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Food aid and Nepal
Food aid and Nepal Some comments
Narayan Khadka
There is no general agreement either on the disincentive effects or on the costeffectiveness of food aid. This article analyses the possible implications of food aid to the agricultural economy of Nepal. It deals with the incentive/ disincentive effects of food aid on the production, pricing and distribution of food commodities. It is argued that due to certain factors such as the existence of disguised unemployment, the need for family security, ineffective market mechanisms and lack of substitution possibilities, food aid does not cause disincentive effects on Nepal’s food production, at least in the short run. However, food aid should be for a specific goal and should be phased out once that goal is achieved. Dr Khadka is at the South Asia Institute, University of Heidelberg, Im Neuenheimer Feld 330, 6900 Heidelberg, FR Germany.
‘World Development Report 1988, World Bank, Washington, DC, 1988. ‘See An Evaluation of Small Farmers Development Projects of Nepal, Agricultural Credit Division, Nepal Rastra Bank, Kathmandu, July 1982, p 1.
0306-9192/89/020155-l
2$3.00 0
Nepal is predominantly an agricultural economy with a subsistence level of production. The agricultural sector engages more than 90% of the economically active population and accounts for well over 60% of national income. It also accounts for 70% of export earnings and about 80% of industrial raw materials. But unfortunately it is beset by numerous problems, resulting in low income and low growth. According to the World Bank, Nepal’s per capita GNP is estimated to be around $150 - one of the lowest in the world.’ But although the agricultural sector suffers from a number of constraints, any sustainable development of the country must also undoubtedly rest with the growth and development of this sector. The problems of Nepal’s agricultural sector can be classified into three categories: topographical, structural and institutional. The topography is a formidable problem. The mountainous nature of the country gives little scope for arable land (about 17% of the total land area is under cultivation). In addition, the country is landlocked and shares a long open border with India, features which have posed many problems ranging from limited opportunities for international trade to difficult adjustments in Nepal’s fiscal, monetary and price policies. The agricultural sector also suffers from structural problems. These are extreme regional variations in terms of the distribution of arable land coupled with an uneven distribution of land in relation to the population. The hills and mountains together contain about 60% of the country’s population but only 30% of the total arable land. The terui region holds about 40% of the population and about 70% of the arable land. There also exist extremely wide variations in the size of landholdings. According to a survey conducted by Nepal’s Central Bank, ‘small and the marginal size farm families constituted 64% of the total farm families in the country and they possessed only 34% of the total cultivated land. Of the total small and marginal farm families, almost 31% possessed even less than one hectare of land accounting for about 8% of the total cultivated land of the country. The majority of these small farm families are illiterate and poor.‘* An exponential growth in the population (the 1981 census showed an unprecedented growth rate of about 2.7%) has caused internal migration from land-scarce regions, ie from the hills and mountains, to the relatively
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Food aid and Nepal
land-abundant terui. This has exerted tremendous pressure on Nepal’s fragile environment. Not only are there both absolute and relative variations in the size of landholdings in the three regions, but there are also distinct variations in the cropping pattern, time lags between plantation and harvesting periods, and productivity. There are institutional problems as well. There exists a considerable inequality in the spatial and social distribution of resources and incomes between the rural and urban populations. There is also a sizeable inequality within the rural areas between landlords and tenants as well as between big and small or marginal farmers. These inequalities have impeded any institutional measures the government has taken to bring about reforms in the agricultural sector. There is neither the political will nor an efficient socioeconomic mechanism for reaching low-income families and improving their economic circumstances. This is because political power at the top is monopolized by landlords and the elite, so any institutional support the government purports to provide to agriculture is enjoyed only by a few big and powerful landlords. This has only a marginal effect on overall productivity. For example, there are credit and supply institutions for meeting agricultural needs, but according to the central bank survey of the total borrowings from the institutional credit agencies during the year 1969/70, the share of the small-size farm families was 3% only. After a lapse of seven years, the proportion of borrowing of this stratum of farm families from the institutional sources rose slightly and reached S%.’ This figure is still very low compared to the number of large and medium-size farm families, which comprise 76 and 16% of the total respectively. Moreover, the credit supplied may not in fact be used for the purpose for which it was intended.
Is there a need for food aid?
31bid.
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Despite all these problems, until recently Nepal produced a surplus of foodgrains. However, this surplus was partly nominal: it reflected only the difference between national production and requirements. Requirements are not the same as consumption. In reality, the actual surpluses would have been higher than the estimated figure because not all the population could buy the marketable foodgrain commodities. Hence the surplus in the foodgrain balance sheet as shown in government statistics should be viewed with caution because these are calculated against actual consumption. The consumption requirement is calculated by taking only about 86% of calorie intake, therefore the surplus is related to assumed effective demand and not need. Nepal’s national foodgrain balance sheet shows that there are marked variations in production and requirements between the three geographical regions (Table I). Hill and mountain regions suffered from a chronic food deficit for all the years under review. The table also indicates that, with the exception of one or two years, the food deficiency in the hills and the mountains is increasing. This is mainly because food production in both these regions has been stagnating whereas the food requirement has gone up during the period under review. The stagnation in food production can be attributed to the inferior quality of land, irregular supply of agricultural inputs, rudimentary farm methods and low yield. Demographically, the hill regions have the highest concentration of population and consequently
FOOD POLICY May 1989
Food aid and Nepal Table 1. National foodgrain balance sheet (in ‘000 tonnes), 1975-95. Food requirement
Food production Mountains
Hills
Terai
Mountains
Hills
Terai
Mountains
Hills
Terai
1975
131 131 128 121 122 106 115 114 105 109 123
870 872 881 816 848 709 821 914 861 909 988
1410 1468 1343 1310 1333 1186 1473 1480 1290 1724 1641
146 150 158 140 142 144 147 160 165 184 181
924 944 922 955 982 1002 1022 1009 1027 1121 1175
801 819 850 841 867 889 891 1087 1116 1194 1223
-15 -19 -31 -19 -20 ~38 ~32 -46 -60 -75 -58
-54 -72 -111 -139 -134 -294 -201 -86 -166 -212 -187
+609 +649 +493 +469 +466 +297 +582 +393 +144 +530 +418
1976 1977 1978 1979 1980 1981 Nofe:Thistable covers51 ofNepal's75 districts.1982 1983 Source:Food and Agricultural Division, Ministry 1984 of Agriculture, His Majesty'sGovernment of 1985 Nepal.
%ee National Planning Commission, Programme for Fulfilment of Basic Needs (798%2000), His Majesty’s Government, Kathmandu, September 1987, p 10. 5A.K. Sen, Poverty and Famine: An Essay on Entitlement and Deprivation, Oxford University Press, 1981. Also see Povetiy and Hunger: issues and Options for Food Security in Developing Countries, World Bank, Washington, DC, 1986. ‘See Pilot Study on Socio-Economic lndicators for Monitoring and Evaluation of Agrarian Reform and Rural Development in Nepal, His Majesty’s Government, Department of Food and Agricultural Marketing Services Division, and FAO, May 1983.
FOOD POLICY May 1989
Food balance
Year
the weakest resource base, with cultivable land averaging only 0.4 hectares per household. The disequilibrium in population growth and availability of farm land has brought marginal land, including steep slopes which must be terraced, into cultivation. In marked contrast to the situation in the hills and mountains, the tropical terui region (the plains) has almost regularly produced a surplus of foodgrains. In fact this region produces a large enough surplus in a normal year to more than offset the deficits of the other two regions. This is because of the comparatively better supply of inputs such as irrigation and fertilizers and the existence of an improved infrastructural base. Therefore in simple arithmetical terms Nepal was not until recently facing serious food shortages but was a net food exporter (in the late 1960s it was one of the major exporters of rice). However, the erratic nature of production on the one hand and the growing population on the other caused imbalances between production and consumption. According to a government report, ‘per capita grain production has fallen to 2.58 kg in 1984-85 as compared to 296 kg in 1974-75. During this decade, the production of grains (paddy, maize, wheat, millet and barley) grew by 1.3% per annum while the population rose by 2.66% annually.‘4 The rerui, the grain basket of Nepal, also showed erratic levels of food production. leading intermittently to an overall food deficit. For example Nepal faced an overall food deficit in 1980 and 1983 of about 35 000 and 122 000 tonnes, leading to a need for either commercial imports or food aid. But, as stated above, the national balance sheet for foodgrains does not adequately reflect Nepal’s food problem. It shows only that given improvements in income and wealth or their distribution in favour of the two food-deficient regions, national requirements could be met domestically. This implies that food shortages are a consequence of poverty. Since poor people do not have the purchasing power to acquire food, their needs either go unmet or are only partially fulfilled. The existing patterns of asset and income distribution, employment opportunities and other socioeconomic factors are such that the vast majority of the rural population does not have what Sen referred to as an ‘exchange entitlement” to trade for food. If we examine the actual calorie deficiencies in all three geographical regions we find that the intensity of food shortages in the two poor regions is much greater than the balance sheet reveals. According to one government report the extent of real calorie and malnutritional deficiency is increasing. About 36% and 32% of the population suffer from inadequate income and consumption respectively.h Calorie intake estimates for households show that on average people below the poverty line in all the regions take less calories
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Food aid and Nepal
‘WFPICFA, Interim Evaluation Summary Report on Project Nepal, Feeding of Mothers, Infants and Children, 17th Session, Rome, 26 May and June 1984,1984. ‘Ministry of Finance, Economic Survey 1983-84, His Majesty’s Government, Kathmandu, 1984. ‘Nepal received wheat under this Emergency Assistance Programme in 1955 and 1958 worth $635 000 and $4 113 000 respectively. Some non-food commodity assistance was provided by the USA on a regular basis but this was basically technical aid used for generating local funds.
