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Workshop on SDG Indicator 2.a.1, Turin, Italy, March 2018 - Compilation of the indicator, rationale and use

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Workshop on SDG Indicator 2.a.1, Turin, Italy, March 2018 - Compilation of the indicator, rationale and use

  1. 1. Workshop on SDG Indicator 2.a.1; Turin, Italy, 27-28 March 2018 COMPILATION OF THE INDICATOR, RATIONALE AND USE Sangita Dubey, Senior Statistician/Team Leader, FAO Titus Mwisomba, Manager of Agriculture Statistics, Tanzania Bureau of Statistics Giulia Gonnella, Statistician, FAO
  2. 2. SDG INDICATOR 2.A.1. FORMULA AOI = Agriculture share of GDP based on Governance Finance Statistics methodology The Classification of the Functions of Government based on System of National Accounts International Standard Industrial Classification of All Economic Activities Agriculture share of government expenditure
  3. 3. TABLE A: Government expenditure on agriculture and related functions General Government Central Government State Government s Local Government s Consolidatio n Column General Government4 Budgetary Central Government Extrabudgetar y Units Social Security Funds Consolidation Column Central Government3 Functional classification2 (1) (2) (3) (4) (5) (6) (7) (8) (9) 7 EXPENDITURE (TOTAL OUTLAYS) 704 Economic Affairs 7042 Agriculture, forestry, fishing, and hunting → Recurrent → Capital 70421 Agriculture (crops and animal husbandry) → Recurrent → Capital 70422 Forestry → Recurrent → Capital 70423 Fishing and hunting → Recurrent → Capital 7048 R&D Economic Affairs 70482 R&D Agriculture, forestry, fishing, and hunting 705 Environmental protection 7054 Protection of Biodiversity and Landscape → Recurrent → Capital 7055 R&D Environmental Protection → Recurrent → Capital 7z1 Other, please specify: ________________________ 7z2 Other, please specify: ________________________ Central government expenditure on agriculture Total central government expenditure GEA Questionn aire: List of COFOG categories FAO-GOVERNMENT EXPENDITURE ON AGRICULTURE (GEA) QUESTIONNAIRE & 2.a.1 2.a.1 numerator components from the GEA questionnaire.
  4. 4. INDICATOR 2.a.1- FAO CALENDAR May: dispatch GEA Questionnaire June-Aug: Review, validate, process GEA data Sept: Compile GEA & 2.a.1 indicators and media release Oct-Nov: FAOSTAT and media release Feb-Mar: Submit 2.a.1 indicator & analysis for SDG Global report
  5. 5. FAOSTAT: HTTP://WWW.FAO.ORG/FAOSTAT/EN/#DATA/IG
  6. 6. FAO STATISTICS DIVISION WEBPAGE HTTP://WWW.FAO.ORG/ECONOMIC/ESS/INVESTMENT/EXPENDITURE/EN/
  7. 7. Top 10 in agricultural share of public expenditures HTTP://WWW.FAO.ORG/ECONOMIC/ESS/INVESTMENT/EXPENDITURE/EN/
  8. 8. SDG REPORT 2017 / RAPPORT SUR LES ODD 2017 HTTPS://UNSTATS.UN.ORG/SDGS/REPORT/2017/GOAL-02/
  9. 9. RATIONALE FOR GOVERNMENT EXPENDITURES (1) Negative externalities Government expenditure on agriculture and its corresponding programs are essential to address market failures, and to improve equity by redistributing income and other resources. • Markets fails when the private sector is unable to reach an efficient outcome, and government intervention helps achieve efficiency. • Market failures occur due to the existence of: negative externalities; positive externalities; public goods; asymmetric information, and market power. Positive externalities Public goods Asymmetric information Market Power
  10. 10. RATIONALE FOR GOVERNMENT EXPENDITURES (2) Positive externalities Public goods Asymmetric information Market Power A negative externality occurs when the activity of a producer or consumer imposes a cost on others who do not benefit from the activity, and cannot recoup the costs they incur. For example, farmers that use chemical pesticides in producing irrigated rice create pollution in nearby rivers and streams. This imposes costs on downstream users of the water. Governments can intervene by taxing pesticides producers; imposing quotas on production; or subsidizing farmers to use non-chemical pesticides. Negative externalities
