Chapter 4


For an assessment of the impact of a reduction in public investments on the food economy
(or any other economic sphere) we need to distinguish between short-term and long-term
effects.

Under a short-term perspective, the effects on the labour market and household income of
the poor are the major issue of concern. The effects are similar to that of a reduction of
public sector employment: if public investment projects are cut, this reduces the demand for
labour with negative effects on employment and wages (see table 4.11). This depends, of
course, on the nature of the investments: while these effects are significant in construction-
based investments (for example, roads, buildings, irrigation system) they are negligible in the
case of investments with high import components (for example, vehicles, military
equipment, office equipment).

In the longer term, the main issue of concern is the impact of public investments on
economic growth. Cuts of public investments in the economic and social infrastructure
affect future production, employment and income possibilities as well as the future provision
of social services, hence almost the complete set of macro-meso-micro economic linkages as
presented in figure 4.6. Again, the effects depend heavily on the nature of the investments
concerned. Food production and marketing are strongly influenced by investments in rural
infrastructure, such as rural roads and irrigation. If public investments in these fields are
reduced, the prospects for increased agricultural incomes, the volume of food supplies as
well as prices to producers and consumers are likely to be adversely affected, bringing about
fewer opportunities and less food security for the rural as well as the urban poor. (Formally,
a reduction of public investments in rural infrastructure is shown as a left-downward shift of
the aggregate demand curve in the short-run, and a left-upward shift of the aggregate food
production/supply curve in the long-run. See Annex 1 for explanation).

As to the likely effects of public investments on the poor, an IMF study (Heller et al., 1988)
summarises:

 "Reducing capital expenditures may hurt the poor in .both the short and the long run. In
 the short run, it may reduce their employment opportunities as daily unskilled
 construction labour; in the long run, it may adversely affect the quality and quantity of
 services provided to the poor through the social and economic infrastructure."

 4.4 Reduction of food subsidies

 Many governments have pursued policies designed to hold down the prices of food and other
 consumer goods below the prices which would have prevailed without subsidies. The main
 rationale behind this is the support of low-income groups. There are general subsidies or
 targeted subsidy programmes.

 General food subsidies have been widely used as they are politically and administratively
 easier to implement than targeted subsidy programmes. They are, however, very costly.
 Food subsidies absorbed up to 21 per cent of the Egyptian Government's total budget
 expenditures in the mid-seventies, 16 per cent of Sri Lanka's and 12 per cent of Morocco's.


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