than are required. It is also stated in another report that ‘the country is faced with malnutrition among a large part of its population particularly in food deficit areas and especially among expectant and nursing mothers and pre-school children. Malnutrition is also a serious problem among school children aged six to twelve.” Government figures show that all the 51 districts having a food deficiency were also suffering from a calorie deficiency. This was calculated by converting the net foodgrains (it was estimated that cereals and potatoes meet about 80% of calorie requirements) into calorie intake available. The regional results of this estimation show that altogether 51 districts, constituting more than 50% of the total population, were affected by calorie deficiency. Table 2 shows the deficiency in calorie requirements and availability. One important aspect of this table is that it shows a food deficiency in all the three regions. Also important is the fact that the gap between food production and requirements in the 51 districts in the year 1983/84 is so high that the surplus in the remaining 24 districts would hardly be enough to bridge the gap. Indeed, the country suffers from a deficit of 248 750 tonnes at national level. This has serious implications for Nepal’s food economy because, in view of the trend in food production, the year 1983184 has been considered a favourable year. According to the government, in that year ‘the index of production of major crops has shot up to 115.1 because of an increase in production of 22.3% over the last year’.X An overall deficiency in foodgrains even in a very favourable year like this would mean that if production does not increase sufficiently the country will face serious food shortages. In addition to production, requirement and consumption factors, one should examine other economic factors in analysing the food situation in Nepal: the existing level of poverty, underemployment and unemployment, causing low incomes, high transportation costs for transporting food from the plains to the food-deficit hills and mountains, the relatively isolated nature of local markets, and the limited resources at the government’s disposal for subsidizing foodgrains through the Nepal Food Corporation in the food-deficient regions.
Sources and magnitude of food aid Nepal was one of the recipients of US food aid (Emergency Food Aid Relief and Food Supply PL 480) in the mid-1950s’ although there was no real need for it. Between 1951 and 1976 Nepal received about $7 million worth of emergency food relief and supplies (about 3.45% of total US aid to Nepal). However, since the early 1970s Nepal has been receiving food aid from the World Food Programme (WFP) and other donors more or less on a regular basis. The aid consists of both project and programme type assistance. The main purpose of these recent food Table 2. Calorie requirement
Note: This table covers 51 districts in the three reqions. aB&ed on the assumption that cereals meet only 80% of the calorie requirements.
158
and deficiency,
1983184.
Population
Food required (1 O6 cal)
Cereals/ deficits’
Calorie deficit (IO6 cal)
Foodgrain deficit
402 578 2 731 230 262 376
1 317 238 6939 195 426 426
1 076 012 5 931 831 328 256
930 044 4 676 230 262 605
458 132 1 992 869 229
132 792 577 643 66
3396
8 682 859
7 336 099
5 868 879
2 451 230
710 501
Region
Food available (lo6 cal)
Mountains Hills Terai Total
184
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Food aid and Nepal
aid measures is to meet the nutritional requirements of certain segments of the population and at the same time to use food as a potential resource for local development. The food aid coming from the WFP contains both food and non-food items. Butter and corn soy blend are the most regularly supplied commodities. Between 1973 and 1983 the WFP supplied a total of 114 000 tonnes of various food and non-food items. A number of bilateral donors also supplied food commodities to Nepal for meeting national food shortages caused by drought in 1979180 and 1982183. The total food aid (cereals only) received from the WFP and bilateral sources during 197685 is shown in Table 3. As this table indicates, a large part of the food aid has come from the WFP. Bilateral donors, of whom there have been a large number, supplied food aid casually in the 1970s but their contribution to the total food aid was quite high particularly in 1980/81 and 1982/83. These sources donated supplies even after this period when Nepal’s domestic production exceeded its average requirements, mainly because food aid committed during the shortage periods was disbursed over a number of years. As noted before, Nepal began to receive food aid on a regular basis in the early 1970s. Between 1973 and 1975 Nepal received a total of about 4000 tonnes of cereals. Only two items were supplied: maize (about 2500 tonnes) and wheat (about 1500 tonnes). These were supplied by the multilateral organization, the WFP. Between 1976 and 1983 Nepal faced two major droughts causing serious food shortages and there followed a period of relatively heavy inflow of food aid. However, from Table 3 it is obvious that a large part of the aid was multilateral. Bilateral aid was mobilized only during the two food shortage periods 1981 and 1983. The commodity composition of the food aid supplied indicates that wheat and wheat flour predominated. Supplies of rice, which is the major staple in Nepal, were sporadic and much smaller than the other two items.
The purpose of food aid It is generally believed that food aid has two objectives: (a) to mobilize domestic savings (through project-type assistance), and (b) to save foreign exchange which otherwise would have been used for commercial imports. However, the programme type of assistance cannot easily be Table 3. Total food aid received (tonnes), 1976-85. 1976
1977
1970
1979
1980
1981
1982
1983
93 93
450 450 -
2 321 2 321 -
2511 2 511 -
24 301 1 990 23 211 -
20 280 5 986 14 294 8115 8115 -
10 465 8913 1 552 -
41 28 13 33 33 -
Wheat Bilateral WFP Rice Bilateral WFP Wheat flour Bilateral WFP Maize Bilateral WFP Soyabean oil Bilateral WFP
-
-
-
-
-
Total
94
750
3 267
6917
27 104
-
1 1
-
300 300 -
946
4406
2
803
946 -
4406 -
2 -
2 007 950 950
7 376
1984
1985
-
-
7 606 7 606 -
405 405 -
-
-
-
-
101 857 45 241 56616 49 503 49 503 22 232 712 21 520 950 950
-
-
-
-
-
-
-
1 520 1 520 -
-
31 352
17841
81 181
9 126
-
FOOD POLICY May 1989
4 393 712 3 681
-
803
SOUrCes: Ministry Of Agriculture, Agricultural Services Division, and Nepal Food
7 376
2 007 -
436 352 084 377 377
1 520 1 520 405
170 026
Corporation,Kathmandu,Nepal,
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Food aid and Nepal
compartmentalized. If emergency relief measures are added, food aid has both short-term and long-term effects, and all three categories of assistance overlap in generating economic effects. The variability of food aid resources creates further problems in controlling the developmental effects with any accuracy. It has rightly been pointed out by Singer, Wood and Jennings that in both project and programme types of assistance ‘food aid offers an opportunity for development, not a guarantee of development. It depends upon what government does with the resources, either independently or in joint programming with donors.“” Nepal has received all types of food aid over the past decade, but the most regular has been the project type of assistance supplied by the WFP. Food aid for balance of payments support is usually covered under bilateral arrangements. In view of the country’s geographical barriers and also its resource constraints, project food aid offers the highest opportunities for development of the food-deficient regions. There is a need to improve the nutritional intake of the underprivileged population, generating employment opportunities and thereby creating effective demand, and at the same time to undertake local developments such as road construction, irrigation and other public works. But due to limited budgetary resources and political expediency, the government is not under pressure to fulfil these necessities. All these various interwined objectives can be pursued through project food aid to which there are neither any serious conditions attached nor any substitution effects on financial aid. However, the government should make sound plans for the whole project cycle involving the selection of genuine project beneficiaries, the generation of economic benefits and provision for maintenance and complementary inputs. Other important considerations are the possibilities for using local grains and the effects of food aid on price fluctuations. But these issues cannot be tackled in the absence of a committed political machinery.
Food aid and development:
‘OHans Singer, John Wood and Tony Jennings, food Aid: The Challenge and the Opportunity, Clarendon Press, Oxford, 1987, pp 43-44. “For a historical account of food aid, see ibid, pp 17-36. “T.W. Schultz, Value of US farm surpluses to underdeveloped countries’, Journal of Farm Economics, Vol 42, 1960, p&l;:
9-1636.
