Wednesday, April 19, 2023

Investment to Support Poverty Reduction

Shenggen FanDirector

Development Strategy and Governance Division IFPRI

Page 2

Outline of Presentation

• Government Spending in Agriculture• How to Mobilize Resources to Support

Agriculture and Poverty Reduction• How to Allocate Resources• How to Improve Efficiency of Public

Resources

Page 3

Composition of Total Expenditure (%)

1980 1990 2004 1980 1990 2004 1980 1990 2004 Agriculture 7.0 5.5 5.3 14.9 12.3 7.4 8.0 2.1 2.5

Education 14.4 14.5 15.5 13.8 17.4 11.6 10.4 7.9 14.2

Health 4.9 4.5 7.1 5.3 4.3 3.6 5.8 6.1 8.0

Infrastructure 11.0 4.5 5.8 11.7 5.2 4.0 6.8 2.6 2.3

Social Security 2.9 2.5 2.8 1.9 2.4 3.1 23.6 21.8 35.8

Defense 19.7 17.1 6.7 17.6 12.9 8.2 6.1 5.0 3.9

Total 100 100 100 100 100 100 100 100 100

Sub Saharan Africa Asia Latin America

Page 4

Agriculture Expenditures

As percentage of Ag GDP

0.00

2.00

4.00

6.00

8.00

10.00

12.00

14.00

16.00

AFRICA ASIA LAC TOTAL

1980

1990

2000

2004

Page 5

Agricultural Spending in Africa

Agricultural spending as a % of total (2005)

0

2

4

6

8

10

12

14

16

18

20B

otsw

ana

Bur

kina

Fas

o

Cam

eroo

n

Cot

e d'

Ivoi

re

Egy

pt, A

rab

Rep

.

Eth

iopi

a

Gha

na

Ken

ya

Mal

awi

Mal

i

Mor

occo

Nig

eria

Tog

o

Tun

isia

Uga

nda

Zam

bia

Zim

babw

e

(%)

Page 6

Sources of Public Spending

Domestic sources• Savings• Tax revenues (income, corporate, value-added taxes)• Domestic nontax revenues (such as user fees)

Foreign sources• Foreign direct investment (FDI)• Borrowing• Debt relief• Foreign aid (official development assistance)

Page 7

Domestic Sources

• Different financing mechanisms have different implications on efficiency and poverty reduction

• The most effective way to boost a country’s resource mobilization effort is to improve its tax system

• A simple, transparent, and direct taxing system is often more efficient and equitable than a more complex, indirect system

• No single taxing system is best: each system has to be designed to fit the country’s economic, social, legal, and cultural context

Page 8

Foreign Aid

• The allocation of aid among different sectors has to be aligned with national development priorities.

• Too much foreign aid can lead to other dangers. • Move from project/program support to budget

support. • National capacity in setting spending priorities is

crucial to improving the effectiveness of budget support.

• Donors may need to earmark special funds to build up the long-term capacity for formulating and implementing development strategies and public spending programs.

Page 9

Allocation of Public Investment: Evidence

• Returns to public spending vary drastically across different types of investment and regions even within the same country.

• Agricultural research, education, and rural infrastructure are the three most effective public spending items in promoting agricultural growth and poverty reduction.

• Limited evidence from China and Uganda also indicates that it is often the low cost types of infrastructure that may have highest pay off per unit of investment in growth and poverty reduction.

Page 10

Returns of Public Investment in China, 2000

Sources: Fan, Zhang and Zhang (2004)

Coastal Central Western Average Returns to total rural GDP yuan per yuan expenditure R&D 5.54 6.63 10.19 6.75 Irrigation 1.62 1.11 2.13 1.45 Roads 8.34 6.90 3.39 6.57 Education 11.98 8.72 4.76 8.96 Electricity 3.78 2.82 1.63 2.89 Telephone 4.09 4.60 3.81 4.22 Returns to poverty reduction no. of poor reduced per 10,000 yuan expenditure R&D 3.72 12.96 24.03 10.74 Irrigation 1.08 2.16 5.02 2.31 Roads 2.68 8.38 10.03 6.63 Education 5.03 13.90 18.93 11.88 Electricity 2.04 5.71 7.78 4.85 Telephone 1.99 8.10 13.94 6.17 Poverty loan 3.70 3.57 2.40 3.03

Page 11

1960s 1970s 1980s 1990s

Number of Poor reduced per Million Rps Spending

Roads 1272.29 1345.68 295.43 334.98Education 411.03 468.65 447.21 108.75Irrigation Investment 182.73 125.49 197.27 66.91Irrigation Subsidies 149.11 67.51 113.50 n.s.Fertilizer Subsidies 180.88 180.88 48.14 23.67Power Subsidies 78.68 52.31 82.52 26.9Credit Subsidies 256.6 92.54 258.51 41.73Agricultural R&D 207.30 325.57 345.24 323.30

Returns in Poverty Reduction in India

Page 12

Conclusions: Mobilizing Support

• Developing countries need to increase their tax revenues by reforming their tax systems, so the dependence on foreign aid can be reduced.

• A simple, transparent, and direct taxing system is often more efficient and equitable

• Decentralization of government powers improves revenues as local authorities have better and more detailed knowledge of local conditions.

• There should be an incentive structure for the subnational entities to raise more revenues by receiving a certain percentage for local public provision and administration.

Page 13

Conclusions: Setting the Right Priorities

• Different spending priorities are needed during different stages of development; “one-size-fits-all” strategies do not work.

• During the first phase, spending should focus on reducing widespread poverty through broad-based economic growth that reaches rural areas.

• In subsequent phases, more direct attention should be focused on lagging sectors and regions, as well as on poverty at the community and household levels in order to reduce the poverty and income inequalities that arise and persist despite reform.

Page 14

Conclusions: Regional Variation

• Most Sub-Saharan African countries are still in the first phase of development. Investments in support of economic growth remain central to reduction of their mass poverty. Public investment in infrastructure and agriculture are the main areas needing attention.

• Countries such as China, India, Vietnam, and Thailand have successfully completed the first phase of poverty reduction and now need to begin to address regional inequities and poverty issues at the household level.

Page 15

Reforming Governance and Institutions

• Reforms in institutions and governance related to public spending are urgently needed.

• Greater transparency in decisionmaking and effective monitoring system can prevent corruptions

• A decentralized, participatory, and evidence-driven governance structure is necessary for efficient and pro-poor government spending.