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Bang for your buck

How to spend money that’s shifting from aid to investment....

Written by Raghav Gaiha |
July 18, 2009 3:17:33 am

The food crisis that erupted in 2007 had barely eased when early signals of another crisis emanated from the financial market in the United States in the first quarter of 2008. The contagion then spread rapidly to Europe and the developing world with dire warnings of an impending global recession. The G-20 summit in Washington,DC in November,2008,aiming to rescue the global economy from slipping into a recession,was followed by another in London in April,2009,pledging $1.1 trillion to strengthen the global financial system. Whether these pledges will translate into coordinated action and tangible results time alone will tell.

Going by the declaration,the G-8 “L’Aquilla Food Security Initiative” — concluded on July 10,2009 — has committed $20 billion for sustainable agricultural development in the developing world over the next three years. This is hailed as a major initiative to root out global hunger and poverty,prompted mainly by fears that the global slowdown has pushed 90 million people into extreme poverty. But,more importantly,it reflects a shift of emphasis from exclusive dependence on food aid to greater investment in agriculture as key to eradication of poverty — especially in a context of dwindling official development assistance for agriculture since the ‘80s. The bulk of the funding for this new initiative will come from the US and Japan ($3bn-$4bn each),and the rest from Europe and Canada.

While pledges matter — to the extent that they are implemented — the challenge of raising agricultural yields and expansion of productive employment opportunities in rural areas,where a large majority of the poor live,is a daunting one. Even if the flow of resources to agriculture is substantially enhanced,much will depend on how these resources are spent. Recent research conducted by IFPRI and World Bank researchers and by one of us offers useful insights.

A study of 10 Asian countries (K. Imai,R. Gaiha and G. Thapa: “Supply Response to Changes in Agricultural Commodity Prices in Asian Countries”,2008) confirms a strong positive yield response to higher prices. However,there is considerable variation in the strength and speed of yield responses of different commodities. For example,a one per cent increase in own price results in a 0.25-0.31 per cent increase in yields (per hectare) with a one year lag for maize,wheat and rice,while the response is weaker for fruits and vegetables. The yield response of oilseeds is stronger in the same year. Higher oil prices,by contrast,have a negative effect on yields of most commodities. Moreover,marketed surplus increases more than proportionately to increases in output even among smallholders. Additional investments in market facilities are pro-poor,as sales of the poorer farmers increase proportionately more than sales of wealthy farmers. The policy insight,therefore,is that remunerative prices to smallholders would ensure a larger market supply.

Other priorities in public expenditure are delineated below mainly for illustrative purposes.

The highest return to an additional rupee spent is in research and development (Rs 13.45),followed by roads (Rs 5.31) and then irrigation (Rs 1.36). However,the number of poor reduced per million spent is highest in roads (124 persons),followed by R&D (85 persons). Somewhat surprisingly,the same investment in irrigation has a relatively small poverty reduction effect (10 persons). By contrast,soil and water conservation might have a relatively small return per rupee spent (96 paise) but a moderate poverty reduction effect per million (23 persons).

Thus China’s government spending on rural infrastructure (eg,roads,electricity,and telecommunications) substantially reduces poverty and inequality through improved opportunities for non-farm employment and higher rural wages. Low-quality (mostly rural) roads show returns that are four times higher than those for high-quality roads.

While generalisations are risky,the perspective sketched here underscores a cautious response to the media hype about the “L’Aquila Food Security Initiative”. Whether higher commitments for agricultural development will trigger a matching response from developing countries is moot. Even if budgetary outlays are influenced appropriately,it would be naïve,if not altogether unrealistic,to assume that the allocations for rural infrastructure would be governed by contextual priorities.

As an illustration,if the financing of rural infrastructure proposed in the UPA budget for 2009-2010 is diluted by the priority assigned to subsidising food consumption of BPL households under the (likely) Food Security Act,there is a real risk that the one important lesson reflected in the “L’Aquila Initiative” would be swept aside with little hope of a sustainable reduction in poverty.

The writer is at the Faculty of Management Studies,University of Delhi. This article was co-written by Vani S. Kulkarni,who is in the sociology department of Harvard University express@expressindia.com

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