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Agricultural Input Subsidies

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Agricultural Input Subsidies
The Recent Malawi Experience

Ephraim Chirwa and Andrew Dorward

1
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3
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It furthers the University’s objective of excellence in research, scholarship,
and education by publishing worldwide. Oxford is a registered trade mark of
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© Ephraim Chirwa and Andrew Dorward 2013

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First Edition published in 2013
Impression: 1
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Links to third party websites are provided by Oxford in good faith and
for information only. Oxford disclaims any responsibility for the materials
contained in any third party website referenced in this work.

This book emerges from longstanding concerns we have had about the prob-
lems facing poor smallholder farmers in rural economies in Africa, and partic-
ularly in Malawi, as with great resourcefulness and resilience they battle with
limited and unreliable resources and support to better their livelihoods and
the options for their children. A critical focus of our different research activi-
ties has been on the roles of markets and governments in supporting poor
smallholder farmers: to increase their production and incomes, to ensure
affordable food security for themselves and others, and to expand opportu-
nity and choice.
In 2006 we began working together on an evaluation of the Malawi
Agricultural Input Subsidy Programme, as it was then known. The programme
was attracting international attention, with the New York Times and The
Economist publishing hopeful and sceptical articles, respectively. We needed
to review past experience with such programmes, understand new thinking
and practice, and study different facets of the implementation and impacts of
a large, complex, and politically sensitive programme.
Six years later we are still engaged in this task: this book sets out much of
what we have learnt so far. We hope it will be useful to policy makers, policy
analysts, researchers, and students of agricultural and rural development who
are concerned with the problems facing poor smallholder farmers in poor
rural economies and considering, planning, or implementing agricultural
input subsidies as a possible way of addressing some of these problems. We
hope it will also be of value as a source of information on Malawian agricul-
ture, rural livelihoods and agricultural policy.
Many organizations and people have contributed to the work in
this book.
The Malawi Ministry of Agriculture and Food Security and the UK
Department for International Development in Malawi have over the years
given us the opportunity to undertake this work and, with others, engaged
with us, asked us challenging questions, and provided both access to critical
information about the programme and the resources to study it. We are par-
ticularly grateful to the AISP/FISP programme coordinators over the period
(Alex Namoana, Idrissa Mwale, and Christine Mtambo), to Charlie Clark and

v
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Acknowledgements

colleagues in the Logistics Unit, to Teddie Nakhumwa and colleagues in DFID,

and to David Rohrbach in the World Bank.
We have benefited greatly from working with different colleagues on the
2006/7, 2008/9, and 2010/11 evaluation teams: Duncan Boughton, Massy
Chiocha, Valerie Kelly, Thom Jayne, Mirriam Matita, Peter Mvula, Jake Ricker-
Gilbert, Rachel Slater, Maxwell Tsoka, and the National Statistical Office and
Wadonda Consult field team members. We are also indebted to many farm-
ers’ and other respondents’ sharing of their time and information.
The University of Malawi and SOAS, University of London, gave us time
to write while on sabbatical, and our colleagues have then taken on extra
responsibilities during our absences.
The Future Agricultures Consortium provided financial support for some
specific parts of the work reported here: special thanks are due to Stephen
Devereux, Rachel Sabates-Wheeler, Blessings Chinsinga, and John Thompson
for their encouragement and insights.
Frank Ellis and Peter Hazell provided critical but encouraging comments on
drafts on a very tight schedule—leading to some significant improvements in
the text.
Adam Swallow, Aimee Wright, and Jenny Townshend at OUP have encour-
aged, guided, and helped us as novices through the task of publication.
Many others have in different ways enabled us to write and publish this
work. The views expressed and any omissions or errors are, however, our
responsibility.
We are grateful to Taylor and Francis for permission to include Figures 2.2,
4.1, 5.1, and 7.4 which are reproduced or adapted from Dorward and Chirwa
(2011c).
Finally, Ireen and Sam Ling have patiently suffered our pre-occupation with
writing (and with the Malawi FISP over a number of years) and encouraged
and supported us in taking on this project and seeing it through. Theirs is a
very special part of this work.
Ephraim Chirwa and Andrew Dorward
Zomba, Malawi
November 2012

vi
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Contents

List of Figures xi
List of Tables xiii
List of Abbreviations xv

1. Introduction 1
1.1. Background: challenges in African
agricultural development 1
1.2. Objectives and outline 7
1.3. Data and methods 8

Part I. Background
2. Agricultural input subsidies: changing theory and practice 15
2.1. Introduction 15
2.2. ‘Conventional’ input subsidies in agricultural
development—theory and practice 15
2.3. Resurgent interest in input subsidies 21
2.4. Input subsidies’ successes, failures, and potential 23
2.5. Input subsidies’ roles and objectives 26
2.6. Design and implementation features 35
2.7. Conditions affecting effectiveness 38
2.8. Rethinking input subsidies: a conceptual framework 41

3. Recent African experience with input subsidies 46

3.1. Introduction 46
3.2. Ghana 47
3.3. Zambia Fertilizer Support Programme and
Food Security Pack 48
3.4. Nigeria 51
3.5. Tanzania 52
3.6. Rwanda 55
3.7. Mali and Senegal 56

vii
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Contents

3.8. Millennium Villages 56

3.9. Overall lessons 56
3.10. Conclusions from recent experience 59

4. Malawi: political, policy, livelihoods, and market background 62

4.1. Introduction 62
4.2. The context 62
4.3. Politics and policies 63
4.4. The livelihoods and markets context 70
4.5. Agricultural policies 77
4.6. The 2005/6 Agricultural Input Subsidy Programme 82
4.7. Summary 83

Part II. Implementation and Impacts of the Malawi Programme

5. FISP activities and achievements 87
5.1. Introduction 87
5.2. Programme design and evolution 89
5.3. Input purchases and distribution 93
5.4. Coupon distribution 99
5.5. Coupon redemption 108
5.6. Diversion and fraud 113
5.7. Farmer support 118
5.8. Programme ﬁnance and costs 118
5.9. Summary 120

6. Direct impacts of input subsidies 124

6.1. Introduction 124
6.2. Methods of evaluating direct beneﬁciary impacts 125
6.3. Impacts on maize production 128
6.4. Impact on food consumption 133
6.5. Impacts on education and health 134
6.6. Welfare impacts 135
6.7. Impacts in life stories of beneﬁciary households 139
6.8. Summary 141

7. Economy-wide effects of input subsidies 143

7.1. Introduction 143
7.2. Sources of evidence and analytical methods 143
7.3. Macro-economic environment and
role of input subsidies 147
7.4. Maize exports and imports 150
7.5. Impacts on maize prices and rural wages 151

viii
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Contents

7.6. Other variables 159

7.7. Summary 165

8. Impacts on input market development 167

8.1. Introduction 167
8.2. Roles of various players in input supply systems 168
8.3. Overall input purchase and use 172
8.4. Developments in the fertilizer markets 174
8.5. Developments in the seed market 183
8.6. Challenges and opportunities of private sector participation 189
8.7. Summary 194

9. Beneﬁt–cost analysis, 2006/7 to 2010/11 196

9.1. Introduction 196
9.2. Benefit–cost analysis purposes and principles 196
9.3. Benefit–cost analysis methods 200
9.4. Problems and challenges with benefit–cost
analysis (BCA) of the FISP 202
9.5. Improving FISP benefit–cost estimates 205
9.6. Summary 215

Part III. Strategic issues

10. Targeting and access to input subsidies 221
10.1. Introduction 221
10.2. Targeting at national, district, and beneﬁciary levels 222
10.3. Factors determining access to subsidies 233
10.4. Gender and use of subsidized inputs 236
10.5. Challenges of access for the most vulnerable groups 241
10.6. Options for targeting 242
10.7. Summary 246

11. Graduation 248

11.1. Introduction 248
11.2. Conceptualizing graduation 248
11.3. Graduation pathways for the Malawi Farm
Input Subsidy Programme 251
11.4. Programme design and implementation to
promote graduation 256
11.5. Summary 258

12. Conclusions 260

12.1. Introduction 260
12.2. Subsidies’ changing theory and practice 260

ix
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Contents

12.3. The Malawi experience 262

12.4. Targeting and graduation 266
12.5. Sustainability 267
12.6. Conclusions 269

Bibliography 273
Author Index 289
Subject Index 293

x
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List of Figures

2.1 Input subsidy impacts on output supply, price, and stakeholder welfare 16
2.2 A conceptual framework for investigating agricultural
input subsidies’ impacts 43
4.1 Vicious circle of the low productivity maize production trap 72
4.2 Subsidy impacts on beneficiary households and the rural economy 75
II.1 Processes and influences linking and affecting inputs, implementation,
and impacts 86
5.1 Major tasks in programme implementation 88
5.2 Fertilizer supplies by source, 2005/6 to 2011/12 96
5.3 Monthly uplifts to rural markets 97
5.4 Landed and international fertilizer prices, 2006–11 98
5.5 Subsidized fertilizer market costs and unsubsidized market prices,
2006–11 99
5.6 MoAFS farm families and NSO rural households 102
5.7 Percentage of beneficiaries reporting receipt of maize fertilizer
coupons by end of each month 107
5.8 Subsidized fertilizer and seed sales by year 110
5.9 Flows of coupons and subsidized inputs 116
5.10 Budgeted and actual programme costs 120
6.1 Increases in maize production estimates above 2002/3 and 2003/4 base 132
7.1 Burley tobacco prices and sales values, 2000–11 145
7.2 Fiscal deficit/GDP ratio, 1999–2010 149
7.3 Nominal and real maize prices in Malawi, 2001–11 151
7.4 Maize prices and estimated quantity consumed per capita from
1993/4 to 2010/11 production seasons 153
7.5 Average farm-gate maize prices, tobacco prices, and ganyu wages,
2009–11 157
8.1 Structure of the fertilizer industry in Malawi in 2010 169
8.2 Structure of the seed industry in Malawi in 2010 171

xi
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List of Figures

8.3 Fertilizer imports and fertilizer use, 2004/5–11/12 173

8.4 Number of bids and awards in fertilizer procurement,
2008/9–11/12 175
8.5 Value and value share of subsidized fertilizers supplied
by sector, 2007/8–11/12 176
8.6 Sources of households’ commercial fertilizer purchases,
2006/7–10/11 178
8.7 Mean quantities of commercial fertilizer purchases per
household, 2006/7–10/11 179
8.8 Values and value shares of subsidized maize seed sales,
2007/8–11/12 186
8.9 Households accessing improved maize seeds by retailer,
2006/7–10/11 187
8.10 Volumes of improved maize seeds purchased per
household, 2008/9 and 2010/11 188
9.1 Input subsidy impacts on output supply and price 207
10.1 Targeting variables and impacts 224
10.2 Maize fertilizer voucher redemption per household per region,
2005/6–10/11 230
10.3 Proportion of male- and female-headed households receiving fertilizer
coupons, 2006/7–10/11 237
11.1 Termination, potential graduation, and actual graduation 249

xii
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List of Tables

1.1 Annual changes in cereal production from 1961 and 2000 3

1.2 Fertilizer use, cereal yields, and value of cereal production, 2002–9 4
2.1 Effects of demand and supply inelasticities on consumer and
producer gains and on deadweights 18
2.2 Critical aspects of input subsidy programmes 44
4.1 Social and economic indicators for Malawi, 1975 to 2005 64
5.1 Principal programme features, 2005/6 to 2011/12 91
5.2 Evolving programme implementation features,
2005/6 to 2011/12 92
5.3 Fertilizer procurement prices before and after removal of high outliers 100
5.4 Estimates of fertilizer coupon issues and receipts from different sources 103
5.5 Scoring on different programme elements by year 108
5.6 Coupon redemption parameters, 2005/6 to 2011/12 111
5.7 Reported distances to buy inputs, time spent buying inputs, and costs for
transport and miscellaneous expenses 112
5.8 Reported extra payments for coupon redemption 113
5.9 Estimated shares of coupon and subsidized fertilizer receipts by
smallholders and others 117
A5.1 Estimated programme costs, 2005/6 to 2011/12 122
6.1 Beneﬁciary household level impact indicators and hypotheses 127
6.2 Distribution of sample and number of seasons with access to subsidized
fertilizer 128
6.3 Summary of ﬁndings on direct subsidy impacts 142
7.1 Economic growth performance, 2000–10 148
7.2 Average nominal maize prices, 2001–11 154
7.3 Household food consumption over the past 1 month,
2006/7–8/9 160
7.4 Trends in poverty headcount in Malawi, 1998–11 163

xiii
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List of Tables

7.5 Nutritional status of children under 5 years, 2000–11 164

8.1 Household survey estimates of total seed purchases 174
8.2 Quantity of subsidized and commercial fertilizers by IHS2
poverty status 181
8.3 Number of seed suppliers to the subsidy programme,
2006/7–11/12 183
8.4 Size of the seed component of the subsidy programme,
2007/8–11/12 185
8.5 Inputs actually obtained against those wanted by farmers
in 2010/11 189
9.1 Broad characteristics of three model types 201
9.2 Base beneﬁt–cost analysis, 2005/6–10/11 212
9.3 Beneﬁt–cost analysis without and with growth multipliers 214
9.4 Alternative estimates of returns to FISP investments,
2005/6–10/11 214
10.1 Programme objectives and their implications for targeting 223
10.2 Major changes in targeting processes, 2005/6–9/10 227
10.3 Fertilizer coupon receipts per household, 2006/7–10/11 231
10.4 Mean attributes of households by number of fertilizer subsidy
coupons received, 2008/9 232
10.5 Estimates for factors affecting access to subsidized fertilizer
in 2008/9 234
10.6 Marginal effects from probit estimates of intra-household
fertilizer use 239
11.1 Graduation processes, requirements, and sequencing of changes 254

xiv
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List of Abbreviations

ADC Area Development Committee

ADMARC Agricultural Development and Marketing Corporation
AE Analyst’s estimates
AISAM Agricultural Input Suppliers Association of Malawi
AISP Agricultural Input Subsidy Programme
AISS Agricultural Input Subsidy Survey
BCA Benefit–cost analysis
BCR Benefit–cost ratios
CNFA Citizens Network for Foreign Affairs
CPI Consumer Price Index
DDC District Development Committee
DFID Department for International Development
DPP Democratic People’s Party
Ed Elasticity of demand
FAM Fertiliser Association of Malawi
FAO Food and Agriculture Organization of the United Nations
FE Fiscal efficiency
FEWS NET Famine Early Warning System Network
FGDs Focus Group Discussions
FISP Farm Input Subsidy Progra
FISS Farm Input Subsidy Survey
Ganyu Hired casual labour
GDP Gross Domestic Product
IHS2 Integrated Household Survey 2 (2004/5)
IHS3 Integrated Household Survey 3 (2010/11)
IRR Internal rate of return
IMF International Monetary Fund
MCP Malawi Congress Party
MK Malawi Kwacha (approximately 140MK to the US$ from 2005 to 2010)
MOAFS Ministry of Agriculture and Food Security
MVAC Malawi Vulnerability Action Committee
NASFAM National Smallholder Farmers Association of Malawi
NEPAD New Economic Partnership for African Development

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List of Abbreviations

NGO Non-Governmental Organization

NPV Net Present Value
NSO National Statistical Ofﬁce
OPV Open pollinated varieties (of maize)
PLWHA People Living With HIV/AIDS
SFFRFM Smallholder Farmers’ Fertilizer Revolving Fund of Malawi
STAM Seed Traders Association of Malawi
TA Traditional Authority
TIP Targeted Inputs Program
UDF United Democratic Front
VDC Village Development Committee

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1

Introduction

1.1. Background: challenges in African

agricultural development

In the ﬁrst decade of the twenty-ﬁrst century sub-Saharan Africa moved,

in the words of The Economist, from being ‘hopeless Africa’ to ‘the hopeful
continent’.1 Economic growth indicators from 2000 to 2010 show an impres-
sive recovery from the poor performance of previous decades, although
growth rates vary considerably between regions and countries within Africa,
with West and East African coastal countries growing faster than other regions
(United Nations Economic Commission for Africa (UNECA) and African
Union, 2012).
There are, however, concerns about the quality of economic growth in
Africa. The United Nations Economic Commission for Africa (UNECA) and
African Union (2012) note that Africa has witnessed jobless growth due partly
to the fact that most of the growth has occurred in capital intensive extractive
sectors with limited forward and backward linkages to the local economies.
This is associated with high levels of unemployment and underemployment,
particularly among the youth, with most of the youth trapped in less produc-
tive informal sectors. At the same time, not much structural transformation
in African economies has taken place, implying that a large proportion of
African people still depend on agriculture as a source of livelihood. These
observations underlie concerns about growing inequity within African
economies, and continuing high levels of poverty and particularly rural pov-
erty (Africa Progress Panel, 2012). There are also major concerns about food
insecurity in Africa, with adverse welfare and developmental effects of high
national and international food prices on both the urban and rural poor,

1
The Economist (13 May 2000). ‘Hopeless Africa’, <http://www.economist.com/node/333429>
and The Economist (3 December 2011). ‘The Hopeful continent: Africa Rising’ <http://www.
economist.com/node/21541015> (18 September 2012).

despite the offsetting effects of economic growth (Headey, 2011b; Dorward,

2012b, 2013; Verpoorten et al., 2012). These concerns link into a set of long-
standing but resurgent debates and controversies about agricultural develop-
ment in Africa regarding

• the importance and role of agriculture in development;

• the extent and causes of African agriculture’s poor historic performance;
• the relative advantages and disadvantages of large and small farms in
agricultural development; and
• the best means of promoting agricultural development in Africa.

Emphasis on agriculture as a critical sector for development has ﬂuctuated

over the last 50 years or so. At independence, most developing country gov-
ernments saw agriculture as either a driver of growth in their economies or as
a foreign exchange earner, with a large reserve of unutilized labour to be taxed
to support industrial development for a modern economy. With a weak and/
or mistrusted private sector, this led to large public investments in agricultural
development. In many African countries these large investments were either
ineffective or, where they were effective, very expensive and—in the con-
text of over-extension of government budgets and activities—unsustainable
without donor support. This was not forthcoming with both the emerging
Washington Consensus (promoting structural adjustment and market liber-
alization) and disenchantment with agricultural investments—which were
seen as ineffective and unnecessary in the context of increasing global food
production and falling prices (although paradoxically these were partly the
result of large and highly successful public investments in the Asian Green
Revolution). Emphasis on agriculture was further undermined by empirical
studies that revealed the widespread importance of non-farm incomes in the
livelihoods of rural farming households (for example, Ellis, 2000; Haggblade
et al., 2007b; Reardon, 1998).
With time, however, the pendulum began to swing back as a result of
further empirical work showing the importance of the agricultural sector
to poor rural economies and to the livelihoods of poor people within those
economies (see, for example, Datt and Ravallion, 1996; Mellor, 2000; Thirtle
et al., 2003; de Janvry and Sadoulet, 2010; Christiaensen et al., 2011). This
coincided with growing concern among governments and donors about the
lack of growth in African agriculture (particularly in staple crop production).
In 2008 the World Development Report made a powerful case for the impor-
tance of agriculture in poverty reduction (World Bank, 2007b) and this was
brought home by the 2008 global food price spike and recognition that the
era of low and stable food prices was over, if it ever existed (Dorward, 2011,
2013).

2
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Introduction

Table 1.1. Annual changes in cereal production from 1961 and 2000

East Asia & Latin America South Asia Sub-Saharan

Paciﬁc & Caribbean Africa

Cereal prodn 1961–2009 2.80% 2.58% 2.27% 2.45%

Cereal land 1961–2009 0.39% 0.61% 0.31% 1.73%
Cereal yield 1961–2009 2.40% 1.95% 1.95% 0.95%
Cereal prodn 2000–09 1.93% 1.78% 1.01% 3.65%
Cereal land 2000–09 0.72% 0.41% -0.01% 2.20%
Cereal yield 2000–09 1.20% 1.37% 1.01% 1.42%

Source: Author calculations from World Bank (2011).

As noted above, resurgent interest in agricultural development was in part

stimulated by African agriculture’s poor performance and associated problems
of food insecurity, lack of rural growth, and persistent rural poverty. Cereal
production faced particular difficulties in that, while production grew (just
keeping pace with population growth), most of this growth was the result
of expansion in cereal areas, with very limited increases in yields. Table 1.1
shows that in contrast to Latin America and Asia, annual average growth in
land under cereals was higher than growth in yields in sub-Saharan Africa
from 1961 to 2009, and this applied both before and after 2000, though with
higher rates of growth in both cereal areas and yields after 2000.
Wiggins and Leturque (2010) provide a helpful summary of different
explanations for sub-Saharan Africa’s poor agricultural performance, while
pointing to considerable variation in performance between regions within
Africa. They identify core problems as limited production potential (due
to geography, environmental degradation, and fertility decline which they
link to lack of technical innovation), unfavourable external conditions (aris-
ing from OECD subsidies and trade rules and from limited demand for farm
output), and government and market failures (the former involving a policy
that deters investors and too little investment, the latter failing to deliver
credit and input services and overcome poverty traps). These difficulties are
of course interrelated. However, the lack of technical innovation is arguably
the proximate cause of the lack of land and labour productivity growth in
African agriculture and is the outcome of other difficulties—which reduce
benefits, raise costs, or in other ways inhibit technical change—particularly
on poor, small-scale farms.2

2
We do not address here the longstanding debate on the relative merits of investment and
support for large- and small-scale farms (see, for example, Collier and Dercon, 2009; Hazell et al.,
2010; Hazell, 2012). We favour the complementary approach to large and small farms advocated
by Hazell (2012), but our focus is on the potential multiple beneﬁts of overcoming problems faced
by poor, small-scale farmers.

3
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Introduction

Table 1.2. Fertilizer use, cereal yields, and value of cereal production, 2002–9

Nitrogen application, Cereal yield, kg/ha Value of cereal prodn

kg/ha as % agric. value
added

Asia 106.0 3404

Northern America 58.8 5723
Europe 44.2 3563
Central America 38.6 2967
South America 36.6 3447
Northern Africa 37.8 1852
Sub Saharan Africa 5.9 1274 23%
Mauritius 96.3 0%
South Africa 27.2 41%
Malawi 22.8 55%
Zambia 17.6 18%
Zimbabwe 15.1 27%
Kenya 12.3 13%

Sources: Author calculations from FAO (2012), World Bank (2011), World Bank (2012).

A critical and widely recognized difference between agriculture in sub-Saha-

ran Africa and in other regions is the low rate of fertilizer use in sub-Saharan
Africa. The extent of this is illustrated in the upper part of Table 1.2, which
shows FAO estimates of mean rates of inorganic fertilizer application (meas-
ured in kg nitrogen per ha arable and permanent crop land) from 2002–9 in
different regions of the world. Even allowing for the difﬁculties of gathering
and interpreting such data, the table shows a striking contrast between sub-
Saharan Africa and other parts of the world. Although signiﬁcant amounts of
fertilizer use is for non-cereal crops (and the importance of this varies between
countries), a similar contrast is evident for cereal yields.
The lower part of Table 1.2 shows estimated nitrogen application rates for
the six sub-Saharan African countries with the highest fertilizer rates. It also
provides an indicator of the importance of cereal production in the agricul-
tural sector.3 Mauritius has a very high rate of fertilizer use but negligible cere-
als production, so the high rates of fertilizer use are largely on other crops.
Fertilizer use in South Africa is spread across both cereals and other crops
but is affected by substantial maize production by the large-scale commercial
sector.4 Malawi then stands out for its relatively high rate of fertilizer use (by
African but not global standards), large share of cereals in the agricultural

3
Due to difﬁculties in sourcing better data the indicator used is value of cereal production at
international grain prices (estimated with prices and grain index weights taken from World Bank,
2012) as a percentage of agricultural value added (World Bank, 2011) in current US$.
4
The 2002–9 average rate of nitrogen application per ha arable and permanent crop land in
sub-Saharan Africa, excluding Mauritius and Swaziland, is only 4.0 kg/ha.

4
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Introduction

sector, and (not shown in Table 1.2) the overwhelming importance of small-
holder agriculture in cereal production.5 Many would argue that a major factor
in Malawi’s high rate of fertilizer use in a poor and smallholder maize-based
agricultural economy has been its longstanding use of agricultural fertilizer
subsidies. In Table 1.2, data for Zambia, Zimbabwe, and Kenya are presented
below data for Malawi. Smallholder cereal production accounts for a smaller
share of agriculture in all three of these economies as compared with Malawi.
Zambia has, however, also been implementing an agricultural input subsidy
programme. The basis for the relatively high rates of fertilizer use reported for
Zimbabwe is not clear, but contributors to higher fertilizer use in Kenya with-
out subsidies have been explored by Minde et al. (2008) and Ariga and Jayne
(2011) and these include: good transport links to and through Mombasa,
high export volumes reducing back-load costs, and high fertilizer demand
for use on smallholder cash crops alongside food crops (stimulating market
development and lowering retail unit costs as well as supporting a variety
of mechanisms for easing cash flow constraints on purchases of fertilizer for
food crops).
In this book we examine the often controversial roles and impacts of agricul-
tural input subsidies (generally dominated by fertilizer subsidies) in promot-
ing technical change in agricultural development, with particular attention
to lessons and insights from the large agricultural input subsidy programme
which Malawi embarked on in 2005.
The topics addressed are important for many countries in sub-Saharan
Africa, as well as for Malawi. As discussed above, agricultural production has
been stagnant in many parts of sub-Saharan Africa, and associated with high
incidence and severity of rural poverty and food insecurity. The challenges in
‘getting agriculture moving’ are exacerbated by local resource pressures from
rapid population growth, the threat of climate change leading to increasingly
uncertain rainfall in many parts of the region, high and volatile world food
prices, and uncertainties about the global economy. As we shall discuss, the
number of African countries implementing large-scale agricultural input sub-
sidies has been growing, and these programmes are costly—in terms of fiscal
costs, lost benefits from investments of these resources in alternative uses
(such as in education, health, infrastructure, or agricultural research), and
the long term distortions they can foster in political, financial, social, and
economic structures. Failure will not only blight the lives of millions of poor
rural people and their children, it may also prejudice policy makers against
future investments in agriculture.

5
Smallholder maize production is estimated to account for 97% of the maize and total cereal
areas in Malawi in 2009/10 (Ministry of Agriculture and Food Security, 2010).

