2) Chemicals 23) Other government services
3) Communications 24) Oil and gas
(telecommunications, postal and 25) Other infrastructure
wireless services) 26) Other agriculture
4) Construction 27) Other food
5) Corn (maize) 28) Other manufactures
6) Coconut, sugar, fruits, and 29) Other mining
vegetables 30) Other services
7) Dairy 31) Palay (paddy rice)
8) Education, primary, government 32) Paper
9) Education, primary, private 33) Petroleum, refined
10) Education, secondary, government 34) Plastic
11) Education, secondary, private 35) Poultry
12) Education, tertiary, government 36) Rice, milled
13) Education, tertiary, private 37) Rubber
14) Electricity 38) Textiles
15) Fisheries 39) Trade services
16) Processed fish 40) Transport services
17) Forestry 41) Wood
18) Health, government 42) Water and sanitation
19) Health, private
20) Leather
21) Livestock
Data for the SAM is derived from several sources. The main source is the official input-
output (I-O) table, which is updated by updating the inter-industry structure from the year
2000 to national accounts data of 2009. Other data are obtained from official sources such as
Tariff Commission, Bangko Sentral ng Pilipinas (BSP), Budget of Expenditure and Sources
of Financing (BESF), Bureau of Treasury, NEDA, Philippine Statistical Yearbook,
Department of Education, and so on. Calibration to the base year data involves elasticities
drawn from the 2006 version of the MAMS for Philippines (Briones et al, 2013), with some
adjustments based on related literature.

Meanwhile data for microsimulation merges the 2009 Family Income and Expenditure
Survey (FIES) with the 2009 Labor Force Survey (October round). Both are official sources
bases for calculating poverty, employment, and inequality. Note that the merging leads to loss
of observations which preclude exact reproduction of official figures, hence scenario results
are reported in terms of differences from baseline indicators.
The scenarios
The Base or "business-as-usual" scenario represents a trajectory of economic and human
development outcomes for the Philippines following past trends, data up to 2012, as well as
projections and targets from the PDP Results Matrix (NEDA, 2013). The most salient of these
are summarized as follows (Table 2):
• Assumed growth rate of GDP, derived from World Bank (2013), which is consistent with
the government target.
• Shares of government spending and taxes in GDP, derived from the PDP Results Matrix.
 7

• Population growth to 2025 adopts UN estimates by age.

• There are no serious global financial crises or world price shocks.

Table 2: Assumptions for GDP growth, government spending, and government revenues, 2009 – 2025 (%)
2009 2010 2011 2012 2013 2014 2015 2016-24

GDP growth (Base) - 7.6 3.9 6.6 6.2 6.4 6.3 6.3
Base: spending (share of GDP)
Education, primary 0.99 0.92 0.84 0.91 0.97 1.03 1.10 1.16
Education, secondary 0.42 0.39 0.36 0.39 0.42 0.44 0.47 0.49
Education, tertiary 0.08 0.08 0.07 0.08 0.08 0.09 0.09 0.10
Health 0.39 0.36 0.33 0.36 0.39 0.41 0.43 0.46
Other government 4.07 3.76 3.44 3.73 3.99 4.24 4.49 4.75
Other infrastructure 0.02 0.02 0.02 0.02 0.02 0.02 0.02 0.02
Investment, water & sanitation 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00
Investment, education, primary 0.05 0.05 0.04 0.05 0.05 0.05 0.06 0.06
Investment, education, secondary 0.02 0.02 0.02 0.02 0.02 0.02 0.02 0.02
Investment, education, tertiary 0.01 0.01 0.01 0.01 0.01 0.01 0.01 0.01
Investment, health 0.04 0.04 0.03 0.04 0.04 0.04 0.04 0.05
Investment, other government 0.65 0.60 0.55 0.59 0.63 0.67 0.71 0.76
Investment, other infrastructure 4.02 3.72 3.40 3.69 3.94 4.19 4.44 4.69
Base: revenues (share of GDP)
Direct taxes 6.41 5.92 6.74 6.95 7.11 7.27 7.43 7.59
Import taxes 3.26 3.39 3.25 3.26 3.26 3.26 3.26 3.49
Other indirect taxes 3.96 3.74 3.66 3.97 3.97 3.97 3.97 4.29
HDInfra: spending (shares in GDP)
Education, primary 0.99 0.92 0.84 0.91 0.97 1.53 1.60 1.66
Health 0.39 0.36 0.33 0.36 0.39 0.91 0.93 0.96
Investment, other infrastructure 4.02 3.72 3.40 3.69 3.94 5.19 5.44 5.69
Notes:
1. Shares rounded off to two decimal places.
2. Differences from Base case indicated in the shaded cells.
Source: Various official data, 2009 – 2012; author's assumptions for 2013 – 2025.

