Optimizing Public Spending on Food and Agriculture

The Food and Agriculture Organization of the United Nations (FAO) and its partners estimated in their 2022 edition of The State of Food Security and Nutrition in the World that, globally, public policy support to food and agriculture averaged almost USD 630 billion a year from 2013 to 2018. This report and others published that year recommended redirecting or “repurposing” some of these public resources toward investments and incentives that encourage greater productivity, sustainable production practices, and healthy dietary choices to achieve win win-win gains for people, the planet, and prosperity. However, there has been a lack of country-specific studies showing how such repurposing can be done in practice for such win-win-win gains to materialize.

What Is There to Repurpose in Lower-Income Countries?

Transforming the policies that underpin agricultural transformation needs to be fast-tracked in many developing countries. Both low-income countries (LICs) and lower-middle-income countries (LMICs) are still a long way from fully transforming their food and agricultural sectors to ensure food security and nutrition today and tomorrow.

For example, there is evidence that many countries in sub-Saharan Africa still rely heavily on the production of one crop for their food security, which largely determines the total caloric intake of the rural population. Policy-makers in this region are faced with a complex and challenging dilemma to achieve notable agricultural transformation results—not only in the areas of agricultural productivity growth, agricultural and national economic growth and employment, and food-industry development, but also in terms of poverty, hunger, food insecurity, and malnutrition reduction.

Agriculture in this part of the world still represents the lion’s share of total output and jobs. FAO found that industrialization is not yet happening in most African countries, and according to the latest estimates, 23.9% of sub-Saharan Africans are undernourished, and 72.2% of them do not have sufficient income to cover the cost of a healthy diet. Sadly, these percentages are markedly higher than those of any other region in the world.

There is now global consensus that repurposing public policy support could help transform agriculture in more equitable and sustainable ways.

There is now global consensus that repurposing public policy support could help transform agriculture in more equitable and sustainable ways. In practice, however, in the case of LICs—notably in sub-Saharan Africa, but also perhaps in most LMICs—governments do not support food and agriculture enough through their expenditure.

Another FAO study sheds light on spending on food and agriculture in sub-Saharan African countries. It found that very few met the Maputo target of allocating at least 10% of their national budget to food and agriculture—a political pledge under the Comprehensive Africa Agriculture Development Programme.

An indicator called the “nominal rate of assistance” also exposes a clear reality. This indicator measures transfers exclusively made to farmers arising from price incentives generated by trade and market policies and fiscal subsidies. Specifically, it sums up the price gap at the farm gate (i.e., the difference between the producer price and the undistorted international reference price) and fiscal subsidies to producers (usually commodity specific). It has been shown that LICs and LMICs have historically protected poor consumers using trade and market policies that keep domestic prices low, implicitly penalizing the farming sector (Figure 1). Not only do LICs and LMICs not support their agriculture sectors enough, but their trade and market policies discourage farmers from boosting their agriculture productivity.

Optimizing the modest budget and policy support that governments in these countries provide to their food and agriculture sector becomes imperative under such circumstances, should agricultural transformation be able to progress rather than stagnate.

Is Optimizing the Budget the Agricultural Policy Breakthrough We Need to See?

The budget that governments allocate to the food and agriculture sector is the backbone of agricultural policies. In LICs and LMICs, where the fiscal constraint is binding, transforming agricultural policies will unavoidably require intra-sectoral reallocations in the budget allotted to the food and agriculture sector. These intra-sectoral budget allocations must be designed to achieve concrete agricultural transformation objectives, using a solid methodological foundation.

The budget that governments allocate to the food and agriculture sector is the backbone of agricultural policies.

Through its Monitoring and Analysing Food and Agricultural Policies (MAFAP) program, FAO has been taking the global consensus on repurposing public support in food and agriculture to the work at country level. Through this program, FAO works with governments in several sub-Saharan African countries to measure, monitor, and analyze their public expenditures on food and agriculture as well as to generate scenarios to optimize their budget on food and agriculture to make the most out of the domestic resources now allocated to support the sector, factoring in fiscal constraints to government spending.

FAO experts have developed a policy modelling optimization tool that—following the principles of Pareto optimality—allows a country’s public budget to become optimal when policy-makers reach a compromise to reallocate it in a way that achieves policy objectives. At this point, the budget is optimal because it is not possible to improve on at least one policy objective without worsening any of the others. This tool was initially developed to consider three policy objectives, which can be seen as a springboard for inclusive agricultural transformation: maximization of agrifood GDP, maximization of off-farm job creation in rural areas, and minimization of rural poverty. Subsequently, the tool was extended to include minimizing the cost of a healthy diet as a fourth policy objective. Through the MAFAP program and the use of this policy optimization modelling tool, governments across Africa are finding that the potential results and benefits from optimizing their budget are not to be overlooked.