  11. 11. RATIONALE FOR GOVERNMENT EXPENDITURES (3) Negative externalities Public goods Asymmetric information Market Power A positive externality occurs when the activity of a producer (or consumer) provides benefits to others who do not pay for (all) benefits received. A classic example is the knowledge generated by R&D. A farmer that develops natural and low-costs mechanisms to contain pests incurs costs that benefit other farmers for free. This reduces incentives to invest in R&D. Governments typically fund or subsidize such R&D activities, combined with patent and copyright laws. Positive externalities
  12. 12. RATIONALE FOR GOVERNMENT EXPENDITURES (4) Negative externalities Positive externalities Asymmetric information Market Power Public goods are goods and services from which individuals cannot be excluded from consumption (non- excludability in consumption), and the addition of a new consumer has no impact on the amount available for existing consumers (non-rivalry in consumption). Examples include dams that prevent flooding of agricultural land; and rural roads that bring goods to market. Fees typically cannot be charged for use; and voluntary fees result in free-riding due to non-excludability. This results in private markets’ under-investment, requiring government to intervene to finance such goods through tax revenues. Public goods
  13. 13. RATIONALE FOR GOVERNMENT EXPENDITURES (5) Negative externalities Positive externalities Public goods Market Power Asymmetric information occurs when at least one party to two an economic transaction has incomplete information. It becomes a problem when it leads to adverse selection (poor quality output) or moral hazard (“bad” or risky behavior). Insurers of crop insurance set rates at the level of the average farmer, adjusted for risk of pre-harvest loss. If production is highly correlated with skills and expertise, high skilled farmers will opt out of insurance due to its pricing at the average, resulting in lower skilled farmers purchasing insurance (adverse selection). Similarly, insurance may reduce incentives for farmers to protect their crop against pests, disease and other forms of damage (moral hazard). Government solutions by include provision or subsidization of crop insurance programs. Asymmetric information
  14. 14. RATIONALE FOR GOVERNMENT EXPENDITURES (6) Negative externalities Positive externalities Public goods Market power occurs when a producer (consumer) can set market prices higher (lower) than if free competition were possible. One cause is barriers to market entry, often from high fixed costs of production or collusion by producers (monopoly or oligopoly). Shear size of a consumer results in monopsony power, particularly if the consumer acts to prevent competition. In countries with concentrated supermarket chains, monopsony power can result in farmers selling produce at low price, or incurring losses if the chain refuses to buy less than perfect looking products. The “ugly food” movement, by consumers, has been one counteraction. Government advertising campaigns also help, as do laws banning collusion. Asymmetric information Market Power
  15. 15. RATIONALE FOR GOVERNMENT EXPENDITURES – INCOME REDISTRIBUTION (7) • Income redistribution is also a key rationale for government intervention, even when markets are competitive and efficient. • This equity-based rationale takes into account that not all individuals are born into the same situation; nor do they all face the same adversities. • Those born into the poorest circumstances can face a life with inadequate resources for survival and food security. Adverse circumstances, such as illness, injury and disability, can also result in individuals and households facing poor prospects of survival and food security.
  16. 16. RATIONALE FOR GOVERNMENT EXPENDITURES – INCOME REDISTRIBUTION (8) • Human rights is one rationale for income redistribution programs, as is socio-political stability and inter- temporal redistribution. Governments redistribute income through multiple means. Progressive tax systems are a key example. Other include the distribution of food during food shortages (to avoid food riots); input subsidies to poor farmers; subsidies to regulate market prices for key food products; public stockpiling to prevent severe price fluctuations; sensitization campaigns targeted to wealthier consumers and producers to reduce food waste and food consumption during shortages.