14F.M. Fisher, ‘A theoretical analysis of the impact of food surplus disposal on agricultural production in recipient countries’, Journal of Farm Economics, Vol 45, No 4, 1963.
the debate
Food aid was expanded considerably after the second world war in terms of both magnitude and responses to new challenges posed by the twin problems of falling agricultural production and increasing population growth in many low-income countries.” The expansion in food aid operations aroused tremendous interest among academics and professionals about their possible implications in recipient countries. Two opposing schools of thought developed, which can be briefly described as supporters and opponents of food aid operations influenced by either ideological or pragmatic considerations. An influential early study was undertaken by T.W. Schultz. In his seminal paper Schultz pointed out that one of the crucial problems that farmers (in this case Indian farmers) face ‘is the many serious price fluctuations that occur’.‘* He added that ‘if a program were devised that would reduce substantially this kind of price uncertainty in agriculture, it seems likely that the effect would be to induce an expansion in agricultural production, even if average prices over three or five year periods were somewhat lower than they otherwise would be’.” Schultz’s thesis was further tested by Fisher who concluded that domestic production responds to the price elasticities of both supply and demand for food.14 Contrary to these arguments, in 1961 the FAO produced a report in which it stated that food aid stimulates agricultural production
FOOD POLICY May 1989
Food aid and Nepal
by generating additional demand.15 This report also argued that food aid contributes to enhancing production particularly during periods of structural change such as land reforms which might disrupt agricultural production. These two opposing strands of argument have aroused considerable debate ever since about the impact of food aid on the recipient’s economy. I6 The debates cover theoretical, empirical and country case studies on food aid and its possible effects. Unfortunately, the results of most of the studies are inconclusive and sometimes astoundingly divergent. For example, of 12 studies on the effects of food aid to India, five argued that the disincentive effect was non-existent; one showed that prices were affected but output was not; four found a significant negative effect on both prices and output; and two reached mixed conclusions.” One recent study showed ‘how food aid could make it possible to increase the size of the development effort above what would otherwise be possible without running into inflation or balance of payments deficit’.lx As regards methodology, the selection of countries, coverage of data and time periods the studies encompass a wide range of choices, but the conclusions drawn betray either ideological or pragmatic preferences. The arguments applauding and disparaging the role of food aid in the recipient’s economy hinge on the following issues. Those who support food aid argue that: 0 0 0 0 0 0
it may provide balance of payments support by freeing foreign exchange; it may help generate domestic savings for development; it may help achieve food security goals by setting up storage facilities; it may help achieve distributive justice in respect of income equality; it has a favourable impact on disadvantaged groups; it may help implement price stabilization measures.
Those who criticize points: “Development Through Food: A Strategy for Surplus Utilization, FAO, Rome, 1961. 16For a survey of the literature on the effects of food aid see Paul J. lsenman and ‘Food aid: disincentive Hans Singer, effects and their policy implications’, Economic Development and Cultural Change, Vol 25, No 2, January 1987, pp 205-237; S.J. Maxwell and Hans Singer, ‘Food aid to developing countries: a survey’, World Development, Vol 7, No 3, March 1979, pp 225-247; and Edward J. Clay and Hans Sinoer. USA/D Food Aid and Develoomeit: .The Impact and Effectiveness bf Bilateral PL 480 Tit/e 1 Type of Assistance, AID Program Evaluation Discussion Paper No 5, USAID, Washington, DC, 1982. ITSee Maxwell and Sinaer. OD cit. Ref 16. ~231. “M. Ezkiel, ‘Uses of agricultural surpluses to finance economic development in under-developed countries - a pilot study in India’. in Food for Development. FAO. Rome, 1985. ‘gMaxwell and Singer, op tit, Ref 16, p 230. ”
FOOD POLICY May 1989
l l l 0
e l
food aid have focused
their arguments
upon
these
food aid produces direct disincentive effects through pricing mechanisms for domestic farmers; it discourages the recipient government from undertaking necessary reforms in the agricultural sector; it creates distortions in food culture and food habits; it creates a state of political and economic dependency; it does not often reach the nutritionally vulnerable groups of the population or the targeted groups; there is also a growing criticism that food aid is an inferior form of external assistance compared to financial or technical aid.
Of all these criticisms, the disincentive effects on production and neglect of the agricultural sector have been the most widespread. According to effect of food aid in recipient one survey, ‘the possible disincentive country agriculture is the single most widely treated issue in food aid literature’.” In the following section we discuss the possible incentive/ disincentive arguments about food aid in Nepal.
Food aid and agricultural production We have outlined
the justification
for food aid to Nepal
in the existing
161
Food uid and Nepal
economic situation. This is based on the hypothesis that food aid to Nepal does not seem to have caused disincentive effects on local production. One of the main reasons is that aid supplies, whether in normal or emergency situations, do not disrupt normal market mechanisms in the short run. In emergencies prices will usually go up. But because of the free open border which facilitates illegal trade, any lucrative price rise will attract supplies from across the border which will eventually bring prices back to an equilibrium level. This means that food aid supplied under emergency conditions will only depress prices to the level which would have been reached as a result of the illegal inflow of supplies. Moreover, food aid supplied under emergency conditions is not so abundant as to bring prices down to a demotivating level. It is also not wise to make projections which are based on abnormal conditions. Under normal conditions the most regular type of food aid is the project type of aid which is used in chronically food-deficient areas. As most of the population living in these areas does not have adequate purchasing power, local food supplies can hardly be sold at normal market prices. Even in the absence of food aid the government distributes food at heavily subsidized prices. But since the government corporation’s food distribution effort falls far short of requirements, food aid geared to these areas simply helps fill the gap, if leakages and improper uses are prevented. Food aid supplied under food-for-work projects creates hardly any disincentive effects on terai farmers whose market outlets are many and open. These additional supplies rather push up the average demand for food. Moreover, the growing population, which is exerting growing pressure on marginal land, the high rate of disguised unemployment and expanding public sector expenditures all have a positive impact on the demand of food. This helps to stabilize foodgrain prices, which would otherwise fall as a result of injection of externally produced food supplies. This automatic stabilization sustains producers’ expectations concerning prices and profits. Similarly, the existing unemployment and underemployment conditions restrict farmers’ risk of undercutting food production. According to estimates from Nepal’s Planning Commission, 6% of the labour force is unemployed and as much as two-thirds is underemployed. The figures for the urban areas run at about 6% and 45% respectively. This means that food aid does not produce disincentive effects in Nepal’s economy in the short run because farmers have no reliable employment substitution possibilities they cannot afford to abandon or reduce their commitment to farming in favour of seasonal employment created by food-for-work projects. Food-for-work schemes have a marginal effect on displacing labour from agriculture to other sectors because of disguised unemployment: the temporary release of farm labour for wage employment does not bring any great change in the production of foodgrains. The size of the average family holding is so meagre that even if the head of the family quits farming there will be little effect on production because other family members will look after the farm. The other possibility, of switching cropping patterns from foodgrains to cash crops, is also limited because of marketing constraints, uncertainty in pricing and the moral need to solve the family food security question. Since farming has not yet been commercialized, most producers are small farmers and tenants (about 64% of all farm families, working 34% of the total cultivated land). Hence feeding the family and paying rent to the landlord are compelling reasons for increasing foodgrain production. 162
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Food
aid and Nepal
Pricing and production
“Quoted in lsenman and Singer, op tit, Ref 16, p 210. “See P.L. Scandizzo, ‘Aggregate supply response: empirical evidence on key issues’, draft, FAO, Rome, 1984 (mimeo). *‘L B Fletcher and D.E. Sahn, An Assessment of Food Aid as Development Resource in Nepal, Community System Foundation, MI, 1984, p 54.
The major element associated with the disincentive effects of food aid on production is pricing. The main debate is about the response of externally induced food supplies to price elasticity. Supporters of food aid believe that any additional increase in its supplies helps contain price increases and over a period of time stabilize them. On the other hand, opponents believe that an increase in food supplies depresses prices received by farmers. What actually does happen to prices and the impact on growth and incomes can be examined by analysing whether supply is price elastic. Mellor’s study showed that ‘while the supply response to price change is positive, it tends to be quite low (eg between 0.1 and 0.2) in land scarce countries because of the relatively inelastic supply of land and consequent diminishing returns to other inputs (and increasing marginal costs)‘.*” Another study concluded that ‘price elasticities of supply are significant’.2’ The hypothesis that the supply of food aid (wheat supplied by the WFP) influences prices and the production of paddy does not hold in Nepal’s agricultural context. The index of prices and production of wheat and paddy indicates that neither price nor production of these commodities seems to be affected by the infusion of food aid (see Table 4). The table shows that production of wheat and paddy is not affected by changes in their prices. In other words, there is no positive correlation between prices and production. Where there is a simultaneous fall in prices and production this seems to be a coincidence. For example, in 1982/83 the volume of wheat supplied by the WFP was relatively high and there was a fall in paddy production, but production of wheat increased substantially in that year. It is interesting to note that in 1983/84 both prices and production of paddy increased despite the fact that Nepal had received a large amount of food aid in the previous year. It is clear that the heavy infusion of food aid commodities (mainly wheat) has not created any disincentive effect. This is demonstrated by the increase in wheat production. In 1983/84 the production of wheat increased so much that prices fell about 50% and the farmers ‘were left unable to recoup their cash costs of production for the crop. It is hard to justify importing wheat, even in the form of aid, when the same commodity was in gross surplus and being exported to neighbouring India at disastrously low prices.‘** The absolute food production figures indicate that despite the need for food aid operations in 1982/83, a situation brought about by the Table 4. Index of prices and production (1972’73 = 100).a
=Due to a lack of consistency in data for both volumes and composition, the index of food aid has not been computed. ‘Due to the lack of data on the national consumer price index for wheat, the indices of wheat prices in Kathmandu and terai have been taken. Source: Government economic surveys, and Nepal Rastra Bank Quarter/y Bulletin (various issues).
