Macroeconomic trade-offs and external vulnerabilities of human development in Nicaragua

Abstract

Nicaragua is making progress towards the Millennium Development Goals, but is set to miss a number of targets in 2015. This paper’s general equilibrium analysis shows that it is unfeasible for the government to step up spending in order to meet these targets by the 2015 deadline. Any boost to public spending and financing would have to be front-loaded, which would entail pernicious macroeconomic trade-offs. A more realistic scenario would be to postpone meeting the goals until 2020. In that case, the allocation of public spending would spur economic growth without causing macroeconomic hardships, although the country would nevertheless remain highly vulnerable to external shocks.