On the opportunity cost of the Malawi fertiliser subsidy

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.

5 thoughts on “On the opportunity cost of the Malawi fertiliser subsidy

  1. Sam gardner

    February 15, 2011 at 4:31pm

    I have worked in fertilizer programs, but have no Malawi experience whatsoever.

    If the return on investment was a meager 1.06, the opportunity cost is enormous. Pest control has a way higher return on investment, road building, infrastructure, etc. I don’t know of any investment in the 3rd world with such a low return.

    More important is the policy choice. Is it really in the best interest of Malawi to bet on food crop agriculture? The equation might have changed over the last year, but in most circumstances typical cash crops or manufacturing are way more beneficial and future oriented than food crop agriculture.

    The subsidy seems to prove that Keynesian policies work, but this approach looks more like subsidizing a dead-end industry than investing in growth.

    A cash transfer program to 1 million Malawi citizens would have given them 250 USD per person, a 2/3 of the nominal gdp/person/year. A cash transfer normally has a multilplication effect beyond 1.06. Moreover, it would stimulate the economy in a more “organic”way: letting the Malawi decide for themselves what is worth spending their money on.

  2. Denny

    February 15, 2011 at 6:31pm

    A thoughtful article, thank you.

    However, it’s really funny that anyone would talk about an industry as “dead-end,” upon which 80-90% of the population of a country depend upon in order to survive. We’re not talking about making buggy-whips here, we’re talking about food which people eat, to live. How very first-world-ish and academic.

    I have a lot of criticisms of the program — for example, its sustainability — but it has succeeded in feeding people.

    Hey, maybe we should convince US farmers that they should give up their subsidies, and use the money to help build roads in Malawi.

  3. Andrew W

    February 16, 2011 at 7:32am

    Interesting article. I’ve never understood why this program hasn’t recieved more (academic?) press.

    I’m not sure how things are now, but when I was living in Malawi (2007-08) the fertilizer program was hugely popular, but I always had a couple of reservations.

    Firstly, the singular obsession with maize. Nsima is so pivotal to the Malawian way of life little else was ever grown or eaten. I had friends working on crop diversification programs that never got anywhere; people were too attached to nsima.

    Secondly, simple agronomy like crop rotation was ignored. Smallholder farmers continually planted and replanted maize in the same fields season upon season. I don’t think I need to explain the negative consequences for the soil. Fertiliser will improve this in the short-term, but eventually the soil will become unplantable.

    Lastly, the availability of land. One guy working at the EU would always blather on when drunk that Malawi had the lowest ratio of humans to arable land in the world – something like 1.4 hectares each. I could never verify what he said, but from working in rural areas myself, it seemed perfectly feasible.

    All in all, the fertiliser subidy program did seem to be having a positive impact on maize production and had huge popular support. There always seemed to be so many other institutional hurdles that the progam wouldn’t overcome. Achieving any sort of productivity improvement in the malawian agricultural sector will take more than a subsidy program .

    Since 2008 has there been any notable improvement in crop diversification?

    @Sam Gardener – A social cash transfer scheme was piloted in Malawi In Mchinji district by UNICEF. I have no idea if the program was ever rolled out beyond the district, but anecdotal evidence suggested it was working.

    See http://www.unicef.org/evaluation/index_49364.html and http://www.nyasatimes.com/columns/malawi%E2%80%99s-cash-transfers-magic-bullets-for-eradicating-poverty.html

  4. bsanchez

    February 16, 2011 at 5:37pm

    My views on the subsidy are torn. I believe, for example, that $100m spent on a subsidy can achieve better results than $100m additional funding to the health or education sectors.

    At the same time I do think that after the initial couple of years the programme really got out of hand and that beyond a certain point (probably way before reaching $100m) the programme reaches serious diminishing returns. And this is why efficiency is such an important factor: in 2008/09 it is likely that the same impact as was achieved with $250m could have been achieved with $100m.

    Sustainability in the context of Malawi is always a red herring. What public programme is sustainable in a country that relies on aid for 40% of its government expenditure? I think the recent post in Owen Barder’s blog argued against thinking of the subsidy in terms of sustainability.

    Irrigation is the Holy Grail for people that believe that Malawi is very vulnerable to the vagaries of weather. The reality is that, contrary to conventional wisdom, a good dose of Nitrogen, Phosphate and Pottasium does a lot to improve the resilience of the maize plant to sub-optimal rainfall. On the other hand, the evidence on irrigation investment in Malawi is rather discouraging.

    Finally, let’s be careful about assessing the programme in the context of 2008/09 performance. This has always been a largely political and hugely popular programme. In 2008 not only did fertilizer prices hit historical records, but it was also the last rainy season before the presidential election. Hence the $250m price tag, which has been reined in since, albeit not as far as it could.

    Oh, and a final thought on the cost:benefit ratio. I always disagreed with Dorward and Chirwa on their methodology for coming up with these numbers. I think as academics they were uncomfortable with a result suggesting that the 2006/07 subsidy had a huge positive return. But the reality is that the additional tons achieved really have to be valued at their marginal value, which is probably the price of maize at the height of the following hungry season. That would have given a much higher C:B ratio for 2007/08, though of course the return on the 2008/09 programme is likely to be negative no matter how you calculate it (unless the calculation is a political one, of course).

    Anyway, apologies for the random mish-mash of thoughts. It’s a bit embarrassing that after four years I haven’t managed to organise my thoughts so as to provide a more meaningful story or rebuttal.

  5. Sam Gardner

    February 16, 2011 at 8:15pm

    I think the opportunity cost is central: what could be done alternatively with the same amount of money? There are a lot of options.

    @ Denny: I remember an article I read in Nicaragua in the 90s on “sustainable poverty” (pobreza sostenible) caused by the NGO politics of subsistence farming with green methods. It argued that these programmes did not give any hope to get out of poverty: they just gave some marginal improvement within a context of long term poverty and misery. No way out. Poverty can not only be long-term sustainable, it feels long too. Should we invest the scarce resources in keeping the status quo, or go for long term growth?

    Subsistence farming is not something most people in the world love to do (except as a hobby). By definition it is income insecure: as there is no real way to absorb higher production (the local market is saturated when you harvest), there is no real reason to produce more than what you need. Comes a bad season and you are out. The return on labor (in the sun with a hoe) is often less than USD 1/day. As for export, I would be hugely surprised if maize in Malawi would be more beneficial than in Argentina.

    Development goes with higher productivity (working less hard, earning more, less risk), meaning normally moving out of subsistence farming into more economical sectors. I am all in favor of supporting the poor, but the support should not lock them into long term poverty traps. Probably they could give all 65+ people a pension for this amount of subsidy.

    - I agree fully with your take on government sponsored irrigation compared to fertilizer.
    - Does Malawi has a system for stocking crops or so, as in most countries the farmers sell normally their crop at the moment of the LOW price, just after the harvest, not at the height of the hungry season.

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