FOOD POLICY May 1989
1972173 1973174 1974i75 1975176 1976ff7 1977178 1978179 1979180 1980181 1981182 1982l83 1983184 1984185 1985186
Production of wheat
Production of paddy
Price of wheat flourb Kathmandu
Terai
Price of rice to national consumer
100.0 98.7 106.1 124.0 116.0 131.2 133.3 141.0 152.8 168.9 210.4 202.5 200.0 223.0
100.0 120.1 121.9 129.5 118.6 113.4 118.4 102.4 122.5 127.3 91.9 137.1 134.0 139.0
100.0 108.2 113.7 126.5 109.8 110.6 103.7 124.7 150.9 187.3 225.6 207.7 195.9 254.4
100.0 136.0 147.1 123.4 123.0 125.7 135.2 150.2 165.0 191.3 240.3 189.2 183.5 241.2
100.0 119.2 139.6 128.8 118.4 133.0 135.4 151.5 162.2 181.0 246.5 233.9 246.1 313.3
163
Food uid md Nrpul
drought, Nepal had achieved three satisfactory harvests over the period 1983184 and 1985/86. In 1985/86 foodgrain production recorded a 5.4% growth and tolal foodgrain production reached 4.44 million tons. In 1986 Nepal exported 18 000 tons of rice. Foodgrain production fell sharply as a result of the late monsoon in 1986/87, but it is expected to increase to 4.8 million tons in 1987/88 compared to 4.1 million tons in the previous year. In examining the price effects of food aid in the Nepalese context one also has to consider two important elements. One is the practice of systematic state intervention in grain markets in respect of both pricing and marketing. The government determines minimum support farm prices with a view to achieving distributive justice and guaranteeing minimum prices for the farmers. Another element is the geographical factor, ie the long porous border with India. The possibility of cross-border movement of both food and production factors creates abnormalities in the pricing mechanisms. Since food aid covers only a small fraction of the total flow in the country, these two elements further discourage any unwarranted effects of food aid upon the prices of agricultural commodities.
Cost effectiveness
%. Reutlinger, ‘Project food aid and equitable growth: income transfer efficiency first’, paper presented to Government of the Netherlands Seminar on Food Aid, The Hague, 3-5 October 1983. reproduced in Report of the WFP, 1983, p 167. 24The cost effectiveness of WFP food aid commodities is calculated by using the simple formula: E, =
$
where E, = cost effectiness of the project and V, = money value (in either dollars or currency local to the recipient), and K, = food aid costs to donors.
164
Another much-debated aspect concerning food aid is cost effectiveness. This aspect also has far-reaching implications for the agricultural economy of Nepal, especially when the genuineness of food aid requirements is considered. Cost effectiveness in its generic sense means the ratio of the money value of food aid commodities to the food and shipment costs of these commodities to the donors. It is believed that in order to be acceptable the ratio should lie between 0.5 and unity. If the ratio is extremely low then food aid acceptability cannot be judged by the narrow measurement of income transfer alone. It has been said that ‘what matters is that people will consume more food when they receive a food aid commodity which conveys more income per dollar of cost than when they receive a commodity which conveys more energy (calories) per dollar of cost. The same is true for nutrients when the food supplied through aid is substitutable for foods in the existing diet.‘23 Cost effectiveness is here examined in order to judge the relative acceptability of food aid to Nepal. Our discussion is based on a case study of WFP-supplied food aid commodities. Due to unavailability of data on many food aid projects, we have selected only one project known as ‘Feeding of Mothers, Infants and Children’. This project was approved on 5 April 1971 and the plan of operation was signed on 21 March 1972. The total cost of food commodities was estimated to be $4.6 billion. The main objective of the project was to launch a feeding intervention programme. The project was approved initially for three years and was extended subsequently until 1984. The total cost of the expanded project to the WFP was $19 million (of which $1.35 million was the cost of food). The cost effectiveness ratio has been calculated24 for three years, from 1981/82 to 1983/84 because of the unavailability of annual figures. The actual data on the prices of each commodity are also not available, so we have taken the national consumer price index as a proxy. The results (Table 5) show that the cost-effectiveness ratio is high in all the three years. One of the reasons for such a high ratio is because of the inclusion of a high-priced commodity like butter oil in the food
FOOD
POLICY
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Food
aid and Nepal
Table 5. Cost effectiveness of the Feeding of Mothers, Infants and Children Project (in ‘000 $). 1981/82
Source: Computed from WFPICFA, lnferim Evaluabon Report on Project Nepal, Feeding of Mothers, Infants and Children, 1984.
WFP food costs Internal subsidy, external transport and supervision Total WFP cost Income value of WFP food aid to Nepal Cost effectiveness
1982l83
1983184
1 352.4
1 352.4
1 352.4
1 773.0 4611.6 10 938.7 0.54
1 773.0 4 611.6 11 747.8 0.58
1 773.0 4611.6 12 361.1 0.62
aid basket. There is no similar commodity in Nepal and hence its price is quite high as compared to other WFP-supplied commodities. If the price of individual commodities is considered, the prices of this commodity to the WFP and the internal consumer seem to be equal, but the prices of other commodities such as wheat are lower in Nepal than paid by the WFP. Once overhead costs are added, the supply of WFP commodities in this project seems to be cost effective. However, by avoiding transport costs (which can be done through the local purchase of food commodities) it is found that it is cheaper for Nepal to have these food commodities bought and donated by the WFP as aid than the opportunity costs of commodities supplied by it. If other costs, such as capital and recurrent costs, are added to the food commodities there is perhaps no sense in getting WFP-supplied commodities unless the country faces serious food shortages which have to be met at any political or economic cost.
Conclusions Food aid entered the agricultural economy of Nepal only recently. Despite the fact that the country normally has a positive food balance, the inflow of food aid could be desirable in view of: 0 0 0 0
25This is calculated by assuming a population growth rate of x% and a certain level of per capita food requirements, and attempts to deduce the growth in both yield and production over time that is necessary so that production equals requirements, See National Planning Commission, op cif, Ref 4, p 12.
FOOD POLICY May 1989
the high transportation costs of carrying food from the terui to the deficit areas; the lack of effective demand from the majority poor; the resources needed for initiating development works in order both to absorb surplus labour and to provide basic public facilities; the need to meet the nutritional requirements of the people in the food-deficient areas.
Food aid, though a potential resource for development, could become a risky and sensitive issue for an agricultural country like Nepal if it is not properly planned and integrated. This was the case until recently. It was only after the Local Level Aid Coordination Meeting on Agricultural Development that the government thought of integrating food-for-work with the development of a food transportation network. There are two possible areas where food aid could be effectively integrated into Nepal’s development plans. These are agriculture and rural development. The possibility of integrating into the agricultural sector has increased especially with the launching of the basic needs strategy. In its new basic needs strategy the government has projected a balance between availability and requirements of foodgrains by the year 2000. This is highly conjectural’” and in view of the growing population the scope for greater food aid becomes even more evident. Hence, an increasing commitment by institutions like the WFP could play an effective role in agricultural development. The increasing interest of certain donors in financing rural development also gives better scope for
Food aid and Nepal
integrating food aid with financial aid. Some of the projects where food aid operations could be well integrated are the Karnali Bheri Integrated Rural Development Project financed by Canada, the integrated hill development project financed by the Swiss government, and the food production programme launched with Japanese assistance. It should be emphasized that food aid should be a temporary phenomenon. This means that food aid should be used to increase domestic food production and not just for transporting food from surplus to deficit areas. Food production could be increased so as to meet consumption requirements and also help generate employment opportunities. This could be achieved only by preventing corruption and leakages for undesirable uses. However, if food aid is used to meet only temporary consumption requirements, then its side effects would damage the agricultural sector and consequently Nepal could fall into a state of perennial food dependency.
