Tuesday, December 21, 2010

Subsidy Success: Fertilizer in Malawi

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 rates. 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. For many who see government subsidies as anti-private sector this will be counterintuitive. But it is exactly the kind of heterodox approach that will be needed to deliver success in Africa and in other poor countries, where we should leave our economic theory at the door and instead focus on what works empirically.

The Dorward and Chirwa paper is in no doubt that the subsidy has been a significant success. It has led to significant increases in maize production and productivity, which in turn has contributed to ‘increased food availability, higher real wages, wider economic growth and poverty reduction.’ The contribution in the last season was an extra million tonnes of maize, doubling pre-subsidy production levels.

The study shows that some of the non-poor do indeed benefit from the subsidy and that it must be better targeted, for example to more to female-headed households. However, 65% of Malawi’s farmers received the subsidy, and this includes many of the poorest.

The cost to the Malawi government of the subsidy has been around 9% of government spending, or 3.5% of GDP. This is not a trivial amount but it is not unsustainable. In 2008/9 this increased dramatically to 16% of GDP due to the global spike in fertiliser prices, but this has now fallen back to its previous level.

This cost has to be set against two things; the macroeconomic benefits of the subsidy, and the costs to government and the macro-economy of the alternatives.

Low inflation, and strong GDP growth all contribute to government revenues and to lowering the cost of borrowing. The paper concludes that the economic impact of the subsidy has definitely been positive.

At the same time the government has avoided having to make any costly food imports as it had to in the years immediately preceding the subsidy. As a land-locked country food imports are very expensive. The fertiliser subsidy enables farmers to grow more of their own food rather than rely on imported handouts in an increasingly volatile global market. One tonne of imported maize can support 5 families for 96 days, whereas the same sum of money spent on fertiliser could enable them to produce enough food for 10 months.

Whilst use of inorganic fertiliser is in one way environmentally unsound, Malawi’s emissions are near the bottom of the table. And by reducing the risk farmers face with an increasingly variable climate, the subsidy is a large scale adaptation strategy; effectively a form of insurance and stability for farmers that increases their resilience. Lastly by increasing the fertility of existing land, the subsidy helps combat deforestation and soil erosion from increasing use of marginal lands.

Summary of Dorward and Chirwa’s paper by Max Lawson.