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.