5
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Introduction

Malawi is, unfortunately, no exception to this. However, its post-2005

subsidy experience provides a good case study for examining the poten-
tial strengths and weaknesses of agricultural input subsidies in addressing
these issues. The programme follows and builds on a long history of differ-
ent forms of subsidy in Malawi, with fertilizer price subsidies to smallholder
farmers from the 1960s to 1980s, which were then removed and reinstated
in the 1990s, and then replaced by an initially universal Starter Pack but later
Targeted Input Programme (TIP) of free distribution of small fertilizer and
seed packs to smallholder farmers. This programme (thoroughly documented
in Levy, 2005) adopted increasingly innovative systems involving private dis-
tributors of seed and fertilizer and was continued until the 2004/5 season.
Following the 2004 elections and food shortages in 2005, however, the increas-
ing political signiﬁcance of fertilizer subsidies led to the introduction of a
much larger programme providing approximately 50% of Malawian small-
holder farmers with much larger packs of inputs at highly subsidized prices.
This new programme, the Agricultural or Farm Input Subsidy Programme
(AISP or FISP),6 attracted immediate controversy, from both supporters (for
example, Dugger, 2007; Denning et al., 2009) and detractors (for example, The
Economist, 2008) but was very popular in Malawi and has since continued.7
The programme has been held up as an example for other countries to follow,
and large-scale input subsidies are now being implemented in a large number
of African countries. Many of these are both drawing on Malawi’s experience
and introducing their own innovations to address perceived opportunities
for improvement. There are, however, also signiﬁcant concerns among many
economists, development analysts, and policy makers both in Malawi and
elsewhere about the effects and cost of Malawi’s programme.
The FISP has also been the subject of a range of different studies, of varying
scope and quality, and advocates and sceptics, supporters and detractors of
the programme often draw on contradictory evidence to support their posi-
tions.8 There is therefore a need to bring these different perspectives and stud-
ies together and to set these in the context of wider debates and experience

6
The names Agricultural Input Subsidy Programme and Farm Inputs Subsidy Programme (AISP
and FISP) are often used interchangeably. We generally use the former in discussion of the earlier
years of the programme, when AISP was its ofﬁcial title, and the latter when discussing the later
years of the programme or the programme as a whole.
7
Chinsinga (2006) provides a detailed analysis of the political narratives of the farm input
subsidy programmes including broad agreement across political parties on the need for farm sub-
sidies in varying form, and the sceptical views of development partners. We discuss these issues
in Chapter 4.
8
Indeed Ricker-Gilbert and Jayne (2012) suggest that debates on agricultural input subsidies
are addressing a ‘wicked problem’ that is difﬁcult or impossible to resolve because of contested
framings of the problem, incomplete and contested information, and absence of agreement on
the core issues.

6
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Introduction

to draw robust conclusions where these are possible, to recognize areas of

disagreement and ambiguity, and to identify outstanding questions for agri-
cultural policy makers, programme implementers, and researchers not only
in Malawi but across Africa. That is the purpose of this book.

1.2. Objectives and outline

In this book we aim to contribute to a greater understanding of the roles,

contributions, and pitfalls of agricultural input subsidies as instruments for
promoting food security, poverty reduction, social protection, and wider eco-
nomic growth in poor agrarian economies. The speciﬁc objectives are

• to update and develop theoretical understanding of agricultural input

subsidies’ impacts, allowing for new delivery systems and instruments
and specific constraints inhibiting the livelihoods of poor subsistence
farmers and the economies of which they are a major part;
• to derive from Malawi’s experience lessons about the implementation
and impacts of a large-scale agricultural input subsidy programme,
with specific focus on the contextual, design, and implementation
determinants of economy-wide, beneficiary, and market impacts; and
• to promote debate about strategic policy decisions in the design of
large-scale agricultural input subsidies in contemporary low income
agrarian economies, including targeting and graduation, to foster their
sustainable contribution to agricultural development and poverty
reduction.

In order to achieve these objectives the book is divided into three parts fol-
lowing this introduction. The first part provides the theoretical and empirical
context for the rest of the book. It is consists of three chapters. Chapter 2
sets out the longer standing empirical evidence and theories on the roles
of agricultural input subsidies in poor agrarian economies. It then extends
conventional theories to provide a richer account of the potential contri-
butions of innovative delivery systems and instruments to microeconomic,
mesoeconomic, and economy-wide processes promoting poverty reduc-
tion, food security, economic diversification, and wider economic growth.
This provides the basis for a broad understanding of the potential roles and
impacts, positive and negative, of a large-scale subsidy programme in poor
agrarian economies with different characteristics. Chapter 3 follows with a
review of the limited information available on twenty-first century agricul-
tural input subsidy programmes in sub-Saharan Africa—but leaves to later
chapters any discussion of Malawi’s post-2005 programme. It identifies a

7
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Introduction

number of commonalities across different programmes, against which the

Malawi programme is compared in later chapters. Chapter 4 completes the
first part of the book with a review of Malawi’s political, livelihood, market,
and agricultural policy history.
The second part of the book draws on panel household surveys, market
surveys, monitoring and implementation reports, close engagement with a
range of stakeholders, and the authors’ detailed studies of the Malawi subsidy
programme from 2006/7 to 2011/12. Chapter 5 describes in detail its evolv-
ing implementation. Chapters 6, 7, and 8 analyse various potential impacts—
direct impacts on beneficiaries and on production, indirect impacts on the
wider economy, and direct and indirect impacts on input markets. Returns to
investment are considered in Chapter 9.
The final part of the book examines two major issues that emerge from
Malawi’s recent subsidy experience, focusing on targeting (in Chapter 10)
and graduation (in Chapter 11). The concluding chapter summarizes the
main arguments and evidence presented in Chapters 2 and 3, draws out the
major lessons from the Malawi experience, and considers the question of
agro-ecological, fiscal, and political sustainability. It concludes with a brief
discussion of possible ways forward for agricultural input subsidies in sub-
Saharan Africa.
Although parts of the book are written from an economist’s perspective,
most of the book should be of much wider interest, addressing general policy
and implementation issues concerned both with agricultural input subsidies
and wider problems of development in poor agrarian economies. There is also
explicit consideration of the political influences on policy and its implemen-
tation: these considerations have wider relevance beyond policies concerned
only with input subsidies.

1.3. Data and methods

We conclude this introductory chapter with a brief discussion on the main

sources of information used in analysis of the Malawi subsidy programme.
We draw on four main sources of information:

• implementation records on the subsidy programme;

• household and input supplier surveys conducted in 2006/7, 2008/9, and
2010/11 as part of the evaluation of the programme;
• ofﬁcial statistics;
• other studies on the subsidy programme.

We discuss each of these in turn.

8
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Introduction

1.3.1. Implementation records on the Malawi subsidy programme

Since 2006/7 the logistics of subsidized fertilizer distribution and payments
to fertilizer suppliers, fertilizer transporters, and seed suppliers have been
managed by the Logistics Unit, working in close cooperation with the
Ministry of Agriculture and Food Security (MoAFS), donors, the two par-
astatals involved in subsidized fertilizer and seed distribution (Agricultural
Marketing and Development Corporation and Smallholder Farmer Fertilizer
Revolving Fund of Malawi, ADMARC and SFFRFM), and contracted trans-
porters and seed and fertilizer suppliers. In Chapter 5 extensive use is made
of information from the Logistics Unit’s weekly and annual reports, sup-
ported by minutes of weekly task force meetings and information supplied
directly by the MoAFS.

1.3.2. Programme evaluation studies

Much of the information and analysis on implementation is also contained
in various reports of FISP evaluations led by the authors (for example, SOAS
et al., 2008; Dorward et al., 2010; Dorward and Chirwa, 2011). Since 2006/7
the authors have led annual evaluations of the subsidy programme, with
more intensive and ‘light touch’ evaluations in alternate years. More inten-
sive evaluations of the 2006/7, 2008/9, and 2010/11 programmes involved
household surveys with focus group discussions and a community survey
and in 2006/7 and 2008/9 an input supplier survey. ‘Light touch’ evaluations
of the 2007/8, 2009/10, and 2011/12 programme years have drawn mainly on
implementation records as outlined above, together with information from
other studies and official statistics, and analysis of data from more intensive
evaluations.
The 2006/7 survey used a sub-sample of households sampled in the National
Statistical Office (NSO) 2004/5 second Integrated Household Survey (IHS2) in
order to provide panel data for analysis of programme impacts on beneficiar-
ies. A total of 3298 households were sampled across all districts in Malawi.
After data cleaning this gave 2431 balanced matched panel households also
sampled in the IHS2. Agro-economic livelihood zones defined by the Malawi
Vulnerability Assessment Committee (MVAC) were used to stratify the sam-
ple (Malawi National Vulnerability Assessment Committee, 2005). Urban,
peri-urban, and protected areas (national parks and reserves) were omitted
from the sample. Data collection and entry were conducted by the National
Statistical Office. The survey provided very valuable information on house-
hold access to subsidized and unsubsidized inputs and on many aspects of
programme implementation. Unfortunately it was less successful as regards
plot areas and production reported by farmers: these were not found to give

9
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Introduction

reliable and consistent results, and this prevented estimation of production

impacts of the programme. The 2006/7 input supplier survey involved focus
group discussions, key informant interviews, and a survey of 271 retail out-
lets in 6 districts. This was supplemented by information from fertilizer and
seed importers and sellers. The findings were reported in School of Oriental
and African Studies et al. (2008).
The household survey in 2008/9 was conducted by the evaluation team
with a sample of 1982 households across 14 districts and represented almost
all livelihood zones. The sample was a sub-set of the 2006/7 sample and there-
fore provided a panel data set across three surveys going back to the IHS2.
The input supply retailer survey sampled 230 retailers in 6 districts. Both
surveys were again supplemented by focus group discussions, key inform-
ant interviews, and a community survey, but detailed fertilizer import infor-
mation was not available. Findings were presented in a portfolio of reports
focusing on different aspects of the programme (for example, Dorward et al.,
2010a, b; Kelly et al., 2010). The survey again provided valuable information
on programme implementation and outputs. However, the introduction of
innovative approaches to production and yield measurement (such as yield
sub-plots with enumerator and farmer harvests), plot areas, and production
data did not give reliable and consistent results. This not only precluded
estimation of production impacts of the programme, it also raised questions
about the reliability and consistency of area, production, and yield estimates
from other studies which rely mainly on farmer estimates and recall of pro-
duction (see Dorward and Chirwa, 2010b).
The 2010/11 study did not include an input supplier survey, and the sam-
ple size of the household survey was reduced further to 760 households across
8 districts in the 3 regions. The sample represented 8 major maize growing
livelihood zones covering 77% of all rural households and was again a sub-
set of the previous survey (this time the 2008/9 survey). The 2010/11 survey
replaced attrition households with younger and newly formed households.
The IHS2 and three FISP evaluation surveys generated a matched panel of 461
households. As for 2008/9, findings were reported in a portfolio of topic-spe-
cific reports (for example, Chirwa et al., 2011d; Dorward and Chirwa, 2011a;
Mvula et al., 2011).
A number of specific studies were conducted and reported within the
programme evaluation—for example, on programme impacts, benefit–cost
analysis, targeting, and graduation. These are explained and cited where
appropriate. It is, however, necessary to provide a little more information
here on the development and use of the partial equilibrium Informal Rural
Economy or IRE model to explore some of the economy-wide impacts of the
programme. This model is fully described in Dorward and Chirwa (2012b). It
is based on detailed programming models of different farm household types

10
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Introduction

in the two most populous livelihood zones in Malawi. These models allow
for seasonal constraints affecting farm household activities and the direct
impacts of the subsidy are investigated by simulating the livelihood effects of
specific households’ access to subsidized inputs. These effects are then aggre-
gated in order to estimate impacts on supply and demand of seasonal labour
and maize. Wage rates and maize prices are then adjusted iteratively to find
new equilibrium wages and prices and to derive estimates of economy-wide
impacts on both subsidy recipients and non-recipients. The nature of the data
available and of the models means that results should be interpreted as indic-
ative of possible effects rather than predictive of actual effects. Nevertheless,
when taken together with other information they provide useful insights
into possible economy-wide impacts.
A full set of evaluation reports from 2006/7 to 2011/12 can be found at
<http://www.wadonda.com/>. These provide further documentation of
analytical methods and references are provided whenever their findings are
drawn upon.

1.3.3. Ofﬁcial statistics

Malawi has an extensive set of agricultural and other national statistics.
The Ministry of Agriculture publishes valuable monthly information on
market prices for major crops, with data collected on a weekly basis from a
large number of markets around the country. The Ministry also publishes
annual estimates of crop areas, production, and yields, and reports annual
estimates of the number of farm families. The annual production estimates,
with large increases in estimated maize production following the introduc-
tion of the subsidy programme in 2005/6, have been widely cited as evidence
of the impact of the subsidy programme. However, there are inconsistencies
between the large estimated production increases from 2005/6 and the very
high domestic maize prices experienced in some years, notably in 2008/9.
These inconsistencies are discussed in Chapter 7. There are also inconsisten-
cies between national maize areas, production, and yield estimates from the
Ministry of Agriculture, and from different reports by the National Statistical
Office (National Statistical Office, 2005a, 2010a). These discrepancies are dis-
cussed in more detail in Dorward and Chirwa (2010b) and summarized in
Chapter 6. Another set of discrepancies between Ministry of Agriculture and
NSO data concerns the number of farm families (reported annually by the
Ministry of Agriculture) and the number of rural households enumerated in
the 2008 census (National Statistical Office, 2008a). This discrepancy and the
difficulties it raises are discussed in Chapter 5.
Apparent discrepancies also arise between maize prices reported by the
Ministry of Agriculture and the consumer price index reported by the NSO.

11
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Introduction

No detailed analysis of this has been published, to our knowledge, but the
high maize prices observed in 2008/9 and in 2011 do not appear to be con-
sistent with consumer price index figures for the same period, given the high
weighting of food and particularly maize in the consumer price index. We
also note that the NSO itself refers to revised ‘CPI data’ with ‘overall inflation
between the IHS2 and IHS3 periods of 128.9 per cent’ (National Statistical
Office, 2012: p. 207), when official CPI estimates for the same period suggest
a considerably lower rate of inflation. This also raises wider questions about
the deflator used in recent years’ GDP estimates, and hence about these GDP
estimates themselves.
Integrated Household Surveys (IHS) conducted by the NSO in 2004/5 (IHS2)
and 2010/11 (IHS3) provide national estimates on a wide range of variables.
We refer to these in Chapters 4 and 7. However, we also note some apparent
discrepancies between and within some of the results presented, and—with
the publication of the first report on the 2010/11 survey (National Statistical
Office, 2012) as the manuscript for this book was being finalized—it has not
been possible to resolve these.

1.3.4. Other studies on the subsidy programme

A number of other studies have been made of different aspects of the subsidy
programme. Due to their varied nature and focus we do not discuss these here
but refer to them at relevant points in the following chapters. In broad terms
the main focus of most other work has been to use survey data to compare
observations on recipients and non-recipients in order to examine targeting
of and direct outcomes and impacts of subsidy receipt—in terms of differences
in wealth, gender, and other household characteristics affecting access to and
use of subsidized and unsubsidized inputs, and subsequent differences in
changes in wealth and other household characteristics. There has been much
less examination of indirect and economy-wide impacts, of impacts on mar-
ket development, of beneﬁts relative to costs, and of the important question
of graduation, though we discuss notable exceptions where appropriate.

12
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Part I
Background

In this part of the book we provide essential theoretical and empirical context
for the rest of the book. The three chapters

• set out and extend more conventional theories on agricultural input

subsidies’ strengths and shortcomings;
• review limited information available on twenty-ﬁrst century agricultural
input subsidy programmes in sub-Saharan Africa; and
• describe Malawi’s speciﬁc political, economic, and agricultural features.

These chapters structure and underpin the description, analysis, and evalu-
ation of the Malawi subsidy programme, and the wider application of that
evaluation, in the remainder of the book.

Agricultural input subsidies: changing theory

and practice

2.1. Introduction

This chapter sets the scene and identifies critical issues addressed in the rest
of the book by setting out evolving understandings on agricultural input sub-
sidies in low income countries. We begin with a summary of conventional
economic theories regarding agricultural input subsidies’ potential benefits
and of the difficulties experienced in realizing these. This leads on to con-
sideration of different theoretical and practical challenges to conventional
criticisms of input subsidies. The chapter concludes with a conceptual frame-
work that sets out key elements and processes linking input subsidies’ design,
implementation, and impacts—a framework that underpins the structure
and content of the rest of the book.

2.2. ‘Conventional’ input subsidies in agricultural

development—theory and practice

Large-scale (so called universal) agricultural input subsidies were a com-

mon and major feature of agricultural development policies in poor rural
economies from the 1960s to the 1980s. They were generally implemented as
‘across the board’ price subsidies accessible to all producers, or to all produc-
ers of a particular category. If they were sold through a state monopsony then
there were common attempts at price discrimination, with, for example, only
smallholder farmers supposed to purchase subsidized fertilizer and forbidden
from selling it on. Fertilizer subsidies were particularly expensive and made
heavy and growing demands on government budgets as they stimulated
increased fertilizer consumption (and hence increased volumes of fertilizer

15
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Background

subsidy) while political pressures also led to pressures for the subsidy rate to
increase, or at least not contract, in the face of rising fertilizer prices.
Conventional arguments for subsidies in agricultural development focused
on promoting agricultural productivity by making adoption of new technolo-
gies more attractive to smallholder farmers (Ellis, 1992). The reduced costs of
subsidized inputs increase their profitability and reduce the risks perceived by
farmers with a limited knowledge of input benefits and of correct usage. With
credit and extension services, input subsidies were supposed to help farmers
implement, benefit from, and—with later subsidy withdrawal—buy and use
inputs on their own: rapid learning about input use and benefits would mean
that subsidies should be needed for only a short time and could be rapidly
phased out. However, subsidies were often subsequently implemented more
widely with pan territorial pricing to support agricultural development in
more remote areas, and to counteract taxes on agriculture through export
tariffs, managed exchange rates, and controls on domestic prices.
Standard economic analysis of price subsidies considers the costs and ben-
efits of subsidies in shifting farmers’ supply curves for agricultural produce
(see Figure 2.1). If there are no market failures then a subsidy of $Z per unit
output increases effective producer price above the market price by $Z. If the
subsidy is addressing a market failure then a subsidy of $Z per unit output
will increase effective producer price above the market price by more than $Z
(say $Z’). The increase in effective producer price causes a downward shift in
the market price supply curve (S to S’ in Figure 2.1). This leads to an expan-
sion in supply (from Q to Q’) and a fall in market or consumer price of the

D S S’
Produce
price ($)

d
P’+Z c
Producer surplus
P a b Z
Consumer surplus
P’ e
f

Q Q’ Produce quantity

Figure 2.1. Input subsidy impacts on output supply, price, and stakeholder
welfare

16
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Agricultural input subsidies

product (from P to P’ in Figure 2.1, assuming that the good is a non-tradable

with a downward sloping demand curve), with an increase in both producer
surplus (shown in Figure 2.1 by the shaded area abcd) and consumer surplus
(shown by the shaded area abef). The total cost of the subsidy is the total
subsidy paid (new equilibrium quantity multiplied by the per unit subsidy,
Q’.Z, shown by the shaded area dcef) plus administration costs (not shown
in the graph). The total subsidy paid is greater than the sum of the increased
consumer and producer welfare by a deadweight loss indicated in Figure 2.1
by the triangle bce (Siamwalla and Valdes, 1986). Under such circumstances,
and even without allowing for administration costs, the subsidy leads to a
net economic loss to the country and an income transfer from taxpayers to
consumers and producers.
Three related points emerge from this analysis.
First, a subsidy only generates a positive overall net economic return if
there is some market failure so that the downward shift in the supply curve
is greater than the total cost of the subsidy (that is Z, the per unit cost of the
subsidy to the government including administration costs, is less than Z’, the
effective increase in output price—or reduction in per unit costs—received by
producers). This may occur where farmers’ perceived private cost of inputs is
higher than the true social or economic cost, and/or farmers’ perceptions of
private beneﬁts from increased input use are lower than the actual social or
economic beneﬁts.1 This may occur where

• farmers’ lack of knowledge about input use means that their expectation
of its beneﬁts are less than the actual beneﬁts;
• there are learning costs, so that initial farmer returns to input use are
low but will increase with experience (see, for example, Ellis, 1992;
Crawford et al., 2006; Morris et al., 2007);
• farmers’ private costs of working capital for input purchase are greater
than the social cost of capital; and
• farmers’ risk assessment and aversion in investing in input purchase and
use are higher than society’s.

The first two divergences between farmers’ and society’s costs, benefits and
perceptions of them, should decline with experience, knowledge, and effi-
ciency in using inputs (and are effectively an infant industry argument), the
latter two may decline with increasing farm productivity, wealth, and market
integration.
Second, the size of the deadweight loss and the distribution of benefits
between consumers and producers depend on elasticities of supply and

1
Dorward (2009b) shows this using marginal value product and marginal factor cost analysis.

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Background

Table 2.1. Effects of demand and supply inelasticities on consumer and producer gains
and on deadweights

Perfectly elastic Unitary demand Perfectly inelastic

demand demand

Perfectly elastic sup- n/a All gains to consumers, All gains to

ply, shifts down Large deadweight consumers, No
deadweight
Unitary supply, shifts All gains to suppliers, Shared gains, Some All gains to consum-
down/to the right Large deadweight deadweight ers, No deadweight
Perfectly inelastic All gains to suppliers, Gains shared (depend- n/a
supply (may shift No deadweight ing on supply shift),
to the right) No deadweight

demand, as shown in Table 2.1. This is important, as larger deadweight losses

are associated with increasing inefficiencies, and the distribution of gains and
costs between producers, consumers, and taxpayers has equity and poverty
reduction impacts, depending on the relative wealth and incomes of the pro-
ducers, consumers, and taxpayers concerned.
Elastic demand or supply tends to be associated with larger deadweight
losses while producer and consumer shares of benefits are determined by rela-
tive supply and demand elasticities: inelastic demand is associated with larger
shares of consumer surplus benefits, and inelastic supply (both price elastic-
ity and in response to the subsidy) is associated with larger shares of pro-
ducer surplus benefits. Supply and demand elasticities therefore affect both
the efficiency of subsidy programmes and their equity and poverty reduction
impacts (depending upon the relative wealth and incomes of affected pro-
ducers and consumers). These observations are significant when linked with
supply and demand characteristics of different crops in different contexts.
Staple food markets in land-locked countries (with large import/export parity
price differentials) tend to be associated with more inelastic demand (where
prices lie between export and import parity prices). Demand tends to be more
elastic for cash crops, particularly export cash crops, for traded staples and
where subsidy implementation is not on a large enough scale to affect out-
put prices (small-scale subsidies that do not significantly affect production
and product prices are analytically equivalent to subsidies with highly elastic
product demand: subsidy benefits are largely captured by suppliers/produc-
ers, and deadweight costs depend upon the elasticity of supply).
Third, transfers to producers can be analysed in terms of inefficiencies
associated with economic rents. Rents arise in three ways. First, part of the
cost of a general input subsidy goes to reducing the cost of production for
produce that would be produced anyway (this is the producer surplus on
produce that would be produced without the subsidy). This is an inefficient
way of stimulating increased production and increased productivity, unless

18
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Agricultural input subsidies

there is some social or economic beneﬁt from transferring income to produc-

ers already using the subsidised input. Second, producer transfers often end
up affecting the demand for agricultural land and labour, and bid up the
demand for inputs. Apparent transfers to producers may then be passed back
to the suppliers of these factors of production as pure economic rents. This
is not a problem if the providers of this land and labour are poor, indeed as
will be argued later this can be an important way for subsidies to promote
pro-poor growth. Third, where subsidized inputs are rationed (officially or
unofficially), then this leads to opportunities for those controlling subsidized
inputs (politicians, government officials, fertilizer suppliers, farmer organi-
zation office bearers, etc.), to divert subsidized inputs from their intended
beneficiaries for a side payment or to demand payments from beneficiaries in
return for provision of subsidized inputs. Economic rents mean that even if
there are net economic and social gains from a subsidy (as discussed above),
much of the subsidy cost may be a straight transfer from the state (or taxpay-
ers) to producers and suppliers of land, labour, and inputs without any eco-
nomic gain, with the relative shares of transfers depending on the elasticities
of supply and demand.
Another concern with input subsides relates to the extent of leakages and
diversion of subsidized inputs away from their intended use. This can be con-
sidered in three ways:

a) Diversion between products: farmers are likely to apply inputs to the

use with the greatest expected return. Fertilizers, for example, may be
applied to a variety of crops. Even if subsidies are intended to expand
production of the food staples consumed by poor people with inelas-
tic demand (and benefit poor consumers with low deadweight losses),
farmers may apply subsidized fertilizers to (cash) crops with more price
elastic demand if these offer higher returns. Direct switching of inputs
between crops or products may not be so easy for subsidized seeds,
although some indirect switching may happen due to wider capital
fungibility.
b) Diversion from intended beneficiaries: input subsidies in developing
countries have commonly been intended for smallholder rather than
commercial farmers. With a general subsidy it is difficult to channel
subsidized inputs to smallholders unless there are a limited number
of tightly controlled supply chains, clear ways of identifying intended
beneficiaries, and control of private fertilizer transactions. Use of sub-
sidized inputs by larger scale commercial farms is likely to increase the
diversion from staple food to cash crops and to less-poor producers less
constrained by market failures. Similar issues arise in subsidy access
between richer and poorer smallholders.

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Background

c) Cross-border leakages: these arise when subsidized inputs are sold out-
side the country at a discount. The value of the discount represents a
straight loss from the transfer of resources outside the country, with the
loss of any chance of consumer beneﬁt or economic gain from increased
input use.

The final point to note from analysis of input subsidies’ effects on product
supply and demand is that the extent of supply shifts is critical in determin-
ing deadweight losses, the distribution of transfers between producers and
consumers, and the extent of wider economic gains. The supply shift depends
upon the technical efficiency of input use—determined by the quality and
appropriateness of the inputs to the product they are used on, timing of their
delivery to farmers, availability of complementary resources (for example,
seed and fertilizer together, market access), and technical skills in input use.
This analysis of product supply and demand impacts of input subsidies
helps to identify features of subsidies that are likely to yield more benefits
and reduce the dangers of things going wrong, with additional insights into
where subsidies are most likely to be useful, and into the ways that subsidies
should be implemented. It suggests that inputs subsidies should be focused

• on producers who are not using inputs because of market failures;

• on inputs for products where they can induce a substantial supply shift
(and this may also require complementary investments in, for example,
other input supply, extension and output markets’ infrastructure and
services); and
• on inputs for products with inelastic demand and supply (particularly
inelastic demand) among poor producers and consumers: staple grain
production tends to have these characteristics in poor land-locked
countries or large countries with suitable agro-ecological conditions.

Although input subsidies are directed at producers and at changing produc-

tion methods and producer behaviour, this analysis emphasizes the impor-
tance of consumer benefits in addition to (or rather than) producer benefits
for maximizing both economic and welfare gains from subsidies. Input sub-
sidies should also be implemented in ways that (a) reduce deadweight losses
and rents from straight transfers, (b) reduce leakages, and (c) have low admin-
istration costs. Subsidies may also be less efficient instruments if they are
primarily aimed at delivering income transfers to producers and remote areas,
because of high deadweight and administration costs, generation of rents,
and the difficulties in developing/delivering complementary services needed
for technically and economically efficient use of subsidized inputs. The dis-
tributional impacts and multipliers from expenditure on input subsidies also

20
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Agricultural input subsidies

need to be considered against alternative (tax and subsidy or transfer) instru-

ments for changing income distribution and for stimulating growth.
The conclusions from the theoretical analysis above matches (and influ-
enced) the conventional wisdom among most economists and northern
policy analysts on the difficulties with input subsidy programmes. This also
emphasized difficulties with

• controlling costs, as there tend to be strong political pressures for the

expansion of subsidies, and only weak pressures for their control;
• ‘exits’, as there is strong political resistance to scaling down or
termination of subsidies;
• effectiveness of targeting of input subsidies to particular farmer
types, with the problems of diversion and leakage noted above both
expanding programme cost and reducing efficiency;
• over use of inputs, or adoption of input intensive production methods,
as a result of artificially low input prices;
• regressive benefits favouring larger farmers who can afford subsidized
inputs (the poorest farmers may not be able to afford inputs even where
they are subsidized);
• market distortions, and particularly parastatal involvement in
subsidized input delivery, tending to crowd out and inhibit private
sector investment in input supply systems and hence impede
sustainable development.

