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Agriculture and Public Finance

Agriculture and Public Finance. Gershon Feder Senior Research Manager DECRG May 2006. Agriculture and Rural Sector Perspective. Poverty is mostly a rural phenomenon. It is estimated that over 70 percent of the world’s poor reside in rural areas

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Agriculture and Public Finance

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  1. Agriculture and Public Finance Gershon FederSenior Research ManagerDECRG May 2006

  2. Agriculture and Rural Sector Perspective

  3. Poverty is mostly a rural phenomenon • It is estimated that over 70 percent of the world’s poor reside in rural areas • For example, in China, 69 percent of the poorare rural, and in India, 78 percent are rural

  4. Poverty is mostly a rural phenomenon, cont. • Rural areas have lower levels of social services, such as health, education, and sanitation, and less physical infrastructure, such as roads, energy, communications.

  5. Four main links of agriculture to poverty reduction • Direct effects on farmers’ incomes • Increase employment in agriculture • Reduced prices of food staples • Growth multiplier effects on the non-farm economy

  6. Poverty reduction impact of a10 percent increase in yields Poverty reduction(percent) 6 4 2 0 Africa Asia Latin America and the Caribbean

  7. Poverty impact of a 10% increase in yield, India Povertyreduction 20 19% 10 4% 0 Short-run Long-run

  8. Rural growth and poverty reduction A study of China’s poverty reduction in the period 1980-2001 indicates that: • China’s poverty count fell from 53 percent to 8 percent • Most of this improvement is due to growth in rural incomes

  9. Example: returns to rural growth in Uganda Number of poor reduced per million schilling:

  10. Challenges of collecting data on public agric spending: off budget funding

  11. Investment in infrastructure serving agriculture will contribute not only to agricultural expansion, but also to yield increases and poverty alleviation Number of Rate of return poor lifted Investment in India China India* China** Rural roads 531% 212% 124 32 Rural power 26% 54% 3.8 23 *Per million rupees**Per thousand yuan

  12. Main Public Goods in the Rural Economy • Agricultural Research • Agricultural Extension • Irrigation and Drainage Infrastructure • Rural Infrastructure • Veterinary Services (some) • Land Administration

  13. Other Agricultural Spending Items • Subsidies to inputs and outputs • Rural Credit • Marketing Organizations and Cooperatives

  14. Agricultural Research • Organization and management of public research often deficient and not cost effective (e.g., “disconnect” between priority needs and research focus.) • Successful experiences in increasing the cost effectiveness of research systems (e.g., “competitive grants”, partnership with private sector and NGOs).

  15. Agricultural Extension • Agricultural extension systems have some generic weaknesses which make them prone to low effectiveness (e.g., weak accountability to clients). • At times of plentiful agricultural budgets (e.g. donor projects) personnel tends to grow, when budgets shrink, most of it is spent on salaries and little on field operations. A bias towards larger farmers has been observed in many systems.

  16. Irrigation and Drainage Infrastructure • Significant item of public spending in many irrigation-dependent countries. • Market failures related to water management, justify public sector involvement at various levels. • Cost recovery is politically unpopular, implying a large public subsidy. • Bureaucratic and political considerations result in neglect of O&M, which lead to costly “rehabilitation”. • Lack of water pricing leads to wasteful use, and inefficient cropping patterns.

  17. Rural Infrastructure • Major impact on the performance of the agricultural sector (rural roads, energy and communications). • Some opportunities for private sector participation, in operating the service delivery component. • Common problem with rural roads is neglect of O&M, leading to expensive rehabilitation. • For energy and communications, user charges are feasible, but are often subsidized. • Subsidization and overstaffing in specialized agencies leads to deficits and dependence on fiscal transfers.

  18. Veterinary Services (some) • Regulatory functions due to the risks to human health, and livestock epidemics. • Contracting out some services, privatizing other aspects, and transferring some functions to producer associations can considerably reduce the fiscal burden

  19. Land Administration • Provision of ownership certification, keeping cadasters and land records, has strong public good elements • Functions are handled by specialized ministries, or autonomous public agencies. • Good land administration enhances security of tenure, and access to credit (land collateral). • The main PE issues are an adequate fee structure to allow sustainability of the services.

