Corresponding author: Olga V. Shik ( shikolga@gmail.com ) © 2020 Non-profit partnership “Voprosy Ekonomiki”.
This is an open access article distributed under the terms of the Creative Commons Attribution License (CC BY-NC-ND 4.0), which permits to copy and distribute the article for non-commercial purposes, provided that the article is not altered or modified and the original author and source are credited.
Citation:
Shik OV (2020) Public expenditure for agricultural sector in Russia: Does it promote growth? Russian Journal of Economics 6(1): 42-55. https://doi.org/10.32609/j.ruje.6.49756
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This paper presents the findings of the agriculture public expenditure review (PER) for the Russian Federation. It reviews the policy instruments and historical trends in the volumes and composition of budget support and investigates their role in recent agricultural growth. The paper also analyzes the effect of public spending in 2006–2017 on growth in agriculture using the fixed effects model and find positive effect. Support for general services is the most efficient method of agricultural spending, but in the Russian agricultural budget the subsidies to individual producers prevail. While the prevalence of the subsidies in the budget benefits the largest and most successful producers, this was part of the strategy to create strong value chains in order to compete with imports. However, the efficiency of investment support is decreasing. The paper explores the distribution of support between national and sub-national levels of budgeting system, and finds that the regionalization of support leads to market disintegration and efficiency losses.
agricultural policy, budget support to agriculture, general services, subsidies, regional development.
An ambitious agrifood export expansion plan requires improving the efficiency of support in order to achieve long term growth in agriculture. At the same time, the information on budget support levels and structure is limited and presented in such a way that does not allow us to analyze the trends in composition of support, its alignment with the policy goals and its effect on the sector’s performance. This paper presents the findings of the agriculture public expenditure review (PER) for the Russian Federation. We review the policy instruments and historical trends in the volumes and composition of budget support and investigate their role in recent agricultural growth.
The objective of this study was to look at the level and structure of public expenditure for Russian agriculture and investigate if the government’s claim that it was a major factor in recent growth in agriculture is supported by empirical evidence. The study reveals three main areas where the loss of efficiency of support to agriculture occurs and where the improvement of allocation of funds can be beneficial for growth in agriculture.
First, focusing on the goals to increase production and exports, most public funds are allocated to support individual producers. At the same time, the measures that benefit the sector as a whole — the general services
Second, as a consequence of supporting agriculture mostly in the form of the subsidies, policy benefits are unequally distributed among different types of producers. Agricultural policy supports investment projects by the larger and more efficient producers, as well as compensating losses of the least successful, keeping them in business for social reasons.
Third, the source of efficiency loss is the regionalization of support. While the general services support is financed at the federal level, support to producers individually is financed from the sub-national (regional) budgets, which affects market integration and promotes unfair competition. We look into the differences between national and sub-national spending and the impact of power distribution between the levels of budgeting system on the efficiency of public spending.
All official expenditure reports by the Government only refer to a short time period (3–4 years) and report expenditures in nominal values, claiming an unprecedented growth of the level of support in recent years. However, when we look at a longer time period (since 2006) and at the data in real values, it turns out that the level of support actually decreased compared to the 2006–2008 time period: the value of support decreased by 3% in constant prices, the share of agricultural spending in total budget expenditure decreased by 24%, and the ratio of support to agriculture to GDP decreased by 18% (Fig.
Level of budget support to agriculture in Russia, 2006–2018.
Sources: Federal Treasury; Russian Federal State Statistics Service (Rosstat).
Support for agriculture in Russia is high compared to other countries; it holds 5th place among the countries for which OECD measures the level of support.
Agricultural production growth has been the main goal of Russian agricultural policy since 2006,
Recent research confirms that there is a positive causal relationship between the size of budget support to agriculture and the outcomes in terms of production growth. Thus,
At the same time research suggests that it is not the level but the composition of support that matters for economic growth in the sector. Support for individual producers is often found inefficient, the efficiency of such measures tends to decrease with time and, in some cases, these have a negative effect on performance in agriculture. Individual producers’ subsidies tend to crowd out investment in public goods, which is more efficient for agricultural growth (
Research based on the Russian data also suggests that in general, public support for agriculture has a positive effect on production and profits; however, it is not the most important factor in economic growth.
In this study we analyzed the effect of public support on economic growth using the fixed effect model based on panel data for 77 regions of Russia for the time period between 2006 and 2017. The fixed effect model was used, which allows to control for all the regional characteristics that do not change over time, such as climate, quality of governance and institutions, etc. Therefore, we can conclude that the differences in outcome measured as the growth of per capita agricultural output appears due to the changes in the variables in question, i.e. the public support from federal and regional budgets.
