Review of Public Expenditures in Agriculture

REVIEW OF PUBLIC EXPENDITURES IN AGRICULTURE:

AN ANNOTATED CHECKLIST

1.INPUT SUBSIDIES: Typically intended to induce the use of inputs perceived as conducive to increased productivity (fertilizers, pesticides, diesel fuel). Administered in a variety of ways, including through specialized credit programs, support to manufacturers and distributors, or government marketing facilities. Leads to inefficiency through excessive use and rationing. Income effects of the subsidy are often concentrated among larger farmers.

2.OUTPUT SUBSIDIES: Often intended to promote production of “strategic commodities” (food grains, high-value export crops). Administered in a variety of ways, including government acquisition at pre-set prices, special credit programs, and direct payments. Inefficiency losses are caused by over-production and distorted crop composition. Equity effects are often negative as larger farmers gain more.

3.CREDIT SUBSIDIES: Already mentioned as a common transmission mechanism for input or output subsidies, but also a general means of providing support to agriculture, or to agricultural investment. Typically administered through state-owned banks. Directed credit programs has often incurred large losses, with the benefits (of both the interest rate subsidy and the unpaid principal) accruing mostly to larger landowners). Excessive capital intensity is a common outcome of such programs when they focus on medium and longer term credit. The losses of state banks are eventually covered by the public budget.

4.PARASTATAL AGRICULTURAL ENTITIES: Such entities were more common in the 1970s and 1980s, but are still quite prevalent. They often handle functions that are, in principle, private goods (marketing of inputs and outputs, livestock enterprises, plantation, fish ponds, storage). A combination of monopoly privileges, lack of hard budget constraints, political interference, and public sector personnel policies, leads to overstaffing, non-business-like decision making, and losses. The fiscal burden is sometimes hidden as the losses are reflected in unpaid debts to state banks.

5.COOPERATIVE AGRICULTURAL SYSTEMS: Although not state-owned, and nominally private (farmer-owned) entities, the systems (composed of several tiers) are often not a bottom-up organization. Rather, they have been promoted and supported by the state, and act de-facto as a state tool for administering various agricultural policies. As they suffer from some of the same deficiencies as state enterprises, they tend to accumulate losses that are covered directly or indirectly (e.g., through the banks) by the fiscal budget.

6.AGRICULTURAL VETERINARY SERVICES: Various regulatory and health functions with respect to livestock management are clear public sector functions due to the risks to human health, and the potential for epidemics among livestock. However, opportunities for contracting out some services, privatizing other aspects, and transferring some functions to producer associations can reduce considerably the fiscal burden.

7.AGRICULTURAL EXTENSION SYSTEMS: While the transmission of information has many public good aspects, 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., under external donor projects) personnel tends to grow, but when budgets shrink, most of the available budget is spent on salaries and relatively little on field operations. A bias towards larger farmers has been observed in many systems.

8.IRRIGATION AND DRAINAGE SERVICES: These sectors are a significant item of public spending in many semi-arid and irrigation-dependent countries. There are many market failures related to water management, justifying public sector involvement at various levels. Cost recovery is politically unpopular, implying a large public subsidy, often accruing inequitably. Bureaucratic and political considerations often result in neglect of operation and maintenance, which lead in turn to otherwise-avoidable costly “rehabilitation”. The lack of pricing of water leads also to wasteful use, and inefficient cropping patterns.

9.AGRICULTURAL RESEARCH SYSTEMS: Basic research and many aspects of adoptive research are classical public goods, and deserve public support. However, the organization and management of public research has often been deficient and not cost effective (e.g., “disconnect” between priority needs and focus of research, imbalance between personnel and analytical budgets). There are some successful experiences in increasing the cost effectiveness of research systems (e.g., “competitive grants”, greater partnership with private sector and non-government organizations).