M U HA M M A D NAS IR

An Evaluation of the Role of PublicInvestment for Agricultural Development

in Hokkaido, Japan 1963-1995.A Case Study

Quaderno di Ricerca n.6 – dicembre 2005

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An Evaluation of the Role of Public Investment forAgricultural Development in Hokkaido, Japan 1963-

1995. A Case Study

Muhammad Nasir

Abstract

Government expenditures are generally regarded as a major influence on the

pace and pattern of the Agricultural development. Agricultural research, rural

education, extension of technology to the farming community and development of

a wide range of agricultural activities from fertilizer distribution to credit are

commonly funded by the government. Nevertheless, there are been few studies of

the Government expenditures on agricultures and its effects on the output. The

study starts with the definition of investment. Investment means the commitment

of resources to the formation of capital assets which in turn allows a stream of

new resources to be generated in future. The value of the capital assets created

in the form of plant or construction depends upon the capital flows. For the

investment to be acceptable then the value of the assets must exceed its cost.

Investment has got two different types public and private investment. A

distinction must be made between public and private investment. The public

investment has origin in the government plans for the different sectors while

private investment is carried out by the individual or groups of enterprises. In

the present study we will focus only on the public investment for Agriculture in

Hokkaido, Japan and assess its effects on the economy of Hokkaido in general

and the productivity of the farmers in specific.

4

1. Introduction

Government expenditures are generally regarded as a major

influence on the pace and pattern of the Agricultural

development. Agricultural research, rural education, extension

of technology to the farming community and development of

a wide range of Agricultural activities from fertilizer

distribution to credit are commonly funded by the

Government.Nevertheless, there have been few studies of the

Government expenditures on Agriculture and its effect on the

output. The study starts with the definition of investment.

Investment means the commitment of resources to the

formation of capital assets which in turn allows a stream of

new resources to be generated in future. The value of the

capital assets created in the form of plant or construction

depends upon the capital flows. For the investment to be

acceptable then the value of the assets must exceed its cost.

Investment has got two different types which are public and

private investment. Ahmed Shagil (1986) said that the

government deficits are thought to have a variety of effects on

the private economy, ranging from forcing up real interest

rates and crowding out private investment in additional plant

5

and equipment to raising wealth and stimulating household

consumption demand (See Ahmed Shagil 1986).

The Public investment has their origin in the government

plans for different sectors while private investment is carried

out by the individual or groups of enterprises. In the present

study we will focus only on the public investment for

Agriculture in Hokkaido. Arrow and Kurz (1970) were the

first authors to formulate Government expenditures as a form

of investment (See Arrow and Kurz).

1.1. Background of the Study and Statement of the

Problem

There are many problems related to the public investment for

Agriculture in Hokkaido, Japan that is the investment made by

central Government and the provincial Government. Some of

the main problems related to the Government and to the

farmers regarding the public investment are as follows.

i. The Government prepares the developmental projects

in Hokkaido. The system of the investment is such that 80%

of the cost is being paid by the Government, 18% by the

municipalities and the remaining 2% the Government requests

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the beneficiaries or the farmers to pay from their side.

Actually, the farmers are reluctant to pay the cost from their

side due to which many of the projects failed to get

implemented. Therefore, keeping in view the difficulty of the

investment from the farmers side, the government has to

prepare new projects which is not only time consuming but

also requires a lot of capital.

ii. As environment is directly related to the economy.

Therefore, the Government should improve the environment.

But unfortunately, the Government does not have good

theories for calculating the environmental cost for improving

the environment.

iii. Maintenance of the projects from the farmers side is

cited as one of the major problems faced by the Government.

Once the projects are being implemented in joint co-operation

of the farmers by the Government then it becomes entirely the

responsibility of the farmers to maintain these projects. But

unfortunately either because of the technical efficiency or the

lack of the capital from the farmers side they are not properly

maintained which means that the investment that the

Government made would be wasted.