Potential Payoffs From Optimizing Budgets

Research from one of the background papers in The State of Food Security and Nutrition in the World 2024 (see analysis around Box 11 on p. 100 of the report) helps build the case for optimizing budget allocations in six sub-Saharan African countries: Burkina Faso, Ethiopia, Ghana, Mozambique, Nigeria, and Uganda. The aforementioned policy optimization modelling tool was used to build a scenario whereby public spending across different policy support measures in the crops and livestock sectors is optimized for the period 2025–2030 to maximize agrifood GDP, maximize off-farm jobs in rural areas, minimize the incidence of rural poverty, and minimize the cost of a least-cost healthy diet. The optimized policy support measures included extension services, fertilizer subsidies, investment in irrigation, investment in mechanization, investment in rural electrification, investment in rural roads, research and development, and seed subsidies.

The differences in the effectiveness, coverage, and unit cost of these policy support measures across the six countries were considered. In this scenario, the resulting budget is optimal because, given a set of preferences, the best possible outcome for the four objectives is obtained subject to a set of economy-wide constraints.

The results from this optimization scenario were compared with a business-as-usual scenario in which the current budget continued to represent the same share of GDP and is allocated without relative changes across the different policy support measures from 2025 to 2030. The results paint a dissimilar picture to today’s budgets in the six countries, as these would have to be reallocated very differently to help their governments improve on the four objectives (see Figure 2). For example, several countries would have to spend less on irrigation (Ghana, Ethiopia, Nigeria, and Uganda) or on seed subsidies (Burkina Faso and Ghana) on average during the 2025–2030 period, whereas other countries would have to step up spending on seed subsidies (Ethiopia and Mozambique) or mechanization (Burkina Faso, Ghana, and Nigeria). Interestingly, extension services would need to be prioritized significantly in some countries (Burkina Faso and Nigeria). The smaller the required budget reallocations (e.g., Uganda), the closer the country is to the optimal budget allocation.

The optimal budget reallocations, irrespective of their size in each country, can significantly increase the value for (public) money. At the country level, they would result in considerable efficiency gains in agrifood output, tens of thousands of off-farm jobs would be created in rural areas, millions of people would be lifted out of poverty, and millions could, for the first time, afford a healthy diet (Table 1). Gains would be seen immediately in 2025, the first year of the budget optimization. Impressive gains would also build up over time up until 2030—except in Uganda, where the required budget reallocations would be the most modest, as the current budget allocated to the crop and livestock sectors in this country seems closest to the optimal allocation. Agrifood GDP would be 8% higher in Burkina Faso and Ghana, or even 11% higher in Nigeria in 2030, compared with the situation where the budget had not been optimized.

All told, across the six countries, almost 1 million off-farm jobs would be created in rural areas, 2.8 million people would be lifted out of poverty, and 16 million additional people could afford a least-cost healthy diet by 2030, all with the same budget. In other words, optimally repurposing the budget allocated to the agriculture and livestock sectors in these six sub-Saharan African countries would have a substantial payoff.

A Feasible Way for Governments to Transform Policies

Repurposing and optimizing government support on food and agriculture are doable and desirable. Countries stand to gain quadruple wins for agrifood GDP, off-farm jobs, more people able to afford a healthy diet, and poverty reduction.

FAO, through its MAFAP program, supports governments in doing this by developing and analyzing scenarios to reallocate their public spending optimally across policy support measures in the food and agriculture sector while respecting the World Trade Organization’s rules for price incentives and fiscal support. This is a feasible pathway for LICs and LMICs to transform policies and agriculture in effective and socially inclusive ways within the means of the public purse.

The results of this technical support are informing several national development plans, sectoral investment plans, and budget setting in sub-Saharan Africa, but the way forward for FAO is to scale up this policy innovation. In practice, the actual reallocations of the budget will, of course, face challenges—not least the political economy involved in moving public resources across different support measures and subsectors in food and agriculture.

The FAO policy modelling optimization tool was already impacting policy in 2023.

This challenge is being overcome not only by developing optimization scenarios together with policy-makers but also by involving all relevant stakeholders. It has been recognized that the FAO policy modelling optimization tool was already impacting policy in 2023. Following also its positive reception in the MAFAP program’s target countries in 2024, its developers are now enhancing the tool to include climate- and biodiversity-related policy objectives. This will allow FAO to support governments in their efforts to spend smarter to transform agriculture while mitigating and adapting to climate change and reversing environmental degradation.

Marco V. Sánchez is Deputy-Director of the Agrifood Economics and Policy Division at FAO.

Source: Food and Agriculture Organization of the United Nations (FAO).

This article is published with permission and under a Creative Commons Attribution 4.0 International License.