Essays on the role of public infrastructure and medium-term growth strategies in developing countries (with particular emphasis on Ethiopia)

Ethiopia’s Five–Years Growth and Transformation Plan (GTP) (2009/10- 2014/15) was an ambitious economic growth strategy. The plan relied on huge investment on infrastructure, health and education to achieve a minimum average annual rate of growth of 11 percent and transform the economy from agriculture to manufacturing base. This thesis analyzes internal consistency of Ethiopia’s medium-term growth strategy, and the challenges posed by the structural transformation process on monetary policymaking. The first chapter examines the link between infrastructure capital accumulation and growth, and explores complementarities between infrastructure development and export growth strategy. To this end, a three-sector analytical model that is built from the production functions of three separate sectors, i.e., the infrastructure, exports and non-export private sectors, is developed as an analytical framework to address the gap in the literature. The estimation results indicate that public infrastructure has a strong spill-over effect on the export and non-export sectors, and differences in marginal productivities of labour and capital between export and non-export sectors range from 12.5 percent in East Asia to 250 percent in Latin America. The second chapter explores whether the structural transformation process in developing countries affects the stability of demand for money and the effectiveness of monetary policy. The chapter applies a panel co-integration analyses on selected fast-growing African countries including Ethiopia. It is found that, given aggregate national income, a-one-percent increase in rural per-capita income, a proxy to structural transformation, boosts the demand for money by more than 0.3 percent. In the third chapter, Ethiopia’s five year Growth and Transformation plan is evaluated for internal consistency using a modified financial programming model. Given the low level of savings, the planned boost in investment on infrastructure is expected to face financing challenges. This potentially threatens the country’s macroeconomic stability. The estimation results indicate that the baseline scenario is not sustainable in the long run indicating the need to reconsider current policies and strategies. Based on simulation results of six alternative policy scenarios, the exchange rate is found to be the most effective policy instruments in terms of addressing both the foreign exchange and saving-investment gaps forecasted by the baseline scenario.