Malawi Public Expenditure Review: Inter-Sectoral Allocations 21 November 2007

Background to the analysis Within the context of the MGDS, government’s strategy is to rebalance expenditure from social to economic sectors Using the Maquette for MDG Simulations (MAMS) model, the research conducted simulations on the impact of changing the balance of expenditures between economic and social sectors on growth, poverty, and selected social indicators in Malawi The MAMS is an economy-wide simulation model created to analyze development strategies

Main Findings

(1) Shifting the composition of expenditures across sectors matters for both growth and human development indicators There is a trade-off between increasing expenditures in infrastructure Vs on social sectors in terms of outcomes A moderate relative increase in infrastructure spending leads to faster GDP growth rate, exports, investments and poverty reduction, but at the expense of slower improvements in human development indicators On the other hand, a relative increase in expenditure in social sectors has a slower and less impact on growth, but a more rapid impact and great impact on human development

(2) Good macroeconomic policies are critical for both growth and human development indicators Maintaining sound macroeconomic policies is critical for improvements in both growth and human development indicators Changing the intra-sectoral allocation of expenditures only brings a small additional impact on accelerating growth or progress towards human development indicators

(3) Ensuring the ‘quality’ of public expenditures is critical to accelerate growth and progress towards the MDGs The results of the MAMS model assume that the ‘quality’ of expenditures and investments (within each sector) does not change substantially But model shows that improving the efficiency in use of resources within each sector is also critical to realize the impact of increased expenditures Hence there is a need to carefully assess public expenditures within each sector to improve efficiency

Recommendations

(1) Need to strike a balance between expenditures on economic & social sectors to achieve growth & improve human development indicators Given that rapid progress in both, growth and human development indicators are needed, there is need to strike a good balance between expenditures in economic and social sectors Maintaining sound macroeconomic policies is critical for both growth and human development indicators The implementation of the efficiency reforms recommended by the sectoral PERs (in education, roads, health and nutrition) is critical to accelerate growth and progress towards MDGs