These concerns led to the conventional wisdom among economists and

international donors in the 1980s and 1990s that input subsidies had been
ineffective and inefﬁcient policy instruments in Africa and that they had
contributed to government over-spending and ﬁscal and macro-economic
problems. From the mid 1990s, however, this conventional wisdom was
increasingly challenged, with a resurgence of interest in agricultural input
subsidies in Africa, new thinking about the historical and potential roles in
agricultural development, and the complementary emergence of innovative
subsidy delivery systems and instruments.

2.3. Resurgent interest in input subsidies

The fundamental driver for new thinking on input (and particularly ferti-
lizer) subsidies in Africa was concern among African politicians, NGOs, and
some policy analysts about the apparent failures of liberalized policies in
supporting broad-based agricultural development, particularly sustainable

21
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Background

intensiﬁcation of staple food crop production. This was accompanied by

continuing political demands for fertilizer subsidies in many countries; ten-
sions among donors in resisting such demands (with increasing legitimacy
of democratic governments in Africa and divergent donor views on subsidy
merits); concerns about declining soil fertility, agricultural stagnation, and
rural poverty in Africa; and identification of input subsidies as a potential
instrument for social protection policies.
These concerns led to interest in the potential for input subsidies to deliver
a wider range of (sometimes unstated) objectives than those formerly recog-
nized in the conventional wisdom described earlier. These objectives included
short-term private input market development, replenishment of soil fertility,
social protection for poor subsidy recipients, and national and household
food security (Morris et al., 2007).
There has also been considerable interest in the development of new
instruments and approaches in designing and delivering input subsidies, as
so called ‘smart subsidies’. Morris et al. (2007) describe 10 features of smart
subsidies: ‘promoting fertiliser as part of a wider strategy’, ‘favouring market
based solutions’ and ‘promoting competition’ in input supply, ‘paying atten-
tion to demand’, ‘insisting on economic efficiency’, ‘empowering farmers’,
‘involving an exit strategy’, ‘pursuing regional integration’, ‘ensuring sus-
tainability’, and ‘promoting pro-poor economic growth’ (Morris et al., 2007:
103–4). They recognize that ‘in exceptional circumstances, poverty reduc-
tion or food security objectives may even be given precedence over efficiency
and sustainability goals’ (Morris et al., 2007: 104–5). Instruments proposed
for implementing smart subsidies include demonstration packs, vouchers,
rationing, targeting, matching grants, and loan guarantees. For all of these
the details of instrument design and implementation are critical to their
success, and there is continuing concern over the problems of subsidies dis-
cussed earlier and the importance of addressing wider problems in input sup-
ply chains (Jayne et al., 2009; Minot and Benson, 2009; Bumb et al., 2011).
The interest in getting input subsidies to serve new functions and objec-
tives, and the extent to which input subsidies are the most cost-effective way
of achieving these objectives, continues to be controversial. The main text
of the 2008 World Development Report on ‘Agriculture for Development’,
for example, recognized all the features of smart subsides outlined above,
but its summarized position was more restricted and conventional, focusing
on subsidy roles as being to provide ‘sustainable solutions to market fail-
ures . . . through . . . ‘market smart’ approaches to jumpstarting agricultural
input markets. . . . and underwriting risks of early adoption of new technolo-
gies to help achieve economies of scale . . . to reduce input prices . . . as part of
a comprehensive strategy to improve productivity with credible exit options’
(World Bank, 2007b).

22
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Agricultural input subsidies

It is, however, possible to question how important some of the objectives

listed above were in successful Asian Green Revolutions (for example, replen-
ishment of soil fertility and social protection for poor subsidy recipients) and
to identify other, perhaps more important, outcomes from subsidy use in
these green revolutions (see, for example, Hazell and Rosegrant, 2000) or in
more recent input subsidy programmes. Such outcomes included

• long-term ‘thickening’ of supply chains and rural markets;

• lower staple food prices and higher wages;
• increased real incomes for poor non-recipients as well as food-insecure
recipients as a result of food price and wage changes; and
• longer term structural changes in livelihoods and the rural and national
economy with expanded domestic demand for higher value farm
products and for non-farm goods and services, together with expanded
supply capacity, due to release of land and labour as a result of increased
staple crop productivity.

These debates, together with new insights into development processes,

require an extension of the conventional wisdom on subsidies with a
re-examination of:

• the empirical record of their success and failure;

• development opportunities and constraints facing African farmers;
• thinking on input subsidies’ roles and objectives in development, on
new design and implementation features, and on the conditions for
inputs subsidies to be effective; and
• a more holistic conceptual framework for examining the roles,
instruments, and implementation of input subsidies.

We consider each of these issues in turn to provide a basis for a review of

recent experience with input subsidies in Africa in the subsequent chapter.

2.4. Input subsidies’ successes, failures, and potential

The substantial success of the Green Revolution in Asian countries in driv-

ing growth and poverty and reduction is widely recognized but, implicitly
or explicitly, this is often considered to have been achieved despite, rather
than assisted by, input subsidies (see, for example, Economist Intelligence
Unit, 2008). This position is taken despite longstanding work showing the
importance of subsidies in Indonesia (see, for example, Timmer, 2004), in
promoting agricultural growth in situations where subsidies should have the

23
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Background

greatest effect (food staples in large countries, with high physical returns from
input use). Djurfeldt et al. (2005) argue that input subsidies were a critical
element in Green Revolution policies across a range of Asian countries. Fan
et al. (2007) estimate a significant contribution of input subsidies to growth
and poverty reduction in India in the early stages of the Green Revolution
but not later (although estimated returns to some other investments such as
agricultural research were higher). Dorward et al. (2004a) argue that sustained
(but not indefinite) input subsidies were a major part of successful Green
Revolution packages, making a critical contribution to thickening and thus
‘kick starting’ markets, first within staple food supply chains and then in the
wider rural economy.
Dorward et al. (2004a) also argue that later problems with input subsidies
should not obscure their initial contribution to driving growth forward, and
much of the pessimism about subsidies was founded on later inefficiency of
Asian subsidies and African experience of such subsidies. The Berg report crit-
icized input subsidies as a major element in inefficient and fiscally and eco-
nomically unsustainable policies that distorted market incentives, blunted
competitiveness and farmer incentives, and undermined growth in private
sector services in Africa. Subsidized input systems may have looked good for
farmers, but the theoretical problems discussed earlier were compounded by
diversion and inefficiency such that actual benefits to farmers were often
very limited (World Bank, 1981). However, there are African countries that
implemented input subsidy systems that had initial success in raising pro-
ductivity, but for varying political and economic reasons failed to sustain the
fiscal investment and market systems needed to sustain benefits (for example,
Zimbabwe and Malawi).
Taking these Asian and African experiences together, Dorward et al.
(2009) note that while there are egregious examples of failure with state-
led approaches, there are also examples of dramatic success in fostering
widespread and sustained growth in smallholder food staples (as noted
above). Private market-led approaches, on the other hand, have very few
examples of such success, and many failures, but the failures of continued
rural poverty may be more hidden from economists working with govern-
ments and businesses than macro-economic and fiscal crises. It can also
be argued, however, that private market-led approaches have never been
properly tried—liberalization of food markets has proved very difficult to
implement consistently—and not just in Africa. This can also be seen, how-
ever, as another challenge to private market-led approaches. An exception
to this was the mid-2000s growth of smallholder fertilizer use in Kenya
(Ariga et al., 2008) which, while aided by special conditions which prevent
its wholesale application to other countries, nevertheless carries important
lessons.

24
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Agricultural input subsidies

The record of input subsidies, as a major part of state-led development

approaches, therefore appears to be more mixed than conventional criticisms
suggest. This requires consideration of both context and programme design
and implementation in appraising the potential for input subsidies as effec-
tive instruments for agricultural (and wider) development. Successful invest-
ments in input subsidies in the Asian Green Revolution cannot be simply
transferred to African countries. It is important to identify situations where
input subsidies could work to take opportunities and overcome constraints
facing African farmers.
Poulton and Dorward (2008) and Dorward et al. (2008) consider con-
straints and opportunities for growth for different agricultural products in
different situations in Africa and southern Africa. They suggest that while
high response cereals (with roots and tubers) are the products with the great-
est importance and potential for driving and/or spreading growth, they are
also the crops that are most affected by interlinked challenges and failures in
price instability, the price/productivity tightrope,2 and seasonal input ﬁnance
provision. In terms of conventional economic theory on subsidy gains and
losses (as discussed earlier in Section 2.2), these characteristics suggest that
high response cereals fulﬁl many of the requirements for well-designed and
implemented input subsidies to have a role to play in stimulating pro-poor
growth:

• the seasonal ﬁnance challenges are market failures that inhibit input
use, so that the gains from subsidies addressing input affordability
problems have the potential to exceed deadweight and implementation
costs;
• inelastic demand for food staples means that (a) deadweight losses
should be relatively low and (b) many of the gains of producer subsidies
should accrue to poor consumers—if subsidies increase production on a
sufﬁciently large scale to lower prices—and in this way input subsidies
can provide a means to address the food price/productivity tightrope;
• they can, in the right agro-ecological conditions and with proper
management, lead to substantial productivity and production increase.

This last point is important, in the context of arguments by Dorward et al.

(2004a) that state interventionist approaches (including input subsidies)
require (a) technologies, management, and agro-ecological conditions that
generate sufﬁcient productivity gains and (b) complementary infrastructure
and institutions to support extension services and market activities. This ties

2
The price/productivity tightrope is the dilemma in poor agrarian countries where on the one
hand high food prices are needed to stimulate investment in inputs but on the other hand high
prices damage poor consumers who spend a large part of their income on staple foods.

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Background

in with earlier arguments about large deadweight costs in producer-oriented

subsidies in remote areas to suggest that input subsidies are more effective
with favourable agro-ecological conditions for high response cereals, good
market access, and higher population densities. This approach is articulated
in AGRA’s thinking about prioritization of investments in ‘breadbasket areas’
in Africa (AGRA, 2008).

2.5. Input subsidies’ roles and objectives

2.5.1. Dynamic effects of subsidies on growth

The above discussion of subsidy impacts has been largely concerned with
subsidies’ ‘static’ impacts on producer costs and decisions, hence on pro-
duce supply and prices and consumer welfare (the more dynamic impacts on
producer knowledge of input benefits and efficient input use contributed to
these static changes). There are, however, two important potential dynamic
benefits of subsidies that have been given much less emphasis in conven-
tional discussion of subsidies’ potential impacts.
First, subsidies that are effective in raising land and labour productivity
(with overall increases in on-farm labour demand) and in driving down food
staple prices will raise the real incomes of large numbers of poor consumers
and producers, and this should expand demand for locally produced non-
staple foods (horticultural and animal products) and non-farm goods and
services, driving up local labour demand and wages and improving people’s
nutrition.3 At the same time increasing staple crop productivity can release
resources for production of the same non-staple foods (horticultural and ani-
mal products) and non-farm goods and services. These growth multipliers
were critical in driving growth in Asia (Hazell and Rosegrant, 2000). Subsidies’
potential contributions to the three core development processes of ‘hanging
in, stepping up and stepping out’ (Dorward, 2009a) require particular empha-
sis on subsidy impacts on wages and food prices for poor consumers and
producers who are net food buyers (around 50% of African farmers—Barrett,
2008) as well as subsidy implementation over a longer period, to achieve
structural change rather than short-term productivity gains. The focus on
staple crops—and both on labour productivity in their cultivation and on

3
Effective subsidies for staple crop production offer double benefits when staple markets are rel-
atively isolated from international markets—with both broad-based increases in land and labour
productivity and increases in real incomes for net food buyers who benefit from falling staple
prices. However, the dynamic benefits of broad-based productivity increases in staple produc-
tion may by themselves be very significant, even if staple markets are more open to imports and
exports, with a narrower band between import and export prices reducing the scope for falling
prices of staple foods.

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Agricultural input subsidies

prices faced by net food buyers suggest that there can be particular benefits
for women, with common gendered responsibilities in staple crop produc-
tion and acquisition.
A second set of important potential dynamic benefits from input subsidies
arises from their stimulation of increased input and output trade and wider
economic activity (as described above) having positive spillover effects with
‘market thickening’. This happens if the greater volume of economic activity
stimulated by the subsidy reduces coordination and transaction costs and
risks and promotes institutional and communications and transport service
and infrastructure development (see Dorward et al., 2004a, 2009; Dorward
and Kydd, 2004). Dynamic effects of input subsidies on the development of
input supply systems (considered below) are a specific feature of this.
These potential dynamic benefits of subsidies require longer term and sta-
ble implementation of subsidies to induce behavioural and structural change,
integration of subsidy policy and implementation with other policies promot-
ing these changes, and evaluations of subsidy programmes that take account
of and ideally assess these wider indirect and dynamic impacts.

2.5.2. Soil fertility replenishment

One of the reasons put forward for implementing fertilizer subsidies is the
need to combat the alarming decline in soil nutrients in many parts of Africa
and the need for (and benefits of) their replenishment. Crawford et al. (2006)
summarize soil fertility problems in terms of declining fallows, rapid defor-
estation, land degradation, and declining nitrogen, phosphate, and potas-
sium levels in arable soils. Subsidies to promote fertilizer application may
then be justified in terms of positive externalities where increased fertilizer
use, higher soil fertility, and higher farm yields provide a number of benefits
to society rather than to individual farmers: reductions in soil erosion and
downstream flooding and siltation, in deforestation and CO2 emissions, and
in soil and wider ecosystem and biodiversity loss as a result of reduced pres-
sures to cultivate marginal and fragile land; and reductions in poverty and in
rural–urban migration and hence in the wider social costs of addressing rural
and urban poverty as a result of increased farm and rural incomes (Sánchez
et al., 1997). It may also be argued that poverty and food insecurity cause
many African farmers to place a higher value on short-term income and food
production and a lower value on longer term investments in soil fertility and
other types of natural capital (as compared with their value to wider society),
again leading to under investment in soil fertility and a justification for sub-
sidies to promote investments in better soil management. Negative externali-
ties from nitrate leaching are not generally a problem with the very low rates
of fertilizer application on poor farms in Africa.

27
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Background

2.5.3. Effects of subsidies on input supply systems

Effective large-scale input subsidies should lead to substantial increases in
volumes of inputs purchased by farmers, and this can have a number of dif-
ferent impacts on input supply systems and markets. We consider a number
of different processes and impacts.
First, the short-run effects of an input subsidy on the input market depend
upon the nature of the subsidy and on the structure of the input supply sys-
tem. If the subsidy is provided to farmers this has the effect of shifting input
demand upwards. Alternatively input subsidies may be provided to input
suppliers (India, for example, has used fertilizer subsidies to domestic produc-
ers to develop and protect its fertilizer industry, Fan et al., 2007). The effects
of this on the input market depend upon input supply elasticity, and this in
turn will depend upon the structure, conduct, and performance in domestic
production and imports. This varies between countries and between different
kinds of inputs. Few African countries produce fertilizer, with local fertilizer
suppliers either importing blends or blending particular formulations from
domestic and imported raw materials. Price elasticities for imported fertilizers
should be very high, unless there are either significant importation costs and
limited importation capacity (as may be the case for land-locked countries,
with increased input demand bidding up importation costs and revenues
(rents) in transport costs) or limited competition between importers (bid-
ding up revenues (rents) of importers). The situation is often very different
with seed supply, where imports are impeded by national seed certification
controls and there is limited domestic capacity in seed production, with long
multiplication lead times. Short and long run supply elasticities also differ
(with greater long-run elasticity with stable policies). More elastic input sup-
ply leads to more of a subsidy accruing to producers, with gains for producers
and/or consumers depending on the product elasticity of supply and demand
(see Dorward, 2009b, for a graphical presentation of this). More elastic input
supply leads to reduced subsidy capture by input suppliers, increased benefits
to producers and/or consumers, and greater development benefits.
Input subsidies can impact beneficially on input supply systems by reduc-
ing supplier margins through economies of scale across the industry and
within particular suppliers (as a result of increased volumes) and/or through
increased competition if increased volumes attract new entrants into input
supply. These benefits should accrue to both subsidized and unsubsidized
supplies of the same inputs, and expand supply and its elasticity. The extent
of improvements in economies of scale and competition depend upon the
nature of the inputs and their supply systems, and upon ways in which sub-
sidized inputs are acquired and disbursed (for example, through general
price support, voucher systems or direct issue with distribution involving

28
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Agricultural input subsidies

government institutions, input supplier cartels, or competitive input mar-

kets). Government supply is not incompatible with realization of economies
of scale in subsidized input disbursement, but spillovers to unsubsidized sales
are likely to be limited (unless the government also markets these) and lack
of competition faced by government organizations (and by cartels) tends to
undermine the achievement of such economies.
Another process by which input subsidies can impact beneficially on input
supply systems is through their promotion of new relationships and forms
of relationships among input sellers and buyers in poor rural areas with, for
example, interlocking arrangements for linking input sellers, seasonal finance
providers, and produce buyers. Again this process depends on the nature of
the inputs and their supply systems, and on the ways in which subsidized
inputs are disbursed. As noted earlier, this can also contribute to wider eco-
nomic and market activity due to input market activities’ potential spillovers
into other markets (for example, expansion of a network to sell subsidized
inputs may also promote buying and selling of other commodities).
The impacts of input subsidies on input supply systems are not, however,
always beneficial. Damaging effects can arise in two main ways.
First, input subsidies may create considerable uncertainty and risks for
input suppliers and directly undermine incentives for private investment in
input supply systems. This occurs most obviously when governments inter-
vene directly in input markets through direct supply of subsidized inputs
and/or through regulation of input markets. Direct supply of subsidized
inputs by government may take away business from private suppliers if there
is significant displacement of unsubsidized sales by subsidized sales, leading
to unsold stocks and lower sales volumes to carry fixed costs.4 Regulation of
input markets may restrict prices or volumes, or require sales of unprofitable
lines or in unprofitable locations—again restricting revenues and increasing
costs and risks. Inconsistent and changeable policies and interventions are
particularly damaging.
Subsidies may also damage the development of input supply systems by
distorting incentives so that input suppliers direct resources into competition
for government contracts to supply subsidized inputs, instead of competition
to expand retail sales.
The implications of this discussion are that subsidy programmes can
promote input supply system development, but this needs careful con-
sideration of input supply markets’ structure, conduct and performance,
careful programme design, and long-term stable but efficiency-focused

4
An extreme case arises if farmers do not purchase unsubsidized inputs because they expect to
obtain subsidized inputs, but subsequently cannot—in such circumstances a subsidy can not only
displace unsubsidized inputs but actually depress total input use.

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Background

relationships of trust between governments and private suppliers. Quick

exits and unstable, changeable subsidy programmes are unlikely to induce
the private sector investments necessary for supply system development.
These issues are the major concerns of many subsidy analysts (for example,
Crawford et al., 2006; Morris et al., 2007; Jayne et al., 2009; Minot and
Benson, 2009; Bumb et al., 2011).

2.5.4. Social protection

A number of authors (for example, Morris et al., 2007) suggest that subsidies
may provide an effective way of delivering social protection. Dorward et al.
(2006) locate this within an evolving relationship between agricultural devel-
opment and social protection policies which they characterize as (a) social
protection from agriculture, (b) social protection independent of agriculture,
(c) social protection for agriculture, (d) social protection through agriculture,
and (e) social protection with agriculture. Input subsidies fit into (a), (d), or (e)
depending upon the relative emphasis on social protection and agriculture in
subsidy policy design and implementation. There seems to be little empirical
review of the effectiveness of subsidies as social protection instruments: we
discuss issues and evidence in Malawi later (in Chapters 6 and 7) but note
here that as compared with cash transfer programmes, social protection ben-
efits from direct input subsidy transfers are reduced in a number of ways: by
targeting that is only partially effective in reaching the vulnerable and mar-
ginalized; by difficulties and costs in redeeming coupons; by the difficulties
that labour- and land-scarce households have in using fertilizers; and by rents
or ‘cuts’ taken by middlemen in secondary markets for coupons and inputs.
Poor, labour-scarce households may also receive limited benefits from indi-
rect subsidy impacts on wage rates. However, poor and vulnerable households
should receive more benefits from indirect impacts on staple food prices and
from wider growth impacts which increase the resources available for infor-
mal social protection mechanisms.

2.5.5. Input proﬁtability

Input subsidies are just one of four ways of improving the proﬁtability of
input use, the others being (a) raising physical productivity of inputs (through
adaptation of technologies and farmers’ learning how to manage them, and
when—and when not—to use them); (b) reducing the costs of input pur-
chases by increasing efﬁciencies (for example, in fertilizer or seed production
and/or delivery systems); and (c) increasing output prices (with either high
consumer prices or with subsidies funded by tax payers). As noted earlier,
there are often considerable opportunities for both raising productivity and

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Agricultural input subsidies

reducing costs (Crawford et al., 2006; Morris et al., 2007; Jayne et al., 2009;
Bumb et al., 2011).
As we have seen, conventional thinking on input subsidies emphasizes
their role in improving the profitability of input use. While profitability con-
straints on input use on food crops continue to be important, the nature of
these constraints has changed, and (as will be discussed later) at the same
time affordability constraints have become more important.
We discuss these two changes in turn, noting that different analysis may be
needed for different inputs (for example, fertilizers and seeds).
Regarding constraints to farmer purchases as a result of lack of knowledge of
fertilizer benefits and their correct usage, it is generally no longer the case that
most farmers are unaware of fertilizers’ benefits, indeed lack of access to ferti-
lizer is commonly cited by farmers as a major constraint on their agricultural
production. Although the extent of farmers’ direct experience of fertilizer
use varies, in most areas there are farmers with direct experience of fertilizer
use, and observation and reports of fertilizer use are widespread. Farmers’
ability to use fertilizers effectively and efficiently (through proper selection
of fertilizer types, appropriate timing and method of application, and use
of complementary investments in, for example, soil and water management
and crop varieties) is more variable. Poorer farmers who do not have access to
fertilizers for cash crop production may face particular problems. Input sub-
sidy programmes continue to have a potential role in helping farmers to learn
from experience here, but this requires timely provision of appropriate fer-
tilizers supported by complementary investments in extension services and
in promotion of improved soil and water management and crop varieties.
Seed subsidies may have an important and more conventional ‘profitability’
role in promoting both achievement and knowledge of higher returns from
fertilizer use and of higher returns from their own use in conjunction with
fertilizer.
The high costs of fertilizers (as a proportion of crop production costs) mean
that the (perceived and actual) profitability of their use is strongly influenced
not only by physical responses to fertilizer use (discussed above) but also
by relative fertilizer and crop prices. Relative global prices of crops and fer-
tilizers have fluctuated over the last 40 years with a trend of falling relative
cereal prices (Dorward, 2013). Relative domestic prices, however, will have
changed in different ways in different countries. Although we cannot gener-
alize as regards declining or increasing profitability of unsubsidized fertilizer
use over the last 30 years, variability in food prices is a major issue in many
countries. Risks of low food prices leading to the low profitability of ferti-
lizer use may depress fertilizer use in less poor farmers’ production of surplus
food for the market. Fears of high food prices may make fertilizer use more
profitable, but use of fertilizer by poorer food deficit farmers is more likely to

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Background

be constrained by affordability arising from problems in accessing seasonal

ﬁnance, to which we now turn.

2.5.6. Input affordability

As noted earlier, access to seasonal finance is widely considered to be a major
constraint on input use on staple food crops, especially among poorer farmers
(see, for example, Newberry and Stiglitz, 1981; Feder et al., 1985; Binswanger
and Rosenzweig, 1986; Binswanger and McIntire, 1987; Dorward, 1996, 2006;
Dorward et al., 2005b, 2009). We describe this in terms of difficulties with the
affordability of inputs. In theory farmers can finance input purchases from
farm savings, from non-farm income sources, or from borrowing. However,
(particularly poorer) small farm households are rarely able to save enough to
fund significant intensification, and few have access to sufficient non-farm
income sources for this purpose. Credit has therefore long been recognized as
a priority to support input purchases and agricultural intensification (see, for
example, Feder et al., 1985) and state provision of subsidized seasonal credit
services were a significant part of the bundle of subsidized services, with input
provision, in successful Green Revolutions (Dorward et al., 2004a; Djurfeldt
et al., 2005). Severe (and justifiable) criticism of agricultural credit programmes
(for example, Adams and Vogel, 1986; Yaron, 1992) as fiscally unsustainable
(with a large subsidy component and major repayment problems), and regres-
sive (with the majority of loans going to well-connected, wealthy borrowers
and limited benefits to poor households) led to their demise. The abolition of
these programmes has not, however, led to their replacement by private sector
and micro-finance services for staple food crop production.5
The absence of financial services allowing farmers to access credit to
finance the significant costs of purchasing fertilizer means that only if subsi-
dies lead to sufficiently large reductions in fertilizer prices for poorer farmers
will they lead to increased access to fertilizers by such farmers. If subsidies
lead to smaller reductions in fertilizer prices which do not make them afford-
able by poorer farmers then they are likely to mainly benefit less poor farmers
whose use of unsubsidized fertilizer is less constrained by inability to finance
their purchase. Such considerations are likely to be particularly pertinent for
poorer women farmers, with particular shortages of working capital and dif-
ficulties in accessing credit and/or input subsidies.

5
Financing of inputs for staple crop production cannot use ‘interlocking’ or contract farming
mechanisms for loan recovery, mechanisms which have been and continue to be successful mod-
els for delivery of seasonal ﬁnance to non-staple producers where higher value crops give limited
numbers of produce buyers incentives to invest in smallholder production (for example, Dorward
et al., 1998; Jayne et al., 2009). Staple crops pose further difﬁculties for farmers’ consumption,
rather than sale, of the product.

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Agricultural input subsidies

Dorward (2009b) examines the issue of affordability using analysis of input

use, comparing marginal value products and marginal factor costs in input
use in the presence of seasonal capital constraints and financial market fail-
ures. Poor households face high interest and transaction costs when borrow-
ing short-term capital, with limited capital of their own and high opportunity
costs. These capital costs lead to much higher total marginal factor costs, and
lower (often zero) input use as compared with households without afford-
ability constraints. Dorward (2012a) presents a wider review of these issues
in farm household models. Both analyses show how an input subsidy which
substantially reduces the capital requirements and costs of input purchase for
capital-constrained households can make input purchases possible for such
households. They also show, however, how there may be substantial inef-
ficiencies if heavily subsidized inputs are made available to farmers whose
unsubsidized input use is not significantly limited by capital constraints.
This suggests that input subsidies’ efficiency and effectiveness in stimulat-
ing increased input use can be improved by smart subsidies that reduce the
quantities of input subsidies received by less capital-constrained farmers. This
can be achieved in two ways: by targeting and by rationing, topics that we
consider later in this chapter and which, as we shall see in later chapters, have
been major issues in the Malawi Farm Input Subsidy Programme.
An alternative and complementary perspective on the role of subsidies in
overcoming affordability constraints on fertilizer use is provided in a study
by Duflo et al. (2011) in Kenya. They report that a small targeted subsidy
for fertilizer purchases provided shortly after harvest time is as effective in
promoting fertilizer purchases among poorer households as a larger subsidy
later in the season. This is because this helps farmers commit available funds
to fertilizer purchase, which, once purchased, is much less fungible. This
phenomenon has parallels with the popularity in Malawi of a ‘fertilizer for
work’ programme as compared with food for work (Gregory, 2006; Devereux,
2006) and offers a potential alternative to, or graduation pathway away from,
large-scale subsidies. Further investigation is needed, however, into the appli-
cability of these findings in other contexts.

