Transcript Sustainable Agricultural Development and Poverty

Agriculture and Public Finance
Gershon Feder
Senior Research
Manager
DECRG
Senior Adviser
ARD
1
Overview
1.
The role of agriculture for growth
and poverty reduction in different
contexts
2.
Public goods in the rural economy
3.
Public expenditure on agriculture:
Key issues
4.
Parting thoughts on needs
2
1. The Role of Agriculture for
Growth and Poverty Reduction in
Different Contexts
3
Historical roles of agriculture
Direct and indirect promoter of growth
Vehicle for poverty reduction
Villain and steward of the environment
Note:
Relative importance of each
changes by country typology
over time
4
Agriculture at different stages of
development
Agriculturebased
Transforming Urbanizing
countries
countries
countries
Population
Rural (million)
Share of population in rural areas (%)
Agriculture
Share of ag in GDP (%)
Share of ag in GDP growth (%)
Agricultural growth
Non-Agricultural growth
Poverty incidence (% )
Share of rural poor in total poor
520
71
2010
68
250
31
34
34
3
3
20
9
3
7
11
8
2
3
78
72
465
Poverty is mostly a rural phenomenon
Rural areas have lower levels of social
services, such as health, education, and
sanitation, and less physical infrastructure,
such as roads, energy, communications.
Improved sanitation facilities, rural
Improved sanitation facilities, urban
Improved water source, rural
Improved water source, urban
LIC
24%
61%
69%
89%
MIC
25%
79%
63%
96%
6
Main links of agriculture to poverty
reduction and growth
Direct effects on farmers’ incomes
Increase employment in agriculture
Reduced prices of food staples
Growth multiplier effects on the non-farm
economy
7
2. Public Goods in the Rural Economy
8
Main Public Goods in the Rural
Economy
Agricultural Research
Agricultural Extension
Irrigation and Drainage Infrastructure
Rural Infrastructure
Veterinary Services (some)
Land Administration
9
…However
What constitutes a public good differs by
country typology and over time
10
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).
11
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.
12
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; the role of user groups
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.
13
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.
14
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
15
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 while ensuring
equitable access
16
3. Public Expenditure on Agriculture:
Key Issues
17
Distribution of public expenditure by
sector, 2004
100%
Other
80%
Defense
Social security
60%
Infrastructure
40%
Health
Education
20%
Agriculture
0%
Africa
Asia
Source: IFPRI using IMF data
LAC
18
Agriculture Orientation Index (%)
share of agricultural spending in total
government spending / share of agricultural
value added in GDP
1.00
0.80
Africa
0.60
Asia
0.40
LAC
0.20
0.00
1980
1990
2002
19
Key issues
1.
Underinvestment
2.
Mis-investment
3.
Off budget/donors
20
Key issues
1. Underinvestment:
Increasing the level of public
expenditure on agriculture
21
Underinvestment in agriculture
Country type
Agriculture based
(14)
Transforming
(11)
Urbanized
(12)
Sources: IMF data
Ag value added
Ag spending
(% of tot GDP)
2004
(% of tot spending)
2004
33
4.6
17
4.8
10
3.2
22
Share of ODA in total agricultural
spending
In several African countries, ODA
commitment contributes more than 80% of
agricultural spending (e.g. Mozambique,
Niger, Rwanda), and more than 50% in
Ghana, Tanzania and Uganda (WDR 2008)
23
Key issues
2. Mis-investment:
Improving the quality of public
expenditure on agriculture
–Subsidies to private vs. public goods
–Capital vs current (O&M) spending
–Who benefits?
24
Mis-investment in agriculture
Large amount of resources devoted to
private goods (input/output subsidies)
and services
• Indonesia: subsidies accounted for 43% of
fiscal support for agriculture in 2006
• Zambia: 80% of poverty reduction
programs (which accounted for 42% of
total agricultural sector budget 2001-06)
devoted to Fertilizer Support Program
(FSP) and FRA.
25
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.
26
Share of public investment and
subsidies in agricultural GDP, India
Percent AgGDP
9
8
7
6
5
4
Subsidies
Public Inv
3
2
1
0
1975-79 1980-84 1985-89 1990-94 1995-00 2000-02
27
Forgone opportunities
The cost to agricultural growth of subsidizing
private rather than public goods is high.