Following the methodology described in
Ln git = β1E L(Eit) + β2 L(Fit) + β3 L(Tit) + β4 L(Yit) + β5 zit + β6kit + βq qit +
+ μi + εit,
where: Ln git — log of agricultural production growth (million rubles at constant 2006 prices) per agricultural worker; Eit — budget support to agriculture per worker (thousand rubles at constant 2006 prices, log); Fit — percent share of the federal intra-budget transfer in budget support; Tit— trade openness index (export plus imports divided by the gross regional product — GRP, %); Yit— non-agricultural GRP per capita (thousand rubles at constant 2006 prices, log); L — lag operator, zit — agricultural land area (000 ha per person, log); kit — capital (fixed assets in agriculture; thousand rubles at constant 2006 prices, log); qit— agricultural price index, %, μit — regional fixed or random effects, εit — error term.
The study confirmed that there is a positive relationship between the budget support for agriculture and economic growth in agriculture (Table
The impact of public expenditure on agricultural growth in Russia.
Variables | log of agricultural production growth (million rubles at constant 2006 prices) per agricultural worker | |
Fixed effect | Random effect | |
Land | 0.8947*** | 0.5425*** |
(0.0968) | (0.0854) | |
Capital | 0.0687* | 0.2306*** |
(0.0621) | (0.0688) | |
Non-agricultural GRP | 0.1499* | 0.0808* |
(0.0734) | (0.0565) | |
Budget support | 0.1091*** | 0.1227*** |
(0.0340) | (0.0384) | |
Federal transfer’s share in support | 0.1475*** | 0.2055*** |
(0.0516) | (0.0482) | |
Trade openness | –0.0012* | –0.0005 |
(0.0005) | (0.0005) | |
Price indices | –0.0816 | –0.0151 |
(0.0542) | (0.0626) | |
Constant | 1.6039*** | |
(0.3494) | ||
R 2 | 0.7145 | 0.6500 |
N of observations | 847 | 847 |
Hausman test (p-value) | 0.00 |
Therefore, we conclude that the budget support has a positive influence on agricultural production growth, but it is not the only factor and the instruments used for support matter. Most likely, the impact of different types of subsidies will vary, and the data to investigate this would be beneficial for finding the most efficient support instruments.
From 2012 until 2019, the main policy goal in the State Program was to increase the volume of production (for import substitution), and therefore the majority of the support programs were directed to increasing production. About 40-50% of the funds were allocated to the programs aiming at production expansion. Rural development support received 4.7% of funds and support directed at small farmers was 4% of agricultural budget.
The structure of support was relatively stable since 2006, with 15–30% of the funds allocated to investment support through mid- and long-term credit support programs. Other subsidies to producers, especially purchased input subsidies (feed, seeds, fertilizers, diesel fuel) were always among the main policy instruments.
The export expansion became the main goal of agricultural policy in 2019, but until then only 0.24% of the budget went to export enhancement. The share of the key services for exporters, such as phytosanitary and veterinary services financing in the budget declined from 8.4% of all general services in 2006 to 3.3% in 2017. Research and development expenditure was declining until 2018, and education’s share in the budget was stable at 10% and mainly went to financing recurrent administrative costs of agricultural colleges.
The structure of support and the choice of policy instruments is much more important for achieving the growth in agriculture than the level of budget expenditure. Recent research has demonstrated that general services support contributes most to the long-term competitiveness and growth in agriculture. The results show that a shift of 10 percentage points of the agricultural budget from individual producers’ support to general services, maintaining total spending constant, leads to approximately a 5% increase in agricultural value added per capita (
Fig.
The structure of budget support to agriculture in Russia: support to producers and general services, 2006–2017 (federal expenditure, billion rubles at constant 2006 prices).
Source: Author’s calculations based on the Federal Treasury data.
This issue is not specific for Russia; the World Bank noted that this is a common issue for most countries included in their PER studies (
Average share of support to general services in total support to agriculture, 2015–2017 (%).
Source: Author’s calculations based on the Federal Treasury and OECD.stat data.
Among different general services support programs, research and development brings the highest rates of returns. The average rate of return to public investments in research and development was at 43% (Alston et al 2000), which is much higher than common rates of return in private investment projects (see also
The focus on subsidies to producers as a main policy instrument is reflected in distribution of support among the types of agricultural producers as they tend to benefit larger producers disproportionally.
Despite the special quotes allocated in the subsidy programs for the small farmers, they receive nearly no budget support. Only about 4% of the federal budget funds is allocated to the programs for the small farmers. In 2016, only 2.1% of the small farmers used budget support, and this share further decreased to 1.6% in 2017.
