Agriculture and Public Finance Gershon Feder Senior Research Manager DECRG May 2006.
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Transcript of Agriculture and Public Finance Gershon Feder Senior Research Manager DECRG May 2006.
Agriculture and Public Finance
Gershon FederSenior Research
ManagerDECRG
May 2006
Agriculture and Rural Sector Perspective
LIC MIC HIC
Share of Agriculture in GDP 23% 10% <5%
Share of Rural Population 70% 47% 20%
Percent Employed in Agriculture 59% 35% 5%
Percent of Ag. Exports in Total Exports 27% 12% 9%
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 poor
are rural, and in India, 78 percent are rural
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.
LIC MICImproved sanitation facilities, rural 24% 25%Improved sanitation facilities, urban 61% 79%Improved water source, rural 69% 63%Improved water source, urban 89% 96%
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
Poverty reduction impact of a10 percent increase in yields
0
2
4
6
Africa Asia Latin America and the Caribbean
Poverty reduction(percent)
Poverty impact of a 10% increase in yield, India
0
10
20
Short-run Long-run
Povertyreduction
4%
19%
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
Rural growth and poverty reduction
Example: returns to rural growth in Uganda
Number of poor reduced per million schilling:
Investment UgandaAgriculture R&D 58Education 13Feeder Roads 34Tarmac Roads 10Health 5
Challenges of collecting data on public agric spending: off budget funding
National Governments ODA
Country% of total
exp.Ag % of
GDP% of Ag.
GDP
% of total Ag
spendingBenin 4 35 2 14Burkina Faso 15 38 11 11Cameroon 4 43 2 29Cote d'Ivoire 5 25 4 9Ethiopia 6 52 4 22Ghana 1 35 0 64Guinea 6 24 5 45Kenya 3 28 23 12Madagascar 12 29 7 23Malawi 6 39 6 39Mali 11 38 8 33Niger 1 40 1 92Nigeria 3 26 5 1Uganda 2 31 2 80Zambia 5 22 8 21
Investment in infrastructure serving agriculture will contribute not only to agricultural expansion, but also to yield increases and poverty alleviation
Investment in India China India* China**
Rural roads 531% 212% 124 32
Rural power 26% 54% 3.8 23
Number of Rate of return poor lifted
*Per million rupees**Per thousand yuan
Main Public Goods in the Rural Economy
Agricultural Research
Agricultural Extension
Irrigation and Drainage Infrastructure
Rural Infrastructure
Veterinary Services (some)
Land Administration
Other Agricultural Spending Items
Subsidies to inputs and outputs
Rural Credit
Marketing Organizations and Cooperatives
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).
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.
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.
Irrigation and Drainage Infrastructure
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.
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
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.
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.
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.
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.
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
Trends in Agric Public Expenditures
India Public Ag Investments vs Subsidies as % of Agric GDP
0.0%
2.0%
4.0%
6.0%
8.0%
10.0%
12.0%
14.0%
Major Ag Subsidies
Public Investments in Ag
Note:Ag subsidies include foodgrain, fertilizer, power, irrigation
PER and Benefit Incidence: who captures benefits?
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
0
4000
8000
12000
16000
20000
24000
28000
Rs
mill
ion
Rice Subsidy Wheat Subsidy
India: Price support beneficiary states
PER and Benefit Incidence
Producer Price Support Per Household, Rs/household, 1998
Rice Producers All Marginal Small Medium Large Punjab 3,041 799 1,674 3,094 7,556 Andhra Pradesh 164 54 186 339 621 Wheat Producers Punjab 9,980 2,210 5,094 9,761 26,752 Haryana 5,794 2,236 3,597 6,547 14,705 Uttar Pradesh 217 29 351 793 1,807 Note: HH- households. Marginal farmers own less than 1 ha of land. 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.
Possible data sources for BI include National Household Surveys, LSMS, Household Income and Expenditure Surveys, project baseline surveys
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
PER to simulate fiscal costs…
Scenario Producer Support Additional Fiscal Cost (Savings) Per Household Support Rice Wheat Total Rice Wheat Total
I. Total Current Producer Price Support, Rs milliona 17,605 23,728 41,333
II. Total Subsidy Using Punjab Support Rate per HHb
Procurement states only, Rs million 403,346 404,558 807,904 385,741 380,830 766,571 All states, rice or wheat, Rs million 449,430 518,052 967,482 431,825 518,052 949,877 All states, all crops, Rs million 749,452 1,174,707 1,924,159 731,847 770,148 1,501,996
III. Total Producer Support-Rs1000 per HHc
Procurement states only, Rs million 21,902 14,015 35,917 26,199 4,302 30,502 All states, rice or wheat, Rs million 24,404 17,947 42,352 31,204 35,894 67,098 All states, all crops, Rs million (Rs500/season) 81,392 ` 121,451
Fiscal costs increase drastically. Adding equivalent of fertilizer, power, and irrigation will increase fiscal cost further.
MozambiqueAgriculture Public Expenditures
Current Status and Issues
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%
Total Expenditures- 2004
Total Budget of the state: US$1,397million
Of which : Investment : $ 555 million (40%)
Selected Priority Sector Spending (% of total expenditures)
2000 2001 2002 2003 2004
Health 8 9 9 10 10Educ. 21 20 19 22 21Ag.&Fish 2 2 2 2 3Transp. & Comm.
5 6 8 11 9
Locally Financed Government Expenditures (As percent of total expenditures)
0.0%
5.0%
10.0%
15.0%
20.0% Health
Education
Agriculture and Fishing
Transport andcommunication
Composition of expenditures
Total and Foreign-financed Investment in Agriculture, 1998 Billion Mt)
84 73
29
80
148174
266
248 3 8
108129
219
0
50
100
150
200
250
300
1998 1999 2000 2001 2002 2003 2004
Total budgetary Investment (Agriculture) Foreign Financed
Composition of Ministry of Agriculture Expenditures
Agriculture Services 37%Forestry Services 5%Agriculture Research Services 17%
Land Management Services 4%
Rural Development Services 19%
Other Services 18%Total 100%
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)
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.