Afghanistan: Balancing Social and Security Spending in the Context of Shrinking Resource Envelope

Aslam, Aqib; Berkes, Enrico; Fukac, Martin; Menkulasi, Jeta; Schimmelpfennig, Axel

doi:10.5089/9781484320587.001

Cited by 3 publications

(2 citation statements)

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“…Extending DIG-Labor 1-3 is consistent with the broad agenda of tailoring models to country speci-…cities and needs. Over the years, the DIG model has been extended to incorporate other dimensions, such as an energy sector (Issoufou et al, 2014), the cost of operations and maintenance of infrastructure (Adam and Bevan, 2014), climate resilient infrastructure to address natural disaster shocks (Marto et al, 2018), and security spending (Aslam et al, 2014), among others. Special mention must be made of the extension by Atolia et al (2019), who explore the trade-o¤s between investing in economic infrastructure vs. investing in social infrastructure (schools).…”

Section: Introductionmentioning

confidence: 99%

Debt, Investment, and Growth in Developing Countries with Segmented Labor Markets

et al. 2020

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We introduce a new suite of macroeconomic models that extend and complement the Debt, Investment, and Growth (DIG) model widely used at the IMF since 2012. The new DIG-Labor models feature segmented labor markets, efficiency wages and open unemployment, and an informal non-agricultural sector. These features allow for a deeper examination of macroeconomic and fiscal policy programs and their impact on labor market outcomes, inequality, and poverty. The paper illustrates the model's properties by analyzing the growth, debt, and distributional consequences of big-push public investment programs with different mixes of investment in human capital and infrastructure. We show that investment in human capital is much more effective than investment in infrastructure in promoting long-run economic development when investments earn their average estimated returns. The decision about how much to invest in human capital versus infrastructure involves, however, an acute intertemporal trade-off. Because investment in education affects labor productivity with a long lag, it takes 15+ years before net national income, the private capital stock, real wages for the poor, and formal sector employment surpass their counterparts in a program that invests mainly in infrastructure. The ranking of alternative investment programs depends on the policymakers' social discount rate and on the weight of distributional objectives in the social welfare function.

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Section: Introductionmentioning

confidence: 99%

Debt, Investment, and Growth in Developing Countries with Segmented Labor Markets

et al. 2020

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“…Further extensions were geared to the analysis of costs of operations and maintenance (Adam and Bevan, 2014); building climate resilient infrastructure ; the trade-offs between investing on economic and social infrastructure (Atolia et. al., 2017); and the trade-offs between public investment and security spending (Aslam et. al., 2013).…”

Section: Introductionmentioning

confidence: 99%

Some Policy Lessons from Country Applications of the DIG and DIGNAR Models

Zanna¹,

Melina²,

Gurara³

2019

IMF Working Papers

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Over the past seven years, the DIG and DIGNAR models have complemented the IMF and World Bank debt sustainability framework (DSF) analysis, over 65 country applications. They have provided useful insights in the context of program and surveillance work, based on qualitative and quantitative analysis of the macroeconomic effects of public investment scaling-ups. This paper takes stock of the model applications and extensions, and extract five common policy lessons from the universe of country cases. First, improving public investment efficiency and/or raising the rate of return of public projects raises growth and lowers the risks associated with debt sustainability. Second, prudent and gradual investment scaling-ups are preferable to aggressive front-loaded ones, in terms of private sector crowding-out effects, absorptive capacity constraints, and debt sustainability risks. Third, domestic revenue mobilization helps create fiscal space for investment scaling-ups, by effectively containing public debt surges and their lateron repayments. Fourth, aid smoothens fiscal adjustments associated with public investment increases and may lower the risks of unsustainable debt. Fifth, external savings mitigate Dutch disease macroeconomic effects and serve as fiscal buffers. The paper also discusses how these models were used to estimate the quantitative macro economic effects associated with these lessons.

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Islamic Republic of Afghanistan: Ex Post Assessment of Longer-Term Program Engagement

Fund¹

2016

IMF Staff Country Reports

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Afghanistan's 2006 and 2011 Fund-supported programs were part of a broad reconstruction effort aimed at establishing macroeconomic stability and laying foundations for structural reforms. Decades of conflict eroded societal order and trust in government, and limited public institutions' implementation capacity. Both arrangements faced the challenges of dealing with unprecedented inflows of international aid and scaling up of public investment against the background of increasing nonsecurity. There were notable successes during the two programs, even though both fell short of their initial goals. On the one hand, supported by aid inflows, the economy grew fast, inflation declined, and international reserves increased. Afghanistan successfully completed the debt relief process under the Heavily Indebted Poor Countries Initiative. Selected structural reforms also advanced, particularly during the Poverty Reduction and Growth Facility arrangement, especially in the area of public financial management. Afghanistan made impressive strides toward meeting the Millennium Development Goals. On the other hand, fiscal sustainability remained elusive as the tax-to-GDP ratio declined and expenditures increased sharply owing to rising security and maintenance costs. Fiscal reforms, such as the VAT, remained incomplete. Despite progress in financial system oversight and governance, some financial sector reforms are still pending. The legislative framework and its enforcement remain to be completed. Aid had both positive and negative effects. The large annual inflows, estimated at around ½ of GDP, played a critical role in stabilizing Afghanistan. Volatility and unpredictability of aid complicated macroeconomic forecasting and policymaking, however. Significant off-budget spending by donors contributed to the buildup of a better-paid "parallel" civil service, which demotivated the regular civil service and weakened program ownership. Potential gains from a new Fund arrangement need to be assessed in the context of rising civil insecurity and political instability. The Fund experience of working in conflict situations is mixed, as reforms struggle to gain traction and to catalyze private sector-led growth. With long-term aid inflows set to decline to a lower level, Fund engagement can at best help manage the transition while maintaining macroeconomic stability. Retaining

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Afghanistan: Balancing Social and Security Spending in the Context of Shrinking Resource Envelope

Cited by 3 publications

References 4 publications

Debt, Investment, and Growth in Developing Countries with Segmented Labor Markets

Debt, Investment, and Growth in Developing Countries with Segmented Labor Markets

Some Policy Lessons from Country Applications of the DIG and DIGNAR Models

Islamic Republic of Afghanistan: Ex Post Assessment of Longer-Term Program Engagement

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