2.5.7. Political economy issues

Large-scale input subsidy programmes are extremely costly, represent very sig-
nificant transfers to subsidy recipients, and offer opportunities for very sub-
stantial captures of rents by a variety of stakeholders (politicians, programme
administrators, input suppliers, traders, and less poor farmers). Political
economy difficulties with large-scale input subsidies are consequently found
in almost all countries where subsidies are implemented. Thus, in OECD
countries agricultural subsidies (not specifically input subsidies) are widely

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Background

recognized to be inefﬁcient but have continued because they serve particular

political interests. Input subsidies (fertilizer and electricity, for example) per-
sist for similar reasons in many Asian countries after they have served their
role of ‘kick starting’ rural growth, despite being extremely costly (Gale et al.,
2005; Gulati and Pursell, 2008; JiKun et al., 2011).
Political economy difficulties can, however, be particularly problematic in
poorer rural economies where (a) there are very substantial economic oppor-
tunity costs from the diversion of scarce fiscal resources to input subsidies
and away from other productive investments, and (b) potential personal
and political gains from subsidy rents are very large relative to other income,
patronage, and rent seeking opportunities in the economy. A paradox arises
because substantial political commitment is needed for large-scale input
subsidies to be implemented, but the political objectives behind such com-
mitment may often focus around or be shifted towards short-term patron-
age opportunities.6 Unfortunately, however, pursuit of these opportunities
may undermine the economic efficiency and wider pro-poor growth benefits
of input subsidies—by directing subsidies to less poor recipients with more
political voice, directing subsidies towards cash crops, undermining compe-
tition and efficiency in input delivery systems, and increasing leakages and
non-transparent secondary markets. These difficulties are particularly preva-
lent in political systems with significant neo-patrimonial elements, as is com-
mon in many poorer rural economies, particularly in Africa (Van de Walle,
1999) and may be enhanced rather than reduced by the electoral cycles of
democratic government (Poulton, 2012).
Another political economy paradox arises with regard to stable, continuing,
and longer term subsidies if they are to lead to supply system development
and wider dynamic changes in rural economies (as discussed earlier). While
this carries important benefits, it also carries important risks, as if subsidies
are not set up with clear time limits and if they continue for long periods then
the risks of their being politically entrenched and ‘hijacked’ are increased.
Similarly, the longer subsidies are in place with stable subsidy systems, the
greater the opportunities for fraud and subsidy diversion. There are therefore
substantial challenges in promoting stability and trust for farmers and input
suppliers while at the same time specifying clear exit mechanisms and rules
(to reduce risks of political capture) and varying systems (to reduce fraud).
A key part of addressing these political economy issues is understand-
ing the diverse legitimate and illegitimate interests and powers of different

6
This is not intended to suggest that there are not other less self-interested and extremely
important reasons for political interest in agricultural input subsidies—these are a major focus of
this book. As will be discussed, subsidies may be particularly attractive to policy makers because
they can lead to quick increases in food production and in some circumstances it may also be more
cost-effective to subsidize fertilizer than to pay for food imports.

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Agricultural input subsidies

stakeholders (for example, farmers with different livelihoods; produce buyers,

sellers, and consumers; tax payers; local and national politicians; technicians;
donors; input supply businesses and employees; civil society; government
and private organizations and their managers; traditional leaders), as they
relate to personal, local, organizational, and wider political, ﬁnancial, eco-
nomic, and symbolic7 constraints and objectives and promoting transpar-
ency and accountability.

2.6. Design and implementation features

2.6.1. Targeting and rationing of input subsidies

A subsidy is likely to be more economically efficient and effective if subsi-
dized inputs are directed or targeted at farmers who otherwise would not use
inputs (for example, due to affordability or risk aversion constraints) but who
will make productive use of any subsidized inputs they can obtain. Dorward
(2009b) extends the analysis of Figure 2.1 above to show that if poorer, cap-
ital-constrained farmers are targeted, then this increases the economic effi-
ciency of the subsidy (as compared with a universal subsidy) and leads to
a transfer from less-poor producers and tax payers to poorer producers and
consumers (assuming that the subsidy is increasing production of a staple
food crop and reducing its price relative to wages). The extent to which less
poor producers (without the subsidy) actually lose from a fall in producer
prices depends on the price fall (which depends upon incremental produc-
tion among targeted famers and elasticity of demand) and upon alternative
activities open to them (affecting their elasticity of supply).
The targeting of subsidized inputs to different groups or types of people is,
however, a critical and sensitive issue, with significant costs and difficulties.
In this it is helpful to distinguish between geographical targeting (between
regions, districts, and different geographically defined communities) and
intra-community targeting (between different categories of people or house-
holds within communities). Geographical differences between areas and com-
munities are often correlated with socio-economic and cultural differences
between these areas and communities. Costs of geographical targeting will
generally be lower than intra-community targeting, with the relative effec-
tiveness of these targeting approaches (in terms of inclusion and exclusion

7
‘Symbolic’ constraints and opportunities are those that while not apparently technocratically
rational have significant symbolic importance. Examples include national food self-sufficiency—
this may or may not be an economically efficient way of ensuring national food security, but in
some countries it has significant symbolic political importance. Avoiding of weakness or devalua-
tion of national currency is another example of a symbolic objective in some countries.

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Background

errors) and the political tensions they cause depending on inter- and intra-
community differences and social, political, and cultural factors. Targeting
also commonly leads to secondary markets for inputs where recipients sell
subsidized inputs to non-recipients (we discuss this issue below under leak-
ages and diversion).
The political, economic, welfare, and equity issues associated with target-
ing mean that targeting criteria and methods are constrained by political
concerns and practicalities (at national, regional, and community levels), by
programme objectives (for example, production, growth, or social protection
objectives), and by the feasibility and costs of targeting. There may be argu-
ments for comprehensive or area targeting that delivers smaller quantities of
inputs (or of entitlements to inputs) to all households or farmers in a country
or area (to allow greater accountability, avoid political and financial costs of
attempts at targeting, and possibly even reduce targeting errors if targeting
mechanisms are very ineffective).
A final comment is needed on the relative efficiencies of input use by poor
and less poor producers. It has been argued above that targeting poor produc-
ers can improve subsidies’ effectiveness in addressing market failures (reduc-
ing displacement, and increasing welfare and distributional benefits). These
arguments, however, are undermined if poor producers make less efficient
use of inputs than less poor producers. There is substantial empirical evidence
supported by continually evolving theory that smaller, poorer farms tend to
be more efficient users of land in the cultivation of labour intensive staple
crops in poor rural economies, but larger farms tend to be more efficient users
of land in the cultivation of capital and market-intensive higher value cash
crops (Poulton et al., 2010). There is less evidence on relative efficiencies in
use of inputs. Although poorer farmers are generally more efficient users of
capital, this may not apply if there are increasing returns to capital with the
use of purchased inputs (this may occur if input productivity is enhanced by
complementary investments).
Targeting limits total subsidy volumes and costs by limiting access to
subsidized inputs to a limited number of beneficiaries. Rationing also
limits total subsidy volumes, by limiting quantities of subsidized input
per beneficiary. Like targeting, it can be an effective way of reducing the
total costs of a subsidy programme while at the same time allowing a
higher per unit subsidy. Dorward (2009b) uses marginal analysis and sup-
ply and demand analysis (extending Figure 2.1) to show that rationing
can also raise the efficiency of input use, with or without targeting, as
there are commonly diminishing marginal benefits to increased input use.
However, as with targeting, rationing is only effective where there are no
(or limited) secondary markets in which recipients sell subsidized inputs
to non-recipients.

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Agricultural input subsidies

2.6.2. Entitlement and distribution systems

Any targeting or rationing system restricts access to subsidized inputs. This
requires specification of entitled beneficiaries and their subsidized input enti-
tlement, with a mechanism allowing access to that entitlement. This may
involve physical distribution of inputs against lists of entitled beneficiaries,
with secure identification, or separate distribution of evidence of entitlement
which is then ‘redeemed’ at authorized retail outlets. Evidence of entitlement
is most commonly a paper voucher, but scratch cards and electronic systems
involving bank cards, electronic ‘smart’ cards, and mobile phones may also
be used. Since entitlements have considerable financial value, these must be
very secure to prevent counterfeit fraud and theft (with secure printing proc-
esses and print features and/or real time, secure, and centralized monitoring
of allocated and redeemed entitlements). Different systems offer different
potential benefits but pose different political, technical, administrative, and
social challenges (biometric information, for example, raises questions about
intra-household control over input subsidy entitlements; electronic systems
must be able to operate in areas with no electricity, and may require reliable
mobile phone network access and expensive and/or sensitive equipment).
Entitlements may be input specific (entitling the beneficiary to a particular
quantity of a particular input) or flexible (allowing choice between a lim-
ited range of specified inputs). They may also be fixed value (with benefici-
aries paying a top up which varies for different locations, outlets or inputs)
or associated with a fixed top up (where the top up paid by the beneficiary
is constant but the redemption value to the retail outlet varies). There are
important interactions between types of vouchers, secondary markets, recipi-
ent choice (of inputs and suppliers), control of fraud and of programme costs,
and gendered access to and control of subsidized inputs within households.

2.6.3. Programme exits and graduation

As discussed earlier, a major criticism of input subsidies has been that for a
variety of reasons they tend to continue as expensive and ineffective pro-
grammes long after their initial economic and developmental justification
has become irrelevant. Consequently an important feature of ‘smart’ subsi-
dies has been an ‘exit strategy’ (Morris et al., 2007) or ‘exit options’ (World
Bank, 2007b). This should involve a clear understanding of the market fail-
ures that the subsidy is intended to overcome and hence of the structural
changes it is intended to promote—with regard, for example, to farmers’
knowledge of input use and its benefits, wider thickening of markets, soil
fertility, input supply system development, input profitability, and/or input
affordability. Such understanding should lead to the design of criteria and

37
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Background

processes for ‘exits’ or, to use a more nuanced term, ‘graduation’ from the use
of subsidies in promoting farmers’ access to inputs to reliance on other, gen-
erally market-based, systems and processes. Graduation processes and criteria
will need to consider interactions between the objectives of a programme, the
particular constraints it is attempting to address, available resources, and the
needs and situations of different targeting groups. We discuss this in more
detail in Chapter 11.

2.7. Conditions affecting effectiveness

An effective input subsidy needs design and implementation that ensure

(a) that input subsidies reach and are used by beneﬁciaries that would not
otherwise use these inputs, and (b) that they are used efﬁciently and effec-
tively to increase crop production. The design features of targeting, ration-
ing, and entitlement and distribution systems discussed above are intended
to promote (a) and, less directly, (b). We now consider three other issues
affecting the reach, use, and productivity of input subsidies.

2.7.1. Leakages and secondary markets

Leakages were discussed earlier in terms of cross-crop, cross-farmer, and cross-
border leakages. These are associated with the development of secondary
markets where subsidy recipients sell their inputs (or input entitlements) to
others, at prices normally discounted against unsubsidized inputs. Such mar-
kets may arise with targeted and rationed subsidies as a result of differences
between subsidy recipients and non-recipients in access to and needs for work-
ing capital (with poorer, capital-constrained farmers selling inputs to less poor
farmers) and/or differences in perceived marginal benefits to input use (with
farmers with more land, for example, requiring larger quantities of inputs).
It is often argued that secondary markets should not be impeded because
(a) farmers generally know what is best for them and (b) attempts to limit sec-
ondary markets generally lead to (poorer) sellers of inputs into these markets
getting lower prices to the benefit of (less-poor) buyers and middlemen who
capture a large share of subsidy benefits. Such arguments lead to a common
related question: would it be better to give poor producers cash rather than an
input subsidy and let them choose what to do with the money? This is impor-
tant in the context of social protection and welfare policies’ increasing use
of cash transfers to avoid the inefficiencies and leakages common in subsidy
administration and secondary markets.
There are, however, significant arguments that both the provision of cash
transfers and widespread secondary markets fundamentally undermine

38
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Agricultural input subsidies

input subsidy programmes’ wider beneﬁts. At the heart of arguments for

input subsidies are information and market failures and externalities, all of
which cause individual optimizing farmers to make decisions that are sub-
optimal or inefﬁcient in meeting the goals of wider society. A well designed
and effectively implemented input subsidy programme can address four
interacting sets of information and market failure and externality problems
together:

• Farmers’ under-valuation of the beneﬁts of input use to themselves as

individuals and to society, as a result of inadequate information on
the effects of inputs when properly used and on efficient ways to use
them—an information failure.
• Poorer farmers’ inability to obtain seasonal working and consumption
capital, or ability to obtain it only at much higher cost than the social
opportunity cost of such capital—a credit market failure.
• Farmers not benefiting directly from economies of scale when increased
input volumes reduce input supply costs and margins—a ‘non-
pecuniary’ externality that arises from increasing returns to scale.
• Farmers not benefiting directly from lower output prices and
consequent dynamic pro-poor growth effects of subsidies which raise
staple food production and productivity—a ‘pecuniary externality’.

If cash transfers replace input subsidies, or secondary markets are encour-

aged, then welfare transfers can be delivered more efficiently to subsidy ben-
eficiaries (subsidy recipients and/or staple food consumers) but cash transfers
are unlikely to be able to address as efficiently at least three of the four infor-
mation and market failure and externality problems described above.8 Policy
choices between cash transfers and input subsidies with or without con-
straints on secondary market operation therefore need to take account of spe-
cific policy objectives; of the nature of the informational, market, externality,
and distributional problems that need to be addressed; and of alternative
instruments and combinations of complementary instruments that may be
used (Filipski and Taylor, 2011).
This discussion of the role of subsidies in addressing information and
market failures and externalities has important implications not only for
thinking and policies on secondary markets but also on farmer choice
within subsidy programmes. It is sometimes argued that voucher systems

8
One would expect cash transfers to address seasonal credit market failures, but Gregory (2006)
and Dorward (2006) suggest that this may not be the case as transfers as input subsidies rather
than cash may help with ‘enforced savings’ as money savings are too fungible. Observations by
Duﬂo et al. (2011) regarding poor Kenyan farmers’ changing willingness or ability to invest in
fertilizer purchase suggests further behavioural reasons for in-kind rather than cash transfers.

39
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Background

can and should be used to extend farmer choice, with ﬁxed value vouchers
being redeemable for different inputs which farmers may choose between.
This empowers farmers, and allows them to use the subsidy to invest in
inputs that they consider will make the largest contribution to their live-
lihoods. The effectiveness with which subsidies address information and
market failures and externalities may, however, require some restrictions on
farmer choice, to ensure that their choices align with wider social efﬁciency
objectives.9

2.7.2. Subsistence production and net deﬁcit producers

Our discussion of input subsidy impacts on output supply and stakeholder
welfare has considered separately the subsidy impacts on output produc-
ers and consumers, linking them through market prices. This analysis is, of
course, highly stylized. While there is evidence that many staple food markets
in southern and eastern Africa are reasonably well integrated (Abdulai, 2007),
they also tend to be characterized by high margins that inhibit exchange and
incentives for surplus production (Barrett, 2008). This, together with vari-
able staple food prices and limited off-farm income opportunities, leads to
substantial subsistence production and very large numbers of African farmers
who are poor deficit staple food producers and net staple food buyers (Barrett,
2008). Such farmers are both producers who can utilize an input subsidy and
consumers who benefit from lower food prices.
Dorward (2009b) examines subsidy impacts on supply and demand within
households and their impact on maize sales and purchases. He shows that
the impacts of a subsidy on farmers will differ with the initial situation of the
household as autarchic or a net buyer or seller, household composition (con-
sumers and workers), and access to land and capital. Subsidy impacts in pro-
duction and consumption by many households will not be fully reflected by
changes in quantities bought and sold in food markets, and this may dampen
market effects of subsidies when measured in absolute terms. However, the
significant quantities of produce that are consumed within farm households
without ever reaching markets also means that produce markets may be very
thin, so that small percentage changes in production can lead to very large
percentage changes in market supply and demand, making markets very
unstable. This can be important for understanding the food market impacts

9
This discussion is also relevant to suggestions that it is ‘theoretically optimal’ to address mar-
ket failures directly, not through input subsidies, for example by providing credit services to poor
farmers’ production of staple foods, as argued, for example, by Wiggins and Brooks (2012). Such
arguments ignore both the arguments made here about input subsidies’ ability to address multiple
market failures and the very great difﬁculties with, and lack of examples of, successful experience
in providing credit services to poor farmers’ production of staple foods (Dorward et al., 2008).

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Agricultural input subsidies

of input subsidies (and indeed of any policy or natural events that affect
smallholder production).

2.7.3. Complementary integration, investments and policies

Positive impacts from input subsidies are determined by the on-farm physical
productivity of inputs; by input supply system efficiency, transport and com-
munication systems and costs; and by output market efficiency—as well as by
the effectiveness and efficiency of implementation of the subsidy programme
itself. Programme impacts can therefore often be enhanced by complemen-
tary investments in agricultural research and extension that can raise input
productivity; by subsidies for complementary inputs (for example, seeds and
fertilizers); and by investments in road, communications, and market infra-
structure and service development. Changes in power relations—for exam-
ple, in men’s and women’s responsibilities and control of resources—may
also have critical impacts on input access and use and on direct and indirect
impacts. Programme effectiveness and efficiency can also be improved by
designing and implementing subsidy and other policy instruments in ways
that are complementary (for example, cash transfer or cash for work pro-
grammes may be linked to subsidy entitlement systems to facilitate participa-
tion by and benefit for very poor producers; more gender aware entitlement
and access systems may increase input uptake and efficiency; or subsidy enti-
tlements may be linked to and incentivize investments in soil and water con-
servation). Complementary development of staple food markets is an area
of complementary policy that is particularly important given the way that
major subsidy benefits involve consumers’ accessing food at lower prices.

2.8. Rethinking input subsidies: a conceptual framework

We now build on the integration of conventional and newer thinking in this

chapter to identify key issues that need to be considered in designing, imple-
menting, and evaluating agricultural input subsidy programmes.
The ‘success’ of an input subsidy programme has to be judged against the
objectives of that programme. As we have seen, input subsidy programmes
can and do have a wide range of different possible objectives. Most of these
objectives are mutually complementary but there may be incompatibilities
between some objectives (for example, there are some trade-offs between con-
sumer and producer objectives, and between efﬁciency objectives and some
rents—even allowing for some rents being necessary for political economy
purposes to allow a subsidy to be implemented). It is also important to note
that stated formal programme objectives may differ from the objectives of

41
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Background

individual stakeholders. The balance of programme objectives should then

determine the key design and implementation elements of input subsidy
programmes—their focus and scale, the inputs to be subsidized, targeting
and rationing systems, procurement and delivery systems, private and public
sector roles, entitlement systems, graduation systems, and complementary
policies and investments.
These elements have all been discussed explicitly or implicitly in earlier
sections. They have suggested that input subsidies will generally (but not
always) yield the greatest social and economic returns where they

• focus on consumer beneﬁts and on indirect gains to pro-poor economic

growth from increased food staple productivity;
• operate at a large enough scale (in terms of the number of beneﬁciaries,
the subsidy per beneﬁciary and the total subsidized volumes) to lower
staple produce prices and/or raise the productivity of substantial
amounts of land and labour;
• have rationing and targeting criteria and methods with entitlement and
distribution systems which direct subsidized inputs to producers whose
productive input use is constrained by market failures which can be
overcome or substantially reduced through the subsidy; and
• include graduation processes and criteria which encourage the
achievement of structural changes which then allow the scaling down
and phasing out of subsidies.

Rationing and targeting will normally be best achieved by various forms of

voucher systems which enable cost-effective and timely input distribution,
which support sustainable unsubsidized (commercial) input supply system
development, and which limit secondary market development and leakages.
Effective implementation of these various elements will normally require
coordinated complementary investments and policies supporting infrastruc-
tural development, agricultural research and development, and efficient out-
put markets offering lower and more stable staple prices to consumers.
However, as should also be clear from these sections, these elements are also
highly inter-related, with many synergies and trade-offs. These interactions
are most easily identified around the themes of scale and scope: large-scale
subsidy programmes offer wider supply-side benefits (in input supply system
development, in consumer and dynamic pro-poor growth impacts) but make
effective, timely, and efficient programme management more difficult and
can crowd out complementary investments needed for higher productivity
of input use. Different entitlement, targeting, and rationing systems are effec-
tively attempts to control the scale of subsidy programmes by directing lim-
ited resources to their most productive uses—but these are themselves often

42
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Agricultural input subsidies

Other macro-
3. Effects on input supply economic
system 4. Effects on macro- management
Private sector importers & economy
large/ small distributors; Fiscal balance; Political
parastatals; foreign exchange balance; economy &
profits, cash flow, confidence, health, education, policy
volumes, prices, investment, infrastructure, other processes
innovations, other services agricultural spending
1. Input subsidy Global &
implementation regional prices
Scale, cost, modalities,
timing, targeting, Staple food
rationing market
policies

2a Effects on recipients 2. Effects on 2b Effects on non-recipients Previous

(different hholds & hhold rural households (different hholds & hhold season(s)’
members) members) events &
Input access & use, farm Local & national, Input access & use, farm & non- outcomes
& non-farm activities & market & non-market farm activities & productivity,
productivity; relations: labour hire in/out, crop Weather
labour hire in/out (staple food, labour, purchases / sales, income, food
crop purchases / sales, cash, land, etc. prices security, welfare, vulnerability Disease
income, food security, & flows) (HIV/AIDS,
welfare, vulnerability malaria, etc)

Other rural
economic
Other social protection and agricultural / rural development measures activities

Figure 2.2. A conceptual framework for investigating agricultural input subsidies’

impacts (adapted from School of Oriental and African Studies et al., 2008)

difﬁcult and costly to implement. Indeed there is something of a paradox

here, that it is in the application of targeted subsidies to input use on staple
foods in poor rural areas that such subsidies both offer the greatest potential
benefits and pose the greatest implementation, resourcing and coordination
challenges (Dorward et al., 2009).
Figure 2.2 provides a conceptual framework that draws on the analysis
and issues addressed in this chapter to identify the key variables and rela-
tionships affecting input subsidy programme impacts. It details how imple-
mentation (and its various elements) impact directly on rural households,
input supply systems, and the macro-economy. Impacts on rural households
can be separated into direct impacts on subsidy recipients or beneficiaries
and indirect impacts on other households through the effects on the rural
economy of changes in beneficiary behaviour and market activities. Direct
and indirect rural economy effects, input supply system effects, and macro-
economic effects all interact with and affect each other, and are also affected
by and may affect other policies and processes. The figure may most eas-
ily be interpreted as an examination of short-term (say annual) effects, but
longer term impacts will also arise, and may be conceptualized with a similar
framework.

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Background

Table 2.2. Critical aspects of input subsidy programmes

A Design & implementation

A.1 Basic subsidy system (objectives, focus on consumer or producer benefits, direct recipients)
A.2 Product focus—staple foods, cash crops, etc.
A.3 Input specification
A.4 Scale—beneficiary coverage
A.5 Subsidy per beneficiary
A.6 Total volumes subsidized
A.7 Procurement systems
A.8 Voucher or other entitlement systems, distribution & input access systems & timing
A.9 Rationing—objectives, methods
A.10 Targeting—objectives, criteria & methods
A.11 Input supply systems (involvement of parastatal & /or private importers & wholesale &
retail suppliers) & timing
A.12 Secondary market & leakage policies (& enforcement mechanisms)
A.13 Complementary integration & investments & policies
A.14 Timing of all activities
A.15 Private & public sector incentives, resources, roles & responsibilities
A.16 Resource allocation & mobilization (finance, personnel, transport, etc.)
A.17 Auditing systems
A.18 Consistency, adaptation across areas, years
A.19 Graduation objectives, criteria, processes, etc.

B Outputs
B.1 Subsidized input deliveries & receipts– quantities, locations, timing, target groups
B.2 Subsidy imports & disbursement by private sector suppliers, by type & location

C Outcomes
C.1 Incremental input use
C.2 Input leakage, displacement, diversion
C.3 Incremental production
C.4 Increased productivity

D Impacts (short & long term)

D.1 Output price changes (producer & consumer prices)
D.2 Input price changes
D.3 Labour market changes (hired labour demand, wages)
D.4 National/household food self sufficiency/security
D.5 Input supply system
D.6 Other market changes
D.7 Rents (supplier, producer, administrative, political)
D.8 Programme benefit–cost analysis (fiscal, economic)
D.9 Opportunity costs of programme
D.10 Macro-economic effects
D.11 Welfare & growth impacts
D.12 Wider (pro-poor) economic growth
D.13 Consumer benefits—lower output prices, access (emphasis on poorer consumers?)
D.14 Producer welfare (emphasis on poorer producers?)
D.15 Input supply system development & efficiency
D.16 Soil fertility replenishment
D.17 Sustained input adoption
D.18 Sustained input use efficiency
D.19 Soil fertility management

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Agricultural input subsidies

This framework, along with the previous discussion, helps to identify criti-
cal aspects of subsidy programmes. These are summarized in Table 2.2. The
distinctions between design and implementation, outputs, outcomes, and
short- and long-term impacts should not be taken as at all precise. Design and
implementation must of course take into account short- and long-term objec-
tives and the intended logical framework linking implementation to desired
outputs, outcomes, and impacts. Similarly, separations between outputs and
outcomes, between outcomes and impacts, and between short- and long-
term impacts are by no means clear. Nevertheless, this provides a helpful
guide to the gradation between on the one hand long-term impact objectives
which are inﬂuenced but not controlled by programme design and imple-
mentation, and on the other hand short-term output and (to a lesser extent)
outcome objectives which are directly controlled by and the responsibility
of programme designers and implementers—as a direct result of their design
and implementation decisions and actions.
Figure 2.2 and Table 2.2 together set out the key issues that are examined
in the remainder of this book, as we consider the recent record of agricultural
input subsidies in other countries in Africa (in Chapter 3) and in Malawi in
Chapters 4 to 12. They also underpin the analytical framework set out in
Part II for examining the Malawi subsidy programme’s implementation and
impacts.