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1.2. Purpose and Significance of the Study

The main objectives of this study is to evaluate the public

investment in the Agricultural sector in Hokkaido. The current

study consists of two major parts.

i. Evaluation and assessment of the public investment for

Agriculture in Hokkaido in the period between 1963 to 1995

made by central Government and Hokkaido Government by

using production function approach.

ii. To undertake the analysis of the data using the total

factor productivity (TFP). The Public investment is important

because of several reasons. Firstly, the Government

expenditures has become a significant fraction of the national

income. Secondly, public capital has a powerful impact on the

productivity of private capital. Thirdly, the public investment

is confined by and large to those goods and services that the

private sector will not produce in optimal amounts.Fourthly,

public investment also could effect private capital formation

indirectly by augmenting demand for goods and services

produce by the private sector and influencing private investors

profit and sales expectations. Lastly, public investment in

8

streets and highways, airports, ports, electrical and gas

facilities, mass transit, water and sewerage’s,health facilities

and education services, increases both total factor productivity

and labor productivity. Barrow and Robert (1989) investigates

the determination of economic growth in a cross section of

countries. The growth rate is found to be negatively related to

the Government consumption and not significantly related to

the Public investment.(See Barrow and Robert 1989).

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2. Methodology and Data

2.1. Cost Function Model

The growth accounting approach uses index number measures

to technology to quantify the components of productivity

change. Alternatively, econometric methods can be used to

estimate the components of the production cost and profit

function. Each approach requires certain assumptions which

must be considered in interpreting the findings of the

productivity studies. Consider the production function as the

output as a function of capital, labor, material and time. Then

the equation is given by

Y= F (K,L,T)

Where Y= output F= function K, L are the various inputs like

seed, fertilizer etc and T shows the Public investment for

Agriculture. The function should be linear homogenous and

should be in the log form to calculate the shares of the inputs

such as alpha, beta, gema. Econometric model will be applied

to assess the effectiveness of the Government investment on

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the economy of Hokkaido in general and the productivity of

the crops in specific. In order to obtain quantitatively the

impacts of the public investment for Agriculture in Hokkaido.

The following cobdouglas form is specified for the cost

function equation.

LnC01lnPL2lnPM3lnPk4lnQ5lnS6lnIt1lnPLlnIt

2lnPMllnIt,

3lnPklnIt4lnQlnIt (1)

Where C is the Cost, PL is the labor, Pk is the capital, It is the

investment, Q is the Agricultural product and S is the land.

lnC/lnPL= SL=11lnIt (2)

lnC/lnPM= SM=22lnIt (3)

The equation 2 and 3 shows the share of the cost, labor,

intermediate inputs and product etc.

2.2. Data Collection

The data on the Public investment was collected from the

office of the Hokkaido Development Agency whose office is

located in Sapporo. This data was related to the investment

being made by the central and the provincial Government in

various developmental. The data related to the investment

11

made by the Government is between the period 1963 to 1993.

But since the data before 1963 was not available and the data

of the labor after the period 1993 could not be arranged.

Therefore, using the regression equation the data before 1972

was made available. However, the values before 1972 comes

out to be in negative, which is not natural due to which the

values in parallel were taken. The researcher visited the office

personally and collected the data from there whereas the data

on the production or the output was obtained from the office

of the Bureau of the Statistics, Sapporo. The data obtained

from the office of the Bureau of Statistics is related to the

output or the production of various crops between the period

1950 to 1995. Only secondary data is being used in this

research. Moreover, since the data obtained from the office of

the Hokkaido Development Agency and the Bureau of the

Statistics was in Japanese, therefore, the main contents of the

data were translated from Japanese into English.

The data originally obtained from the office of the Hokkaido

Development Agency was converted in such a manner that the

figures were converted from the nominal to the actual ones by

multiplying the figures of the data with the cost of co-efficient

12

given at the end of the data. For the simplicity of the graphs,

the actual figures were converted once again by making 100

as the base of the total and converting all the figures

accordingly.

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3. Empirical Results

The statistical trends related to the Agricultural management

of Hokkaido was based on the data from 1963 to 1993.

