The impacts of public investment in and for agriculture

In light of a reinvigorated policy orientation toward agriculture in developing countries following recent dramatic developments affecting food prices and agricultural land use, public resource allocation decisionmakers ought to have access to the existing evidence from academic research on the impact of public investments related to and in support of agriculture. The objective of this review paper is to synthesize available knowledge on the impact of public investments in and for agriculture in developing countries and to draw conclusions from this body of work to help determine policy and future research directions. The potential for agricultural investments to have significant and observable effects on health and nutrition is great, through access to own-produced food, by lowering food prices, and by raising incomes with which to buy more and more nutritious food and health services. An emerging literature on the cost-effectiveness of biofortification programs reveals strong impact of these interventions. For example, the internal rate of return (IRR) of biofortification investments range from 66 to 133 percent for golden rice in the Philippines, and the costs of averting loss of disabiliy-adjusted life years (DALYs) through zinc and iron biofortification of wheat and rice in many cases meet standards of high cost effectivess. Analysis has shown the importance of public investments in agricultural research and development, irrigation, and extension in the growth of production. But the contributions of different types of agricultural investment can strongly differ. Across many studies undertaking such comparisons, based on various methodologies, R&D investments often have the single largest effect on sectoral growth— even more so when considering long-run effects. R&D investment returns in terms of poverty reduction are, across several studies also not only often stronger but also more stable than that of other types of agricultural public spending. Just as the effect of different functional investments in agriculture may vary in magnitude, agricultural public spending might also differ by the commodity being targeted. Ex-ante analyses show stronger economywide effects of investments in staple crops than in export crops, through the formers’ stronger cross-sectoral forward and backward linkages and employment effects. Rather than considering the components of agricultural spending, such as R&D, irrigation, or other functions, or the investments specifically targeted at certain commodities, some studies have explored how effective agricultural expenditure in its aggregate is at increasing welfare and development. In contrast to analyses of investments in particular elements in agriculture, in the case of studies of aggregate agricultural spending the picture is more mixed, suggesting that policy should ultimately target productive components of agricultural expenditures, and that increasing agricultural spending without attention to heterogeneous impacts of different types of agricultural investments may not bring about the strongest outcomes. 1 Tewodaj Mogues and Bingxin Yu are Research Fellows in the Development Strategy and Governance Division of the International Food Policy Research Institute; Shenggen Fan is the Director General of IFPRI; and Linden McBride is a PhD Student in the Dyson School of Applied Economics and Management at Cornell University. For any questions or comments, please contact T.Mogues@cgiar.org. The views presented in this paper are those of the authors and do not necessarily represent the official view of FAO or its member countries. Public investment designed to provide public goods can increase the profitability of private investment, but can also have crowding-out effect on private investment, such as through macroeconomic effects. The net effect on private investment may thus be positive or negative. The existing evidence on this is strongly mixed in thus inconclusive, but is also only limited to a specific developing region, and thus need to be better understood in different settings. JEL Codes: H4, H5, O1, O13, Q1.