1. 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 onPresented 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
__________________________________________________________________________

2. 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 thanSocial spending is more effective for poverty reduction than
economic spendingeconomic spending
o Social welfare aspect of FISP is most critical by design, butSocial 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

3. 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 sector
o Development = medium for poverty reduction largely via social sector
o 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-Optimal
o Growth more utilitarian: no regard for income/wealth inequalities
o Development more egalitarian: directly pro-poor & pro-vulnerable

4. 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)

5. How Spending is Functionally Classified MattersHow Spending is Functionally Classified Matters
________________________________________________________________________________________________________________________
• Unequivocal:
Minimise general spending, maximise social and economic spending

6. 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)

7. 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 withGenerally 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 povertyNPV, 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?

8. 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

9. 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

10. 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!!!

11. Implications for Optimal GoM Budgeting
________________________________________________________________________________________________________________________
• Allocate FISP (or similar subsidy) resources to Social Protection
Subsidy: → 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 FISP
Productivity: → largely a functional markets concept
→ certainly a MOA duty with/without FISP

12. 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

13. End
Thank You