166
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Narayan Khadka
There is no general agreement either on the disincentive effects or on the costeffectiveness of food aid. This article analyses the possible implications of food aid to the agricultural economy of Nepal. It deals with the incentive/ disincentive effects of food aid on the production, pricing and distribution of food commodities. It is argued that due to certain factors such as the existence of disguised unemployment, the need for family security, ineffective market mechanisms and lack of substitution possibilities, food aid does not cause disincentive effects on Nepal’s food production, at least in the short run. However, food aid should be for a specific goal and should be phased out once that goal is achieved. Dr Khadka is at the South Asia Institute, University of Heidelberg, Im Neuenheimer Feld 330, 6900 Heidelberg, FR Germany.
‘World Development Report 1988, World Bank, Washington, DC, 1988. ‘See An Evaluation of Small Farmers Development Projects of Nepal, Agricultural Credit Division, Nepal Rastra Bank, Kathmandu, July 1982, p 1.
0306-9192/89/020155-l
2$3.00 0
Nepal is predominantly an agricultural economy with a subsistence level of production. The agricultural sector engages more than 90% of the economically active population and accounts for well over 60% of national income. It also accounts for 70% of export earnings and about 80% of industrial raw materials. But unfortunately it is beset by numerous problems, resulting in low income and low growth. According to the World Bank, Nepal’s per capita GNP is estimated to be around $150 - one of the lowest in the world.’ But although the agricultural sector suffers from a number of constraints, any sustainable development of the country must also undoubtedly rest with the growth and development of this sector. The problems of Nepal’s agricultural sector can be classified into three categories: topographical, structural and institutional. The topography is a formidable problem. The mountainous nature of the country gives little scope for arable land (about 17% of the total land area is under cultivation). In addition, the country is landlocked and shares a long open border with India, features which have posed many problems ranging from limited opportunities for international trade to difficult adjustments in Nepal’s fiscal, monetary and price policies. The agricultural sector also suffers from structural problems. These are extreme regional variations in terms of the distribution of arable land coupled with an uneven distribution of land in relation to the population. The hills and mountains together contain about 60% of the country’s population but only 30% of the total arable land. The terui region holds about 40% of the population and about 70% of the arable land. There also exist extremely wide variations in the size of landholdings. According to a survey conducted by Nepal’s Central Bank, ‘small and the marginal size farm families constituted 64% of the total farm families in the country and they possessed only 34% of the total cultivated land. Of the total small and marginal farm families, almost 31% possessed even less than one hectare of land accounting for about 8% of the total cultivated land of the country. The majority of these small farm families are illiterate and poor.‘* An exponential growth in the population (the 1981 census showed an unprecedented growth rate of about 2.7%) has caused internal migration from land-scarce regions, ie from the hills and mountains, to the relatively
1989 Butterworth
& Co (Publishers)
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Food aid and Nepal
land-abundant terui. This has exerted tremendous pressure on Nepal’s fragile environment. Not only are there both absolute and relative variations in the size of landholdings in the three regions, but there are also distinct variations in the cropping pattern, time lags between plantation and harvesting periods, and productivity. There are institutional problems as well. There exists a considerable inequality in the spatial and social distribution of resources and incomes between the rural and urban populations. There is also a sizeable inequality within the rural areas between landlords and tenants as well as between big and small or marginal farmers. These inequalities have impeded any institutional measures the government has taken to bring about reforms in the agricultural sector. There is neither the political will nor an efficient socioeconomic mechanism for reaching low-income families and improving their economic circumstances. This is because political power at the top is monopolized by landlords and the elite, so any institutional support the government purports to provide to agriculture is enjoyed only by a few big and powerful landlords. This has only a marginal effect on overall productivity. For example, there are credit and supply institutions for meeting agricultural needs, but according to the central bank survey of the total borrowings from the institutional credit agencies during the year 1969/70, the share of the small-size farm families was 3% only. After a lapse of seven years, the proportion of borrowing of this stratum of farm families from the institutional sources rose slightly and reached S%.’ This figure is still very low compared to the number of large and medium-size farm families, which comprise 76 and 16% of the total respectively. Moreover, the credit supplied may not in fact be used for the purpose for which it was intended.
Is there a need for food aid?
31bid.
156
Despite all these problems, until recently Nepal produced a surplus of foodgrains. However, this surplus was partly nominal: it reflected only the difference between national production and requirements. Requirements are not the same as consumption. In reality, the actual surpluses would have been higher than the estimated figure because not all the population could buy the marketable foodgrain commodities. Hence the surplus in the foodgrain balance sheet as shown in government statistics should be viewed with caution because these are calculated against actual consumption. The consumption requirement is calculated by taking only about 86% of calorie intake, therefore the surplus is related to assumed effective demand and not need. Nepal’s national foodgrain balance sheet shows that there are marked variations in production and requirements between the three geographical regions (Table I). Hill and mountain regions suffered from a chronic food deficit for all the years under review. The table also indicates that, with the exception of one or two years, the food deficiency in the hills and the mountains is increasing. This is mainly because food production in both these regions has been stagnating whereas the food requirement has gone up during the period under review. The stagnation in food production can be attributed to the inferior quality of land, irregular supply of agricultural inputs, rudimentary farm methods and low yield. Demographically, the hill regions have the highest concentration of population and consequently
FOOD POLICY May 1989
Food aid and Nepal Table 1. National foodgrain balance sheet (in ‘000 tonnes), 1975-95. Food requirement
Food production Mountains
Hills
Terai
Mountains
Hills
Terai
Mountains
Hills
Terai
1975
131 131 128 121 122 106 115 114 105 109 123
870 872 881 816 848 709 821 914 861 909 988
1410 1468 1343 1310 1333 1186 1473 1480 1290 1724 1641
146 150 158 140 142 144 147 160 165 184 181
924 944 922 955 982 1002 1022 1009 1027 1121 1175
801 819 850 841 867 889 891 1087 1116 1194 1223
-15 -19 -31 -19 -20 ~38 ~32 -46 -60 -75 -58
-54 -72 -111 -139 -134 -294 -201 -86 -166 -212 -187
+609 +649 +493 +469 +466 +297 +582 +393 +144 +530 +418
1976 1977 1978 1979 1980 1981 Nofe:Thistable covers51 ofNepal's75 districts.1982 1983 Source:Food and Agricultural Division, Ministry 1984 of Agriculture, His Majesty'sGovernment of 1985 Nepal.
%ee National Planning Commission, Programme for Fulfilment of Basic Needs (798%2000), His Majesty’s Government, Kathmandu, September 1987, p 10. 5A.K. Sen, Poverty and Famine: An Essay on Entitlement and Deprivation, Oxford University Press, 1981. Also see Povetiy and Hunger: issues and Options for Food Security in Developing Countries, World Bank, Washington, DC, 1986. ‘See Pilot Study on Socio-Economic lndicators for Monitoring and Evaluation of Agrarian Reform and Rural Development in Nepal, His Majesty’s Government, Department of Food and Agricultural Marketing Services Division, and FAO, May 1983.
FOOD POLICY May 1989
Food balance
Year
the weakest resource base, with cultivable land averaging only 0.4 hectares per household. The disequilibrium in population growth and availability of farm land has brought marginal land, including steep slopes which must be terraced, into cultivation. In marked contrast to the situation in the hills and mountains, the tropical terui region (the plains) has almost regularly produced a surplus of foodgrains. In fact this region produces a large enough surplus in a normal year to more than offset the deficits of the other two regions. This is because of the comparatively better supply of inputs such as irrigation and fertilizers and the existence of an improved infrastructural base. Therefore in simple arithmetical terms Nepal was not until recently facing serious food shortages but was a net food exporter (in the late 1960s it was one of the major exporters of rice). However, the erratic nature of production on the one hand and the growing population on the other caused imbalances between production and consumption. According to a government report, ‘per capita grain production has fallen to 2.58 kg in 1984-85 as compared to 296 kg in 1974-75. During this decade, the production of grains (paddy, maize, wheat, millet and barley) grew by 1.3% per annum while the population rose by 2.66% annually.‘4 The rerui, the grain basket of Nepal, also showed erratic levels of food production. leading intermittently to an overall food deficit. For example Nepal faced an overall food deficit in 1980 and 1983 of about 35 000 and 122 000 tonnes, leading to a need for either commercial imports or food aid. But, as stated above, the national balance sheet for foodgrains does not adequately reflect Nepal’s food problem. It shows only that given improvements in income and wealth or their distribution in favour of the two food-deficient regions, national requirements could be met domestically. This implies that food shortages are a consequence of poverty. Since poor people do not have the purchasing power to acquire food, their needs either go unmet or are only partially fulfilled. The existing patterns of asset and income distribution, employment opportunities and other socioeconomic factors are such that the vast majority of the rural population does not have what Sen referred to as an ‘exchange entitlement” to trade for food. If we examine the actual calorie deficiencies in all three geographical regions we find that the intensity of food shortages in the two poor regions is much greater than the balance sheet reveals. According to one government report the extent of real calorie and malnutritional deficiency is increasing. About 36% and 32% of the population suffer from inadequate income and consumption respectively.h Calorie intake estimates for households show that on average people below the poverty line in all the regions take less calories
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Food aid and Nepal
‘WFPICFA, Interim Evaluation Summary Report on Project Nepal, Feeding of Mothers, Infants and Children, 17th Session, Rome, 26 May and June 1984,1984. ‘Ministry of Finance, Economic Survey 1983-84, His Majesty’s Government, Kathmandu, 1984. ‘Nepal received wheat under this Emergency Assistance Programme in 1955 and 1958 worth $635 000 and $4 113 000 respectively. Some non-food commodity assistance was provided by the USA on a regular basis but this was basically technical aid used for generating local funds.
