Malawi's farm subsidy benefits the poor but doesn't come cheap.

Author:Arndt, Channing
Position:Reprint
 
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30 September 2015

Malawi's farm input subsidy benefits the poor and can be part of a viable national development strategy.

Agriculture is Malawi's main economic sector. It generates one-third of GDP, half of total export earnings and two-thirds of employment.

The farm input subsidy programme is a prime example of a large-scale development programme. It is designed to provide about half of the country's farmers with two 50kg bags of fertiliser. Beneficiaries pay a small redemption fee, equating to a subsidy of two-thirds or more. Farmers are also provided with free improved seeds, principally for maize.

Implementing the programme has prompted large cuts to other agricultural programmes, such as irrigation, research and extension, as well as to other sectors, including roads, industry and the environment. Its budget accounts for 3-6% of Malawi's GDP and represents around 9-18% of government spending.

Given the scale of the programme, there is, correctly, strong interest in its effectiveness and a number of evaluations have been conducted. In a recent paper, we present a comprehensive evaluation of the programme and its macroeconomic effects.

The benefits

While the statistical fog that characterises Malawi precludes definitive conclusions, the available evidence indicates that the programme has resulted in:

* higher maize production despite reduced area;

* greater allocations of land to other crops;

* lower food prices;

* higher wages; and

* lower poverty rates, particularly in rural areas.

These positive outcomes are consistent with the best reading of available data, a broad array of non-monetary measures of welfare, and the views of Malawians with respect to their living standards.

The mechanisms

The programme increases land productivity and releases agricultural land to crops that are of higher value than traditional maize. We estimate that the programme has resulted in a roughly 15% gain in maize production. This is despite a slightly more than 15% reduction in the total area allocated to maize.

The release of land for other crops constitutes the major spillover from the programme. These and other spillover effects have been largely unaccounted for in existing evaluations. We find that the benefit-cost ratio increases by 60% when spillovers are accounted for.

While accounting for spillovers such as land reallocation raises the benefit-cost ratio for the programme across an array of scenarios, arguments exist that the programme's costs still outweigh the benefits....

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