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3

Recent African experience with

input subsidies

3.1. Introduction

Having considered key features of input subsidy programmes and a con-

ceptual framework of their impacts in the previous chapter, we now turn to
examine experience with the implementation of recent, large-scale initiatives
in poorer agrarian economies. This leads to an emphasis on programmes in
Africa. As noted in Chapter 2, there has been resurgent interest in input sub-
sidies, in particular ‘smart subsidies’ for fertilizers in Africa. Unfortunately
there are few detailed and rigorous evaluations of most of these programmes.
In this chapter we review African programmes for which there is new infor-
mation since an earlier review by Dorward (2009b)—but we explicitly exclude
any discussion of the Malawi experience from 2005/6. In subsequent chapters
we will, however, where appropriate compare Malawi’s post-2005 experience
with observations from this review. This review does not cover all large-scale
subsidy programmes in sub-Saharan Africa since 2005, only those for which
some information is available. Thus, there is no review on achievements
under Kenya’s National Accelerated Agricultural Input Programme (NAAIP),
planned for implementation from 2008 (Dorward, 2009b). Similarly, there is
very little information available on programmes in Mali and Senegal (Kelly
et al., 2011) and these are therefore considered together. A number of authors
comment on the lack of systematic and good quality information on subsidy
programmes in Africa (Dorward, 2009b; Morris et al., 2009; Kelly et al., 2011;
Druilhe and Barreiro-Hurlé, 2012).
We summarize here observations from an examination of nine fertilizer
subsidy programmes in Africa selected on the basis of (a) availability of infor-
mation and (b) relevance to our review of large-scale subsidy programmes
aimed at boosting input use in staple crop production. We ﬁrst brieﬂy describe
the main elements of each programme’s history before considering what they

46
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Recent African experience with input subsidies

can teach us regarding general patterns of subsidy programme objectives,

design, implementation, and impacts.

3.2. Ghana1

In early 2008 Ghana faced high food prices and rising fertilizer prices and
the government and large fertilizer importers (who had signiﬁcant but high
priced fertilizer stocks) discussed the potential and possible modalities for a
national fertilizer subsidy programme. Press reports (Ghana News Agency, 9
June 2008, 3 July 2008) indicate that the programme was formally announced
in June 2008 and operated from July to December. A total of 30,000 tons of
four types of fertilizer was made available by three major importers, with
pan-territorial farmer prices representing an approximate 50% subsidy,
keeping farmer prices similar to the previous years’, in the context of rising
international prices, at a total cost of around US$15 million.2 Large numbers
of vouchers (over 1 million) were printed against planned subsidy sales of
600,000 bags. Deliveries were late for the cropping season in the south of
the country (April to July), but were more timely for the north, and this may
account for lower uptake and fertilizer sales in the south and use on a wider
range of minor crops as compared with the north where there was more sub-
stantial uptake and use mainly on maize.
Vouchers were distributed by Ministry of Agriculture staff for redemption
by distributors linked to the major fertilizer importers. There was wide varia-
tion in voucher distribution approaches, systems, and numbers across differ-
ent areas, and limited information to ﬁeld level staff on the total number of
vouchers that they would receive for distribution. Redemption prices varied
geographically to provide pan-territorial farmer prices in district capitals, but
this tended to discourage suppliers from supplying fertilizers outside district
capitals as neither redemption nor farmer prices covered costs of transport
outside district capitals. No subsidy sales were made by (smaller) distributors
independent of the major fertilizer importers (indeed in the north unsub-
sidized sales were reported to be banned completely) and the programme
may have reduced competition and depressed sales and revenues for smaller
retailers closest to farmers in rural areas. It may also have strengthened the
position of importers participating in the programme (who gained from
increased sales of previously imported stocks) at the expense of others. It was

1
Information on the Ghana 2008 fertilizer subsidy programme is obtained from Banful (2009,
2011); Krausova and Banful (2010); Yawson et al. (2010).
2
Total budgeted subsidy cost was $25 million but only about $15 million was directly for the
subsidy inputs and voucher costs (personal communication, Afua Branoah Banful).

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Background

also widely believed that sales without vouchers were illegal. Banful (2011)
reports that both political and economic efficiency considerations appear to
have influenced distribution of vouchers between districts. Receipt of vouch-
ers by farmers is reported to be associated with access to distribution points,
reliance on agricultural income, hiring of labour, wealth, and years farming
(Vondolia et al., 2012). There is less specific and detailed information about
subsequent programmes, which appear to have operated in a similar way.
However, the scale of the programme had doubled by 2011—when 150,000
tons were subsidized at a cost of US$70 million and a 50% subsidy rate—
and there are continuing concerns over late implementation (Ghana News
Agency, 2012; Alassan, 2012).

3.3. Zambia Fertilizer Support Programme and Food

Security Pack

We consider two input subsidy programmes in Zambia, the Food Security

Pack and the Fertilizer Support Programme, both confusingly known as FSP.
The Food Security Pack as reviewed by Ellis (2007) has a number of differ-
ences in design from other programmes reviewed in this chapter, but displays
many similarities in its actual operation.3 It was developed and has consist-
ently been considered more as a social transfer programme than an input
subsidy programme, aimed at ‘vulnerable but viable’ farming households,
but attempting to address a cause of vulnerability: lack of access to productive
inputs. Its main objectives have been to provide basic inputs to vulnerable
households with some land and labour, but also to promote crop diversifica-
tion and conservation farming. Its primarily social welfare objectives led to
its implementation by a national NGO coordinating a network of district
NGOs under the direction of the Ministry of Community Development and
Social Services, with technical support from the Ministry of Agriculture and a
domestically funded budget line from the Ministry of Finance and National
Planning.
The first year of operation of the Food Security Pack was 2000/1, and it was
intended to reach 200,000 households per year for three years. It has in fact
operated for a much longer period on a much smaller scale as regards the
number of beneficiaries served, but has been thinly spread across all 72 dis-
tricts in Zambia. Budgetary provision, beneficiaries reached, and input packs
have varied widely across the years (Ellis, 2007; Kodamaya, 2011), as has the
composition of input packs. These were supposed to contain inputs for 0.25

3
Information on the Food Security Pack is from Ellis (2007) unless another source is speciﬁcally
cited.

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Recent African experience with input subsidies

ha of cereal (maize) production, for 0.25 ha of cassava or sweet potato produc-

tion, and for 0.25 ha of legume production. Packs are provided free, but after
the first couple of years the programme farmers are expected to repay 50% of
the value in kind after harvest with the proceeds partly stored food security
and partly sold to finance public works (Jorgensen and Loudjeva, 2005).
There have been particular difficulties with the sourcing of inputs for
root crops and legumes, and in 2005/6 for example, only maize inputs were
provided. Funding has often been inadequate, unpredictable, and late, and
thus reached a smaller than budgeted number of beneficiaries with common
late delivery of inputs. The small numbers of beneficiaries in each district
have often been concentrated in small geographical areas for logistical rea-
sons. Within these areas, targeting by local committees has been affected
by local elite capture and also by widespread splitting and sharing of packs.
Beneficiary selection was supposed to use primary targeting criteria focused
on land-operating but land-poor households with unemployed labour,
together with secondary criteria focused on favouring particular vulnerable
groups (for example, households of the elderly, disabled, orphaned or unem-
ployed youth members). However, Jayne et al. (2006) report that in 2002/3
beneficiaries under the Food Security Pack had average per capita incomes of
less than half of those of beneficiaries of the Fertilizer Support Programme
discussed below. There is, however, very little information available on the
programme’s impacts.
Turning now to consider the much larger Fertilizer Support Programme,
this was initiated in 2002 as the successor to a long history of fertilizer sub-
sidies and alongside the smaller and socially targeted Food Security Pack dis-
cussed above. Since that time the programme has grown and evolved: from
2002/3 to 2009/10 beneficiaries rose from 120,000 to 500,000 farmers, subsi-
dized inputs rose from 48,000 to 180,000 tons of fertilizer and from 2000 tons
to nearly 9000 tons of maize seed, and the subsidy rose from 50% to 75% of
input costs (Ministry of Agriculture and Cooperatives, 2011). However, the
same basic approach has been maintained, with fertilizer imports by private
companies under government tender with distribution to farmers through
cooperative societies. Our review draws on a number of studies which have
examined different aspects of the programme over time.
Minde et al. (2008) report that the objectives of the programme have
changed over time with it being intended at first to assist smallholders access-
ing inputs in remote areas which it was thought were not served by private
traders. However, private sector market and service expansion, in these areas
particularly, has also been stressed, with reduced government involvement
in input supply. Thus, the Ministry of Agriculture and Cooperatives (2011)
lists the 2011/12 programme overall objectives as ‘to increase private sector
participation in the supply of agricultural inputs to small-scale farmers and

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Background

contribute to increased household food security and income’ with speciﬁc

objectives to expand private sector input markets and involvement, reduce
government involvement, ensure timely and effective supply to targeted farm-
ers, improve these farmers’ access to inputs, promote competitiveness and
transparency in input supply and distribution, reduce risks in farmers’ inputs
use, and promote rural institutional development. However, the Zambia
Agricultural Consultative Forum (2009) proposed that the overall objective
of the programme should be ‘to increase small scale farmers’ productivity
in order to contribute to improved household and national household food
security’ (p. 14) with (as above) specific objectives to improve small-scale
farmers’ access to inputs with increased participation of the private sector,
an expanded agro-dealer network, and timely, effective, and adequate input
supply.
These multiple objectives lead to a number of different criteria by which
the programme is judged. As regards private expansion, there are persistent
criticisms that the programme has discouraged (or at best had mixed effects
on) private trader participation due to the restricted number of companies
supplying fertilizers, and unpredictable location, timing, and composition
of subsidy supplies leading to uncertainty over commercial demand (for
example, Jorgensen and Loudjeva, 2005; World Bank, 2010b). This is associ-
ated with concerns that there has been significant leakage of supplies from
the subsidy supply chain into the commercial supply chain (Muleba, 2008;
Minde et al., 2008; World Bank, 2010b; Mason, 2011) and displacement of
unsubsidized sales by subsidized sales to larger farms in less remote areas
where the bulk of supplies have gone (Minde et al., 2008; Xu et al., 2009a;
Mason, 2011; Jayne et al., 2011).
Displacement and targeting, and widespread reports of late input delivery,
also affect the programme’s effectiveness in raising maize production and
in improving the food security and livelihoods of poorer farmers, and again
this is the subject of concern in a number of studies (Civil Society for Poverty
Reduction, 2005; Jorgensen and Loudjeva, 2005; Minde et al., 2008; Zambia
Agricultural Consultative Forum, 2009; World Bank, 2010b; Mason and
Ricker-Gilbert, 2012). While these issues reduce the effectiveness of the pro-
gramme in raising maize production, the programme’s impact on increased
maize production is recognized, though these increases may be smaller than
the effects of good rainfall and smaller than official estimates of the pro-
gramme’s benefits (Minde et al., 2008; World Bank, 2010b; Mason et al.,
2011). There are, however, also concerns that yield responses are limited by
soil acidity and other complementary investments are needed for fertilizer
subsidies to be effective (Burke et al., 2012).
There are also concerns that the programme’s emphasis on maize has dis-
couraged production of other crops such as sorghum and cassava (Haantuba

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Recent African experience with input subsidies

et al., 2011). Coupled with these are wider concerns about poor monitor-
ing and evaluation, expansion of the programme as regards both volume of
subsidized inputs and the subsidy rate despite initial intentions to scale both
back, annual budget over-runs and consequent growing programme cost—
averaging nearly 40% of the Ministry of Agriculture’s budget from 2002 to
2009 (Civil Society for Poverty Reduction, 2005; Jorgensen and Loudjeva,
2005; Zambia Agricultural Consultative Forum, 2009; World Bank, 2010b).
Nevertheless, the programme is estimated to yield an economic cost—beneﬁt
ratio that is greater than 1 (Jayne et al., 2007) but a large number of studies
comment that it is crowding out alternative and higher return investments in
longer term research or infrastructural programmes (Jorgensen and Loudjeva,
2005; Jayne et al., 2007; Minde et al., 2008; Bigsten and Tengstam, 2008;
Govereh et al., 2009; Xu et al., 2009a).

3.4. Nigeria

Nigeria has implemented large-scale fertilizer subsidies since the 1970s

with the broad objective of promoting agricultural productivity and, lat-
terly at least, improving food security by making fertilizers more affordable
and accessible to smallholder farmers. Subsidies have been marked by wide
variation in rates and modalities over time, accompanied by substantial dif-
ferences between states (Akande et al., 2011). There is, however, general con-
sistency in a very active role of the state in fertilizer delivery and widespread
reports of high diversion of fertilizer, such that smallholder farmers receive
only 30% of subsidized fertilizers at subsidized prices (Nagy and Edun (2002)
cited by Liverpool-Tasie et al. (2010b), Banful and Olayide (2010)), with gen-
erally late delivery of subsidized fertilizers and frequent reports of concerns
about quality (Nagy and Edun (2002) cited by Liverpool-Tasie et al. (2010b),
Kiger and Adodo (2010), Banful and Olayide (2010)). There is, however, very
little information on the impacts of subsidies in terms of increased fertilizer
use, production, food security, or poverty reduction (Mogues et al., 2008).
Banful and Olayide (2010) and Banful et al. (2010) report that farmers and
stakeholders consider unavailability of fertilizers, late delivery, and poor
quality to be much greater constraints to fertilizer use by farmers than its
expense (although access to credit is also cited as a major constraint (Banful
and Olayide, 2010)). Liverpool-Tasie et al. (2010b) therefore recommend that
much more emphasis should be given to stable policies that encourage the
development of private sector suppliers. One approach to this is the use of
fertilizer vouchers to deliver subsidies. Small pilots of this approach were
championed by IFDC from 2004 (Gregory, 2006) and judged to be successful
in demonstrating that a voucher-based system could improve farmer access

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Background

to fertilizers if implemented with the private sector. Progressively larger pilots

were implemented, with large programmes in two states in 2009 and 2010
reaching 194,000 and 171,000 farmers respectively with sales of 29,800 and
16,397MT (Kiger and Adodo, 2010). Kiger and Adodo (2010) report that the
programme has been very successful in improving farmers’ access to sub-
sidized fertilizers, in reducing leakages, and in demonstrating and building
private capacity in fertilizer supply, while recognizing continuing but sur-
mountable challenges facing the programme. There is, however, no informa-
tion on programme impacts in terms of increased fertilizer use, production, or
food security, and a survey by Liverpool-Tasie et al. (2010a) find that farmers
still reported late delivery and poor fertilizer quality. Their study also raises
questions about beneficiary targeting—criteria seem to be very broad, with
voucher distribution to members of farming or other groups, and there was
some evidence of multiple receipt within households, but recipients tended
to be poorer than non-recipients (Liverpool-Tasie, 2012). In this context, and
with over 70% of farmers outside the subsidy programme buying fertilizer in
the private market, Liverpool-Tasie (2012) do not find evidence that subsidy
receipt depresses the probability of farmers buying unsubsidized fertilizer,
and indeed find that for subsidy recipients who are buying unsubsidized fer-
tilizers there is a significant crowding in effect, with receipt of a bag of sub-
sidized fertilizer increasing unsubsidized purchases by 0.8 of a bag. This is
attributed to the subsidy programme encouraging the establishment of a bet-
ter private distribution network. Overall, there seems to be little doubt that
the programme is a substantial improvement over the standard programmes
being administered by the Federal and State governments.

3.5. Tanzania

Like many countries in Africa, Tanzania has implemented a variety of input

subsidy programmes over the years. Following the withdrawal of subsidies
in the 1990s, fertilizer transport subsidies were introduced in 2003 with the
objective of facilitating fertilizer use in remote areas (Minot, 2009). The pro-
gramme subsidized transport costs and fixed margins and prices for farm-
ers, with government management of stocks and transport. Although this
appeared to lead to some increases in fertilizer use, there were problems with
the heavy involvement of government in managing distribution, late fer-
tilizer delivery due to budgetary processes, ineffective price controls, and
leakage from target beneficiaries (to local unsubsidized markets and also to
neighbouring countries), with the latter problems associated with lack of skill
and financial capacity among agro-dealers (Minot, 2009; World Bank, 2009).

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Recent African experience with input subsidies

In view of these problems, the government started piloting a ‘smart sub-

sidy’ programme from 2007. This grew into the National Agricultural Input
Voucher Scheme (NAIVS), with increasing pilots in 2008 and the develop-
ment of a very large programme with World Bank support implemented from
2009 to 2012 (World Bank, 2009).
The objectives of the NAIVS are to facilitate fertilizer use in high-potential
areas, to offset rising international fertilizer costs, to reduce food prices by
stimulating production, and to stimulate expansion and increased capacity
in the private input supply system. The main features of the programme,
summarized by Minot (2009), include the use of vouchers for food crop
inputs (fertilizer and maize and rice seed) and distribution to targeted ben-
eficiaries with complementary support to help them improve the efficiency
of input use and to expand input suppliers’ financial and skills capacity. The
programme is also intended to first of all scale-up and then scale-down, with
a maximum of three years access by each beneficiary and termination in 2012
(although extension of the programme to other regions is under considera-
tion). Vouchers, covering 50% of full input prices, are redeemed by farmers at
agro-dealers who then redeem them through the large branch network of the
National Microfinance Bank. Vouchers and inputs are targeted to high-poten-
tial regions according to the number of maize and rice farmers per region and
then targeted to full-time resident maize or rice farmers with less than one
ha and the ability to part finance input purchases. Among eligible farmers,
priority should be given to female-headed households and those not using
improved inputs in the previous five years.
It has not been possible to source evaluation studies of the programme since
2010, but the World Bank (2009) identifies benefits and challenges from the
pilot programmes. Major benefits of the targeted subsidy mechanisms over
the previous transport subsidy include easier monitoring of input distribution
and impacts, wider coverage and improved input affordability for farmers,
and mutually beneficial links and strengthened relations with and between
the National Microfinance Bank and agro-dealers. There are, however, also
challenges identified from the NAIVS 2008/9 pilot where there was a need for
more human and financial field resources for implementation and technical
support (for the Government and National Microfinance Bank), there were
insufficient inputs for all eligible farmers and late delivery of inputs to farm-
ers, there were late bank payments to agro-dealers and late government pay-
ments to the bank, and agro-dealers lacked sufficient working capital. Minot
(2009) commends the programme design for its targeting approach and use
of vouchers, intention to scale-down after 2012, and complementary support
to the fertilizer subsidy (in terms of a public awareness campaign, capacity
building and certification for agro-dealers, seed sector support, an emphasis
on integrated soil fertility management, and investment in monitoring and

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Background

evaluation). However he also questions whether it will be politically feasible

to scale the programme down after 2012, and if the targeting will be effective.
Pan and Christiaensen (2012) and Patel (2011) report household survey
findings in 2008 and 2009 that provide some insights into the targeting
and timing of input delivery. In a sample survey in the Kilimanjaro dis-
trict, Pan and Christiaensen (2012) report some difficulties with targeting
in 2008. The major observation is that there are conflicts between potential
targeting objectives, with an emphasis on economic efficiency in increas-
ing production requiring targeting outcomes that favour those house-
holds with the highest marginal return to fertilizer use on fertilizer that
they would not have used without subsidy receipt. These may not be the
same households as those that should be targeted to reduce poverty and
inequity. However, examination of actual targeting outcomes shows that
elected village officials received about 60% of the distributed vouchers, and
this ‘substantially reduces the targeting performance . . . At the margin, vil-
lage elected officials are usually not the more efficient input users’ (Pan and
Christiaensen, 2012: p. 1627).
Patel (2011) finds that cost was the most commonly cited reason for
farmers not using improved inputs (cited by 69% of households not using
seeds, and by 36% of households not using fertilizers), but lack of aware-
ness was also a significant impediment. Lack of fertilizer availability was
cited as problem by only 6% of farmers. They also find that the targeting
criteria were not consistently followed but do not suggest that vouchers are
going to the wrong farmers—contrary to Pan and Christiaensen (2012) they
find no evidence of elite capture. While beneficiaries tended to be wealth-
ier than non-beneficiaries, they note that the programme is not intended
to be a pro-poor programme and targets ‘middle-level farmers’ most able to
make good use of the inputs. They recognize, however, that this may lead to
problems of displacement of unsubsidized sales. Poorer and female-headed
households, which the programme also aims to prioritize, are often unable
to finance the purchase cost even of the subsidized inputs. They find that in
terms of programme implementation, NAIVS operations generally adhered
to the guidelines, although anecdotal reports for subsequent seasons are less
optimistic. However survey estimates of beneficiary coverage were much
lower than indicated by MAFC’s programme data, which estimate coverage
above 80% in some districts. They make initial estimates of incremental
production gains from input use of 147% for maize and 35% for paddy,
but are not clear that this is high enough for unsubsidized input applica-
tion to be profitable, raising questions about the economic returns to the
programme.
As regards programme implementation, the Ministry of Agriculture Food
Security and Cooperatives (2012) provides information on programme

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Recent African experience with input subsidies

activities from 2008/9 to 2011/12: 3.5 million households are identiﬁed as

eligible for voucher receipt, with actual recipients rising from 730,000 house-
holds in 2008/9 to 1.5, 2.0, and 1.8 million households respectively in the
following three years. However the 2011/12 recipients excludes households
who started receiving vouchers in 2008/9 and therefore ‘graduated’ after three
years in the programme. This should give a total of some 2.5 million direct
beneficiary households over the three years, each receiving three vouchers
per year (two for fertilizer and one for maize or rice seed).
Activities designed to support private input supply development and more
effective input use by farmers have included agro-dealer training, matching
grants to guarantee agro-dealer loans from input supply companies, devel-
opment of seed systems, and research and (to a lesser extent) extension on
Integrated Soil Fertility Management and input use. Although some of these
activities have been delayed for various reasons, significant progress has been
made on others. Just under 4,000 agro-dealers have been trained and 23 agro-
dealer associations formed; 2,335 agro dealers participated in the 2010/11 pro-
gramme and 2,010 in 2011/12. The drop out of some agro-dealers in 2011/12
was due to discouragement from late payments in 2010/11, late delivery of the
2011/12 vouchers, phasing out of the matching grant for input supplier loans,
and exclusion of a small number of agro-dealers following poor performance in
2010/11. Approximately 1,800 agro-dealers who received training did not par-
ticipate in the programme in 2011/12. Some planned agro-dealer training and
support activities were not implemented due to procurement process problems.
A full evaluation of the impacts of the programme on beneficiary and non-
beneficiary households, on input access and use, and on the input supply
system should be very informative.

3.6. Rwanda

In 2008 Rwanda responded to rapid rises in food and fertilizer prices by

introducing a novel fertilizer subsidy system that involved (a) a general sub-
sidy to fertilizers imported by the government and sold under auction to
private companies obliged to sell these fertilizers at ceiling retail prices and
(b) vouchers allowing farmers to buy a proportion of these at 50% of ceiling
prices (Morris et al., 2009). Limited information available in 2009 suggested
that both parts of the subsidy (through the ceiling price and vouchers) were
broadly successful in raising productivity and in encouraging growth among
private sector input suppliers (Morris et al., 2009).

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Background

3.7. Mali and Senegal

Kelly et al. (2011) and Druilhe and Barreiro-Hurlé (2012) summarize key
features of programmes in Mali and Senegal, noting that in both cases
information is limited due to a lack of formal monitoring and evaluation
processes. The programmes started in 2008 and were largely funded from
domestic resources (though in Mali donors funded just under 40% of total
costs in 2008/9 and 2009/10, but a number of donors then withdrew sub-
sequent funding due to lack of transparency and reported ‘leakages’). Both
programmes aimed to boost production and yields of staple food crops (for
example, rice, maize, and wheat in Mali) and (in Mali) of cotton, to lower
urban rice prices and to compensate farmers for high input prices. In both
countries the primary objective was to promote food security, while in Mali
there was an additional objective to promote exports. Programmes provided
a 25 to 50% universal subsidy on fertilizers and seeds to all farmers cultivating
target crops. Subsidies were provided for imports by private companies under
tender and, in Mali, were administered using effectively a voucher system (a
‘caution technique’) through producer organizations and through agro-dealers
associated with importers. In both countries fertilizer deliveries suffered from
delays and importers suffered from late payments—although they beneﬁted
from growth in import volumes with, it appears, limited losses from displace-
ment of unsubsidized sales. The lack of any apparent impact on rice prices,
which remained high, calls into question both production statistics and pro-
gramme beneﬁts (Kelly et al., 2011).

3.8. Millennium Villages

The Millennium Villages Project (MVP) established integrated projects in selected

villages to demonstrate the substantial changes that are possible with signiﬁcant
investments in health, agriculture, and community development across Africa.
A major part of this is the provision of subsidized agricultural inputs (seed and
fertilizer). Monitoring and evaluation systems are in place. This approach has
invested in relatively small-scale, localized input subsidy programmes with
much wider but generally unrealized objectives of national scaling-up.

3.9. Overall lessons

We now consider wider lessons across the eight reviewed programmes against
the major issues identiﬁed in Chapter 2 as important for subsidy programme
evaluation.

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Recent African experience with input subsidies

3.9.1. Programme objectives

Here, we consider how far the different possible programme objectives dis-
cussed in Chapter 2 are found in the different programmes and types of
programme.

• Food security (household or national), input adoption, and producer

welfare are found as objectives of all or almost all programmes (with
variation as regards particular emphasis on poorer or food-insecure
producers).
• Only three programmes explicitly recognize the potential for
producer subsidies to benefit poor consumers, except subsistence
producers. Although this is small, given the importance of consumer
benefits in consideration of large-scale staple crop subsidies, it is an
improvement over findings in Dorward (2009b) where none of the
reviewed programmes appeared to consider consumer benefits at all.
Nevertheless, there is no recognition of the potential role of subsidies
in addressing the price-productivity tight rope, and only in the MVP
is there a wider recognition of the potential role of subsidies in driving
forward pro-poor growth: even here there is no explicit consideration
of the mechanisms by which this may be achieved or of processes of
structural change in the economy as a whole.4
• Input use efficiency and soil fertility replenishment are only
explicitly considered as programme objectives in the Tanzania
programmes.
• Input access and input supply system development are explicit
objectives in all programmes except Mali and Senegal (and limited
sources may mean that this has been overlooked), the Zambia Food
Security Pack and the MVP.
• Political considerations were important for the Ghana programme
and the Zambia Fertilizer Support Programme, but are not explicitly
mentioned in the documentation on other programmes (though they
are likely to have been important). In Nigeria the FVP’s implementation
is driven by an interest in depoliticizing some aspects of the existing
wider Federal and state subsidy programmes, which are highly
politicized.

4
Other programmes may also implicitly consider that increased productivity and producer
welfare may drive forward growth, but consideration of the food price, non-staple and non-farm
production, and demand mechanisms is absent.

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Background

3.9.2. Design and implementation

As regards design and implementation features of the different programmes,
there is broad commonality across the different programmes as regards

• the basic focus of subsidy systems on producers as major (and generally

sole) direct subsidy beneﬁciaries;
• a primary focus on subsidizing inputs for staple food production (for
subsistence production or for sale into domestic markets);
• very substantial subsidized input price reductions (of 50% or more
for most programmes), consistent with measures to address both
affordability and proﬁtability constraints to input use;
• almost all programmes clearly rationing (or attempting to ration) the
quantity of subsidized inputs to be received per household, with vouchers
being a common (but not universal) means of achieving this; and
• use of private sector importers to provide basic fertilizer supplies.