However, the impact assessment of the Public investment for

Agriculture is from the period 1972 to 1993. This is because

of the fact that the project life for each project is different and

also because of the fact that we used lag in our study and the

average lag that came out was nine. Differrent parameters

were used to estimate the data of the public investment for

Agriculture which is given in table 3.1. These parameters are

∂,β and γ etc. It is quite clear from this table that when the

results obtained were negative it means that the inputs were

saved in Agriculture and when it is positive it means that the

inputs were used in Agriculture. Baxter and King (1993)

studied the macroeconomic implications of increases in the

stocks of public goods. They derived the transitional dynamic

response of output, investment, consumption, employment

and interest rates to such policies by calibrating a real

business cycle mode (See Baxter and King 1993).It was also

found that the parameters ∂s, my were not statistically

insignificant and the remaining parameters were found to be

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statistically insignificant at 5% level. The parameters ∂S, βMI

were found to be statistically significant at 5% level.

The parameters ∂s, BMI were found to be statistically

insignificant means that their performance was not

satisfactory and the other parameters which were found to be

statistically significant shows that their performance was

satisfactory. Evidence by Buffs, John and Anwar Shah (1993)

also showed that the impact of the government spending is

contingent on what the government spends its resources on

(See buffs, John and Anwer). There were also three different

R2 values in Table1 because of the fact that we used different

equations in our study.

15

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3.1. Analysis of the Effect on Agriculture

Expenditures of the Agricultural Infra-structure

Construction and Improvement Programmes

The cost reducing effect of the improvement project of

Agriculture and Agricultural village expenditures is shown in

figure 1.The figure clearly shows that the elasticity is positive

and the value of the average elasticity is 0.97. Berndt and

Khaled (1979) found that the apparent presence of the

substantial economies of scale and relatively little

technological progress is important for policy decisions. (See

Berndt and Khaled 1979).

For example when promoting an industry, the government

must decide how subsidies should be divided between the

promotion of scale economies and the promotion of the

technical progress.

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Source: Hokkaido Dev. Agency Sapporo, Japan.

Figure1 GraphShowing theAgricultural Expenditures Cost ReducingEffectof Agricultural ProductionStructureProject

2

(-16.7) D.W.=1.44

-0,4

-0,2

0,0

0,2

0,4

0,6

0,8

1,0

1,2

1,4

1972

1977

1982

1987

1992

1997

2002

2007

2012

2017

2022

2027

2032

2037

2042

2047

2034

RegressionEquation

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3.2. Analysis of the Total Factor Productivity of

Agriculture in Hokkaido (1972-1993)

The figure 3.2 shows the trend of the total factor productivity

between the periods 1972 to 1993 in our study we have

assessed the impact from the period 1972 to 1993 as the effect

or the impact of the project status after a few years after the

project is implemented. However, the original data used in

this study is between the period 1963 to 1993. Barro and Sala-

I-Martin (1981) said that it is conceivable that the relationship

between the public capital and productivity is merely evidence

of a reverse causation from productivity, proxying for per

capita income to the demand for the Public capital (See Barro

and Sala-I-Martin 1989). The following general equation

which shows the total factor productivity was used in our

analysis.

TFP/TFP=∂lnc/∂t+(∂lnc/∂lnQt+∂lnC/∂lnQs)/Q/Q

In the above equation, TFP is the total factor productivity, lnC

is the cost, lnQ shows the product. The land improvement law

was made in the year 1949 due to which the investment

initially started in Hokkaido in this year. Corley and Chive

19

(1973) reported that the relative productivity of the public and

the private investments in less developed countries is

obviously important and topical (See Corley and Chive

1973).The trend clearly shows the that it is increasing with the

passage of time that is between the period 1949 to 1993. It is

quite clear from the figure for the total factor productivity that

the trend of the total factor productivity between the periods

1972 to 1976. From 1976 onwards, the trend of the total

production again increases for three more years from 1976 to

1979. The situation changed after 1979 and it showed a little

downward movement and declined for two more years from

1979 to 1981. From 1981 onwards again it increased for one

year from 1981 to 1982 and then again declined from one year

from 1982 to 1983. The trend of the total factor productivity

again showed an upward movement from 1983 to 1986 and

the decreased for one year from 1982 to 1983. The situation

changed after 1987 and the trend of the total production

showed an upward movement for five years from 1987 to

1992 and then it again showed a downward movement and

declined for one year from 1992 to 1993. The trend showed a

downward movement because of the fact that the weather

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conditions were extremely bad in Japan in the year 1993.