than are required. It is also stated in another report that ‘the country is faced with malnutrition among a large part of its population particularly in food deficit areas and especially among expectant and nursing mothers and pre-school children. Malnutrition is also a serious problem among school children aged six to twelve.” Government figures show that all the 51 districts having a food deficiency were also suffering from a calorie deficiency. This was calculated by converting the net foodgrains (it was estimated that cereals and potatoes meet about 80% of calorie requirements) into calorie intake available. The regional results of this estimation show that altogether 51 districts, constituting more than 50% of the total population, were affected by calorie deficiency. Table 2 shows the deficiency in calorie requirements and availability. One important aspect of this table is that it shows a food deficiency in all the three regions. Also important is the fact that the gap between food production and requirements in the 51 districts in the year 1983/84 is so high that the surplus in the remaining 24 districts would hardly be enough to bridge the gap. Indeed, the country suffers from a deficit of 248 750 tonnes at national level. This has serious implications for Nepal’s food economy because, in view of the trend in food production, the year 1983184 has been considered a favourable year. According to the government, in that year ‘the index of production of major crops has shot up to 115.1 because of an increase in production of 22.3% over the last year’.X An overall deficiency in foodgrains even in a very favourable year like this would mean that if production does not increase sufficiently the country will face serious food shortages. In addition to production, requirement and consumption factors, one should examine other economic factors in analysing the food situation in Nepal: the existing level of poverty, underemployment and unemployment, causing low incomes, high transportation costs for transporting food from the plains to the food-deficit hills and mountains, the relatively isolated nature of local markets, and the limited resources at the government’s disposal for subsidizing foodgrains through the Nepal Food Corporation in the food-deficient regions.
Sources and magnitude of food aid Nepal was one of the recipients of US food aid (Emergency Food Aid Relief and Food Supply PL 480) in the mid-1950s’ although there was no real need for it. Between 1951 and 1976 Nepal received about $7 million worth of emergency food relief and supplies (about 3.45% of total US aid to Nepal). However, since the early 1970s Nepal has been receiving food aid from the World Food Programme (WFP) and other donors more or less on a regular basis. The aid consists of both project and programme type assistance. The main purpose of these recent food Table 2. Calorie requirement
Note: This table covers 51 districts in the three reqions. aB&ed on the assumption that cereals meet only 80% of the calorie requirements.
158
and deficiency,
1983184.
Population
Food required (1 O6 cal)
Cereals/ deficits’
Calorie deficit (IO6 cal)
Foodgrain deficit
402 578 2 731 230 262 376
1 317 238 6939 195 426 426
1 076 012 5 931 831 328 256
930 044 4 676 230 262 605
458 132 1 992 869 229
132 792 577 643 66
3396
8 682 859
7 336 099
5 868 879
2 451 230
710 501
Region
Food available (lo6 cal)
Mountains Hills Terai Total
184
FOOD POLICY May 1989
Food aid and Nepal
aid measures is to meet the nutritional requirements of certain segments of the population and at the same time to use food as a potential resource for local development. The food aid coming from the WFP contains both food and non-food items. Butter and corn soy blend are the most regularly supplied commodities. Between 1973 and 1983 the WFP supplied a total of 114 000 tonnes of various food and non-food items. A number of bilateral donors also supplied food commodities to Nepal for meeting national food shortages caused by drought in 1979180 and 1982183. The total food aid (cereals only) received from the WFP and bilateral sources during 197685 is shown in Table 3. As this table indicates, a large part of the food aid has come from the WFP. Bilateral donors, of whom there have been a large number, supplied food aid casually in the 1970s but their contribution to the total food aid was quite high particularly in 1980/81 and 1982/83. These sources donated supplies even after this period when Nepal’s domestic production exceeded its average requirements, mainly because food aid committed during the shortage periods was disbursed over a number of years. As noted before, Nepal began to receive food aid on a regular basis in the early 1970s. Between 1973 and 1975 Nepal received a total of about 4000 tonnes of cereals. Only two items were supplied: maize (about 2500 tonnes) and wheat (about 1500 tonnes). These were supplied by the multilateral organization, the WFP. Between 1976 and 1983 Nepal faced two major droughts causing serious food shortages and there followed a period of relatively heavy inflow of food aid. However, from Table 3 it is obvious that a large part of the aid was multilateral. Bilateral aid was mobilized only during the two food shortage periods 1981 and 1983. The commodity composition of the food aid supplied indicates that wheat and wheat flour predominated. Supplies of rice, which is the major staple in Nepal, were sporadic and much smaller than the other two items.
The purpose of food aid It is generally believed that food aid has two objectives: (a) to mobilize domestic savings (through project-type assistance), and (b) to save foreign exchange which otherwise would have been used for commercial imports. However, the programme type of assistance cannot easily be Table 3. Total food aid received (tonnes), 1976-85. 1976
1977
1970
1979
1980
1981
1982
1983
93 93
450 450 -
2 321 2 321 -
2511 2 511 -
24 301 1 990 23 211 -
20 280 5 986 14 294 8115 8115 -
10 465 8913 1 552 -
41 28 13 33 33 -
Wheat Bilateral WFP Rice Bilateral WFP Wheat flour Bilateral WFP Maize Bilateral WFP Soyabean oil Bilateral WFP
-
-
-
-
-
Total
94
750
3 267
6917
27 104
-
1 1
-
300 300 -
946
4406
2
803
946 -
4406 -
2 -
2 007 950 950
7 376
1984
1985
-
-
7 606 7 606 -
405 405 -
-
-
-
-
101 857 45 241 56616 49 503 49 503 22 232 712 21 520 950 950
-
-
-
-
-
-
-
1 520 1 520 -
-
31 352
17841
81 181
9 126
-
FOOD POLICY May 1989
4 393 712 3 681
-
803
SOUrCes: Ministry Of Agriculture, Agricultural Services Division, and Nepal Food
7 376
2 007 -
436 352 084 377 377
1 520 1 520 405
170 026
Corporation,Kathmandu,Nepal,
159
Food aid and Nepal
compartmentalized. If emergency relief measures are added, food aid has both short-term and long-term effects, and all three categories of assistance overlap in generating economic effects. The variability of food aid resources creates further problems in controlling the developmental effects with any accuracy. It has rightly been pointed out by Singer, Wood and Jennings that in both project and programme types of assistance ‘food aid offers an opportunity for development, not a guarantee of development. It depends upon what government does with the resources, either independently or in joint programming with donors.“” Nepal has received all types of food aid over the past decade, but the most regular has been the project type of assistance supplied by the WFP. Food aid for balance of payments support is usually covered under bilateral arrangements. In view of the country’s geographical barriers and also its resource constraints, project food aid offers the highest opportunities for development of the food-deficient regions. There is a need to improve the nutritional intake of the underprivileged population, generating employment opportunities and thereby creating effective demand, and at the same time to undertake local developments such as road construction, irrigation and other public works. But due to limited budgetary resources and political expediency, the government is not under pressure to fulfil these necessities. All these various interwined objectives can be pursued through project food aid to which there are neither any serious conditions attached nor any substitution effects on financial aid. However, the government should make sound plans for the whole project cycle involving the selection of genuine project beneficiaries, the generation of economic benefits and provision for maintenance and complementary inputs. Other important considerations are the possibilities for using local grains and the effects of food aid on price fluctuations. But these issues cannot be tackled in the absence of a committed political machinery.
Food aid and development:
‘OHans Singer, John Wood and Tony Jennings, food Aid: The Challenge and the Opportunity, Clarendon Press, Oxford, 1987, pp 43-44. “For a historical account of food aid, see ibid, pp 17-36. “T.W. Schultz, Value of US farm surpluses to underdeveloped countries’, Journal of Farm Economics, Vol 42, 1960, p&l;:
9-1636.
