Agriculture and Public Finance

BECO
 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 MIC
Improved 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 a
10 percent increase in yields
Poverty reduction
(percent)

0
Africa Asia Latin America
and the Caribbean
Poverty impact of a 10% increase
in yield, India
Poverty
reduction
20

19%

10

4%
0

Short-run Long-run
Rural growth and poverty reduction

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
Example: returns to rural growth in
Uganda
Number of poor reduced per million schilling:

Investment Uganda
Agriculture R&D 58
Education 13
Feeder Roads 34
Tarmac Roads 10
Health 5
Challenges of collecting data on public
agric spending: off budget funding
National Governments ODA
% of total
% of total Ag % of % of Ag. Ag
Country exp. GDP GDP spending
Benin 4 35 2 14
Burkina Faso 15 38 11 11
Cameroon 4 43 2 29
Cote d'Ivoire 5 25 4 9
Ethiopia 6 52 4 22
Ghana 1 35 0 64
Guinea 6 24 5 45
Kenya 3 28 23 12
Madagascar 12 29 7 23
Malawi 6 39 6 39
Mali 11 38 8 33
Niger 1 40 1 92
Nigeria 3 26 5 1
Uganda 2 31 2 80
Zambia 5 22 8 21
Investment in infrastructure serving
agriculture will contribute not only to
agricultural expansion, but also to
yield increases and poverty
alleviation
Number of
Rate of return poor lifted
Investment in India China India* China**

Rural roads 531% 212% 124 32

Rural power 26% 54% 3.8 23

*
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.
 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.
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.
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(Public Expenditure Rate) 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

14.0%
12.0%
10.0%
8.0%
6.0%
4.0%
2.0%
0.0%

Major Ag Subsidies
Public Investments in Ag
Note:Ag subsidies include foodgrain, fertilizer, power, irrigation
 PER and Benefit Incidence:
who captures benefits?
India: Price support beneficiary states
28000
Categorize by
24000 state/province,
Rice Subsidy Wheat Subsidy
20000
region, crop
category, farm size,
16000
income group,
Rs million

12000 ethnic/social group,

8000
etc
4000 E.g. subsidies,
expen. on agric
0
services,
employment,
nutrition programs
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…
Scenario Producer Support Additional Fiscal Cost (Savings)
Per Household Support Rice Wheat Total Rice Wheat Total
a
I. Total Current Producer Price Support, Rs million 17,605 23,728 41,333
b
II. Total Subsidy Using Punjab Support Rate per HH
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
c
III. Total Producer Support-Rs1000 per HH
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.
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- 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 10
Educ. 21 20 19 22 21
Ag.&Fish 2 2 2 2 3
Transp. 5 6 8 11 9
& Comm.
Composition of expenditures

Locally Financed Government Expenditures

(As percent of total expenditures)

20.0% Health
15.0%
Education
10.0%
5.0%
Agriculture and Fishing
0.0%
Transport and
communication
Total and Foreign-financed Investment in Agriculture,
1998 Billion Mt)

300 266
250 219
200 174
148
150 129
108
100 84 73 80

50 24 29
8 3 8
0
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.
Some of the reasons why farmers
need agricultural credit:
1. Purchase of new inputs
2. Purchase of implements
3. Better management of risk
4. Permanent improvement in land
5. Better marketing of crops
6. Facing crises
Thank you !