Inequality of distribution of support between various economic agents is always criticized by policy analysts (
Unequal distribution of support benefitting the largest and most successful producers is not exclusive to Russia. Thus, in the EU, 20% of the farms with the highest income receive up to 80% of subsidies; in the US in 1995–2006 10% of the farms received 74% of the subsidies. In the highest income group, the farms received on average $36 thousand per farm, and in the bottom income group it was only $700 per year (
The situation in Russia, however, is different because support for the largest and most successful farms is part of the strategy of increasing investments in agriculture with the aim of creating value chains for export expansion. At the same time, there is no convincing evidence that budget support played a key role in this process.
Unlike the subsidies, support to the general services creates benefits to producers equally without benefitting the most successful producers. At the same time, the subsidies play a less and less important role in stimulating investment in agriculture, the trade policy being a major factor. This is another argument in favor of shifting the funds towards the general services support.
The level of sub-national budget support to agriculture varies significantly across the regions. Thus, in 2017 the share of agriculture in regional budgets varied from 0.7% in Kemerovo region to 15% in Bryansk Region. Fifty percent of subnational support to agriculture was provided in Central and Volga Federal Districts. However, the Far Eastern District received the highest support per ha and per rural inhabitant (Fig.
The level of support by the Federal District and general services support in Russia’s regional budgets, average 2015–2017.
Source: Author’s calculations based on the Federal Treasury and RF Ministry of Agriculture data.
Regional budget expenditure, both support to producers and to rural development, is highly concentrated. In 2018, forty percent of all credit subsidies were provided in 5 regions (Belgorod Region, Bryansk Region, Voronezh Region, Kursk Region and Republic of Tatarstan). Thirty percent of the rural development program funds were provided to 5 regions: Rostov Region, Republic of Bashkortostan, Republic of Daghestan, Republic of Tatarstan and Republic of Sakha (Yakutia). There is no correlation between the regional budget support and agricultural output, the highest share of budget support to gross agricultural output was in Chukotka Autonomous Area (over 100%) and the lowest in Krasnodar Territory (less than 2%). While many regions allocate greater share of budget funds to the general services programs than the federal budget does, on average, only less than 10% of the regional budgets go to general services support.
In 2004, the powers were redistributed between the federal and regional levels of the budget system, providing regions the rights to introduce and implement agricultural policy programs. There is evidence that this stimulates market disintegration and leads to sub-optimal efficiency of budget spending. Support to agricultural producers from the regional budgets provides advantages to producers in richer regions and creates unfair competition.
The intra-budget agricultural policy consists of two components, one with the focus on support to the most efficient and financially viable projects, as was discussed in the previous section. Those projects are usually located in the most climatically favorable areas for agricultural production, and therefore those regions received a higher share of support in the period of study. At the same time, there is the second policy direction: achievement of each region’s self-sufficiency
Decentralization of support slightly decreased since 2010; the regional budget’s share of total support was 28% in 2018 (Fig.
Budget support from the Russia’s budgets at different levels, 2006–2018 (%)
Source: Author’s calculations based on the Federal Treasury and RF Ministry of Agriculture data.
In most cases, the most financially stable regions are the regions with the less developed agriculture as they are located in the areas climatically less favorable for agricultural production. In the past 12 years this imbalance somewhat decreased, with the increased financial stability in agricultural regions. However, this is still the case, as demonstrated by Fig.
The role of agriculture and financial capacity of the Russian regions.
Note: GRP — gross regional product; financial capacity index: Find = EXPind + (1 – Dind), where EXPind — consolidated regional budget expenditure; Dind — share of the federal budget equalization transfer in each region compared to average; normalized. Source: Author’s calculations based on the Federal Treasury and Rosstat data.
The increased role of the regional governments in implementing the agricultural support programs provides benefits to the richest regions and therefore stimulates the shift of production towards the least climatically favorable areas, potentially creating efficiency losses. The richest regions have more financial capacity to support investment projects in agriculture from regional funds, also, regional lobbying forces work to attract a larger budget share from the federal funds. We looked at all those forces at play to see how this affects the development of agriculture.
In order to study the consequences of the regionalization of support, we looked at the redistribution of the agricultural production between the groups of regions according to their location in Fig.
We expected to see the production shifted to the regions in group 1, as the current policy promotes higher subsidies in the richer regions, but the data does not support this. In spite of the policy stimulus, the greatest development occurred in agriculture in groups 2 and 3, regions where agriculture was a major part of the economy at the beginning of the time period in question. Agricultural production grew about 30% in 12 years in the two groups combined. However, if we look not only at production, but also at the income distribution, we see that the profits from livestock production were higher in the regions with the largest budgets (Table
Trends in Russia’s regional support and agricultural productions by group, from 2005 till 2017 (%).
