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 –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.

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 a 10 percent increase in yields AfricaAsiaLatin America and the Caribbean Poverty reduction (percent)

Poverty impact of a 10% increase in yield, India Short-runLong-run Poverty reduction 4% 19%

A study of China’s poverty reduction in the period 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:

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

Investment in infrastructure serving agriculture will contribute not only to agricultural expansion, but also to yield increases and poverty alleviation Investment inIndiaChinaIndia * China ** Rural roads 531%212% Rural power 26% 54% 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 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 India: Price support beneficiary states

PER and Benefit Incidence  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… Fiscal costs increase drastically. Adding equivalent of fertilizer, power, and irrigation will increase fiscal cost further.

Mozambique Agriculture 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 Total Budget of the state: US$1,397million Of which : Investment : $ 555 million (40%)

Selected Priority Sector Spending (% of total expenditures) Health89910 Educ Ag.&Fish22223 Transp. & Comm

Composition of expenditures

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

Composition of Ministry of Agriculture Expenditures Agriculture Services37% Forestry Services5% Agriculture Research Services17% Land Management Services4% Rural Development Services19% Other Services18% Total100%

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.