There are differences across the programmes as regards

• scale, with some national programmes and others piloting potential

national programmes;
• targeting, with differences as geographical targeting (in some
programmes) and some programmes focusing on food-insecure/
vulnerable households and others seeking to maximize production by
focusing on less poor households;
• use of vouchers for targeting, rationing, and/or supply system
development;
• private sector and farmer organization involvement (and nature of
involvement) in distribution;
• recognition of the importance of gender awareness in targeting and
entitlement and access;
• complementary policies, and their links to programme objectives; and
• graduation and exits (with the Tanzanian programme explicitly
limiting farmer access to three years and with scaling-back aspirations
for both the Zambian programmes, but little or no mention of exits or
graduation in other programmes).

3.9.3. Programme outcomes

Different programme outcomes—or information gaps about particular out-
comes—are closely related to the programme objectives. Thus, limited examples

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Recent African experience with input subsidies

of subsidies leading to output (food staple) price changes and the lack of infor-
mation on labour demands and markets and longer term and wider welfare
and growth impacts are not surprising. Similarly, the lack of information on
soil fertility replenishment is consistent with the lack of emphasis on this in
programme objectives. There are, however, other similarities in outcomes that
cut across differences in programme objectives, notably very common (but
not universal) problems with late input delivery in subsidy programmes and
common (but again not universal) leakages. Both of these are important for
programme impacts, irrespective of programme objectives. There is a lack of
reliable information on displacement and on production and productivity
impacts, although increases in input use are reported for most programmes.
Lack of reliable information on a number of topics is associated with a pau-
city of programmes with monitoring and evaluation systems. Consequently,
there are few estimates of economic benefits although, as will be discussed in
Chapter 9, such estimates are difficult to calculate and, once calculated, often
difficult to compare.
There are, of course, also substantial differences across programmes, some
of these related to differences in programme objectives, as noted above. Thus,
differences in reporting of input supply system impacts are related to dif-
ferences in interest in these impacts. However programmes with the inten-
tion of developing supply systems may actually undermine them, if poorly
designed and implemented.

3.10. Conclusions from recent experience

A number of observations from the limited programmes reviewed here war-

rant particular emphasis:
First, we reiterate a point made by Druilhe and Barreiro-Hurlé (2012) that
the resurgence of agricultural input subsidy programmes in Africa is not a
temporary phenomenon—they are attempting to address a real set of agri-
cultural and development problems and their visibility and immediacy make
them politically attractive. In this context, debates about their effectiveness
and about ways to improve that effectiveness are healthy and should be wel-
comed. It is, however, important that such debates are based on thorough
agronomic, economic, political, and administrative analysis of historic, cur-
rent, and potential costs and achievements of subsidy programmes.
In this context our second observation, again supported by Druilhe and
Barreiro-Hurlé (2012) is disappointing: it is notable how difﬁcult it is to ﬁnd
comprehensive reviews of subsidy programmes, despite the substantial num-
ber of programmes that have been or are being implemented across Africa
and the very substantial investments of public funds in these programmes.

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Background

There is a major need for country studies to document country experiences,

using a comprehensive conceptual framework linking inputs, activities, out-
comes, and wider impacts, as developed in the previous chapter.
Third, we note a continuing tendency for programmes to focus on produc-
tion objectives and producer welfare, and to ignore the interests of consum-
ers and the processes (and necessary conditions) for subsidy programmes to
contribute to wider pro-poor economic growth. This is a critical omission,
and is linked to the limited extent that the design and implementation of
many programmes are integrated with complementary investments. Such
integration is needed first for subsidy programmes to effectively deliver their
stated objectives of incremental production, and then for them to contribute
to the wider processes of pro-poor growth. Recognition of the importance of
consumer price benefits and of the ‘price productivity tightrope’ is particu-
larly important here. Druilhe and Barreiro-Hurlé (2012) also note the ten-
dency to focus on producers, production objectives, and expansion of input
access, and argue that there is insufficient attention paid to improved soil
fertility and health, to development of private sector input supply, to com-
plementary investments raising input productivity, to effective programme
implementation (with more secure entitlement systems, better targeting,
better monitoring and evaluation), and to phasing out and exits for input
subsidies. However Druilhe and Barreiro-Hurlé (2012) themselves make lit-
tle mention of programme benefits for consumers and for wider economic
growth, and provide no discussion of farm level (as opposed to input supply)
processes whereby subsidy delivery may lead to reduced need for and benefits
from subsidies.
Fourth, and related to the previous two points, there appears in some pro-
grammes to be an unfortunate lack of interest in improving effectiveness and
efficiency. This is evident from the limited monitoring, evaluation, and audit
systems in some programmes, limited cost benefit and fiscal efficiency anal-
ysis, and limited attention to problems of late delivery, displacement, and
leakage. Challenges from fiscal constraints, likely rising fertilizer prices, and
the effects of climate change will make it even more important that in the
future governments improve the efficiency and effectiveness of input sub-
sidy programmes in both raising productivity and promoting wider pro-poor
growth within and beyond agriculture.
Limited apparent interest in exits and graduation is also common. In the
examples where this is not the case (Tanzania and Zambia) there appear to
be difficulties in implementing this. This may be related to an apparent and
indeed remarkable lack of attention to the question of why and how scaling
back, graduation, and exit should and could occur. In the Tanzanian case,
for example, farmers are to access subsidies for a maximum of three years. It
is not clear how or why farmers will no long need access to the subsidy in a

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Recent African experience with input subsidies

fourth year, but this raises important questions about the processes of change
needed for this (in farmers’ livelihoods and resources, in local economies, in
input supply systems). Similar questions arise regarding the development of
private sector input suppliers.
Two notable commonalities observed across programmes are (a) the lack
or limited focus on replenishing soil fertility and (b) a strong (almost univer-
sal) prevalence of heavy subsidies (50% to 100% subsidy rates) on rationed
inputs. This commonality occurs despite differences between programmes
as regards first relative emphasis on improving national food security (and
total input use and production) as against improving household food secu-
rity (and helping food-insecure households) and second relative emphasis on
supply system development. Political objectives and strong political influ-
ences on programmes are explicitly mentioned in only some of the pro-
grammes reviewed, but the scale of resources allocated to these programmes
and their continued implementation suggests very strong political interest in
and commitment to these programmes—even if the implications of this for
programme design and implementation are not generally given very much
emphasis.
When compared with the earlier review by Dorward (2009b), this review
suggests that there is increased implementation of important aspects of smart
subsidies, but there are still weaknesses in design and implementation, par-
ticularly late input delivery. There is also a continuing lack of emphasis on
improving programme effectiveness and efficiency, limited attention to grad-
uation processes, and inadequate attention to integration with complemen-
tary policies and programmes for improving achievements of both direct and
indirect benefits of input subsidy programmes. The mixed record of input
subsidies continues.

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4

Malawi: political, policy, livelihoods,

and market background

4.1. Introduction

This chapter sets out the background for examination of the Malawi subsidy
experience in the rest of the book. We begin with some contextual informa-
tion about Malawi, including a brief outline of its post-colonial history, struc-
tural characteristics, and economic and welfare indicators. This leads on to a
more detailed discussion of the interactions between Malawian politics and
policy. We then examine critical features of rural livelihoods and the poten-
tial impacts of input subsidies in this context.

4.2. The context

At its independence in 1964 Malawi was a small land-locked country with

a population a little under 4 million largely engaged in and dependent on
smallholder agriculture, with poorly developed infrastructure and little
industry or mineral resources. The infrastructure and industry that was there
tended to be concentrated, along with the bulk of the population, in the
south and, to a lesser extent, in the centre of the country, while the north
had a very low population density and very little infrastructure or indus-
try. Cultural and historical differences between regions, however, meant that
commitment to and standards of education in the north were higher than in
the centre and the south.
Many long term generic features of the country have not changed much
over the last 40 years or so since independence, despite major (if somewhat
erratic) investments and policies to address them (see, for example, Cammack
et al. (2010)). These features include high dependence on agriculture; low pro-
ductivity in production of maize (the dominant staple crop which accounts

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Malawi: political, policy, livelihoods, and market

for around 70% of cultivated area); lack of other exploitable natural resources;
isolation and high import and export costs due to its land- locked location
and poor external transport systems; poor physical infrastructure; chronic
poor health, with very high infant mortality from malaria, water-borne dis-
eases, and mal- and under-nutrition; low levels of literacy and education;1
and broad regional differences in many of these variables. Other elements
have emerged more recently as a result of development failures or wider eco-
nomic, social, and natural processes. These include high population densities
and small landholdings (particularly in the south), falling soil fertility, and
high rates of HIV/AIDS infection, morbidity, and mortality. A further set of
problems emerged from the mid 1990s due to policy and governance failures,
and these include the collapse of the industrial economy due to exposure to
outside competition; poor macro-economic management with large budget
deficits, high interest rates, large devaluations of the Malawi Kwacha (MK),
and high inflation rates; high crime rates in urban and rural areas; and weak
governance.2
As a result, in 2004/5, Malawi was one of the poorest countries in the world,
with 56% of Malawi’s rural population classified as poor and 24% as ultra-
poor (National Statistical Office, 2005a), a GNI per capita of around US$160,
very low achievements on a range of social and economic indicators (see
Table 4.1), and many people characterized by high levels of vulnerability, due
to the fragility of their livelihoods, susceptibility to shocks, and large numbers
of the non-poor living just above a very low poverty line (Devereux, 2006).
Understanding this depressing backdrop to the emergence of the agri-
cultural input subsidy programme in 2005, the starting point of the pro-
gramme addressed in this book, requires an understanding of agricultural
and other policies in the context of wider political change in Malawi, to
which we now turn.

4.3. Politics and policies

The relationship between politics and policies is best considered in relation to

the periods of tenure of the three presidents of Malawi since independence:
Kamuzu Banda (from 1964 to 1994), Bakili Muluzi (from 1994 to 2004), and

1
From the mid 1990s there were major improvements in primary school enrolment and its
gender balance (but not in the quality of primary education) and substantial falls in infant and
under-ﬁve mortality (though these are still very high).
2
From 2005 to 2009 there was a dramatic improvement in macro-economic management and
consequent reduction of inﬂation and interest rates and much greater currency stability. Good
weather and input subsidies also contributed to growth in food production, as will be discussed
later. Macro-economic management declined, however, from 2009 to 2011.

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Background

Table 4.1. Social and economic indicators for Malawi, 1975 to 2005

1975 1985 1995 2000 2005

Population Population, 5.2 7.2 10.1 11.5 12.9

total
(millions)
Rural popula- 92 90 87 85 88
tion (% of
total
population)
Rural popula- 364 368 468 465 ..
tion density
(n/km2
arable land)
Welfare Poverty 56
incidence
(rural)
Health Life expect- .. 46 43 40 41
ancy at
birth, total
(years)
Mortality rate, 304 245 193 155 125
under-5
(per 1,000)
Prevalence of .. .. .. .. 14.1
HIV, total
(% of pop’n
ages 15–49)
Nutrition Stunting 49 43
(% chil-
dren 6 to
59 months)
Education School enrol- .. .. .. 139 122
ment,
primary
(% gross)
Economy GNI per 130 160 160 150 160
capita, Atlas
method
(current
US$)
GDP growth 6.1 4.6 16.7 1.6 2.8
(annual %)
Inﬂation, .. 21.9 83.3 29.6 15.4
consumer
prices
(annual %)
Real interest .. 9 -17 17 15
rate (%)
Agriculture, 37 43 30 40 35
value added
(% of GDP)
Industry, value 20 11 20 18 19
added
(% of GDP)

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Malawi: political, policy, livelihoods, and market

Table 4.1. (continued)

1975 1985 1995 2000 2005

Services, etc., 42 35 50 43 46
value added
(% of GDP)
Trade Imports of 46 30 48 35 52
goods and
services
(% of GDP)
Food imports 9 8 14 10 18
(% of mer-
chandise
imports)
Agriculture Fertilizer con- 22 65 196 167 292
sumption
(‘000 metric
tons)
Irrigated 0.93 0.97 1.50 2.46 ..
land (% of
cropland)
Maize growers 97
(% agri-
cultural
households)

Sources: From National Statistical Ofﬁce and ORC Macro (2001); National Statistical Ofﬁce (2005a); Imperial College
et al. (2007); World Bank (2007a).

Bingu wa Mutharika (from 2004 until his death in 2012). These three periods
can be examined in terms of neo-patrimonialism where politics is centred
around the president who uses the power and resources of the state to dis-
pense patronage to sustain political power (Booth et al., 2006) and, following
Cammack et al. (2010), in terms of three features of government: centraliza-
tion of rent utilization and time horizons (as with stationary and roving ban-
dits (Olson, 1993)), relations of political leaders with a more or less capable
technocracy, and political inclusiveness and competition. It is also helpful to
explore these using a simple distinction between three different patronage
client groups: the political elite, the middle classes, and the wider masses.
Regional dimensions are also important in garnering the on-going support of
regional elites and, in the run up to elections, of regional masses. Poulton’s
analysis of the relations between political and technical considerations and
processes in determining agricultural policy in different contexts also pro-
vides valuable insights (Poulton, 2012).
The ﬁrst president of Malawi, Hastings Banda, held the reins of power for
30 years from independence in 1964 until he was ousted in democratic elec-
tions in 1994. He presided over a highly personalized and repressive regime,
taking a strong personal interest in policy and engaging closely with a capa-
ble civil service. Two phases of policy under Banda may be considered (Booth

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Background

et al., 2006; Cammack et al., 2010), the first delivering quite rapid economic
growth but achieving this through a set of ultimately economically and polit-
ically unsustainable policies. These focused on developing highly import-
dependent estate agriculture producing tobacco, while the smallholder sector
grew much more slowly (the estate sector grew from a very small base at an
average of 17% per annum from 1964 to 1977, while the much larger small-
holder sector grew at less than 3% per annum (Harrigan, 2003), below the
population growth rate). Smallholders were restricted to cultivation of food
crops and low value cash crops, while providing a low cost labour reserve
for estate agriculture. Banda used the promotion of tobacco (Malawi’s ‘green
gold’) in the estate sector as an important means of dispensing political
patronage to elites and a small but emerging middle class based primarily
in the central and, with time, in the northern regions. Middle class support
was also garnered by investments in secondary and higher education and by
growth in civil service employment, while mass support rested upon large-
scale visible investments in a variety of infrastructural and development pro-
jects in all regions of the country, including fertilizer and credit subsidies
channelled to better off (or less poor) smallholders, and a commitment to
deliver national food security. Estate and smallholder agriculture were highly
regulated, with a high degree of state intervention through generally effec-
tive parastatals and government ministries. Booth et al. (2006) characterize
Banda’s approach in this period as ‘patronage following policy’. There was
little explicit attention to welfare policies in this policy phase as government
and the Malawi Congress Party played down the existence of chronic poverty.
The fragility of the growth developed under these policies became appar-
ent when the economy was hit by a number of external shocks in the early
1980s. The government was then forced to recognize the need for different
policies and to seek financial assistance, with policy conditions, from the IMF
and World Bank. Malawi consequently entered its second post-independence
policy phase, of liberalization, coinciding with Banda’s increasing fragility
and a decline in his personal policy engagement. Policies then looked to
increase smallholder export crop production by increasing farmgate prices
while holding down maize (food) prices (Harrigan, 2003). This encouraged
the substitution of smallholder maize production by cash crops which, with
removal of fertilizer subsidies and unsuccessful market reforms, resulted in
a food crisis in 1987, with rapid increases in maize prices. Banda’s sense of
responsibility in delivering food self-sufficiency to the country (and his vul-
nerability to growing calls for political change and the failure of an important
part of his mass patronage) led to policy reversals and the re-introduction of
fertilizer subsidies and government intervention in maize markets. Despite a
positive maize production response to these policy changes, maize shortages
continued with two severe droughts in the 1992–4 period. At the same time

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Malawi: political, policy, livelihoods, and market

access to patronage from tobacco was extended to a much larger part of the
middle classes, primarily in the central and northern regions, through the
promotion of large numbers of small-scale tobacco estates.
Following the transition to multi-party democracy and presidential elec-
tions in 1994, Malawi’s second president, Bakili Muluzi, served two terms of
office, from 1994 to 2004. A major change in agricultural policy in the mid
1990s was the repeal of the Special Crops Act, which had restricted small-
holder cultivation of some crops, most notably burley tobacco. The liberali-
zation of burley tobacco production was very successful, with rapid growth
in the number of smallholders growing the crop, and without (initially at
least) expected declines in quality (Harrigan, 2003). However the 10 years
from 1994 were characterized by severe macro-economic mismanagement,
rampant inflation, dramatic falls in the value of the Malawi Kwacha, and
a weakening of government capacity. Opportunistic privatization, fund-
ing diversions, and the issue of bonds to finance budget deficits became an
important source of patronage for a primarily southern region elite with com-
mercial rather than agricultural interests, so that short-term financial inter-
ests of politicians drove policy with ‘policies following patronage’ (Booth
et al., 2006). As the real value of civil service salaries collapsed, middle class
patronage involved what Booth et al. (2006) describe as the ‘democratization’
of corruption. With the government’s political power base in the south of the
country (in contrast to Banda’s base in the less populous centre), and with
stagnation of the economy, growing land pressure in the south, declining soil
fertility, and experience of wider use of fertilizer in the early 1990s, the poli-
tics and mass patronage of maize self-sufficiency became associated with the
politics of fertilizer subsidies. In 1998 the Muluzi government introduced the
universal free provision of small packs of maize seed and fertilizer under the
starter pack programme. This was subsequently down-scaled to the Targeted
Input Programme (TIP), and considered by donors more as a social protec-
tion programme promoting food security for vulnerable households, and less
as an agricultural subsidy programme. However we note here the populist
political roots of this programme and the ambiguity as to its role in promot-
ing agricultural development, social protection, and/or short-term political
patronage objectives.
‘Fertilizer politics’ has subsequently become a major feature of Malawi. In
the 2004 presidential election, in which President Bingu wa Mutharika was
elected as the United Democratic Front (UDF) candidate chosen by Bakili
Muluzi, both the UDF and Malawi Congress Party (MCP) (parties of the two
former presidents) campaigned with promises of different forms of fertilizer
subsidy. Fertilizer subsidies continued to be a major political issue in subse-
quent political manoeuvring associated with the President’s breaking away
from former president Bakili Muluzi to form his own party, the Democratic

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Background

People’s Party (DPP). Without a base in parliament, where he was vulnerable

to calls for impeachment by the UDF and MCP, Mutharika introduced the
highly popular Agricultural Input Subsidy Programme (AISP) to garner sup-
port from the masses, over the heads of parliament. The government also
appealed to middle class professional and business people through its major
emphasis and success in improving macro-economic management. This led
some observers to suggest that Mutharika’s term would in some ways ‘be closer
to the Banda tradition than to Muluzi’s, with patronage being subordinated
to an overall vision’ (Booth et al., 2006). As time went on, however, it became
apparent that Mutharika also shared Banda’s autocratic tendencies, and there
were increasing concerns about corruption and patronage within his gov-
ernment. These concerns did not prevent him from winning a broad-based
landslide second term election in 2009—indeed the subsidy programme not
only allowed him to garner widespread support from rural beneﬁciaries, diver-
sion of resources also provided him and his party with potential opportunities
to capture and use substantial resources for political patronage (Chinsinga,
2012b).The subsequent substantial parliamentary majority, however, released
him from his former precarious reliance on support from the middle classes
and gave free rein to both his autocratic tendencies and to increasing corrup-
tion and patronage (Chinsinga, 2012b). This led to serious political and eco-
nomic problems from late 2010 until his sudden death in April 2012.
Understanding agricultural policy changes in Malawi also requires an
understanding of changing donor interventions (Harrigan, 2003; Chinsinga,
2006, 2007). These were very supportive of agricultural policies in the ﬁrst
phase of Banda’s dualistic policies as described above, making very large
investments in integrated rural development projects. Concerns about the
problems of Malawi’s dualistic and interventionist policies, as regards both
economic vulnerabilities and constraints on smallholder development, then
came to the fore at the same time as a wider shift in ideology to structural
adjustment and the Washington Consensus. This was a major driver of the
liberalization policies in Malawi as it took on structural adjustment loans in
the early 1980s. Harrigan (2003) then describes a series of ‘U turns’ by the
World Bank in agreeing to the re-introduction of fertilizer subsidies and then
later insisting on their removal and opposing their re-introduction under
the start pack programme. From 2000 onwards donors placed increasing
emphasis on the development of policies for social protection, and these
have since evolved as regards their relationship with agricultural policies
(Dorward et al., 2006) with consequences for attitudes to agricultural poli-
cies. Chinsinga (2006) describes more recent differences between donors and
changes in individual donor positions. These positions have been driven
by domestic donor politics, economic ideology, humanitarian concerns,
changes in international development thinking and practice, and personal

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Malawi: political, policy, livelihoods, and market

concerns of often short-term in-country staff. Changing donor policies have

been important because (a) they have suffered frequent changes and incon-
sistencies, and (b) they have been unduly influential as a result both of the
high dependence of the Malawian economy on foreign aid and of weak-
nesses (particularly under Muluzi) in government capacity and commitment
to articulate consistent policies (which Sahley et al. (2005) explains in terms
of political processes resulting from both Malawian understandings of state
responsibilities in agriculture and social protection, and clashes with donor
understandings of these responsibilities).
A number of important insights emerge from this discussion. We note that
the use by different presidents of different approaches to delivering patron-
age to client groups with different regional interests has been a core determi-
nant of the prominence and resources given to agricultural policies and the
nature of these polices. A major challenge which all three presidents faced
in this was the need to deliver short-term patronage without compromising
the longer term capacity of the economy to support such patronage. Thus,
‘patronage policies’ were critical in the promotion of agricultural policies
and investment under Banda, while failures by the policies in dealing with
core poverty/vulnerability and food security problems led to their demise.
Conversely, the failure of ‘commerce-based’ patronage polices under Muluzi
led to a resurgent interest in fertilizer subsidies, which Mutharika used as a
major means of garnering widespread political support in his first term. The
challenges faced by Mutharika in his second term are more difficult to ration-
alize: as will be shown later, excessive and increasing subsidy costs up to 2009
were effectively reined in after the election, and agriculture received much
less political attention—although the core elements of the subsidy were
maintained. This ebb and flow of political interest in agriculture has revolved
around the different regional and patronage group interests in food, fertilizer,
and tobacco and has at times coincided with, and at times conflicted with, a
different pattern of changing interests among donors.
It is also important to note, however, that an entirely appropriate and
legitimate political preoccupation with food security arises not because of
populism and patronage, but because food security is an important preoccu-
pation for poor people, whether urban or rural, who spend a large proportion
of their income on staple foods and who are very vulnerable to price changes.
The emphasis on fertilizer subsidies as a response to food insecurity, however,
is determined by recognition that

(a) high price volatility in relation to domestic supply shocks is a result

of lack of integration of national and international maize markets
(due to poor international transport links, and also foreign exchange
constraints);

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Background

(b) the majority of poor food-insecure people and of the electorate, par-
ticularly in the south, are rural deficit producers facing particular con-
straints in accessing fertilizers;
(c) less-poor rural people also face difficulties in accessing fertilizer but have
an interest in fertilizer access for the production of food and non-food
cash crops;
(d) most urban people have strong links with rural people and rural inter-
ests; and
(e) widespread understandings among the Malawian population that fer-
tilizers are critical to food security, that this is dependent on food self-
sufficiency, and that the government has an active responsibility in
ensuring food self-sufficiency and hence in enabling widespread ferti-
lizer access.

Key to the importance of fertilizers in the food security narrative, therefore,

is an understanding of severe market failures affecting rural livelihoods, an
understanding which has been shared by Malawian politicians and techno-
crats—but less often by donors (Sahley et al. (2005) note a related divergence
between donors and Malawians regarding the role of the state in maize and
fertilizer provision). This difference in understanding of market failures has
been an important reason for government/donor disagreements regarding
instruments for pursuing the poverty reduction and agricultural develop-
ment agendas of donors and the mass patronage and agriculture develop-
ment agendas of domestic politics, even where their interests in these agendas
appear to converge. We therefore now turn to consider brieﬂy key features of
markets and livelihoods in rural Malawi.