14F.M. Fisher, ‘A theoretical analysis of the impact of food surplus disposal on agricultural production in recipient countries’, Journal of Farm Economics, Vol 45, No 4, 1963.
the debate
Food aid was expanded considerably after the second world war in terms of both magnitude and responses to new challenges posed by the twin problems of falling agricultural production and increasing population growth in many low-income countries.” The expansion in food aid operations aroused tremendous interest among academics and professionals about their possible implications in recipient countries. Two opposing schools of thought developed, which can be briefly described as supporters and opponents of food aid operations influenced by either ideological or pragmatic considerations. An influential early study was undertaken by T.W. Schultz. In his seminal paper Schultz pointed out that one of the crucial problems that farmers (in this case Indian farmers) face ‘is the many serious price fluctuations that occur’.‘* He added that ‘if a program were devised that would reduce substantially this kind of price uncertainty in agriculture, it seems likely that the effect would be to induce an expansion in agricultural production, even if average prices over three or five year periods were somewhat lower than they otherwise would be’.” Schultz’s thesis was further tested by Fisher who concluded that domestic production responds to the price elasticities of both supply and demand for food.14 Contrary to these arguments, in 1961 the FAO produced a report in which it stated that food aid stimulates agricultural production
FOOD POLICY May 1989
Food aid and Nepal
by generating additional demand.15 This report also argued that food aid contributes to enhancing production particularly during periods of structural change such as land reforms which might disrupt agricultural production. These two opposing strands of argument have aroused considerable debate ever since about the impact of food aid on the recipient’s economy. I6 The debates cover theoretical, empirical and country case studies on food aid and its possible effects. Unfortunately, the results of most of the studies are inconclusive and sometimes astoundingly divergent. For example, of 12 studies on the effects of food aid to India, five argued that the disincentive effect was non-existent; one showed that prices were affected but output was not; four found a significant negative effect on both prices and output; and two reached mixed conclusions.” One recent study showed ‘how food aid could make it possible to increase the size of the development effort above what would otherwise be possible without running into inflation or balance of payments deficit’.lx As regards methodology, the selection of countries, coverage of data and time periods the studies encompass a wide range of choices, but the conclusions drawn betray either ideological or pragmatic preferences. The arguments applauding and disparaging the role of food aid in the recipient’s economy hinge on the following issues. Those who support food aid argue that: 0 0 0 0 0 0
it may provide balance of payments support by freeing foreign exchange; it may help generate domestic savings for development; it may help achieve food security goals by setting up storage facilities; it may help achieve distributive justice in respect of income equality; it has a favourable impact on disadvantaged groups; it may help implement price stabilization measures.
Those who criticize points: “Development Through Food: A Strategy for Surplus Utilization, FAO, Rome, 1961. 16For a survey of the literature on the effects of food aid see Paul J. lsenman and ‘Food aid: disincentive Hans Singer, effects and their policy implications’, Economic Development and Cultural Change, Vol 25, No 2, January 1987, pp 205-237; S.J. Maxwell and Hans Singer, ‘Food aid to developing countries: a survey’, World Development, Vol 7, No 3, March 1979, pp 225-247; and Edward J. Clay and Hans Sinoer. USA/D Food Aid and Develoomeit: .The Impact and Effectiveness bf Bilateral PL 480 Tit/e 1 Type of Assistance, AID Program Evaluation Discussion Paper No 5, USAID, Washington, DC, 1982. ITSee Maxwell and Sinaer. OD cit. Ref 16. ~231. “M. Ezkiel, ‘Uses of agricultural surpluses to finance economic development in under-developed countries - a pilot study in India’. in Food for Development. FAO. Rome, 1985. ‘gMaxwell and Singer, op tit, Ref 16, p 230. ”
FOOD POLICY May 1989
l l l 0
e l
food aid have focused
their arguments
upon
these
food aid produces direct disincentive effects through pricing mechanisms for domestic farmers; it discourages the recipient government from undertaking necessary reforms in the agricultural sector; it creates distortions in food culture and food habits; it creates a state of political and economic dependency; it does not often reach the nutritionally vulnerable groups of the population or the targeted groups; there is also a growing criticism that food aid is an inferior form of external assistance compared to financial or technical aid.
Of all these criticisms, the disincentive effects on production and neglect of the agricultural sector have been the most widespread. According to effect of food aid in recipient one survey, ‘the possible disincentive country agriculture is the single most widely treated issue in food aid literature’.” In the following section we discuss the possible incentive/ disincentive arguments about food aid in Nepal.
Food aid and agricultural production We have outlined
the justification
for food aid to Nepal
in the existing
161
Food uid and Nepal
economic situation. This is based on the hypothesis that food aid to Nepal does not seem to have caused disincentive effects on local production. One of the main reasons is that aid supplies, whether in normal or emergency situations, do not disrupt normal market mechanisms in the short run. In emergencies prices will usually go up. But because of the free open border which facilitates illegal trade, any lucrative price rise will attract supplies from across the border which will eventually bring prices back to an equilibrium level. This means that food aid supplied under emergency conditions will only depress prices to the level which would have been reached as a result of the illegal inflow of supplies. Moreover, food aid supplied under emergency conditions is not so abundant as to bring prices down to a demotivating level. It is also not wise to make projections which are based on abnormal conditions. Under normal conditions the most regular type of food aid is the project type of aid which is used in chronically food-deficient areas. As most of the population living in these areas does not have adequate purchasing power, local food supplies can hardly be sold at normal market prices. Even in the absence of food aid the government distributes food at heavily subsidized prices. But since the government corporation’s food distribution effort falls far short of requirements, food aid geared to these areas simply helps fill the gap, if leakages and improper uses are prevented. Food aid supplied under food-for-work projects creates hardly any disincentive effects on terai farmers whose market outlets are many and open. These additional supplies rather push up the average demand for food. Moreover, the growing population, which is exerting growing pressure on marginal land, the high rate of disguised unemployment and expanding public sector expenditures all have a positive impact on the demand of food. This helps to stabilize foodgrain prices, which would otherwise fall as a result of injection of externally produced food supplies. This automatic stabilization sustains producers’ expectations concerning prices and profits. Similarly, the existing unemployment and underemployment conditions restrict farmers’ risk of undercutting food production. According to estimates from Nepal’s Planning Commission, 6% of the labour force is unemployed and as much as two-thirds is underemployed. The figures for the urban areas run at about 6% and 45% respectively. This means that food aid does not produce disincentive effects in Nepal’s economy in the short run because farmers have no reliable employment substitution possibilities they cannot afford to abandon or reduce their commitment to farming in favour of seasonal employment created by food-for-work projects. Food-for-work schemes have a marginal effect on displacing labour from agriculture to other sectors because of disguised unemployment: the temporary release of farm labour for wage employment does not bring any great change in the production of foodgrains. The size of the average family holding is so meagre that even if the head of the family quits farming there will be little effect on production because other family members will look after the farm. The other possibility, of switching cropping patterns from foodgrains to cash crops, is also limited because of marketing constraints, uncertainty in pricing and the moral need to solve the family food security question. Since farming has not yet been commercialized, most producers are small farmers and tenants (about 64% of all farm families, working 34% of the total cultivated land). Hence feeding the family and paying rent to the landlord are compelling reasons for increasing foodgrain production. 162
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Food
aid and Nepal
Pricing and production
“Quoted in lsenman and Singer, op tit, Ref 16, p 210. “See P.L. Scandizzo, ‘Aggregate supply response: empirical evidence on key issues’, draft, FAO, Rome, 1984 (mimeo). *‘L B Fletcher and D.E. Sahn, An Assessment of Food Aid as Development Resource in Nepal, Community System Foundation, MI, 1984, p 54.
The major element associated with the disincentive effects of food aid on production is pricing. The main debate is about the response of externally induced food supplies to price elasticity. Supporters of food aid believe that any additional increase in its supplies helps contain price increases and over a period of time stabilize them. On the other hand, opponents believe that an increase in food supplies depresses prices received by farmers. What actually does happen to prices and the impact on growth and incomes can be examined by analysing whether supply is price elastic. Mellor’s study showed that ‘while the supply response to price change is positive, it tends to be quite low (eg between 0.1 and 0.2) in land scarce countries because of the relatively inelastic supply of land and consequent diminishing returns to other inputs (and increasing marginal costs)‘.*” Another study concluded that ‘price elasticities of supply are significant’.2’ The hypothesis that the supply of food aid (wheat supplied by the WFP) influences prices and the production of paddy does not hold in Nepal’s agricultural context. The index of prices and production of wheat and paddy indicates that neither price nor production of these commodities seems to be affected by the infusion of food aid (see Table 4). The table shows that production of wheat and paddy is not affected by changes in their prices. In other words, there is no positive correlation between prices and production. Where there is a simultaneous fall in prices and production this seems to be a coincidence. For example, in 1982/83 the volume of wheat supplied by the WFP was relatively high and there was a fall in paddy production, but production of wheat increased substantially in that year. It is interesting to note that in 1983/84 both prices and production of paddy increased despite the fact that Nepal had received a large amount of food aid in the previous year. It is clear that the heavy infusion of food aid commodities (mainly wheat) has not created any disincentive effect. This is demonstrated by the increase in wheat production. In 1983/84 the production of wheat increased so much that prices fell about 50% and the farmers ‘were left unable to recoup their cash costs of production for the crop. It is hard to justify importing wheat, even in the form of aid, when the same commodity was in gross surplus and being exported to neighbouring India at disastrously low prices.‘** The absolute food production figures indicate that despite the need for food aid operations in 1982/83, a situation brought about by the Table 4. Index of prices and production (1972’73 = 100).a
=Due to a lack of consistency in data for both volumes and composition, the index of food aid has not been computed. ‘Due to the lack of data on the national consumer price index for wheat, the indices of wheat prices in Kathmandu and terai have been taken. Source: Government economic surveys, and Nepal Rastra Bank Quarter/y Bulletin (various issues).
