By Anonymous, a former ODI Fellow
In 2005, Malawi undertook one of the most ambitious drives to develop its agricultural sector witnessed in a generation. The initiative involves targeting fertiliser and seed inputs using ‘smart subsidies’, aimed at supporting the poorest smallholder farmers in the country. The policy was launched following a drought which left close to five million people in need of food aid. Between 2005 and 2009, Malawi’s maize production doubled and real per capita GDP increased by 40%.
Andrew Dorward and Ephraim Chirwa have written a series of papers chronicling the program’s development – their most recent paper was released last month. They have been consistently supportive of the program, arguing that fertiliser subsidies have increased food availability, increase real wages and led to wider economic growth and poverty reduction. However, this has come at a cost. In 2008/9, the program cost over $250m. At 16% of the national budget and 5.6% of GDP, the money spent is equivalent 147% of total health spending and 175% of education expenditure.
When analysing a project of this scale, the concepts of opportunity cost and sustainability should form the main criteria for assessment. Not concepts such as operational efficiency – the focus of Dorward’s and Chirwa’s most recent work. I would argue that the fertiliser subsidy program performs poorly on these criteria for two main reasons.
First, it is unclear that the benefits of the scheme actually outweigh the costs. In 2008, Dorward and others estimated the benefit to cost ratio of the program in 2006/7 – a year of good rains and relatively low fertiliser prices. The estimate was 1.06 – a small net benefit – and had a wide variance. However, in later years, fertiliser prices have been considerably higher – suggesting that if the same methodology was applied, the results would be negative (costs>benefits). The paper rightly argues that many of the benefits of the program are hard to measure, so have been excluded from this metric. But there are also unknown costs, for example the displacement of the private sector in the agricultural industry by massive government intervention.
Second, the focus on fertiliser to raise crop yields leaves the economy vulnerable to exogenous shocks –all the eggs are in one basket! For instance, fertiliser won’t work if there is no rain. At present much of the country’s foreign exchange is used for fertiliser imports – reducing the amount available to import food in the event of a drought. Money spent on the subsidy could also be used to improve the country’s near non-existent irrigation network (despite Lake Malawi covering a third of the country). Or the money could be used to diversify the economy away from the volatile agricultural sector. All of these make the economy more resilient.
There are many other costs and benefits associated with the program. My point is that it is not enough to state that the fertiliser subsidy program is a success because maize yields have risen, or because the government has improved its logistical operations. Instead, we should be asking whether this program will help Malawi move away from subsistence farming? What are the complements to subsidised fertiliser? And what are its substitutes inside and outside of the agricultural sector?
Malawi now stands at cross-roads. On one hand the politically very popular subsidy program could continue to expand, raising its cost and complexity, to a level similar to the wasteful and counter-productive subsidies of the 1970s and 1980s. On the other hand, the program can be brought under control, both in terms of scope and scale. This will free up valuable resources to target complementary intervention within agriculture and support other government priorities outside of agriculture. In order to stimulate a Green Revolution in Malawi, where increased production is used to invest in raising productivity, a holistic approach must be taken, with several interventions being pursued simultaneously.