Group 1. High financial capacity / no developed agriculture | Group 2. High financial capacity / developed agriculture | Group 3. Low financial capacity / developed agriculture | Group 4. Low financial capacity / no developed agriculture | |
Support to agriculture, average growth rate | 0 | 0.02 | 0.02 | 0.01 |
Agricultural output growth 2017/2005 | 8 | 28 | 32 | 19 |
Group’s share in profit from crop production | –40 | 0.6 | 39 | –62 |
Group’s share in profit from livestock production | –35 | 90 | 25 | – a) |
More and more programs are structured in the way that benefits the regions with the larger budgets, i.e. the consolidation of the various subsidies in the “Joint Subsidy” in 2017, new rules of the subsidized credit support since 2018. Therefore, we are likely to see more redistribution effect in the next few years.
Both budget support and production growth were the highest in the groups of regions where the share of agriculture in GRP was higher at the beginning of the period of study, regardless of the regions’ budget size, reflecting the government’s strategy to promote investment in the high-potential areas. At the same time, support and output increase in group 4, poor non-agricultural regions, reflects the second regional development strategy, the one aimed at self-sufficiency in agricultural products for each region, and promoting investment in the least developed regions with poor agro-climatic conditions.
We looked at other factors potentially affecting inter-regional distribution of budget support and agricultural production among the regions: budget size, lobbying capacity of the local authorities and agroclimatic conditions, and found that favorable agro-climatic conditions were the only significant factor of agricultural production growth. Average values of support and production and the difference in means between groups of regions are presented in Table
Effect of lobbying capacity, financial capacity and agro-climatic conditions on average growth of support and production in Russia, 2006–2017.
Regions’ characteristics | Average budget support growth rate | Average agricultural output growth rate |
High lobbying index a) | 0.77 | 1.11 |
Low lobbying index | 1.47 | 1.13 |
Difference (standard error in brackets) | –0.7 (1.22) | –0.02 (0.67) |
High financial capacity b) | 0.27 | 0.46 |
Low financial capacity | 1.98 | 1.91 |
Difference (standard error in brackets) | –1.70 (1.18) | –1.44 (0.64)* |
Favorable agro-climatic conditions c) | 2.36 | 3.24 |
Unfavorable agro-climatic conditions | 0.45 | 0.15 |
Difference (standard error in brackets) | 1.91 (1.27) | 3.09 (0.62)*** |
We also investigated the differences in production and support growth rates among the regions in the most favorable agro-climatic group of regions, and found large differences in the growth rates (Fig.
Differences in agricultural output and budget support growth in 2006–2017 in the Russian regions with the most favorable agro-climatic conditions.
Source: Author’s calculations based on the Federal Treasury and Rosstat data.
Therefore, we can conclude that, in general, the distribution of budget support among Russian regions was not a major factor in the production decisions, which were defined by market forces. At the same time, we see that the profits grew much faster in the richer regions, and among the regions with similar climatic conditions we see considerable inequality in the production and budget support allocations.
This agricultural public expenditure review demonstrated that although agricultural budget support had a positive effect on agricultural growth, it is not the only factor contributing to the growth in agriculture and the structure of support and distribution of support between different types of producers and between the levels of the budget system matter. During the period of study, budget funds were shifted from support to general services to support to producers individually. The share of support to general services in agricultural budget decreased from 48% in 2006 to 29% in 2017. The instruments of support that are most efficient for promoting growth in agriculture, such as research, development and innovation support, are underfinanced (3.1% of the budget funds in 2017).
Shifting the support from subsidizing individual producers to providing the general services would contribute to redistribution of the benefits from policy away from the larger and most successful producers. During the period of study, supporting the most successful producers was part of the import substitution and export expansion strategy and it played its role in ensuring competitiveness of those producers at the world markets, while the productivity of the rest of Russian agriculture remains low. Support for general services benefits all producers equally and will promote innovative development required to ensure long-term international competitiveness.
The distribution of support between the federal and regional budgets leads to market disintegration and reduces the efficiency of budget spending. The policy encourages the shift of production to the regions with the least developed agriculture and larger budgets. However, other factors appeared to be stronger than the regionalization of support, and the production shifted to the regions with the best agro-climatic conditions. At the same time, presently the regions receive more and more capacity to support producers directly, and the inefficiency of this strategy will inevitably lead to sub-optimal spatial distribution of production. Besides, the regions within the group with the most favorable climate receive very different levels of subsidies and therefore the competition between them is unfair. It is recommended to legally restrict the application of trade distorting policy measures at the regional level to ensure market integration, which is important for long-term growth in agriculture.