Enhancing Agricultural Production and Productivity via Budget Processes

1. Enhancing Agricultural Production and Productivity via Budget Processes Hans P. Binswanger-Mkhize Session introduction CABRI Agriculture Sector Dialogue 29 – 30 July, 2013 Dakar, Senegal

2. 1.       Government investments in agriculture have both production as well as poverty impacts. How should that influence the choice of assessment technique for the expenditures such as rates of return, benefit-cost rations, or broader poverty and social impact assessments. • 2.     The background paper provides ranges of rates of return for different agricultural investments that rank agricultural research at the top, and irrigation investments much lower down. To what extent can such general rankings be used as criteria in budget allocation when the country-specific studies are missing?  • 3.     The paper then advocates that investments should provide an Internal rate of return of at least 20 percent and a Benefit cost ration above 20. Is this a useful guideline, and how would it be enforced? • 4. Large scale private investments are entering the African farm sector, while much research support the view that supporting small scale agriculture has the highest productivity, linkage and  equity impacts. Under what conditions is government financial support for the large scale farm sector nevertheless warranted?  Group Discussion Questions

3. Calculate Rates of return of each project • Define the corresponding expenditure • Rank projects in terms of their rate of return • Add up the total expenditures reached after each project is included • Define a budget constraint • The portfolio is the projects that are included before the budget constraint is reached The classic economic approach

4. In this case the classic procedure fails to provide guidance: Since rates of return for research are very high, not placing restrictions on the budgets will lead to the entire budget allocated to resources. • If you set expenditure ceilings, the sub-sectors with the highest returns will reach their budget limits • This means that the decisions on sub-sector allocations have been made in the setting of the budget constraints. There are only a few projects with fixed budgets. Many expenditure streams allow for a continuous allocation of resources

5. The ranking by rates of return does not take account of poverty, social and environmental impact • Or of differences in the time profile of the benefits: Research versus subsidies • The three issues mean that other factors have to be taken into account • How are you doing it in your countries? More Complications

6. They provide a cutoff point of returns below which projects/expenditures should be eliminated: 20%? 10%? • They should enter as decision weights into a multi-objective approach to decisions • How are you doing this in your country, • And specifically for agricultural production and productivity • How do you ensure analytical rigor and avoid complete politisation But rates of return are still important

7. Short term options • Borrow from similar countries • Use rules of thumb derived from the literature as discussed in the background paper • This may lead to low productivity projects slipping through • Medium term option: Multi-objective modeling • Long term option: Increase capacity for ex-ante and ex-post evaluation and combine outputs with multi-objective modeling Rates of return are not available

8. Thank you for your attention Please discuss both the general issues and the specific session questions