Strategic public spending: Scenarios and lessons for Ghana

Abstract

Growth in Ghana during the last decade has not translated into meaningful benefits for rural households who experienced an increase in poverty in recent years. This reflects, among other factors, the relatively weak performance of the agricultural sector and its general lack of competitiveness. The government has identified agriculture as the backbone of its development strategy and is committed to address the numerous challenges faced by the sector. However, it is likely to encounter fiscal constraints in a postdevelopment assistance era. It is therefore crucial to understand the trade-offs associated with alternative spending strategies. In this study we develop an economywide modeling framework for analyzing returns to public spending in support of agriculture. The model is used to evaluate the effect of compositional shifts in spending given marginal returns to different areas of investment. Our analysis focuses especially on extension services and input subsidies as two important components of the government’s agricultural development strategy. The objective of the study is to advise policymakers on which spending strategy is the most likely to contribute to government’s development goals, such as poverty reduction or economic growth. We find that a doubling of the share of agriculture in total public budget would accelerate agricultural growth to somewhere between 7.6% and 8.6% against the business-as-usual scenario of about 3.5%. The level of growth achieved depends on the types of policies that are favored. In the examples presented here, we show that an input subsidy-oriented spending strategy may yield significant benefits in the short run (1–5 years), and especially in an expansionary fiscal environment, but investments in effective extensive services are more sustainable and rewarding in the medium- to longer-run (6–10 years), especially when public resources are more constrained. These results demonstrate why short-term political goals might result in policy choices that are suboptimal from a longer-term development perspective.