4.4. The livelihoods and markets context

We focus on two important features of rural livelihoods and markets in

Malawi that are relevant to our analysis of agriculture policy.
First, agriculture policy is politically and economically important because
of the major importance of small-scale, low productivity, and risky agricul-
ture in the livelihoods of poor rural people. While agriculture is by no means
the only source of income of poor rural people, it is critically important to
their livelihoods. There are surprisingly few empirical estimates of the pro-
portion of rural Malawians’ income coming from own farm activities. The
National Statistical Ofﬁce (2005a) estimates agricultural activities as compris-
ing 50% of rural household incomes and 55% of the lowest income quartile
for rural and urban households, and these estimates are consistent with the
commonly cited ﬁgure of 50% of income being farm income in different parts

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Malawi: political, policy, livelihoods, and market

of Africa (Ellis, 1998; Reardon, 1998; Jayne et al., 2001). Dorward (2006) esti-
mated figures of 33% own farm income in 1998 (closer to figures of 20 to 45%
in different southern Africa case studies cited by Bryceson (1999)), although
later analysis suggests own farm incomes of 50% or more in two different rural
areas, but around 40% among poorer households (Dorward, 2007). However
such figures underestimate the wider importance of agriculture in rural liveli-
hoods. Food expenditures are estimated to account for just over 61% of total
expenditures in the lowest income quintile in the rural population in 2004
(National Statistical Office, 2005a). A large part of the 50% or more non-own
farm income of poor people is also derived from employment on other peo-
ple’s farms and from providing services to other rural people whose incomes
and demand for services are also heavily dependent on agriculture (Dorward,
2006). This very large importance of agriculture coupled with the low and
risky nature of smallholder agriculture in Malawi means that agriculture is a
major source of vulnerability in rural livelihoods.
The second major feature of rural markets and livelihoods in Malawi rel-
evant to our analysis is the very low level of market development and eco-
nomic activity. Dorward and Kydd (2004) argue that a defining characteristic
of rural areas in Malawi is that low and fragile incomes and low demand lead
to limited market activity based on very small transactions. The dependence
on a relatively narrow range of risky and low productivity activities, which
leads to increased covariant risk and vulnerability in the economy within
which rural livelihoods are located, is exacerbated by poor infrastructure, ser-
vices, and communications, with poor roads and transport services and poor
telecommunications, leading to high costs in physical movement of goods
and services in and out of rural areas, together with high costs of communica-
tion about market opportunities and prices.
The result of the low general level of economic activity, of the risks from
lack of diversification, and of poor communications, is thin markets, with
very low traded volumes of key commodities, manufactures, and services
(notably agricultural produce, agricultural inputs, and agricultural finance).
Thin markets are both a cause of and are caused by high costs and risks in
trading small volumes in small transactions, requiring high risk premiums
and margins to make it profitable to engage in markets. However these high
margins themselves depress demand, and the result is a low level equilibrium
trap and market failure (Kydd and Dorward, 2004). These problems are par-
ticularly acute in the input, output, and financial markets needed for intensi-
fication and increased maize productivity, and can be analysed in terms of a
‘low maize productivity trap’, set out in Figure 4.1.
At the heart of Figure 4.1 is low maize agricultural productivity, the direct
consequence of low yields resulting from continual cultivation of maize
on land without organic or inorganic fertilizers. Low yields then require

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Background

UNSTABLE SLOW PRIVATE

T POOR
POLICIES SECTOR ROADS
UNSTABLE DEVELOPMENT
WEATHE
T R

Unstable maize prices

Limited agric.
credit Consumer ‘lock in’ to
low productivity maize

Low producer
investment
Low maize & agric Low demand for non-
productivity agric goods
d &
services

Low & vulnerable real

incomes

Figure 4.1. Vicious circle of the low productivity maize production trap
Source: Dorward and Chirwa (2011c).

increased areas under maize production to meet as much of household staple

demands as possible (for reasons explained below). Low productivity leads
to low incomes. For each farm-household this makes it difﬁcult to afford
input purchases for raising agricultural productivity. Most farmers cannot
buy inputs on credit either because of under-developed credit markets and
high costs of credit administration, high borrower and lender risks, consump-
tion rather than sale of produce (with lack of cash for repayment), and high
input prices and access costs due to low input demand, poor infrastructure,
and high transport costs.
At the same time low maize production, low maize sales, and a high degree
of subsistence consumption lead to thin markets in maize (as a large propor-
tion of the maize produced in Malawi is consumed within households and
villages, never reaching the market) and this leads to high variability in maize
prices between years (as a result of good and bad rains or access to inputs)
and within years (as a result of seasonality in maize stocks, input and labour
requirements, incomes, and wage rates). This contributes to risks in input use,
undermining incentives for investment in higher productivity by farmers
with the potential to produce surpluses. However variability in maize prices
also means that deﬁcit producers seek to produce as much maize as they can
to reduce their exposure to high purchase prices for maize in years when prices
are high, and thus devote large parts of their cultivated land to maize. Poverty

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Malawi: political, policy, livelihoods, and market

and vulnerability to shocks (low yields, high food prices, sickness, loss of
employment or remittance income) further constrain productivity and pro-
ductive investments—with women, who play a key role in agricultural pro-
duction and rural livelihoods, particularly vulnerable to these shocks.
Low demand for inputs itself raises costs and inhibits the development of
input supply systems in less accessible areas. Investments in maize market
development are also constrained by low traded volumes and price risks in
thin markets. High price variability for this critical commodity leads to govern-
ment intervention in maize markets (with, for example, setting of minimum
and maximum prices, export bans, and bans on private trade) but difﬁculties
in designing and implementing interventions mean they often increase price
variability for maize sellers, buyers, and traders; inhibit investment and partici-
pation in markets; and exacerbate the problems they attempt to address (see,
for example, Tschirley and Jayne (2010)). These problems have then been exac-
erbated by unstable policies and unstable weather conditions (with particularly
low maize production from 1992 to 1994, 2001/2, and 2004/5), lack of invest-
ment in roads, and a general policy, infrastructure, and economic context that
has not encouraged long-term private sector investment and development.
The various inﬂuences and feedbacks described above lead to a vicious cir-
cle of low maize productivity and unstable maize prices inhibiting (a) net
producers’ investment in maize production,3 (b) net consumers’ reliance on
the market for maize purchases, and (c) poor farmers’ exits from low produc-
tivity maize cultivation. The result is a lock-in to widespread cultivation of
low productivity maize which, because of its scale and importance in the
wider Malawian economy, depresses labour and agricultural productivity and
growth in the non-farm economy and of the Malawian economy as a whole.4
This analysis, which builds on wider understandings of coordination prob-
lems and low level traps (Rodenstein-Rodan, 1943; Hoff, 2001; Dorward et al.,
2009) has important implications for understanding livelihood constraints and
vulnerability, and in the design and implementation of agricultural policies and

3
Profitability of and incentives for fertilizer use are commonly measured by the Value Cost
Ratio (VCR) with a a general rule of thumb that it needs to be greater than 2 for smallholder invest-
ments in fertilizer use (Morris et al., 2007). School of Oriental and African Studies et al. (2008)
note that with highly variable inter- and intra-seasonal maize prices and with rising nominal fer-
tilizer prices, the VCR for maize varied markedly from the mid 1990s, with particular divergences
between VCRs with peak pre-harvest and low post-harvest maize prices. In the latter case it was
generally below 2, while in the former case it was generally but not always above 2. This suggests
that profitability of fertilizer use on maize was a constraint to its use on maize grown for sale at or
near harvest but not for maize is grown for own consumption. The divergence surplus and deficit
maize producers’ VCRs are exacerbated if maize price risk considerations are allowed for, as these
would lead to a lower (higher) subjective valuation of maize produced for sale (purchase).
4
This summary is not a complete account of the many issues involved. Other causes for high
dependency on maize include different crops’ calorific yields, dietary preferences, processing and
storage considerations, farmers’ familiarity with the crop, and government policies. Poor macro-
economic management also constrained wider growth before 2005.

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Background

instruments. It identiﬁes low levels of investment and rural market develop-

ment on the one hand and poverty and vulnerability on the other as interacting
cause constraints to development and livelihood security. This then suggests
that without the existence of established and functioning thick markets, mar-
kets cannot be relied on to deliver agricultural and food delivery services—but
that such markets cannot develop, or can only develop slowly and ﬁtfully, in
the context of high levels of poverty. Two major questions emerge from this:

1. How can agricultural service markets (principally for inputs and credit)
and food markets be developed in the medium to long term in order
to address the problems of low productivity, poverty, and vulnerability
that are endemic in Malawi?
2. How can agricultural services and food access be provided in the short
term in the context of endemic poverty and low productivity and in
ways that crowd in rather than crowd out market development?

These questions interact strongly with the political context discussed earlier
and in particular with the different interests and ideologies of technocrats,
politicians, and donors: in the ﬁrst phase of policy under Banda there was a
consensus recognizing that these questions, and development and patron-
age interests in agricultural policy, complemented each other. Subsequent
agricultural liberalization policies have involved a lack of agreement regard-
ing these questions (generally between the predominant Malawian analysis
on the one hand and donor analysis on the other, but also between donors),
leading to policy conﬂict and reversals as different views have prevailed. We
examine these issues in the next section of this chapter. However, we con-
sider a third question that emerges from the analysis above of livelihood and
market constraints:

3. In what ways might a large-scale agricultural input subsidy impact on

markets and livelihoods and the ‘low productivity maize production
trap’?

This question can be answered in two ways. First, with reference to Figure 4.1,
a subsidy that substantially reduces input costs can make such inputs afford-
able, leading to producer investment in these inputs. If their use then leads to
increased maize productivity, this can raise real incomes and then, through
raising real incomes and their stimulus to demand for non-agricultural goods
and services, this can break the vicious circle of the low productivity maize
production trap. This will be strengthened where the subsidy is accompanied
by stable policies, investment in roads, support to private sector growth, and
policies that encourage more stable maize prices following weather shocks.

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Malawi: political, policy, livelihoods, and market

RURAL
HOUSEHOLDS Farm/non-farm investment
Poorer
households
Y1 Increased Y2 Increased
Resale real incomes real incomes

Input Increm
mentall
m
use
subsidy
Y1 Increased
production Y2 Increased
Displacement
production
use
Less-poor
households

Y1 Increased Y2 Reduced Y2 Increased

RURAL wages maize prices wages
ECONOMY
Input service demand & Farm/non-farm demand
investment & investment

Figure 4.2. Subsidy impacts on beneﬁciary households and the rural economy

We can also investigate the possible impacts of a large-scale agricultural

input subsidy by exploring possible effects on different households’ liveli-
hoods within the rural economy. This is set out in Figure 4.2.
Figure 4.2 identifies three possible uses of the subsidy by the recipients:
reselling of coupons or of subsidized inputs, incremental use of the inputs
in production, or use of the inputs with displacement of otherwise unsubsi-
dized purchases. These different uses lead to two main types of direct benefit
for recipients: immediate income transfers from reselling or displacement of
some or all of the input coupons or subsidized inputs, or incremental produc-
tion at harvest if the inputs are used on farm.
Immediate transfer benefits should lead to a tightening of the labour mar-
ket in the season of implementation, due to contraction in labour supply
by poorer households (who need to hire out less ganyu—casual labour—to
earn food, as a result of income from reselling some or all of their coupons
or subsidized inputs) and a much smaller expansion of hired labour demand
by less-poor households (who have more resources available to hire labour
as a result of cash saved by subsidy displacement of unsubsidized seed and
fertilizer purchases). This tightening of the labour market should lead to an
increase in real wages.
Increased wages lead to immediate real income and hence welfare and con-
sumption gains to poorer households, both recipients and non-recipients.
Increased on-farm labour use by the poor (as a result of reduced need to hire
out labour) also means that gains from direct transfers to poor people and

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Background

higher wages should lead to incremental production and welfare gains at

and after harvest, even without any incremental input use (though these
gains will be offset to some extent in the wider economy by losses of low cost
labour to the less poor). Less-poor people who hire in labour may also incur
a loss in net real income if they have to pay higher wages when hiring labour
in and for purchasing local goods and services whose prices are determined
largely by unskilled wage costs.
Impacts of a subsidy are, however, also expected in the season following its
implementation, as a result of households having increased stocks of grain
produced with the subsidy. Depending on the amount of extra production
that is carried forward in these stocks, there should be two effects: decreased
need for pre-harvest purchases of grain by households with insufficient stored
grain and, as a result of this, decreased hiring out of ganyu to earn cash and
food by poorer households and (slightly) increased financing to hire in farm
labour by less-poor households (Dorward (2012b) provides a graphical house-
hold model analysis of this). The effects of the loosening of the grain market
should be a fall in maize prices and a rise in wages.
This analysis draws out the importance of understanding different direct
effects of subsidy access on different households and the different indirect
effects of these as they affect labour and maize markets. Figure 4.2 shows the
rather complex set of direct and indirect subsidy impacts and their relation-
ships over time as described above. Further subsidy impacts shown in the fig-
ure are that increased real incomes should lead to greater farm and non-farm
investment (in human and social capital as well as in financial, natural, and
physical capital for particular enterprises), and that growing real incomes in
rural areas should, through economic linkages or multipliers (Delgado et al.,
1998; Dorward et al., 2002; Haggblade et al., 1989, 2007a), lead to a virtuous
circle of increased demand for locally produced goods and services, includ-
ing higher value non-staple foods. Increased consumption of vegetables and
livestock products should lead to nutrition and health benefits and further
tighten local labour demand. There will be similar human capital and welfare
benefits and tightening of labour markets from investments in, for exam-
ple, improved housing and sanitation, from investment in education and/
or other consumption items. Many of these benefits should accrue to both
subsidy recipients and non-recipients as a result of changes in maize prices
and wages.
Impacts on demand for and investment in input services will depend heav-
ily on the way that subsidies are implemented. Understanding of these poten-
tial direct and indirect subsidy benefits should guide programme design and
implementation: it should also guide investigations of programme impacts.
We return to these issues later in Chapters 6 to 9. In the next section of
this chapter, however, we continue our examination of evolving Malawian

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Malawi: political, policy, livelihoods, and market

agricultural policies that have led to, and provide the background for, the
introduction and development of the Agricultural (or later Farm) Input
Subsidy Programme (AISP or FISP).

4.5. Agricultural policies

We now explore in more detail the major agricultural policies pursued in

Malawi over the last 40 years or so. These policies have shaped and continue
to shape infrastructure, research, knowledge, institutions, and the expecta-
tions of different stakeholders (politicians, technocrats, rural people, and
voters) and, with the political analysis and context provided earlier in this
chapter, are critical to understanding both the emergence of Malawi’s Farm
Input Subsidy Programme and its subsequent implementation and evolution.

4.5.1. Post-independence policies

Post-independence smallholder agricultural development policy revolved
around the establishment and then scaling up and out of four large donor-
financed integrated rural development projects (one in the northern region,
two in the centre, and one in the south) to a national programme of projects
covering the majority of the country. Although elements varied between pro-
jects, there were a number of common core activities: agricultural extension;
subsidized supply of improved seeds and fertilizers for maize and cash crops;
construction of feeder roads and market facilities; construction of offices and
staff housing; and construction of health facilities. Within the context of sup-
porting infrastructure, the core smallholder development activities involved
the promotion of farming groups which took input loans for seed and fer-
tilizer, loans which were repaid through interlocking sales at fixed prices to
the parastatal marketing board, ADMARC. The system was very successful in
expanding access to purchased inputs, particularly in maize production, and
in achieving very high rates of credit repayment. Fundamental to this success
were (a) the role of the parastatal marketing agency, ADMARC, as a sole seller
of inputs to and sole buyer of produce from smallholders, (b) a major focus
on facilitation of this system by extension staff, and (c) strict enforcement of
penalties for non-repayment, (with the denial of access to input purchases on
both cash and credit for all members of a defaulting group and, in some cases,
heavy handed confiscation of assets of defaulters). ADMARC also maintained
pan-territorial and pan-seasonal prices.
These policies had complex anti-poor and pro-poor elements (Chirwa
et al., 2006). The interests of the poor were damaged by food prices frequently
being held above import parity, and cheaper imported food prices might

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Background

have allowed the large number of malnourished poor better access to food
in some years (although lower maize prices would have depressed incentives
for investment in improved seed and fertilizer use in maize). ADMARC also
tended to tax the smallholder sector, and the proceeds of this were transferred
to the estate sector, which also benefited from cheap labour in an exploitative
tenant system of tobacco production.
However the smallholder development projects described above invested
considerable sums in rural areas, and although the direct beneficiaries of the
agricultural programmes were generally (but not always) less-poor farmers,
they did promote national food self-sufficiency and local food availabil-
ity (both through local production and through the network of ADMARC
markets which sold maize) and stimulated economic growth in rural areas.
Smallholder taxation was also mainly on cash crops, and the smallholder
maize system was moderately subsidized by ADMARC (Kydd and Christiansen,
1982). Smallholder taxation was also offset, and with time eclipsed, by gov-
ernment infrastructural investment in the integrated rural development pro-
jects described above and by the implicit subsidies in the support of groups in
obtaining credit and in marketing their produce.
This set of agricultural policies can be seen as setting up a system that
addressed many of the demands made of it. Support for estates provided
direct patronage to elites (and resources for dispensing patronage) and to
emerging middle classes as noted earlier, particularly in the central region.
Donor resources supported smallholder agricultural development that pro-
vided infrastructure and agricultural services and food access to smallholders
(addressing the market development trap), meeting both donor develop-
mental objectives and government developmental and patronage objectives
(the latter being through regionally distributed visible project investments,
civil service and parastatal employment, improved incomes to less poor
farmers, and stable food availability in rural areas). There were also impor-
tant social protection outcomes from stable pan-territorial, pan-seasonal
food prices, and reliable food availability in most rural areas in the country.
Although the direct beneficiaries of these policies were not generally the
poorer members of rural communities, and there were differences between
regions in the benefits produced by these policies, both the flow of seasonal
finance to less-poor households and the increased incomes arising from the
use of those inputs (and their multiplier effects) should have increased sea-
sonal liquidity in rural communities, raising demand and wages for casual
labour and increasing community resources for informal local social pro-
tection measures. The discussion of pro- and anti-poor elements of these
policies also, however, illustrates conflicts over maize prices (low prices are
good for poor, food-insecure consumers but high prices are needed to stimu-
late investment), while the longer term failure of the government to sustain

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Malawi: political, policy, livelihoods, and market

these policies illustrates the difﬁculties governments face in allocating lim-

ited resources between the short-term demands for distribution of beneﬁts
to different interest groups on the one hand and longer term demands for
investment in growth on the other.

4.5.2. Liberalization policies

As liberalization and, later, multi-party democracy and currency devaluation
led to the demise of the interlocking smallholder agricultural credit system
and integrated rural development approach at the core of the agricultural
policies described above, subsequent agricultural policies were not part of
such a comprehensive vision of rural development. Agriculture, and indeed
individual crops, were seen as needing crop- and commodity-specific market
solutions. The best example of this is probably the development of small-
holder tobacco, which, as discussed earlier, was very successful. Harrigan
(2003) reports a number of benefits from this expansion: a major cash injec-
tion with multipliers feeding through into the rest of the non-farm rural
economy, the use of tobacco income to buy seed and fertilizer for maize
production, and market development. However she also notes that middle
income smallholders were the predominant direct beneficiaries and while
there were significant numbers of poorer smallholders with very limited land
growing tobacco, tobacco began to crowd out maize on these farms. This
led to severe declines in maize production when devaluation of the Malawi
Kwacha and the removal of input subsidies made the use of fertilizer on maize
uneconomic. At the same time, growth in smallholder tobacco production
was mainly in the central and northern regions, not in the southern region
where the holdings are smallest and the extent, incidence, and severity of
poverty are greatest (National Statistical Office, 2005a; Prowse, 2007).
A variety of social protection instruments were then introduced. Initially
mainly safety nets, these were closely related to agriculture and changes in
agriculture policies as they attempted to address increased food insecurity
and increasing vulnerability from, inter alia, declining holding sizes and soil
fertility and the spread of HIV/AIDS among poor rural Malawians. Over time
a wide variety of different social protection programmes and instruments
were implemented (Slater and Tsoka, 2007), including targeted nutrition
programmes, food transfers, public works programmes, school feeding pro-
grammes, credit transfers, and more recently cash transfers.
The agricultural synergies and conflicts of many of these programmes are
well known: injections of cash and food into people’s livelihoods can make
a critical contribution at lean times of year before harvest when labour is
needed by people to work on their fields, these cash and food injections may
allow them to work on their fields rather than seek work for cash or food

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Background

elsewhere. These injections can also generate local economic multipliers (Davies
and Davey, 2008) and build up productive capacity and assets (Covarrubias
et al., 2012). However cash or food for work programmes face a dilemma in that,
if they are providing work and income at the time when people need it most,
then this will take people from their ﬁelds and undermine their own production
(Slater and Tsoka, 2007).These programmes also face wider problems regarding
the extent and value of their contributions to rural assets and most importantly
to the livelihoods of participants (Devereux, 2006). A tendency for programmes
to lack long-term funding and consistency has also undermined the extent to
which they can be relied upon by rural households (Slater and Tsoka, 2007).

4.5.3. Agricultural input provision programmes

As discussed earlier, recognition of the importance of agriculture for food
security, of the need for fertilizers to raise yields for poor farmers with small-
holdings and declining yields under continuous maize cropping, and of dif-
ficulties in accessing maize seed and inputs led to major political, economic,
and developmental interests in policies and instruments aimed at increas-
ing poor people’s access to inputs (seed and fertilizer) for maize production.
Two different programmes and instruments concerned with input delivery
to poor people are important for understanding the subsequent emergence
of the agricultural input subsidy programme in 2005: ‘inputs for work’ and
free input distribution (the latter under the ‘Starter Pack’ and ‘Targeted Inputs
Programme’ or TIP). These programmes have operated at different scales and
in different ways with different agricultural and social protection objectives
of stakeholders in supporting different programmes: ambiguity and diversity
in understandings of programme objectives have been widespread, and have
had both benefits and costs.
‘Inputs for work’ describes the use of public works programmes aimed pri-
marily at delivering social protection but, in contrast to food for work and
cash for work programmes, participants are paid with agricultural inputs.
‘Inputs for work’ has only been implemented on a local scale by NGOs with
donor funding. Payment with inputs is intended to overcome some of the dif-
ficulties with food and cash for work programmes by providing participants
with work during the dry season, when there is little competition for labour
with work on their fields, but benefits during the following cropping sea-
son (by easing labour and cash demands for households looking to purchase
inputs) and/or by increasing subsequent maize harvests and food stocks. An
evaluation of a pilot project in two districts of Malawi cited by Devereux
(2006) concluded that the project was more popular with participants than
food or cash for work, and yielded a very favourable return in the value of
increased maize produced.

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Malawi: political, policy, livelihoods, and market

Free input distribution has been a much more widely used approach to
extending access to inputs across the country, with large-scale government
distributions starting from 1993 in response to currency devaluation, the
removal of fertilizer subsidies, the collapse of the credit system for maize
inputs, and drought (Devereux, 2006). In 1998, the government implemented
a universal ‘Starter Pack’ programme, under which every smallholder was
provided with enough seeds and fertilizer to plant 0.1 hectares of land. This,
with good weather, was a contributor to an estimated 67% increase in maize
output, with maize production reaching 2.5 million tonnes (Levy, 2005).
The programme, funded by DFID, was continued in 1999 amid consider-
able controversy, rooted in different stakeholder interests in the programme,
in the political context, and different perceptions of its objectives. As origi-
nally conceived, the Starter Pack was an agricultural development programme
intended to promote farmer skills in more intensive maize production, diver-
sification out of maize, and the growth of commercial input distribution sys-
tems in rural areas. It was intended to include maize fertilizers and legume
and maize seed, to be accompanied by a strong extension programme, and to
address the market and livelihood constraints discussed earlier. However the
programme was actually funded and implemented more as a social protec-
tion programme, with a major emphasis on fertilizer provision to promote
immediate food production, and less emphasis on agricultural education,
provision of legume seed, or the development of commercial input delivery
systems. The programme was highly politicized, being introduced just before
the 1999 presidential elections, and was seen as particularly beneficial for the
southern region, the ruling party’s power base.
Donors were concerned about the politicization of the programme, its high
cost, its apparent emphasis on maize rather than on promoting diversifica-
tion, its possible crowding out effects on input markets, and its efficiency as
regards targeting and benefits to the poor. There was concern that large num-
bers of non-poor people were benefiting, and that receipt of inputs by such
people was simply a transfer, with starter pack inputs displacing commer-
cial purchases, although the extent of displacement is disputed. As a result
DFID support of the programme was subsequently scaled back to the Targeted
Input Programme (TIP).
Targeting, however, faced problems. There were considerable difficulties
in the selection of beneficiaries and in the effectiveness of targeting. More
fundamentally, however, Levy (2005) argues that the starter pack assisted
poorer households in two ways: by increasing their own maize production
and (by stimulating national maize production) reducing maize prices. The
second benefit was lost when the programme was scaled back to a targeted
programme. Dorward and Kydd (2005) simulate the effects of maize price and
wage effects of the universal starter pack and compare this with effects under

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Background

a targeted programme, and argued that even if targeting could be achieved

without exclusion and inclusion problems, and ignoring both the increased
costs associated with targeting and displacement effects, the wage and maize
price effects of a universal subsidy could be more cost-effective than a targeted
programme in delivering welfare beneﬁts to the target group. They were con-
cerned, however, that by depressing maize prices, the universal programme
‘may undermine the important growth contributions of less poor households
that engage in more intensive labour demanding maize-production’ (p. 274).

4.6. The 2005/6 Agricultural Input Subsidy Programme

High food prices and food shortages following poor harvests in 2000/1 and
2001/2 (after the scaling back of the starter pack programme), led to food
security and fertilizer subsidies becoming major political issues in the period
leading up to the 2004 presidential elections. Both the major parties and
their candidates promised fertilizer subsidies, though the UDF and Bingu wa
Mutharika, its presidential candidate, offered an extension of the rationed
Starter Pack approach while the MCP and its candidate, John Tembo, offered
a return to price subsidies through farmer groups. After the election the new
government delayed the introduction of subsidies, perhaps due to the need
for controlling government expenditure to qualify for debt relief (Chinsinga,
2006). Uncertainty about a subsidy led to delays in the decision to implement
another targeted input programme, and also led to delays in fertilizer imports
and to farmers delaying fertilizer purchases (Sahley et al., 2005). The result
was another very poor season with subsequent food shortages, high prices,
very expensive importation of maize, and considerable damage to people’s
welfare and livelihoods and to the economy.
During 2005, therefore, the government decided to implement the
Agricultural Input Subsidy Programme (AISP) as a rationed and targeted pro-
gramme that would involve the partial subsidy of a much larger volume of
inputs than were provided under the previous Starter Pack and Targeted Input
Programme. While the impetus for this was the renewed concerns within
Malawi over maize production, the decision provided an opportunity for
President Bingu wa Mutharika to craft a programme that would be popular
with the rural masses across the country, would provide potential resources
for patronage, and was clearly different from previous subsidies or input sup-
ply programmes under Banda and Muluzi, but which also had a clear eco-
nomic and welfare rationale that lay ﬁrmly in traditional domestic analysis
of smallholder farmer needs. In this it was a critical strategic response to the
political challenges facing Bingu wa Mutharika as he established his govern-
ment without a majority in parliament. It also drew on new opportunities for

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Malawi: political, policy, livelihoods, and market

independent policy afforded by the introduction of large-scale budget sup-

port by Malawi’s major donors and (to a lesser extent) by ideological divisions
within the donor community regarding the relative economic and welfare
beneﬁts of such a programme (with, for example, strong support from Jeffrey
Sachs and the Millennium Programme).
The design, implementation, and impacts of the programme, and potential
wider lessons from this, are the subject of the rest of this book.

4.7. Summary

This chapter has described the context of Malawi’s introduction of its

Agricultural Input Subsidy Programme in 2005. An understanding of the eco-
nomic context of smallholder agriculture and rural livelihoods in Malawi is
critical for understanding technical arguments for the introduction of this
programme, and its subsequent implementation and impacts. The impor-
tance of, and difficulties posed by, the ‘low maize productivity trap’ are par-
ticularly relevant. There are important interactions here with the arguments
presented in Chapter 2 about subsidies’ objectives and modalities, as well as
contrasts and similarities with other countries’ engagement with input sub-
sidy programmes, as discussed in Chapter 3. However Malawi’s agriculture,
rural livelihoods, and economy, and technical understanding of them, are
themselves strongly influenced by its history of changing political circum-
stances and deep-rooted political influences and processes. Understanding
these political issues is equally important for understanding the genesis, evo-
lution, and impacts of agricultural input subsides in Malawi, and indeed in
other countries.

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Part II
Implementation and Impacts of the
Malawi Programme

In this part of the book we describe the major features of the design and
implementation of the Malawi Farm Input Subsidy from 2005/6 to 2011/12
(in Chapter 5) and then examine evidence for various potential impacts of
the programme. Examination of these impacts and their links to prior pro-
gramme design and implementation is guided by the conceptual framework
set out in Figure 2.2 in Chapter 2, by the issues raised in examination of recent
subsidy programme experience discussed in Chapter 3, by key political, eco-
nomic, and agricultural features of Malawi discussed in Chapter 4, and by
the possible impacts of a large scale agricultural inputs subsidy on different
households’ livelihoods within the rural economy as set out in Figure 4.2.
Figure II.1 draws these strands together and restructures Figures 2.2 and 4.2
to show the causal pathway that is traced from examination of input subsidy
distribution, receipts, and costs (in Chapter 5 on implementation) through
to various direct and then indirect impacts (in Chapters 6 and 7), alongside
and interacting with input market impacts (in Chapter 8). Chapter 9 pro-
vides an overarching consideration of the overall beneﬁts and costs of the
programme: we do not attempt to show its links across programme costs and
welfare and growth impacts in the ﬁgure.