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1972173 1973174 1974i75 1975176 1976ff7 1977178 1978179 1979180 1980181 1981182 1982l83 1983184 1984185 1985186
Production of wheat
Production of paddy
Price of wheat flourb Kathmandu
Terai
Price of rice to national consumer
100.0 98.7 106.1 124.0 116.0 131.2 133.3 141.0 152.8 168.9 210.4 202.5 200.0 223.0
100.0 120.1 121.9 129.5 118.6 113.4 118.4 102.4 122.5 127.3 91.9 137.1 134.0 139.0
100.0 108.2 113.7 126.5 109.8 110.6 103.7 124.7 150.9 187.3 225.6 207.7 195.9 254.4
100.0 136.0 147.1 123.4 123.0 125.7 135.2 150.2 165.0 191.3 240.3 189.2 183.5 241.2
100.0 119.2 139.6 128.8 118.4 133.0 135.4 151.5 162.2 181.0 246.5 233.9 246.1 313.3
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Food uid md Nrpul
drought, Nepal had achieved three satisfactory harvests over the period 1983184 and 1985/86. In 1985/86 foodgrain production recorded a 5.4% growth and tolal foodgrain production reached 4.44 million tons. In 1986 Nepal exported 18 000 tons of rice. Foodgrain production fell sharply as a result of the late monsoon in 1986/87, but it is expected to increase to 4.8 million tons in 1987/88 compared to 4.1 million tons in the previous year. In examining the price effects of food aid in the Nepalese context one also has to consider two important elements. One is the practice of systematic state intervention in grain markets in respect of both pricing and marketing. The government determines minimum support farm prices with a view to achieving distributive justice and guaranteeing minimum prices for the farmers. Another element is the geographical factor, ie the long porous border with India. The possibility of cross-border movement of both food and production factors creates abnormalities in the pricing mechanisms. Since food aid covers only a small fraction of the total flow in the country, these two elements further discourage any unwarranted effects of food aid upon the prices of agricultural commodities.
Cost effectiveness
%. Reutlinger, ‘Project food aid and equitable growth: income transfer efficiency first’, paper presented to Government of the Netherlands Seminar on Food Aid, The Hague, 3-5 October 1983. reproduced in Report of the WFP, 1983, p 167. 24The cost effectiveness of WFP food aid commodities is calculated by using the simple formula: E, =
$
where E, = cost effectiness of the project and V, = money value (in either dollars or currency local to the recipient), and K, = food aid costs to donors.
164
Another much-debated aspect concerning food aid is cost effectiveness. This aspect also has far-reaching implications for the agricultural economy of Nepal, especially when the genuineness of food aid requirements is considered. Cost effectiveness in its generic sense means the ratio of the money value of food aid commodities to the food and shipment costs of these commodities to the donors. It is believed that in order to be acceptable the ratio should lie between 0.5 and unity. If the ratio is extremely low then food aid acceptability cannot be judged by the narrow measurement of income transfer alone. It has been said that ‘what matters is that people will consume more food when they receive a food aid commodity which conveys more income per dollar of cost than when they receive a commodity which conveys more energy (calories) per dollar of cost. The same is true for nutrients when the food supplied through aid is substitutable for foods in the existing diet.‘23 Cost effectiveness is here examined in order to judge the relative acceptability of food aid to Nepal. Our discussion is based on a case study of WFP-supplied food aid commodities. Due to unavailability of data on many food aid projects, we have selected only one project known as ‘Feeding of Mothers, Infants and Children’. This project was approved on 5 April 1971 and the plan of operation was signed on 21 March 1972. The total cost of food commodities was estimated to be $4.6 billion. The main objective of the project was to launch a feeding intervention programme. The project was approved initially for three years and was extended subsequently until 1984. The total cost of the expanded project to the WFP was $19 million (of which $1.35 million was the cost of food). The cost effectiveness ratio has been calculated24 for three years, from 1981/82 to 1983/84 because of the unavailability of annual figures. The actual data on the prices of each commodity are also not available, so we have taken the national consumer price index as a proxy. The results (Table 5) show that the cost-effectiveness ratio is high in all the three years. One of the reasons for such a high ratio is because of the inclusion of a high-priced commodity like butter oil in the food
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POLICY
May 1989
Food
aid and Nepal
Table 5. Cost effectiveness of the Feeding of Mothers, Infants and Children Project (in ‘000 $). 1981/82
Source: Computed from WFPICFA, lnferim Evaluabon Report on Project Nepal, Feeding of Mothers, Infants and Children, 1984.
WFP food costs Internal subsidy, external transport and supervision Total WFP cost Income value of WFP food aid to Nepal Cost effectiveness
1982l83
1983184
1 352.4
1 352.4
1 352.4
1 773.0 4611.6 10 938.7 0.54
1 773.0 4 611.6 11 747.8 0.58
1 773.0 4611.6 12 361.1 0.62
aid basket. There is no similar commodity in Nepal and hence its price is quite high as compared to other WFP-supplied commodities. If the price of individual commodities is considered, the prices of this commodity to the WFP and the internal consumer seem to be equal, but the prices of other commodities such as wheat are lower in Nepal than paid by the WFP. Once overhead costs are added, the supply of WFP commodities in this project seems to be cost effective. However, by avoiding transport costs (which can be done through the local purchase of food commodities) it is found that it is cheaper for Nepal to have these food commodities bought and donated by the WFP as aid than the opportunity costs of commodities supplied by it. If other costs, such as capital and recurrent costs, are added to the food commodities there is perhaps no sense in getting WFP-supplied commodities unless the country faces serious food shortages which have to be met at any political or economic cost.
Conclusions Food aid entered the agricultural economy of Nepal only recently. Despite the fact that the country normally has a positive food balance, the inflow of food aid could be desirable in view of: 0 0 0 0
25This is calculated by assuming a population growth rate of x% and a certain level of per capita food requirements, and attempts to deduce the growth in both yield and production over time that is necessary so that production equals requirements, See National Planning Commission, op cif, Ref 4, p 12.
FOOD POLICY May 1989
the high transportation costs of carrying food from the terui to the deficit areas; the lack of effective demand from the majority poor; the resources needed for initiating development works in order both to absorb surplus labour and to provide basic public facilities; the need to meet the nutritional requirements of the people in the food-deficient areas.
Food aid, though a potential resource for development, could become a risky and sensitive issue for an agricultural country like Nepal if it is not properly planned and integrated. This was the case until recently. It was only after the Local Level Aid Coordination Meeting on Agricultural Development that the government thought of integrating food-for-work with the development of a food transportation network. There are two possible areas where food aid could be effectively integrated into Nepal’s development plans. These are agriculture and rural development. The possibility of integrating into the agricultural sector has increased especially with the launching of the basic needs strategy. In its new basic needs strategy the government has projected a balance between availability and requirements of foodgrains by the year 2000. This is highly conjectural’” and in view of the growing population the scope for greater food aid becomes even more evident. Hence, an increasing commitment by institutions like the WFP could play an effective role in agricultural development. The increasing interest of certain donors in financing rural development also gives better scope for
Food aid and Nepal
integrating food aid with financial aid. Some of the projects where food aid operations could be well integrated are the Karnali Bheri Integrated Rural Development Project financed by Canada, the integrated hill development project financed by the Swiss government, and the food production programme launched with Japanese assistance. It should be emphasized that food aid should be a temporary phenomenon. This means that food aid should be used to increase domestic food production and not just for transporting food from surplus to deficit areas. Food production could be increased so as to meet consumption requirements and also help generate employment opportunities. This could be achieved only by preventing corruption and leakages for undesirable uses. However, if food aid is used to meet only temporary consumption requirements, then its side effects would damage the agricultural sector and consequently Nepal could fall into a state of perennial food dependency.
166
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