Denison (1974) among others concluded that the economies

of scale are significant reason for the TFP growth in the

United States (See Denison 1974 for details).

21

4. Summary and ConclusionThe productivity of the Public investment is obviously an

important issue. Although the question is topical and

important very few studies have investigated the empirical

evidence.One reason for the paucity of the empirical evidence

in this area may be the lack of good data on public investment.

Government expenditures are generally regarded as major

influence on the pace and pattern of the Agricultural

development. Agricultural research, rural education, extension

of technology to the farming community and development of

a wide range of agricultural activities from fertilizer

distribution to credit are commonly funded by the

Government.

The main objectives of this study is to evaluate the public

investment in the Agricultural sector in Hokkaido. The current

study consists of two major parts.

i. Evaluation and assessment of the public investment for

agriculture in Hokkaido in the period between 1963 to 1995

made by Central government and Hokkaido government by

using production function approach.

22

ii. To undertake the analysis of the data using the total factor

productivity (TFP).

The data on the Public investment was collected from the

office of the Hokkaido Development Agency whose office is

located in Sapporo. This data was related to the investment

being made by the central and the provincial government in

various developmental. The data related to the investment

made by the government is between the period 1963 to 1993.

But since the data before 1963 was not available and the data

of the labor after the period 1993 could not be arranged.

Therefore, using the regression equation the data before 1972

was made available. However, the values before 1972 comes

out to be in negative, which is not natural due to which the

values in parallel were taken. The researcher visited the office

personally and collected the data from there whereas the data

on the production or the output was obtained from the office

of the Bureau of the Statistics, Sapporo. The data obtained

from the office of the Bureau of Statistics is related to the

output or the production of various crops between the period

1950 to 1995. Only secondary data is being used in this thesis.

Moreover, since the data obtained from the office of the

23

Hokkaido Development Agency and the Bureau of the

Statistics was in Japanese, therefore, the main contents of the

data were translated from Japanese into English.

Different type of projects are implemented by the central,

provincial Governments and the corporations. Those projects

which are implemented by the Central government are

directly operated by the central government. Those projects

which are operated by the provincial Government are also

partly subsidised by the central government. In case of the

Projects being implemented by the corporations are directly

related to the Agricultural investment.

The projects operated by the central, provincial and the

corporations include irrigation and drainage, integrated upland

field improvement, farmland consolidation, agricultural land

development, grassland development, farmland improvement,

rural improvement projects, agricultural land conservation etc.

Investment is being made by the Government in the irrigation

and drainage for the construction and the improvement of the

canals or dams. The integrated upland field improvement

projects include land, soil improvement and dressing. The

farmland consolidation projects include paddy field

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improvement such as soil dressing, land readjustment and

farm roads etc. The Agricultural land development projects

deals with the foundation works, reclamation and farmland

reclamation etc. In case of the grassland development public

pasture, construction and improvement, grassland

improvement and livestock basement etc are being

implemented. For the farm roads farm road construction and

improvement except farm roads for paddy field mentioned

under the farmland consolidation projects are being

undertaken. The rural improvement projects include integrated

rural improvement model projects, integrated rural

infrastructure improvement pilot projects etc. In case of the

agricultural land conservation slide prevention, agricultural

land conservation project, water pollution project etc are

included.

The statistical trends related to the Agricultural management

of Hokkaido was based on the data from 1963 to 1993.

However, the impact assessment of the public investment for

Agriculture is from period 1972 to 1993. This is because of

the fact that the project life for each project is different and

also because of the fact that we used lag in our study and the

25

average lag that was calculated that came out was nine. The

data related to the agricultural land in Hokkaido was collected

from the farm economic survey report of the farm economy.