Targeting/access ; Beneficiary household characteristics; Technical fit, complementary inputs &

investments; Livelihood & economy characteristics; Subsidy scale, rate & rationing; Input & product
demand elasticities, tradable/non-tradables; Political processes; Infrastructure & institutions

INPUT SUBSIDY DISTRIBUTION Incremental Increased

& RECEIPT farm hh beneficiary
r
consumption welfare, income
Sale & assets

Incremental Incremental
Displacement production sales Incremental
/incremental consumption
input use Fall in
Incremental price
labour demand Increased
Programme & reduced consumer
costs labour supply welfare, income,
Increased wages & assets
& labour welfare
& income
Economic growth
Input market
impacts
short/long
term impacts

Chapter 5 Chapter 6 Chapter 7 Chapter 8

Implementation Direct impacts Indirect impacts Input market impacts

Figure II.1. Processes and inﬂuences linking and affecting inputs, implementation,
and impacts

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5

FISP activities and achievements

5.1. Introduction

This chapter describes the implementation of the Malawi FISP from its incep-
tion in 2005/6 to 2011/12. Our aims in this chapter are to

• set out the major activities involved in implementing the programme,

and the core determinants of programme outputs which in turn
determine programme impacts, as discussed in Chapters 6 and 7;
• describe the major features of the programme with regard to design and
implementation features identiﬁed at the end of Chapter 2 as critical for
programme evaluation (although some aspects of targeting, rationing,
and private sector input supply are addressed in later chapters); and
• consider some of the political and other inﬂuences that have affected
programme design and implementation.

We begin the chapter by introducing the core elements of the programme

and major changes from 2005/6 to 2011/12. The bulk of the chapter then
provides more detail on these, on implementation achievements and outputs
of the programme, and on some of the determinants of changing practices.
We go into considerable detail on some topics both to document these topics
and to provide readers with information that is needed to understand issues
discussed in later chapters. We conclude by discussing how consideration of
the implementation of the Malawi subsidy programme fits within, extends,
and/or challenges understandings of theory, practice, and policy set out in
Chapters 2 to 4. We first, however, conclude this introduction with an over-
view of the major tasks and core activities involved in programme implemen-
tation and generation of its core outputs. A simplified summary of these is
provided in Figure 5.1.
There are a number of points to note from Figure 5.1. First, following on
from key lessons from the reviews in Chapters 2 and 3, programme outputs

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Implementation and Impacts

Planning & budgeting

Coordination &
Farmer control
registration Input
Area purchase
allocations
Stakeholders
FARMERS
Secure coupon MoAFS: HQ, LU, ADDs
printing DADOs, ASs, FAs
Input DCs, TAs, VDCs, Police, CSOs
Beneficiary
r
Fertilizer importers, retailers
identification distribution Market
Coupon Seed suppliers, retailers
(transport & opening ADMARC: HQ, districts,
distribution
storage)
to areas. markets
SFFRFM: HQ, depots, markets
Transporters
Donors
Coupon issue to
farmers

Payments & control

Coupon redemption

Figure 5.1. Major tasks in programme implementation

Note: see list of abbreviations for description of stakeholders.
Source: adapted from Dorward and Chirwa (2011c).

are defined as timely coupon redemption and incremental input sales. The
activities and tasks required to deliver these outputs are then divided into
two broad groups: input management and coupon management, with fur-
ther division into input purchases and market opening on the one hand and
coupon supply and beneficiary identification on the other. Across these divi-
sions, however, there are major planning interactions, as coupon allocations
to different areas depend upon overall planned input purchases and input dis-
tribution to different areas depends upon coupon allocations to those areas.
There are also major implementation interactions between input and coupon
management as regards timing of separate activities and of the exercise as a
whole. Starting at the bottom of the figure, before coupon redemption can
start in an area the markets must be stocked and open and beneficiaries must
have been issued with their coupons. Similarly, input distribution to depots
and markets requires the prior allocation of inputs to the areas in which mar-
kets are located. Allocations to areas, however, must follow initial decisions
on the total volumes of inputs to be sold under the programme.
Finally, the figure also provides some indication of the way that the pro-
gramme’s complexity and scale pose major challenges in programme plan-
ning and implementation. These activities are carried out for several different
sets of inputs (for example, different fertilizers and seeds), over the whole

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FISP activities and achievements

country in rural areas that are often poorly served by roads and services, serv-
ing dispersed farmers (many of whom have very low levels of literacy), without
access to advanced information technology systems. There is also a wide range
of stakeholders in the programme, often with different understandings of the
objectives of the programme and of how it is supposed to be implemented,
and different personal and professional interests in it, with some of these
interests more and less ‘legitimate’. Fraud and theft are also major temptations
and threats (criminals are not included as stakeholders, but their inﬂuence
and effects on the programme also have to be recognized). All of this occurs
on a very large scale. For example, in 2008/9 more than 1.5 million fertilizer
coupon beneﬁciaries were selected from over 2.5 million farm households,
3.5 million fertilizer coupons and 2.5 million seed coupons were printed and
distributed, and 3.5 million bags of four kinds of fertilizer were purchased and
distributed, together with 2.5 million bags of two different kinds of maize seed
and three kinds of legume seed. These subsidized commodities were together
worth around US$275 million,1 with each fertilizer coupon’s value greater
than 10% of annual household income for more than around 40% of the
population. Discussion of the programme’s implementation, achievements,
and weaknesses should take into account these considerations.
We now consider major implementation activities in turn, considering
each of the activities in Figure 5.1 in terms of their structures, volume, and
outputs over the period 2005/6 to 2011/12. We begin, however, with a brief
overview of core programme features and of their evolution and of the con-
text of that evolution from 2005/6 to 2011/12.

5.2. Programme design and evolution

The core stated objective of the FISP has consistently been to improve resource-
poor smallholder famers’ access to improved agricultural inputs in order to
achieve their and national food self-sufficiency and to raise these famers’
incomes through increased food and cash crop production. Later years of
the programme have given greater emphasis to concerns for vulnerable farm
households. Throughout this, however, there has been an emphasis on pro-
gramme beneficiaries as farmers and producers, with little emphasis on benefi-
ciaries as consumers (beyond the recognition of the programme’s contribution
to improving household food self-sufficiency) and there has been no emphasis
on the indirect programme effects on maize prices and hence consumers.
The core of the programme has been the use of vouchers (or coupons) to
target approximately 50% of farmers in the country to receive fertilizers and

1
This is inclusive of transport costs and farmer redemption payments.

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Implementation and Impacts

improved seeds for staple food (maize) production. ‘Maize fertilizers’ have
been provided in a package of one voucher for a 50 kg bag of 23:21:0 +4S
basal fertilizer (NPK) and one voucher for a 50 kg bag of urea for top dress-
ing. Improved maize seeds subsidized under the programme were initially
open pollinated varieties (OPVs) but there has subsequently been much
greater emphasis on hybrid maize varieties. The seed and fertilizer packages
drew on longstanding Ministry of Agriculture and Food Security (MoAFS)
crop production recommendations. In the early years there were further
vouchers for tobacco fertilizers, and in later years support for tobacco inputs
was withdrawn and more emphasis given to provision of legume seeds.
Grain storage chemicals were also provided from 2007/8 and cotton seed
and chemicals provided in some years, but the disbursement and reporting
channels and methods for these have been different from those for ferti-
lizers and for maize and legume seed, and we do not report on them in
any detail. The subsidization of complementary inputs (fertilizers, maize
and legume seed, and maize storage chemicals) have been the main form
of complementary investment in or associated with the programme, but
there has also been some provision of extension messages on input use,
and under the Agricultural Sector Wide Programme some investment in a
nationwide set of on-farm trials of different integrated soil fertility manage-
ment technologies.
Throughout the FISP, the government and other stakeholders have worked
with varying success and agreement on innovations to address difficulties,
improve programme performance, respond to changing political and eco-
nomic conditions, and broaden impact. These changes have emerged from
formal and informal discussions, reviews and lesson learning within gov-
ernment and with other stakeholders, and from changing policy concerns
in a changing economic and political environment. Bilateral and multilat-
eral donors have engaged substantially with the government over the pro-
gramme from the 2006/7 season, with specific funding of some activities.
This has involved consistent support for seed subsidies, logistics, monitoring
and evaluation, and some fertilizer transport. They have also supported ‘buy
back’ arrangements in some years (allowing the government to carry forward
unused stocks from one year to the next with the costs of these stocks in
the budget and accounts for the year of their use rather than purchase) and
assisted with costs of auditing, anti-corruption measures, coupon printing,
and exceptionally high fertilizer prices in 2008/9.
The major modifications in different years are shown in Tables 5.1 and 5.2
and involved changes in

• volumes of subsidized fertilizer and seed sales (both maize and legumes)
and of grain storage chemicals and cotton chemicals and seed, with

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FISP activities and achievements

fertilizer volumes rising and then falling but seed volumes rising apart
from a fall in maize seeds in 2011/12;
• reliance on private sector imports to supply parastatal fertilizer sales
(generally rising) and private sector involvement in retail sales of
subsidized fertilizer only in 2006/7 and 2008/9 but in seed sales for all
years except 2005/6;
• programme objectives and beneficiary targeting criteria and systems
placing increasing emphasis on vulnerable beneficiaries;
• beneficiary registration and beneficiary selection, voucher distribution,
and market monitoring systems;
• redemption prices falling; and
• coupon design and security features and processes increasing fitfully.

Further details and explanations are provided on these changes in the follow-
ing sections.

Table 5.1. Principal programme features, 2005/6 to 2011/12

2005/6 2006/7 2007/8 2008/9 2009/10 2010/11 2011/12

Fertilizer voucher 166,156 200,128 216,000 195,369 160,000 160,000 140,000

distribution (MT
equivalent)
Total sub- Planned 137,006 150,000 170,000 170,000 160,000 160,000 140,000
sidized Actual 131,388 174,688 216,553 197,498 159,585 160,531 139,901
fertilizer
sales
(MT)
Fertilizer voucher value, 1,750 2,480 3,299 7,951 3,841 5,237 6,536
approx. (MK/bag)
Redemption price (MK/ 950* 950 900 800 500 500 500
bag)
Subsidy % (approx.) 64% 72% 79% 91% 88% 91% 93%
Subsidized maize seed n/a 4,524 5,541 5,365 8,652 10,650 8,245
(MT)
% Hybrid seed 0% 61% 53% 84% 88% 80% 68%
Legume seed (MT) 24 1 1551 2726 2,562
Cotton seed/chemicals No No Yes Yes No No Yes
Total pro- Planned 5,100 7,500 11,500 19,480 21,908 19,700 21,586
gramme Actual 4,480 10,346 13,362 33,922 15,526 21,868 23,455
cost (MK
million)

* 950MK per bag for ‘maize fertilizers’ and 1450MK per bag for ‘tobacco fertilizers’.
Sources: Logistics Unit reports; Nakhumwa (2006), School of Oriental and African Studies et al. (2008), Dorward and
Chirwa (2009, 2011a, 2012a), Dorward et al. (2010b).

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Implementation and Impacts

Table 5.2. Evolving programme implementation features, 2005/6 to 2011/12

Subsidized inputs Voucher Voucher Other system

distribution redemption features
system systems

2005/6 Maize & tobacco First round district Only through Fertilizer
fertilizers, Maize allocation by SFFRFM & coupons
seed (OPV) maize areas, ADMARC not specific
distribu- to fertilizer
tion through type.
Traditional
Authorities
(TAs),
subsequent
rounds less
transparent
2006/7 Hybrid & OPV maize Distribution Fertilizers also Coupons
changes seed through varied through major specific to
stakeholders retailers; fertilizer
flexible maize type.
seed vouchers Fertilizer
through a wide buy back
range of seed system.
retailers Logistics
unit
involvement
2007/8 Very limited legume District allocation Cotton inputs Reduced
changes seed; cotton seed by farm hh & through copies of
& chemicals areas, distribu- Agricultural coupons.
tion through Development Remote
MoAFS/Village Divisions Extension
Development (ADDs) Planning
Committees Area (EPA)
(VDCs) premium
2008/9 Tea & coffee fertiliz- Use of farm Fertilizers only Extra coupon
changes ers, maize storage household through security
chemicals register, open ADMARC & features
meetings for SFFRFM; Grain & market
allocation & storage chemi- monitoring;
disbursement cals through No remote
led by MoAFS. ADDs EPA
Additional premium;
‘flexi-vouchers’ ADMARC
for maize or computers
legume seed for voucher
allocated processing
separately
2009/10 No cotton chemi- Elimination of 2nd Variable top up for Complex extra
changes cals. No tobacco and 3rd round maize seed max coupon
fertilizers, Increased distributions. 100MK security
legume seed, more Use of voter features
maize seed (hybrid identification in centre
& OPV) per pack for registra- & north.
tion, receipt & Features
redemption. (e.g.
numbering)
varied

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FISP activities and achievements

Table 5.2. (continued)

Subsidized inputs Voucher Voucher Other system

distribution redemption features
system systems

2010/11 No major changes No major changes No major changes No major

changes except ‘ﬂexi- changes
vouchers’
replaced by
legume vouch-
ers added
to standard
package
2011/12 Major foreign No major changes Cotton inputs Coupons
changes exchange & fuel through ADDs printed out-
problems; cotton side Malawi
seed & chemicals with packs
straight to
Districts

Sources: Logistics Unit reports; Nakhumwa (2006), School of Oriental and African Studies et al. (2008), Dorward and
Chirwa (2009, 2011a, 2012a), Dorward et al. (2010b).

5.3. Input purchases and distribution

This section describes processes, achievements, and performance in the pro-

curement and distribution of fertilizers and of maize and legume seeds.

5.3.1. Procurement and distribution systems

The programme has used two fertilizer procurement and distribution sys-
tems in different years. The dominant system, with distribution and retailing
through two parastatal corporations (ADMARC and SFFRFM—Smallholder
Farmers Fertiliser Revolving Fund of Malawi), was the only system used in
2005/6 and from 2008/9, while in 2006/7 and 2007/8 this was augmented by
parallel private sector retailing of subsidized fertilizers. With parastatal distri-
bution, the government calls for tenders for the supply of specified fertiliz-
ers to three SFFRFM depots (in the southern, central, and northern regions).
After a formal process of tender analysis and awards, successful bidders (both
private importers and SFFRFM and ADMARC) then deliver contracted quanti-
ties to the specified depots, which also hold any programme stocks bought
forward from excess supplies in the previous year. The government (working
through the programme’s Logistics Unit from 2006/7) then contracts private
transporters to ‘uplift’ fertilizers from the regional depots to ADMARC and
SFFRFM local area markets which act as the retail outlets for subsidized ferti-
lizer supplies. Timely availability of fertilizers for redemption by beneficiaries

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Implementation and Impacts

requires timely award of tenders and tender deliveries, timely uplifting of

supplies from depots to markets (to supply the markets and to free storage
space for deliveries from importers to depots), and timely sales from markets
(to supply beneficiary demand and to free storage space for deliveries from
depots to markets).
Timely sales of fertilizers before or immediately on commencement of the
rains are critical for a good fertilizer response, particularly for ‘basal’ NPK fer-
tilizers applied at planting. However limited storage space at depots, limited
transport capacity, poor feeder roads once the rainy season has started, and
limited storage space at markets pose major logistical challenges in maintain-
ing stocks for selling large quantities of fertilizers quickly after the start of
the rains. Absence of such stocks leads to shortages at markets, which in turn
leads to farmers wasting time and money searching and waiting for stocks.
Shortages also give corrupt sales agents and others opportunities to extort
extra payments from beneficiaries.
As mentioned above, a parallel fertilizer procurement and distribution
system using private sector retail outlets was implemented for two years,
2006/7 and 2007/8. Under this system six input suppliers with rural chains
of retail outlets were contracted to procure, store, and distribute the fertiliz-
ers that they sold under the programme, with stocks of ‘subsidy fertilizers’
not distinguished from stocks of fertilizers for unsubsidized sales (they were
only treated differently at the point of sale, and in the subsequent submis-
sion of vouchers to the MoAFS Logistics Unit for redemption at previously
agreed prices). An important part of this system was the funding by DFID of
a financing agreement with Stanbic Bank to address government concerns
that ADMARC and SFFRFM might be left holding unused stocks if the private
sector’s subsidized sales were larger than expected. Under this agreement,
Stanbic bought unsold fertilizer stocks from the government at the end of the
season for resale to the government at the start of the next season at the same
price (plus storage and financing costs). In 2006/7 prices varied by district to
reflect varying transport costs to different districts, but in 2007/8 a further
‘remote areas premium’ was introduced to promote companies extending
their distribution network into more remote zones. Private sector sales of
subsidized fertilizer were cancelled by the government at short notice in the
2008/9 season when contract negotiations were at an advanced stage, on the
basis of (as far as we know) unsubstantiated reports that some private com-
panies had been misusing fertilizer coupons and accepting them in exchange
for other sales of other products.
With regards to maize and legume seeds, from 2006/7 onwards these have
been supplied and distributed by private seed suppliers and sold through
both private and parastatal retail outlets. A small number of seed compa-
nies negotiate annual coupon redemption prices for different seed types

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and packs (with the ability to charge a further ‘top up’ price to farmers in
most years). Retailers (retail chains, small scale agro-dealers, and parastatal
outlets) are then supplied with seed for sale under the programme, and
have to return seed coupons redeemed by farmers back to the seed compa-
nies, who then present them to the MoAFS Logistics Unit for redemption
payments.

5.3.2. Fertilizer procurement and distribution

Procurement of fertilizers for subsidized sale by ADMARC and SFFRFM is a
major and critical activity in programme implementation, affecting beneﬁ-
ciaries’ access to fertilizers (in terms of timing, volumes, and access costs),
programme impacts, and programme costs (with fertilizers accounting for
around 75% of net programme costs from 2009/10 to 2011/12). While pro-
curement of fertilizers and seeds for sale through private channels is also
important, this is coordinated and implemented by private companies, with
critical government involvement restricted to tendering at the beginning
and payment at the end. We report on these later when we consider coupon
redemption and seed sales under the subsidy, and beneﬁciary information
about delivery performance. In this section we focus on government and
parastatal procurement and distribution achievements and performance for
fertilizers. We discuss more on this in Chapter 8.
Figure 5.2 shows fertilizer supplies to the programme by source from
2005/6 to 2011/12 (excluding unutilized supplies carried forward). The graph
demonstrates well

• the increasing volume of subsidized fertilizer from 2005/6 to 2008/9

and its subsequent decline;
• the general trend for increasing reliance on private sector supplies, but
highly variable volumes of private sector supplies between years (rising
year on year from 2005/6 to 2008/9, then falling back markedly in
2009/10);2
• government distribution of 125,000 MT or more in every year of the
programme.

Given these large volumes, performance in government procurement and

distribution of fertilizers is very important to programme performance as a
whole. This can be considered in terms of timing and costs.

2
Total private sector supplies to government in 2008/9 were greater than shown in Figure 5.2,
as this excludes government purchases for winter production and purchases that were not used
and then carried forward, contributing to the 2009/10 drop in new private sector supplies.

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metric tons 100%

200,000 90%
80%
150,000 70%
60%
50%
100,000
40%
30%
50,000 20%
10%
0 0%
2005/6 2006/7 2007/8 2008/9 2009/10 2010/11 2011/12

Private sector tenders MT Parastatal tenders MT

Brought forward MT Private sector retail MT
Private sector % new supplies

Figure 5.2. Fertilizer supplies by source, 2005/6 to 2011/12

Sources: Logistics Unit annual reports.

Procurement activities have generally been completed a little earlier each

year, and this has been associated with substantial improvements in end
of October and end of November deliveries in 2009/10 and 2010/11 (there
were also greater carry-forward stocks in 2009/10). Despite these improve-
ments, however, end of October deliveries have still been less than 80% of
total supplies even in the best years, and have frequently been below 40%.
End of November deliveries were as low as 70% of total supplies in 2008/9,
and in only two years have all supplies been delivered to depots by the end of
December. The limited impact of earlier tendering on deliveries is due partly
to lack of ﬁrm delivery dates and late delivery penalty clauses in tender con-
tracts, partly to the failure of some suppliers to deliver at all (with consequent
late contracts with alternative suppliers), and partly to constraints on storage
space at SFFRFM regional depots. This is affected by difﬁculties in uplifting
stocks from the depots to rural markets, to which we now turn.
Earlier deliveries to depots have allowed improvements in uplifting stocks
from the depots to rural markets (see Figure 5.3), with uplifts by the end
of November rising steadily from a little over 64% to 86% from 2006/7 to
2010/11. However this should be 100%, indeed all supplies should be availa-
ble for sale by mid November, whereas even in 2010/11 only 70% was uplifted
by the end of October and 85% by end November. Although uplifts are con-
strained by the availability of stock in depots, they are also constrained by
transport capacity, poor roads, and availability of storage space in markets,
with the latter determined by the timing of seasonal markets’ opening and by

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200 100%
1,000s of metric tons ('000 MTS) End Jan '000 MT
180 90%
160 80% End Dec '000 MT
140 70% End Nov '000 MT
120 60%
End Oct '000 MT
100 50%
End Sept '000 MT
80 40%
60 30% End Sept %

40 20% End Oct %

20 10%
End Nov %
0 0%
2006/7 2007/8 2008/9 2009/10 2010/11 2011/12 End Dec %

Figure 5.3. Montly uplifts to rural markets (‘000 MT & % parastatal sales by end of
month)
Source: Logistics Unit weekly and annual reports.

sales disruptions to stock flows. Sales are determined not only by stock avail-
ability, but also by beneficiaries being in possession of redeemable coupons.
We discuss coupon distribution systems determining this later, in Section
5.4. First, however, we briefly examine another aspect of procurement perfor-
mance: prices paid for inputs.
Figure 5.4 compares average fertilizer costs per metric ton (MT) for NPK
(23:21:0 +4S) and urea delivered to the three depots with international prices
for DAP and urea over the period 2006 to 2011 (with good data on procure-
ment prices available for the last three years but weaker data for the previous
three years). Data are shown each year from March to November, with March
to April generally being the time at which tenders have been submitted (and
hence the basis for tender pricing, although some contracts were established
later in each season) with delivery from August to December: actual timing
of different suppliers’ purchases is not known, nor are the prices paid. The
figure shows

• broad patterns of change in prices and in difference between delivered

and international prices;
• sharp rises and falls in international prices, particularly for phosphate
fertilizers in 2008, with tenders and being placed when prices were
rising to their peak;
• sharp rises in urea prices from March to June 2011, with a peak in
September;
• more generally, the very high volatility in fertilizer prices in recent years;
• variations in price differentials between international and landed prices
and between urea and NPK prices.
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The variability in international prices, with foreign exchange and other risks,
and consequent exposure of suppliers to large potential losses and gains
must lead to suppliers building substantial risk margins into their tenders.
Measures that allow shorter bid validity periods and faster tender processing
and awards should lead to lower prices. These measures would also allow for
earlier delivery of supplies. Costs might also be reduced if the government
took on more of the foreign exchange risks and was able to manage these risks
more effectively than private suppliers.
Further insights into fertilizer prices paid by the government can be
gleaned by comparing cost per MT delivered to markets with normal com-
mercial (unsubsidized) sales prices, as shown in Figure 5.5. Here market prices
include landed costs (as in Figure 5.4) and transport costs, but exclude over-
head costs of ADMARC and SFFRFM. Unsubsidized prices are for November
each year averaged across major centres in Malawi, and for 2008 and 2009
there is also data collected from markets around the country by the MoAFS.
The ﬁgure suggests that if overhead costs were added on to the subsidized
costs then unsubsidized market prices might be closer to the costs incurred by
the programme through parastatal delivery (although if ADMARC is reach-
ing more remote areas then higher average costs might also be incurred by
private suppliers in reaching these).

1600
NPK, landed in depots
1400 Urea, landed in depots
DAP, international
1200 Urea, E. Europe, Bulk
Price US$/MT

1000

800

600

400

200

0
2006 2007 2008 2009 2010 2011

Figure 5.4. Landed and international fertilizer prices, 2006–11

Notes: 2007/8 & 2008/9 information for only part of purchases, 2009/10 excludes ADMARC b/
fwd. Urea at US$1,254/MT, 2011/12 excludes ADMARC supplies of Urea at US$864/MT & NPK
at US$904/MT.
Sources: Logistics Unit reports and data, World Bank commodity price data (World Bank, 2012).

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1600

1400

1200
Price US$/MT

1000

800

600

400
MoAFS survey market price US$/MT
200 FISP cost in markets US$/MT
FAM prices US$/MT
0
2006 2007 2008 2009 2010 2011

Figure 5.5. Subsidized fertilizer market costs and unsubsidized market prices,
2006–11
Notes: 2011 FAM prices are sensitive to the choice of exchange rate converting MK to US$. Prices
shown are calculated with the ofﬁcial exchange rate, but if the widely used unofﬁcial exchange
rate in late 2011 were applied then the FAM price would be lower.
Sources: Logistics Unit reports and data, Fertiliser Association of Malawi (pers. comm.), MoAFS
market reports.

The effectiveness of the programme in obtaining low-priced fertilizer sup-

plies may also be investigated by examining the patterns of tender prices.
Table 5.3 presents the range of prices paid from 2008/9 to 2011/12. Price
ranges are high, although they have generally been falling and in some years
(such as 2009/10) cannot be explained by wide variation in international
prices during the buying period. Some suppliers appear to have been paid
consistently higher prices (for example, Simama and, notably for a large urea
consignment in 2009/10, ADMARC). On the other hand there is no evidence
of higher prices being paid to SFFRFM (indeed the low outlier prices for NPK
and urea in 2008/9 were both for supplies from SFFRFM). Price ranges remain
high even after removal of outliers, but again have generally been falling
since 2008/9.

5.4. Coupon distribution

We now examine the activities involved in coupon distribution, which, as

shown earlier in Figure 5.1, run in parallel with input procurement and distribu-
tion activities. We again ﬁrst provide an overview of systems and then consider

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Table 5.3. Fertilizer procurement prices before and after removal of high outliers

Year Fert. Price ($/MT) After removal of high outliers Outlier %

price supply
Mean Range Mean Range % change Suppliers
($/MT) price ($/MT) mean removed

2008/9 NPK 1,453 407 1,450 348 0.2% Mulli Bros 1,649 1.3%
Urea 1,121 313 1,090 239 0.4% Simama 1,246 3.0%
2009/10 NPK 744 390 736 287 3.1% Simama, Coin 886 5.1%
Urea 715 670 647 221 8.4% ADMARC 1,246 9.2%
2010/11 NPK 791 202 779 192 1.5% Various inc 870 13.0%
Simama
Urea 650 236 645 103 0.7% Masina 830 2.5%
Investments
2011/12 NPK 824 124 817 51 0.7% ADMARC 904 7.1%
Urea 776 200 775 135 0.2% ADMARC 864 1.4%

Source: Author calculations from Logistics Unit Annual reports

achievements and performance over the life of the programme, drawing on

information from programme records and from farm household surveys.

5.4.1. Systems
Coupon distribution to beneficiaries involves a number of activities, as set
out in Figure 5.1: allocations to different areas, beneficiary identification, and
then actual distribution of coupons. These activities are conditional on the
quantity of subsidized inputs set in the national budget, the registration of all
farm families, the printing of coupons, and then their distribution to districts
and communities.
The formal process and criteria for determining budgeted quantities of sub-
sidized inputs are not clearly documented. