Economic Transfers to Support Agricultural and Rural Development

The reach of rural investments can be broadened by implementation of complementary programs of fiscal transfers to poor rural households. Mexico has been more decisive than most developing countries in putting into effect programs of fiscal transfers to farmers, first through its own adaptation of the European Union's McSharry Plan (the PROCAMPO program, which mandated payments of $US100 per hectare to specified categories of active farms), and then through the above-mentioned program of direct transfers to rural households on the basis of children's attendance at school (the PROGRESA program). Estonia also adopted a variant of the McSharry Plan to ease the transition of its agricultural sector to a market economy.

Transfers to poor rural households are a category of subsidy that is justified on grounds of poverty alleviation (Chapter 2) and, properly conceived, it can help put farmers on the road to self-sustaining development. Examples might include payments to defray the costs of land titling (made upon completion of the titling process) and vouchers for poor farmers which can be exchanged for the purchase of agricultural inputs or extension services or for participation in specialized training programs.84

Transfers of this type may be considered to be instruments of agricultural policy, rather than rural development programs per se, but in any event they are complementary to other kinds of

83. L. D. Smith, 2001, pp. 21-22 [emphasis in original].

84. The concept of direct transfers targeted on smallholders for the purpose of increasing their productive capacity is a relatively new one. For example, a 1992 report of the Inter-American Development Bank listed four kinds of subsidy to rural families but did not include productive transfers. The types of subsidies mentioned were rural employment programs, school feeding programs, cash subsidies for subsistence to vulnerable groups (the aged, young children, pregnant and lactating mothers), and the distribution of food to nutritionally deficient groups in the population. (Gladys Aristizâbal, Jorge Echenique, Ruy de Villalabos y Wolfram Fischer, 'Combatiendo la Pobreza Rural en América Latina y el Caribe: Una Nueva Estrategia de Desarrollo Rural', Banco Interamericano de Desarrollo, Washington, DC, USA, December 1992, p. 58.)

investments in rural areas. Worldwide there is a long history of transfers to poor farmers by providing some classes of agricultural inputs in physical form, particularly seeds, seedlings for trees, tools and agrochemicals. However, the next step, of empowering poor farm households to make their own choices of inputs, and to obtain them from established market channels, generally has not been taken. Direct transfers, especially for smallholders, take on added importance in light of the worldwide trend toward closure of State-owned development banks, and the consequent contraction of agricultural credit. To the extent that such credit programs were, in effect, disguised subsidies because of low loan recovery rates, then it would make sounder policy to replace them with direct transfer payments.

Programs of direct transfers facilitate the capitalization of smallholder farms and would represent neutral policy interventions with respect to cropping patterns. Therefore, in the frequent cases in which existing policy incentives are biased in favor of import substitute crops and against export crops, the implementation of direct transfers would reduce this bias, in effect compensating for the lack of programs of export incentives. In addition, when fiscal incentives are biased in favor of larger farms - another frequent occurrence - the use of direct transfers, with an upper limit on hectareage eligible in any farm, would tend to ameliorate that bias.

If both an area-based land tax, as discussed earlier in Chapter 5, and a program of direct transfers were implemented, the net effect would be progressive taxation, since the tax would exempt the first few hectares and the direct transfers would be subject to an upper limit on the cultivated area per farm that was eligible for the benefit. The effects are shown schematically in Figure 9.1, where on the horizontal axis the point 'a' represents the area exempt from taxation, point 'b' represents the upper limit on the area eligible for the transfers, and farmers with land areas greater than 'c' would be net tax payers. Farms smaller than 'c' would be net gainers.

The benefits of an area-based tax have been discussed above in Chapter 5. These include administrative simplicity, avoiding the problem

Farm size-

Figure 9.1 Schematic representation of the effects of direct transfers and land tax (see text for further details).

Farm size-

Figure 9.1 Schematic representation of the effects of direct transfers and land tax (see text for further details).

of cadastral valuations that are continuously out of date, and avoiding disincentives to on-farm investments. They could be deductible from income tax obligations, and for most farmers would effectively substitute for income taxes, since the latter are not paid very much in rural areas of developing countries.

The combination of the area-based tax and direct transfers would enable the sector to fulfill its fiscal revenue obligations at the same time that production incentives and rural income support were provided to small- and medium-scale farms. As noted, unlike most policy support measures in developing agriculture, direct transfers would be neutral with respect to choice of cropping pattern.

The administration of direct transfers raises a number of practical issues, and perhaps the principal one is the need to decentralize the implementation of agricultural policies. It would be impossible to administer a program of transfers to tens of thousands or more smallholders by operating directly out of a centralized ministry. For purposes of this kind of program, greater autonomy should be assigned to regional offices of ministries of agriculture as well as involving organs of local government.

The role of regional or local offices of a ministry of agriculture can be visualized as that of an intermediary, or a broker. A local representative of the ministry has the following basic tasks: (i) to get to know his/her clients, i.e. the farm families in his or her area, and their needs and potentials; (ii) to transmit to the center the main agricultural problems and issues in the area; (iii) to be familiar with the range of policy programs that may be implemented locally, and the criteria for qualification of the participants and the mechanisms for their execution; (iv) to create awareness in the rural population of the programs in which they may participate and, in this way, facilitate a matching of clients and programs; (v) monitor the implementation of programs and report to the center any design flaws that need correcting, as well as possible variants of existing programs or new programs that might be developed.

For local agents to play this role, the central institutions have to define carefully and clearly the options that are available, and to indicate in detail how they are to be implemented and monitored. Basically, the role of the center is to define clearly the policy options and issue a set of guidelines, one for each policy program or module and each kind of investment that may be implemented if the farmers demonstrate interest and meet the qualifying criteria. They can be as diverse as financial and technical assistance in establishing small-scale irrigation programs, assistance in community programs of watershed management, specialized training courses (for raising small livestock, cultivating non-traditional crops, small-scale agricultural processing, marketing, cost accounting, the rudiments of veterinary care, and the like), opportunities for titling land, vouchers to cover titling costs, opportunities for purchase of land with the financing of a land bank, vouchers for input purchase, vouchers for purchasing privatized extension services, transfers for school attendance, participation in programs of local infrastructure investment, etc. Emphasis should be placed on the role of women among the recipients of such transfers, and also opportunities should be sought to link financial transfers to environmentally sound agricultural practices.

Each program can have a descriptive brochure and an operational manual, developed by the center in co-ordination with local agents. The latter can assist in pilot tests of the usefulness of the materials. Looking at the implementation issue in this way, it is clear that most of the operations of a ministry of agriculture need to be decentralized to local offices, and the co-ordination between the center and the local agents needs to be strengthened. Yet, this is a topic that rarely receives priority in programs of institutional strengthening in agriculture, even in those that are oriented primarily to ministries of agriculture.85

An outstanding example of this approach to rural development can be found in the experience of the Province of Andalucía in Spain. An extensive set of brochures has been issued, covering not only agricultural topics but also rural tourism, the rural environment, forest management and other subjects.86 Of course, in the Andalucian case the role of intermediaries is made easier by the fact that the range of programs on offer includes several that are funded by the European Union as well as those of the Government of Spain. Nevertheless, it is a useful example, not only of administrative decentralization but also of developing a wide range of actions for stimulating activities in the rural non-agricultural sectors. The central focus of the program is on developing the capabilities of the farm family members themselves, to some extent by capitalization of farm and non-farm activities but even more so through offering a range of carefully designed training programs in economic activities, agricultural and otherwise, that have potential in that region.

85. The aforementioned 1992 report of the Inter-American Development Bank on the subject of rural poverty and rural development commented: 'one of the organizational challenges of a system of programming, budgeting and management for rural development will be to attain optimal combinations among the decentralized levels of action for rural development projects and programs and the formulation of policies at a national level' (G. Aristizábal. J. Echenique, R. de Villalabos and W. Fischer, 1992, p. 41; author's translation).

86. These manuals were issued in 1996, under the umbrella title of Guía de Desarrollo Rural, by the Consejería de Agricultura y Pesca, Junta de Andalucía, Sevilla, Spain.

Specialized training programs for smallholder families should not overlook the possibilities of linkages with agroindustry. Various kinds of linkages between small farms and processing industries are possible, ranging from renting out farmland to the industrial companies and supplying them with labor, to entering into contracts to purchase inputs from the agroindustry (usually accompanied by supervision) and sell them products, to simply entering into contracts to provide them with the products.87 The main stumbling block to successfully fulfilling such contracts can be lack of sufficient quality control on the products, as stressed earlier. It is in this area that training can have its greatest payoff.

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