Investment and Pro-Poor Growth Shenggen Fan, IFPRI Phnom Penh, June 27-30, 2005

Outline of the Presentation -Trends in Government Investment -How Investment Reduces Poverty -Case Studies -Public-private Partnership -Conclusions Page 2

Why Public Investment - Market Failures - Distribution and Poverty Reduction - Enabling the Investment Environment Page 3

Agriculture Expenditure Page 4

Composition of Expenditure (%) Page 5

Investment and Rural Poverty Page 6

Returns to Rural Investment, India Returns in Rupee per Rupee Spending Number of Poor Reduced per Million Rupee Spending Page 7

Effects of Rural Investment, China Education No. of poor reduced /10,000 yuan R&D Roads Power Phone Irrigation Loans yuan per yuan spending Page 8

Regional Effects, China Returns in Yuan per Yuan investment Number of poor reduced per 10,000 Yuan invested Page 9

Effects of Rural Investment, Uganda Returns in shilling per shilling Investment Number of poor reduced per million shillings investment Page 10

Ranking of Investment Effects Page 11

Effects of Low and High Quality Roads, China No. of Urban Poor Reduced per 10,000 Yuan No. of Rural Poor Reduced per 10,000 Yuan Page 12

Agricultural research Education Rural infrastructure Highlights of Results The three most effective public spending items in promoting agricultural growth and poverty reduction: Agricultural research Education Rural infrastructure Page 13

Highlights of Results Trade-off between agricultural growth and poverty reduction is generally small - For agricultural research, education, and infrastructure development, they have large growth impact as well as large poverty reduction impact - Regional analysis: more investments in less-developed areas lead to largest poverty reduction and high growth per unit of spending in Asia. In Africa, lack of investment in all types of regions. Page 14

Highlights of Results Returns vary over time Initial subsidies in credit, fertilizer, and irrigation might have been crucial for small farmers to adopt new technologies. But as more and more farmers have adopted new technologies, continued subsidies have led to inefficiency of the overall economy However, returns to agricultural research, infrastructure and education have high returns throughout the whole period Page 15

Reforming Institutions: PPP Public and Private Partnership (PPP). Public sector will be still the major player in providing infrastructure services in rural areas. But privatizing certain component can improve efficiency and service “Unbundling” is a necessary part of privatization. Page 16

Feasibility of Private Sector Delivery Sector/type of service Potential for competition Characteristics of good/service Potential for cost recovery Equity concerns Marketability index Telecommunications Local services Long distance   medium high private few 2.6 3.0 Power Thermal generation Transmission Distribution Gas production/ transmission low club many 2.4 Transport Rural roads Primary/secondary Roads public 1.0 Irrigation Primary/secondary networks Tertiary (on farm) 1.4 Page 17

Unbundling and Degree of Competition Industry Generation/ storage Transmission Distribution/retailing   Power / energy Competitive Monopolistic Large scale irrigation Monopolistic/ oligopolistic Medium scale irrigation Small scale irrigation Telecommunications Rural roads Page 18

Centralization vs. Decentralization Scale of economy New technological innovations Community and user’s association Strengthening public institutions Improving human capitals Page 19

Conclusions National governments and donors need to increase investment in rural areas More resources are needed to less developed/favored areas Instead of high quality/high cost, low quality/cost investment can be more cost-effective and more pro-poor Reforming institution is equally important Privitization of certain components of the whole system can improve efficiency Public institutions and human capitals need to be improved Page 20