This data consists of the ordinary upland field, land under

permanent crops, temporary meadows and paddy field etc.

The data for all these crops was then aggregated. As was also

mentioned in the methodology section of this thesis two types

of data is being used in this thesis that is the investment data

between the period 1963-1995 for the central, provincial

governments and the corporations obtained from the office of

the Hokkaido Development Agency, Sapporo. The second

type of data is that of the output or the yield data between the

period 1950 to 1995 obtained from the Bureau of Statistics

office in Sapporo.Using the three types of data, evaluation of

the investment made by the Government in various

developmental projects was made. Moreover, evaluation of

the share of each project was also undertaken.The investment

trends showed that with the passage of time the investment

made in various developmental projects in the Government

has increased. Moreover, the share of each project was also

undertaken. The investment trends showed that with the

26

passage of time, the investment made in various

developmental projects by the Government has increased. As

is also quite clear from the results of our analysis that the

elasticity of the cost reducing effect of the investment is

positive until 2033 and the value of the average elasticity is

0.97. Moreover, the absolute value of the elasticity is

decreasing with the passage of time. Therefore, it can be

concluded from this study that the cost reducing effect of the

Agricultural expenditures in Hokkaido is positive between the

period 1972 to 2033 and it will become negative in 2034.

Therefore, if the Government would like that the cost

reducing effect of the agricultural expenditure should be

negative much earlier than 2034, then it is recommended that

the Government should increase the investment. Moreover,

based on all the data presented, it can also be concluded from

this study that in order to improve the economy of Hokkaido

in general and to increase the productivity of the various crops

in specific, the Government should continue to invest. This

investment will not only improve the economy of Hokkaido

and the productivity of the various crops but will also indeed

improve the economic and the social conditions of the people

27

of Hokkaido. Public investment expenditures had a positive

and significant effect on the output growth. While much of the

literature attribute weak growth to the public investment and

social expenditures. For the Hokkaido’s Agricultural

productivity to improve, Government and donors must invest

in programmes and policies that will improve the incentives

and capacity of the farmers to make investments that increase

farm productivity and soil fertility while protecting the

environment. With rapid population growth, agriculture must

rapidly intensify if Hokkaido farmers are to meet the rapid

growth in demand for food and fibre.

28

REFERENCES

AHMED SHAGIL, “Temporary and Permanent Government Spending in an OpenEconomy ”Journal of Economics,Vol 17, 1986, pp.194-224.

ARROW, K.J AND R.C. LIND, “Uncertainity and the Evaluation of the PublicInvestment Decisions”, American Economic Review, Vol.60, pp.364-78.

BARRO AND ROBERT.J, “Economic Growth in a Cross Section of Countries,” TheQuarterly Journal of Economics,1989, pp.407-443.

BARRO, ROBERT. J, “Output Effects of the Government Purchases”, Journal ofthe Political Economy, Vol.83, 1981, pp.1086-1121.

BAXTER, M. AND KING, R.G., “Fiscal Policy in General Equilibrium”, AmericanEconomic Review, Vol.83, 1993, pp.315-334.

BERNDT, E.R AND KHALED, M.S, “Parameter Productivity Meausrement andChoice among Flexible Functional Forms,” Journal of the Political EconomyVol.87, 1979, pp.1220-1245.

BARRO, ROBERT J. AND SALA-I-MARTIN, “Economic Growth in a Cross Sectionof Countries “The Quarterly Journal of Economics, 1995, pp.407-443.

CORLLEY CHAIVI “Relative Effects of the Public and Private investment onGrowth in Economic Community of the West African States M.S Thesis(Normal II Illonois State University 1973

D. BRADFORD, “Constraints on the Government Investment Opportunities andthe Choice of the Discount Rates ,” American Economic Review,Vol.65,Dec.1975, pp.887-899.

DEININGE , KLAMS AND LYNE SQUIRE,“ New Ways of Looking at Old issues,Inequality and mimeo, the World Bank,1996.

DENINSON, E.F, “Accounting for the United States Economic Growth,” 1929-1969, Brookings Institute, Washington, D.C,1974.