Without increasing the overall level of
expenditure, re-allocating 10% of subsidy
expenditure to the provision of public goods
increases per capita agricultural incomes by 5%
for 15 countries in LAC (Lopez and Galinato,
2007)
28
Forgone Opportunities in Maharashtra,
India
29
Mis-investment in agriculture
Wrong composition: capital vs. current spending
(composition of current spending favours wages
rather than spending on operation and
maintenance (O&M))
• The effectiveness of agricultural services can be
adversely affected if wage share of total recurrent
budget is excessive
• Scarcity in O&M spending particularly severe in
irrigation, resulting in poor service delivery:
• e.g.: Turkey: 24% rural spending in irrigation (recurrent share is
44%, O&M only 2% of recurrent spending)
30
Share of current spending in
agricultural public expenditure
Current
O&M
(% of tot ag
spending)
39
(% of current
spending)
34
Kenya (2002-03)
77
18
Turkey (2003)
94
32
Vietnam (1997-02)
22
25
Laos (2002-04)
6
38
Ethiopia (2002-06)
Source: Country PER reports (Edmeades, 2007)
31
Credit subsidies
Typically administered through stateowned banks
Benefits often going to larger landowners
Frequently low repayment rate
Losses of state banks are eventually
covered by the public budget.
32
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.
33
Pr
ad
es
h
Ch Bih
a
at
tis r
ga
Ha rh
r
K ya
M
ad arn na
hy
ata
a
ka
P
M rad
e
ah
a r sh
as
ht
r
Or a
is s
Pu a
Ra nja
jas b
Ut
ta
r P than
W rad
es
e
t B sh
Ta eng
a
m
il N l
ad
u
An
dh
ra
Rs million
PER and Benefit Incidence:
who captures benefits?
India: Price support beneficiary states
28000
24000
20000
Rice Subsidy
Wheat Subsidy
16000
12000
8000
4000
0
34
PER and Benefit Incidence
 Possible data sources for BI include National Household
Surveys, LSMS, Household Income and Expenditure Surveys,
project baseline surveys
Producer Price Support per Household, 1998
Rs/household
30000
25000
Punjab (rice)
20000
Andhra Pradesh (rice)
15000
Punjab (wheat)
10000
Haryana (wheat)
5000
Uttar Pradesh (wheat)
0
small
medium
large
Household Class
Note: Small farmers own 1 to less than 2 ha of land; medium farmers own 2 to less than 4
ha of land; large farmers own 4 or more hectares of land
35
PER
Is India Ready for Income Support?

What happens to fiscal cost?
e.g. food grain 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
36
PER to simulate fiscal costs…
Scenario
1. Current, US million
2. Punjab Subsidy Rate
Procurement States rice or wheat HH
All States, rice or wheat HH
All States, all agric HH
Producer Support
Rice
Wheat
Total
387
522
909
8,874
9,888
16,489
8,901
11,398
25,846
17,775
21,286
42,335
Fiscal costs increase drastically. Adding equivalent of fertilizer, power, and
irrigation will increase fiscal cost further.
Nowadays, India allocates a larger share of total expenditure to agriculture
(from 4.6% in 1975 to 8.5% in 2004), though the sector’s contribution to
the national economy has declined (from 31.7% in 1975 to 11.7% in 2004).
37
Key issues
3. Donors
38
Donor Finance Often Off-Budget
Donor financing often not captured, off-budget,
may escape public financial management system
Hinders analysis on how sources of financing
correlate with effectiveness, coordination with
other PE, or congruence with government stated
priorities
39
4. Parting Thoughts on Needs
40
Improve coordination between the Ministry of Finance
and the sector ministries in budget planning and finance.
– Strengthen capacity of MOA in PER and policy analysis
Harmonize figures presented by budget execution
reports, economic and social plans to facilitate the
evaluation of outcomes.
– Accounting for decentralized expenditures and revenue
Improve transparency and accountability of
expenditures
– Over 60% of expenditures are off- budget funded by donors, (of which
80% of investments)
41
Combine preparations of recurrent and capital
expenditures.
– Maintain a ratio that that enables sustainable use of resources in the
sector
Allocation of resources within Ministry should be
related to government policies rather than ad-hoc.
– Budget allocations necessary for policy implementation should be
aligned to stated policy goals towards agriculture
Evaluate the effectiveness of public expenditure.
– Using different tools: e.g. benefit incidence analysis
42