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The overarching objective of this report is to use a multi-level analysis approach to assess the effects of various government spending on growth and poverty reduction and their trade-offs between these two goals and to offer future policy options to achieve the Millennium Development Goals (MDGs). The study involves analyses and simulations at the different levels: household, sector/region as well as macro levels. Different analytical tools are used at the different levels. Analyses at the different levels are initially executed independently, but final synergy is drawn through an integrated macro-micro framework. This new approach has enabled us to gain new knowledge as well as new policy insights. The study confirmed previous studies that universal subsidy is inefficient and usually achieves its intended goal at a much higher cost. Targeted approach is much preferred. If a well-targeted program is designed, more poverty reduction and much better income distribution can be obtained. Moreover, saved government resources can be used for productive investments in human capitals, infrastructure, and agricultural technology that would have long terms impact on growth and poverty reduction. Among all types of targeted programs, direct income transfer deserves a special attention. Aged, women, children and rural population are also special groups for targeting as they account for the majority of poor. In order to achieve the maximized growth and poverty reduction impact, public investment needs to be better prioritized. Investing in human capital and infrastructure, particularly in rural Egypt, offers the highest return in terms of both growth and poverty reduction. This is conformed by all levels of analyses: household, regional and macro levels: In terms of regional priorities, investment in Upper Egypt would lead to largest poverty reduction as poor are increasingly concentrated in the region. Investing in agriculture is potentially pro-poor and can contribute to long term national food security and economic growth. But the current trade policy that isolates domestic market from the international one leads to lower returns to these investments, particularly in terms of rural income and rural poverty reduction. Most of the benefits from agricultural investment under an autarky economy are reaped by urban consumers and majority of rural population may suffer and they account for majority for Egyptian poor population. In summary, investing in agriculture and in rural areas is a must to lift rural poor out of poverty, but free trade in agriculture is a pre-condition for this to happen.


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