Returns to Spending and Optimal Budget AllocationReturns to Spending and Optimal Budget Allocation

Ronald ManganiRonald Mangani

University of MalawiUniversity of Malawi

Presented at the National Symposium on Presented at the National Symposium on

““Eight Years of FISP - Impacts and What Next”Eight Years of FISP - Impacts and What Next”

Lilongwe, 14 - 15 July 2014Lilongwe, 14 - 15 July 2014__________________________________________________________________________

 

Key MessagesKey Messages________________________________________________________________________________________________________________________

o Poverty reduction is the primary goal of GoMPoverty reduction is the primary goal of GoM

o Social spending is more effective for poverty reduction than Social spending is more effective for poverty reduction than economic spendingeconomic spending

o Social welfare aspect of FISP is most critical by design, but Social welfare aspect of FISP is most critical by design, but compromised by spending under MoAcompromised by spending under MoA

o FISP spending under Social Protection is more appropriateFISP spending under Social Protection is more appropriate

Context: The GoM Poverty Reduction GoalContext: The GoM Poverty Reduction Goal________________________________________________________________________________________________________________________

• GoM set poverty reduction as its primary goal (MGDS, Vision 2020)o Growth = medium for poverty reduction largely via economic sectoro Development = medium for poverty reduction largely via social sectoro But there is a thin line:

FISP food security better nutrition health development

FISP more output growth

• Do growth and development achieve comparable impacts on poverty?o Effective poverty reduction entails discriminatory public spending

But Pareto-Optimalo Growth more utilitarian: no regard for income/wealth inequalitieso Development more egalitarian: directly pro-poor & pro-vulnerable

Context: The GoM Poverty Reduction GoalContext: The GoM Poverty Reduction Goal________________________________________________________________________________________________________________________

• GoM budget = key tool for achieving the poverty reduction goal

• Functional classification of the GoM Budget

o Economic spending = source of most growth (utilitarian)

o Social spending = source of most development (egalitarian)

o General spending = “unnecessary necessity”• But some of it directly pro-growth and pro-development (e.g., security)

How Spending is Functionally Classified MattersHow Spending is Functionally Classified Matters________________________________________________________________________________________________________________________

• Unequivocal: Minimise general spending, maximise social and economic spending

How Spending is Functionally Classified MattersHow Spending is Functionally Classified Matters________________________________________________________________________________________________________________________

• FISP has both social and economic elements (WB PER 2013)

• How responsive is poverty reduction to social and economic spending?

Proposition:• Poverty reduction requires more social spending than economic spending

– (direct/first round effects on poverty; more “developmental”)

Proposition:• Poverty reduction requires more social spending than economic spending

(direct/first round effects on poverty; more “developmental”)

Propositions:•From perspective of poverty reduction, social welfare aspect of FISP more important than productivity aspect (ref: social spending more poverty-reducing)

•From perspective of programme design (“it’s a subsidy!”), welfare aspect of FISP more important that productivity aspect (“targeting vulnerable, resource-poor)

•FISP welfare aspect thwarted by allocating resources to Agriculture instead of Social Protection (scale; inter-ministerial politics)

Standard Measures of Returns to Spending May Miss the PointStandard Measures of Returns to Spending May Miss the Point______________________________________________________________________________________________________________

BCA measures may not be aligned to national goalBCA measures may not be aligned to national goal• Generally less than impressive results of BCA for FISP; better with Generally less than impressive results of BCA for FISP; better with

improved tools (e.g. Ricker-Gilbert; Chirwa & Dorward)improved tools (e.g. Ricker-Gilbert; Chirwa & Dorward)

• NPV, BCR, FE measures usually utilitarian: not focused on poverty NPV, BCR, FE measures usually utilitarian: not focused on poverty

• Need to emphasise the distribution of benefits from public spendingNeed to emphasise the distribution of benefits from public spending

Benefit Incidence Analysis: Complementary measure of appropriatenessBenefit Incidence Analysis: Complementary measure of appropriateness• Allows assessment of distribution of benefits against program objectivesAllows assessment of distribution of benefits against program objectives

• Allows objective comparisons of distribution of benefits across programsAllows objective comparisons of distribution of benefits across programs

Consider BIA based on IHS3 (WB PER, 2013)Consider BIA based on IHS3 (WB PER, 2013)• Has FISP delivered on its key (social welfare/development) objectives?Has FISP delivered on its key (social welfare/development) objectives?

• Are allocations to Education and FISP comparably developmental?Are allocations to Education and FISP comparably developmental?

IHS3 BIA: DISTRIBUTION OF FISP NET SUBSIDY FISP Net Subsidy share, Rural vs. Urban (%)

• Subsidy pro-poor in urban: pro-policy• Subsidy mostly favors middle income households in rural areas: poor and non-

poor households get equal shares: generally anti-policy

Hence re-design program to address poverty reduction objective effectively

IHS3 BIA: DISTRIBUTION OF FISP NET SUBSIDY

• Subsidy pro-poor in urban: pro-policy• Subsidy mostly favors middle income households in rural areas: poor and non-

poor households get equal shares: generally anti-policy• Benefits by gender fairly balanced across all wealth levels: anti-policy???

Hence re-design program to target more female-headed???? Maybe No!!!

Distribution of FISP Net Benefits (%), by Wealth and Selected Characteristics

Poorest Quintile

2nd Quintile 3rd Quintile 4th Quintile Richest Quintile

All households

Malawi 17.6 21.0 22.3 21.5 17.6 100 Urban 23.3 24.6 22.8 14.8 14.6 100 Rural 17.2 19.9 22.4 21.4 19.2 100 Gender of head Male-headed 17.2 20.8 22.5 21.8 17.6 100 Female-headed 18.7 21.4 21.9 20.6 17.5 100 Rural Region North 21.3 19.6 20.5 19.9 18.6 100 Center 16.7 21.3 22.9 20.9 18.3 100 South 15.5 19.2 21.5 22.9 20.8 100

Source: IHS3 Survey data

IHS3 BIA: DISTRIBUTION OF NET GOM SUBSIDY IN EDUCATION (TO COMPARE)

Distribution of GoM Subsidy by Wealth, by Level (%)

• Subsidy progressive in primary education – the poorest households capture a greater share: pro-policy

• Subsidy regressive in secondary education: anti-policy• Tertiary education is highly regressive: 82% of subsidy to the rich – anti-policy• The rich claiming far more of the education subsidy that of the FISP subsidy

Hence re-structure education sector financing in secondary and tertiary!!!

Implications for Optimal GoM Budgeting________________________________________________________________________________________________________________________

• Allocate FISP (or similar subsidy) resources to Social ProtectionSubsidy: intervention against market failures

for distributive justice

is a “social sector” responsibility

productivity important, but not key focus

Hence, in FISP:De-emphasise productivity (efficiency; growth) – most BCA

Emphasise effectiveness (distributive justice; development) – e.g. BIA

Evaluate outcomes against other “subsidies”; comparable smallholders

• Prioritise & fund productivity initiatives of MOA regardless of FISPProductivity: largely a functional markets concept

certainly a MOA duty with/without FISP

Implications for Optimal GoM Budgeting________________________________________________________________________________________________________________________

• Proposed redirection of “FISP” allocations addresses key challenges

Forms basis for scale-down to “true FISP” for target beneficiaries

reduces pressure on resources

Restores MoA attention to productivity & growth (not social welfare) directly benefits FISP & entire agricultural sector

scale down frees resources to MOA core functions

Brings separation between management and technical advisory roles

Social Protection directly on board as program managers

MOA focuses on providing critical technical advice

End

Thank You