Investment to Support Poverty Reduction Shenggen Fan Director Development Strategy and Governance Division IFPRI Wednesday, January 02, 2019

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 2

Composition of Total Expenditure (%) Page 3

Agriculture Expenditures Page 4

Agricultural Spending in Africa Page 5

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 6

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 7

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 8

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 9

Returns of Public Investment in China, 2000 Page 10

Returns in Poverty Reduction in India Page 11

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 12

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 13

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 14

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. Page 15