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close this book2020 vision focus 4 - Promoting Sustainable Development in Less-favored Areas (IFPRI, 2000, 18 p.)
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View the documentBrief 1 of 9 - November 2000 - Overview
View the documentBrief 2 of 9 - November 2000 - Technologies for the East African Highlands
View the documentBrief 3 of 9 - November 2000 - Technologies for the Tropical Andes
View the documentBrief 4 of 9 - November 2000 - Technologies for the Southeast Asian Uplands
View the documentBrief 5 of 9 - November 2000 - Returns to Public Investment: Evidence from India and China
View the documentBrief 6 of 9 - November 2000 - Development Strategies for Semiarid South Asia
View the documentBrief 7 of 9 - November 2000 - Development Strategies for the East African Highlands
View the documentBrief 8 of 9 - November 2000 - Development Strategies for West Africa
View the documentBrief 9 of 9 - November 2000 - The Role of Agricultural Science

Brief 5 of 9 - November 2000 - Returns to Public Investment: Evidence from India and China

Shenggen Fan and Peter Hazell

Shenggen Fan is a senior research fellow in and Peter Hazell is director of the Environment and Production Technology Division at IFPRI.

Conventional wisdom suggests that the productivity returns to investment are highest in irrigated and high-potential rainfed lands and that growth in these areas has substantial trickle-down benefits for the poor, including those residing in less-favored areas. Even though investing in less-favored lands might have a greater direct impact on the poor living in those areas, it is argued that investments in high-potential areas give higher social returns for a nation than investments in low-potential areas. The logic behind this position is as follows. Investment in high-potential areas generates more agricultural output and higher economic growth at lower cost than in less-favored areas. Faster economic growth leads to more employment and higher wages nationally, and greater agricultural output leads to lower food prices, both of which are beneficial to the poor. Less-favored areas will benefit from cheaper food, from increased market opportunities for growth, and from new opportunities for workers to migrate to more productive jobs in the high-potential areas and in towns. Fewer people will try to live in less-favored lands, and this will help reduce environmental degradation and increase per capita earnings. Migrants may also send remittances back to less-favored areas, further increasing per capita incomes there, especially for the poor.

Many of the expected benefits arising from rapid agricultural growth in high-potential areas have been confirmed through empirical research. Nevertheless, the rationale for neglecting less-favored areas is being increasingly challenged by: (1) the failure of past patterns of agricultural growth to resolve growing poverty, food insecurity, and environmental problems in many less-favored areas; (2) increasing evidence of stagnating levels of productivity growth and worsening environmental problems in many high-potential areas; and (3) emerging evidence that the right kinds of investments can increase agricultural productivity to much higher levels than previously thought in many less-favored lands. It now seems plausible that increased public investment in many less-favored areas may have the potential to generate competitive if not greater agricultural growth on the margin than comparable investments in many high-potential areas and that these investments could have a greater impact on the poverty and environmental problems of the less-favored areas in which they are targeted. If so, then additional investments in less-favored areas may actually give higher aggregate social returns to a nation than additional investments in high-potential areas. In fact. they might offer win-win-win possibilities (that is, more growth. greater poverty reduction, and better environment).

To test this hypothesis, IFPRI recently analyzed the agricultural production and poverty alleviation impacts of different types of investments in high- and low-potential areas in India and China. Unfortunately, the available data did not permit a comparable analysis of the environmental impacts of public investments in these two countries. India and China are good examples to study because, like many other Asian countries, past public investments have been biased toward high-potential areas, and the remarkable productivity gains achieved in those areas (which led them from acute national food shortages to current surpluses) can now be juxtaposed against the lagging productivity and poverty, food insecurity, and environmental degradation that exist in many less-favored areas. The results provide strong support for the hypothesis that greater levels of investment in less-favored lands are now warranted, at least on growth and poverty alleviation grounds.

Table 1 Marginal Returns to Infrastructure and Technology Investments in Rural India

Investment

Irrigated Areas

High-Potential Rainfed Areas

Low Potential Rainfed Areas


(production return in rupees per unit of investment)

High-yielding varietiesa

63

243

688

Roadsb

100,598

6,451

136,173

Canal irrigationa

938

3,310

1,434

Private irrigationa

1,000

(2,213)

4,559

Electrificationa

(546)

96

1,274

Educationc

(360)

571

102


(number of people lifted out of poverty per unit of investment)

High-yielding varietiesd

0.00

0.02

0.05

Roadse

1.57

3.50

9.51

Canal irrigationd

0.01

0.23

0.09

Private irrigationd

0.01

(0.15)

0.30

Electrificationd

0.01

0.07

0.10

Educationf

0.01

0.23

0.01

Source: Fan and Hazell 2000 (see suggestions for further reading).