  20. Subsidies to Inputs and Outputs • Input subsidies are perceived as conducive to increased productivity. • Output subsidies are intended to promote production of “strategic commodities”, or social objectives. • Administered through specialized credit programs, or interventions in input and output markets. • Causes inefficiencies. • Income effects are often concentrated among larger farmers.

  21. Credit subsidies • Typically administered through state-owned banks • Benefits often going to larger landowners • Frequently low repayment rate • Losses of state banks are eventually covered by the public budget.

  22. Marketing organizations and cooperatives • A combination of monopoly privileges, lack of budget constraints, political interference, and public sector personnel policies, leads to overstaffing, non-business-like decision making, and losses in marketing organizations. • Agricultural cooperatives are nominally private (farmer-owned) entities. Often not bottom-up organizations, but promoted and supported by the state, and act as a state tool for administering agricultural policies. • Losses are covered directly or indirectly by the fiscal budget.

  23. India Agricultural PER • Agricultural sector • Ag GDP down to 20%, but 58% of labor force still employed in agriculture • Rural poverty- 26% 1999/00 (195 million people) • Major concern: slowdown in agric growth • From 3.4% during 1985/86 to 1994/95 to 1.8% in 1995/96 to 2002/03 • GOI’s goal: raise it to 4% per year • PER helps identify one of the key constraints—declining public investments in agriculture

  24. Trends in Agric Public Expenditures India Public Ag Investments vs Subsidies as % of Agric GDP Note:Ag subsidies include foodgrain, fertilizer, power, irrigation

  25. PER and Benefit Incidence: who captures benefits? India: Price support beneficiary states • Categorize by state/province, region, crop category, farm size, income group, ethnic/social group, etc • E.g. subsidies, expen. on agric services, employment, nutrition programs

  26. PER and Benefit Incidence • Possible data sources for BI includeNational Household Surveys, LSMS, Household Income and Expenditure Surveys, project baseline surveys

  27. PER - Is India Ready for Income Support? • What happens to fiscal cost? e.g. foodgrain subsidies--depends on coverage • All rice and wheat farmers in procurement states • All rice and wheat farmers • All farmers (128 million, Ag Census 99/00) • Simulate price subsidy received by Punjab farmers (most influential) as income support • Income support = MSP – cost of production

  28. PER to simulate fiscal costs… Fiscal costs increase drastically. Adding equivalent of fertilizer, power, and irrigation will increase fiscal cost further.

  29. MozambiqueAgriculture Public Expenditures Current Status and Issues

  30. Mozambique, Basic Facts • 20 years since peace • Population: 19 million • Per Capita Income: US$250 • GDP growth rate : 7.2% • Nominal GDP: US$6.1 billion • Inflation: 12.6 % ( currently about 9%) • GDI/GDP: 20% • Govt. Revenue/GDP: 12.3% • Govt. Expenditures/GDP: 23.7% • Aid/GDP: 13.2%

  31. Total Expenditures- 2004 • Total Budget of the state: US$1,397million • Of which : Investment : $ 555 million (40%)

  32. Selected Priority Sector Spending (% of total expenditures)

  33. Composition of expenditures

  34. Total and Foreign-financed Investment in Agriculture, 1998 Billion Mt)

  35. Composition of Ministry of Agriculture Expenditures

  36. Key Issues • High level of donor dependency. • Lack of coordination between the Ministry of Finance and the sector ministries in budget planning and finance. • Budget execution reports, economic and social plans report different figures. Hence outcomes difficult to evaluate. • Weak transparency and accountability- Over 60% of expenditures are off- budget funded by donors, (of which 80% of investments)

  37. Key Issues ( cont’d) • Preparations of the recurrent and capital expenditures separated. • Allocation of resources within Ministry ad-hoc. • Effectiveness of P.E. not evaluated – thus difficult to justify increased donor funding.

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