  17. 17. INDICATOR 2.a.1 POLICY USE AND INTERPRETATION (1) Consider a country whose central government spends 3.5% of total expenditures, or outlays, on agriculture; and has a sector whose value-added is 3.5% of GDP: 𝑨𝑶𝑰 = 𝐴𝑔𝑟𝑖𝑐𝑢𝑙𝑡𝑢𝑟𝑒 𝑆ℎ𝑎𝑟𝑒 𝑜𝑓 𝐺𝑜𝑣𝑒𝑟𝑛𝑚𝑒𝑛𝑡 𝐸𝑥𝑝𝑒𝑛𝑑𝑖𝑡𝑢𝑟𝑒 Agriculture Value Added as Share of GDP = 3.5 3.5 = 𝟏. 𝟎𝟎 AOI =1 means neutrality in the central government to the agricultural sector relative to agriculture’s economic contribution.
  18. 18. INDICATOR 2.a.1 POLICY USE AND INTERPRETATION (2) Botswana in 2015: central government expenditures of 50.563 billion BWP (Botswana Pula), of which 2.099 was on agriculture; GDP of $14.390 billion, and agriculture Value-Added of $0.312 billion. 𝑨𝑶𝑰 = 𝐴𝑔𝑟𝑖𝑐𝑢𝑙𝑡𝑢𝑟𝑒 𝑆ℎ𝑎𝑟𝑒 𝑜𝑓 𝐺𝑜𝑣𝑒𝑟𝑛𝑚𝑒𝑛𝑡 𝐸𝑥𝑝𝑒𝑛𝑑𝑖𝑡𝑢𝑟𝑒 Agriculture Value Added as Share of GDP = 2.099 50.563 ∗ 100 0.312 14.390 ∗ 100 = = 4.15 2.17 = 𝟏. 𝟗𝟏 AOI >1 means Botswana had a higher orientation by its central government to the agricultural sector relative to agriculture’s economic contribution
  19. 19. INDICATOR 2.a.1 POLICY USE AND INTERPRETATION (3) Guinea-Bissau in 2015: central government expenditures of 86.302 billion XOF (CFA Franc), of which 4.003 was on agriculture; GDP of $0.978 billion, and agriculture Value-Added of $0.433 billion. 𝑨𝑶𝑰 = 𝐴𝑔𝑟𝑖𝑐𝑢𝑙𝑡𝑢𝑟𝑒 𝑆ℎ𝑎𝑟𝑒 𝑜𝑓 𝐺𝑜𝑣𝑒𝑟𝑛𝑚𝑒𝑛𝑡 𝐸𝑥𝑝𝑒𝑛𝑑𝑖𝑡𝑢𝑟𝑒 Agriculture Value Added as Share of GDP = 4.003 86.302 ∗ 100 0.433 0.978 ∗ 100 = = 4.64 44.27 = 𝟎. 𝟏𝟎 AOI <1 means Guinea-Bissau had a lower orientation by its central government to the agricultural sector relative to agriculture’s economic contribution
  20. 20. INDICATOR 2.a.1 POLICY USE AND INTERPRETATION (4) AOI = 1 means a neutral orientation of the central government towards agriculture sector relative to the sector’s contribution to the economy. AOI >1 means a higher orientation of the central government towards the agriculture sector relative to the sector’s contribution to the economy. 𝑨𝑶𝑰 = 4.15 2.17 = 𝟏. 𝟗𝟏 AOI < 1 means a lower orientation of the central government towards the agriculture sector relative to the sector’s contribution to the economy. 𝑨𝑶𝑰 = 3.5 3.5 = 1.00 𝑨𝑶𝑰 = 4.64 44.27 = 𝟎. 𝟏𝟎
  21. 21. INDICATOR 2.a.1 POLICY USE AND INTERPRETATION? (5) AOI>1:  “overinvestment” in agriculture;  well developed agricultural and rural infrastructure with diminishing marginal productivity to public investment; and/or  Response to high degrees of market failure relative to other sectors? AOI<1:  “under investment” in agriculture;  poorly developed agriculture and rural infrastructure; o with high returns to public investment; and/or  low degrees of market failure relative to other sectors?
  22. 22. INDICATOR LIMITATIONS • 2.a.1 reflects central government only. • Underestimates AOI if agriculture is disproportionally undertaken by state governments. • AOI=1 may not be the right target for any country • Difference in: degrees of decentralization, market failures; income inequality and food insecurity. • Still provides useful trend analysis, and comparisons between countries with similar agriculture sectors. • FAO to revise regional aggregation methodology • Currently uses cold deck imputation of non-response

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