Notes: The numbers in parentheses are negative. In most cases these negative coefficients were not statistically significant.

a Return is in rupees per hectare affected by investment.
b Return is in rupees per kilometer of road built.
c Return is in rupees per worker made literate.
d Return is in number of persons lifted out of the poverty per hectare affected by investment.
e Return is in number of persons lifted out of the poverty per kilometer of road built.
f Return is in number of persons lifted out of the poverty per worker made literate.

RETURNS TO PUBLIC INVESTMENTS IN INDIA

In India the analysis was based on district-level data, and districts were classified into three categories: irrigated, high-potential rainfed, and low-potential rainfed. Districts were defined as irrigated if more than 25 percent of the cropped area was irrigated. Rainfed districts were subdivided into high- and low-potential areas according to their agroecological characteristics. About 80 percent of the rural poor live in rainfed lands as defined here, and about half of those live in low-potential rainfed lands. Using district-level data for 1970-95, an econometric model was estimated to measure the impact of different types of public investments on agricultural production and rural poverty. The model was then used to calculate the impact on growth and poverty of another unit of each type of investment by land type. The results are shown in Table 1.

For every investment, the highest marginal impact on agricultural production and poverty alleviation occurs in one of the two rainfed lands, while irrigated areas rank second or last. Moreover, many types of investments in low-potential rainfed lands give some of the highest production returns, and all except education have some of the most favorable impacts on poverty. These results provide strong support to the hypothesis that investments in less-favored areas are becoming win-win opportunities and that more investment Should now be channeled to less-favored areas in India.

RETURNS TO PUBLIC INVESTMENTS IN CHINA

In a similar study of China, three regions were defined: the coastal, central, and western regions. The coastal region is the most fertile, with good rainfall, and can be classified as a high-potential region. The western region is the least developed and has poor natural resources and social infrastructure; it is a low-potential area. The central region falls between the other two and from an agricultural perspective can be considered a mid-potential area. More than 60 percent of the rural poor lived in the western region in 1996, and most of the rest lived in the central region. Using a similar method as for India and province-level data for 1970-97, the agricultural production and poverty impacts of additional investments were estimated for each region (Table 2).

All investments have their biggest impact on poverty in the low-potential western region and their second-biggest impact in the mid-potential central region. The high-potential coastal region ranks second or third for all investments. Most investments also have their highest production returns in either the central or western region, showing that investments in these regions are now win-win strategies. However, the production returns are mostly larger in the central rather than the western region, suggesting that some trade-off exists between growth and equity goals in allocating investments between mid-potential and low-potential areas.

Table 2 Marginal Returns to Infrastructure and Technology Investments in Rural China

Investment

High-Potential Coastal Region

Mid-Potential Central Region

Low-Potential Western Region


(production return in yuan per yuan invested)

R&D

7.33

8.53

9.23

Irrigation

1.40

0.98

0.93

Roads

3.69

6.90

6.71

Education

6.06

8.45

6.20

Electricity

3.67

4.89

3.33

Rural telephone

4.14

8.05

6.57


(number of people lilted out of poverty per 10,000 yuan invested)

R&D

0.97

2.42

14.03

Irrigation

0.15

0.23

1.14

Roads

0.70

2.80

14.60

Education

1.79

5.35

21.09

Electricity

0.92

2.64

9.62

Rural telephone

0.98

4.11

17.99

Source: Fan, Zhang and Zhang 2000 (see suggestions for further reading).

These results from India and China should not be interpreted to mean that public investment should now be reduced in irrigated and high-potential lands. These areas are the major sources of food for rapidly growing urban populations, and they still offer favorable returns to many investments. But the results do suggest that attractive opportunities exist for reducing poverty through additional investment in less-favored areas and that rather than sacrificing growth, many of these investments actually offer win-win opportunities for achieving more production growth and greater poverty reduction. Similar studies have yet to be done for other regions, and it would be dangerous to extrapolate these results beyond Asia, since many poorer countries, especially in Africa, have not yet invested sufficiently in their high-potential areas to have reached the point of diminishing production returns.

For further information see Shenggen Fan and Peter Hazell, "Are Returns to Public Investment Lower in Less-Favored Rural Areas? An Empirical Analysis of India," Economic and Political Weekly (April 22, 2000): 1455-1463; and Shenggen Fan, Linxiu Zhang, and Xiaobo Zhang, "Growth and Poverty in Rural China: The Role of Public Investments," Environment and Production Technology Division Discussion Paper No. 66 (International Food Policy Research Institute, Washington, D.C., 2000).