Considering the counterfactual and the subsidising of subsistence in Malawi

By Anonymous, currently working in Malawi

Working in Malawi, I am always pleased to see interest in the country’s Input Subsidy Program. While it may not generate the same column inches as recently introduced legislation wrongly deemed to outlaw farting; a forthcoming paper written by Dorward and Chirwa evaluating the first 4-5 years of the program has drawn a response from Max Lawson on Max Lawson’s Oxfam blog From Poverty to Power.

According to the blog:

Thanks largely to the subsidy Malawi has had seven years of economic growth, based on agriculture, which has had a major impact on reducing poverty, helping to halve child mortality rate. For me the key point is the huge role a government subsidy like this can play in getting an economy back on its feet and in stimulating (rather than stifling) growth and poverty-reducing private sector development.

I, like Max Lawson, instinctively want to like the AISP for a number of reasons. This is a domestically led program in a country where all too often policies are driven by the priorities of donor countries. 85% of Malawians work in the Agricultural sector, yet agriculture has often been overlooked by policy makers as development partners fight over initiatives in Health and Education.  The program is also ambitious – distributing fertilizer to 1.6 million farmers is a hugely impressive logistical achievement in such a poor country. There is also something eminently satisfying about seeing a small country like Malawi asserting its right to set its own economic policies in the face of criticism from the developed world that reeks of hypocrisy, given the agricultural subsidies employed there.

While there is little doubt, that judged against the narrowest stated objectives of the policy, namely to achieve food self-sufficiency and increased income of resource poor households, the impact of the policy has been impressive. Notwithstanding challenges in collating reliable agricultural statistics, there seems little doubt that the program has led to major gains in crop production and statistics provided do seem to suggest a degree of poverty alleviation.

I am however much more skeptical about the linkages that Green draws out between the program and ‘stimulating growth’. Dorward and Chirwa argue in their paper that smallholder farmers are stuck in a ‘low-productivity maize trap’. They argue:

That sustained increases in maize productivity and in real incomes [as stimulated by the Input Subsidy Program] with falling real food prices should provide important pre-conditions for economic growth processes and diversification out of maize….The extent to which these conditions have in fact occurred is debatable, in view of the high maize prices experienced in recent years. Nevertheless there should be some contributions to economic growth, but it is not possible to quantify them.

This is important because if this diversification is not occurring then the government is essentially subsidizing subsistence agriculture and it is enormously expensive. The subsidy will remain a one-off productivity gain that would disappear should the subsidy be removed.

Diversification away from the country’s staple food crop will only take place if households are confident that they are indeed food secure. According to household survey reports on

food security cited in the paper, they do not show any clear trends in improvement: in 2004, prior to the subsidy, 57% reported inadequate food consumption over the previous 12 months (NSO, 2005), this figure then fell to 50% in 2007 but rose again to 56% in 2009 (SOAS et al, 2008; Dorward et al, 2010a).

Dorward and Chirwa do go on to point out when making the case for economic growth:

Very large increases in national maize production reported by the MoAFS crop estimates are an important component of higher GDP growth rates reported for Malawi.

Yet this argument does not present a counterfactual. Since the onset of the Input Subsidy program, Malawi has received a considerable scaling up of aid inflows, equivalent to approximately 8% of GDP when the program first started. At its most expensive, the program cost 6.6% of GDP. If the donor money had been used to pay workers to dig holes, you would still expect higher GDP growth rates. The agricultural sector has also been boosted by a dramatic rise over the same period in tobacco prices, Malawi’s primary export crop which accounts for approximately 60% of its exports. In 2008, tobacco prices had reached almost $237/Kg compared to $99/Kg in 2005.

While I am not denying the possibility that the subsidy program may contribute to diversification – I do think that there is not as of yet sufficient evidence to support Green’s claim that ‘fertilizer subsidies have transformed Malawi’.

This of itself is not a reason to necessarily stop the programme; the policy clearly has merits as providing a form of social protection and increasing crop production. However, while the ‘diversification’ hypothesis remains unproven, scepticism is still required that it represents a good investment in economic development because there are a number of other hypotheses that could be formed that would suggest that the subsidy might even inhibit transformation of the agricultural sector and the wider Malawian economy:

  1. The subsidy may put off policy makers from taking more difficult and unpopular decisions such as the need for land tenure reform;
  2. The subsidy is targeted at a subsistence crop that is largely untraded and so does not push  farmers into a more formalised cash economy ;
  3. It absorbs a huge amount of foreign exchange that is channelled into the production of a crop that is not traded in a country that has limited exports and access to foreign exchange;
  4. It does not bring sustained productivity gains in the same way as subsidized irrigation technologies might for example;
  5. It may crowd out other agricultural or indeed government policies aimed at investing in the productivity of estate and smallholder agriculture or the wider economy.

It does seem that the Malawian Government does share certain of these same concerns – the Program has been scaled back from over 200,000 Metric Tonnes being subsidized in 2008/09 to just 160,000 in 2009/10 and 2010/11. The Government has also committed in the Budget to the Greenbelt Initiative – a large scale Irrigation Project – although implementation of the project has not yet begun.

Despite the reductions in the size of the program, the FISP remains an enormous investment. For those who believe, like me, that economic development is possible in Malawi  then answering whether indeed the subsidy really does stimulate private sector development is absolutely crucial. Based on the existing research, this question remains unanswered.

One thought on “Considering the counterfactual and the subsidising of subsistence in Malawi

  1. RME

    February 17, 2011 at 7:51am

    Sadly I see a lot of maize around the country which is tasseling too early and is yellowing. Same old story, I’m afraid.

Comments are closed.