The HDInfra-borrow scenario is the same as the Base scenario, except with increases in
government spending as shares in GDP, summarized in Table 3. Higher expenditures target
both human development and infrastructure; the former targets primary education and health;
the latter aims at higher and more sustained growth. The scenario involves a 1 percentage
point increase per annum in government spending distributed between primary education and
health expenditure, for years 2014 to 2025; and another 1 percentage point increase per
annum in government outlay for infrastructure for the same years. (Note that in 2012, 1% of
GDP is approximately 105 billion pesos or $2.5 billion). The fiscal gap is closed by foreign
borrowing.
The HDInfra-tax scenario meanwhile is identical to the HDInfra-borrow scenario, except the
closure rule for government finance is changed, from foreign borrowing to tax revenues. This
scenario examines the option of financing the increase in spending on human development
 8

and infrastructure using tax revenue, assuming the government is successful in raising
revenue effort, whether by new taxes, or by improved collection efficiency.

4. RESULTS OF SIMULATIONS
Scenarios for human development
Figure 5 presents the scenarios for poverty and extreme poverty. Poverty incidence is
projected to decline by 3.3 percentage points in the Base scenario by 2015. This is much
faster than the historic pace of poverty reduction, yet far below the MDG target of 8.6
percentage points. Similarly the decline in subsistence incidence falls short of what is needed
to reach half of the 1991 level of subsistence poverty. Poverty will be lower by 7.8% by 2025,
i.e. under business-as-usual the target will not be attained even a decade past the milestone
year. What will be attained – but only by 2025 – is a 2.7 percentage point reduction in
extreme poverty, sufficient to attain half of the 1991 level.

Figure 5: Poverty and subsistence incidence, differences from base year in percentage points, by scenario

0 2 4 6 8 10

Base 2015 3.3

1.3

Base 2025 7.8

2.7

HDInfra-borrow 2015 4.2 Poverty incidence

1.7
Subsistence incidence
HDInfra-borrow 2025 8.8
3.0

HDInfra-tax 2015 4.0

1.6

HDInfra-tax 2025 8.6

3.0

Source: Author's calculations.

On the other hand, with increased spending under the HDInfra scenarios, reduction in both
official and subsistence poverty is faster than under the Base scenario. The alternative
scenarios are similar, though the pace of reduction is slightly faster for the borrowing
scenario compared to the tax scenario; the reason is that higher tax rates in the latter reduce
the disposable incomes of households. By 2025 the decline in official poverty even in the
HDInfra-tax scenarios is sufficient to attain the MDG target.
Meanwhile for the on-time primary completion rate, under the Base, attainment of the target
must wait until 2025 (Figure 6). Under the HDInfra-borrow scenario, the goal for the
completion rate will be attained much earlier, though not fast enough to reach the 2015
milestone. Instead, attainment is expected by 2019. Results for the HDInfra – tax scenario are
similar (though not identical) to those of the HDInfra – borrow scenario.
Despite rising enrollment and completion rates implicit in these projections, the economy's
absorptive capacity for school graduates appears adequate at the assumed growth rates
(Figure 7. In the Base, the unemployment rate declines gradually, from 7.1 to 4.8%. The
decline is slightly faster in the HDInfra scenarios.
 9

Figure 6: On-time primary completion rate, 2009 – 2025 projections, by scenario (%)
100.0

90.0

80.0

70.0

60.0

50.0

40.0

30.0

20.0
09 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25

Base HDInfra - borrow HDInfra - tax Target

Source: Author's calculations.

Figure 7: Unemployment rates, 2009 – 2025 projections, by scenario (%)

8.0

7.5
7.1 7.1 7.1
7.0
6.4
6.5 6.2 6.3 2009

6.0 2015
5.6
5.3 5.4 2020
5.5
2025
5.0 4.8 4.8
4.7
4.5

4.0
Base HDInfra-borrow HDInfra-tax

Source: Author's calculations.

With respect to child mortality (Figure 8), the MDG target is nearly attained in 2015, though
the critical value is actually passed in 2016.

Figure 8: Under-five mortality rate, 2009 – 2025 projections, by scenario (deaths per 1,000 live births)
35.0

33.0

31.0

29.0

27.0

25.0

23.0

21.0

19.0

17.0

15.0
09 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25

Base HDInfra - borrow HDInfra - tax Target

Source: Author's calculations.

 10

Meanwhile under the HDInfra scenarios, attainment of the Goal is moved earlier to 2014. The
massive increase in spending in health is successful in closing the MDG gap well within the
current MDG period. However, the Goal for maternal mortality is not attained for the Base by
2015 (Figure 9), consistent with expectation. Rather, the Goal is realized in 2021. Under the
HDInfra scenarios, attainment of the maternal mortality MDG can be moved earlier to 2016,
just one year past the first MDG period. Moreover the maternal mortality rate under the
HDInfra scenarios are lower than under Base by about 17 – 18 deaths by 2025.
Lastly for MDG 7, the analysis considers only the Goal for sanitary toilet (as the Goal for
safe drinking water had already been attained at the base year.) The scenario shows
attainment of the Goal by 2013, two years ahead of the milestone (Figure 10). The
improvement in MDG 7 under alternative scenario relative to Base is imperceptible,
primarily as the added expenditure in these scenarios is limited to primary education and
economic infrastructure.

Figure 9: Maternal mortality rate, 2009 – 2025 projections, by scenario (deaths per 100,000 live births)

150.0

130.0

110.0

90.0

70.0

50.0

30.0

10.0
09 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25

Base HDInfra - borrow HDInfra - tax Target

Source: Author's calculations.

Figure 10: Share of households with sanitary toilet, 2009 – 2025 projections, by scenario (%)
100.0

95.0

90.0

85.0

80.0

75.0

70.0
09 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25

Base HDInfra - borrow HDInfra - tax Target

Source: Author's calculations.

 11

Macroeconomic variables
In the Base, GDP is projected to grow as assumed (Figure 11). Additional spending under
HDInfra-borrow yields a perceptible difference in terms of higher GDP growth (0.29
percentage points per year). Though the difference is small on an annual basis, this translates
to a per capita income higher by around 50% in 2025 under the HDInfra-borrow scenario.
Growth rate under HDInfra-tax lies in between, as tax financing displaces some of the
additional demand from households.

Figure 11: Projected GDP growth, 2010 – 2025 projections, by scenario (%)
7.0
6.9
6.8
6.7 6.62
6.6 6.52
6.5
6.4 6.33
6.3
6.2
6.1
6.0
Base HDInfra - borrow HDInfra - tax

Source: Author's calculations.

Results for fiscal variables are reported in Table 3 as shares in GDP. By assuption, tax
revenues under the Base and HDInfra-borrow scenarios rise from 2009 levels; revenues are
larger under the HDInfra-tax scenario relative to the Base, with the difference widening at
most by 3 percentage points in 2015, then narrowing to 2.5 percentage points in 2025.

Table 3: Fiscal variables as shares to GDP, 2009 – 2025 projections, by scenario (%)
2009 2015 2020 2025
Base 13.6 15.1 15.4 15.4
Tax revenue HDInfra - borrow 13.6 15.1 15.4 15.4
HDInfra - tax 13.6 18.1 17.9 17.9
Base 6.0 6.6 7.0 7.0
Government
HDInfra - borrow 6.0 8.1 8.5 8.5
consumption spending
HDInfra - tax 6.0 8.1 8.5 8.5
Base 4.8 5.6 5.2 5.2
Government
HDInfra - borrow 4.8 7.1 6.3 6.3
investment spending
HDInfra - tax 4.8 7.1 6.3 6.3
Base 2.6 1.9 1.4 0.8
Government borrowing HDInfra - borrow 2.6 5.3 4.9 5.3
HDInfra - tax 2.6 1.9 1.4 0.8
Base 29.5 24.6 22.0 18.9
Domestic government
HDInfra - borrow 29.5 24.4 21.5 18.2
debt
HDInfra - tax 29.5 24.5 21.8 18.6
Base 23.7 18.8 17.7 13.1
Foreign government
HDInfra - borrow 23.7 25.3 34.2 44.4
debt
HDInfra - tax 23.7 18.6 17.4 12.8
Source: Author's calculations.
 12

By assumption, government spending for consumption and investment all rise across
scenarios, with the HDInfra scenarios corresponding to greater levels spending for both
consumption and investment. The assumptions for the Base imply a declining fiscal deficit,
falling to under 1% in 2025; a similar deficit path is projected for the HDInfra-tax scenario.
However the deficit path is sharply higher for the HDInfra-borrow scenario.
For Base, both domestic and foreign debt declines over the projection period, by about 10 –
11 percentage points for each component. Manasan (2013) likewise projects a reduction in
national debt based on a different method (debt simulation); her estimate is a debt-to-GDP
ratio of 40% of GDP by 2017, which seems close to this paper's estimate of 42% for the same
year.
The HDInfra-tax scenario corresponds to a nearly identical path for national debt as with
Base. Likewise the trajectory for domestic debt is similar to that of Base (and therefore of
HDInfra-tax scenario). The big difference is seen in terms of foreign debt; for the HDInfra-
borrow scenario foreign debt climbs to over twenty percentage points relative to Base. In
terms of total national debt (Figure 12), total debt falls to 32% by 2025 in the Base; despite
increased spending in the HDInfra-tax scenario, total debt declines slightly faster compared
with the Base. The downward trajectory for total debt is slower in the case of HDInfra-
borrow, and only up to 2015; subsequently it reverses and rises to 63% of GDP by 2025.

Figure 12: Debt-to-GDP ratios, 2009 – 2025 projections, by scenario (%)

70
63
60 56
53 53 53
50
50
43 43
40 39
40
32 31
30

20

10

0
Base HDInfra - borrow HDInfra - tax

2009 2015 2020 2025

Source: Author's calculations.

5. CONCLUSION AND POLICY IMPLICATIONS

To summarize: consistent with expectation, scenario analysis indicates that, under current
trends and policies, the country is on track to attaining several MDGs, namely: safe drinking
water (attained), sanitary toilet (2014), and child mortality (borderline by 2015). However, it
will likely miss targets for poverty, as well as the education and maternal health MDGs. The
country is on its way to attain the education and maternal health MDGs, but beyond the first
MDG period, i.e. 2025 for the former and 2021 for the latter. The target for poverty incidence
is unattainable even by 2025.
Massive increases in primary education, health, and economic infrastructure, will have the
desired effect of hastening attainment of MDGs and accelerating growth. Under the higher
spending scenario, the education MDG can be attained in 2019, and the maternal mortality
 13

MDG by 2016. The growth rate is higher with greater outlays for infrastructure spending,
translating to a significantly higher per capita income by 2025. Poverty reduction is not fast
enough to attain the MDG target by 2015, though an additional decade of sustained poverty
reduction is enough to close the poverty MDG gap.
Under business-as-usual, the national debt (as a share of GDP) is expected to track a
downward trajectory from half of GDP to about one-third. Under the higher spending
scenario, the same debt reduction path can be maintained with tax financing of the added
spending, which translates to a significantly higher tax effort (2 to 3 percentage points of
GDP). However, under the higher spending scenario financed by foreign borrowing, the
national debt rises from to nearly two-thirds of GDP. The analysis suggests that government
should be cautious about proposals for dramatic increases in social spending and
infrastructure to more quickly close development gaps, unless it is able to accompany
increases in spending with commensurate tax effort.

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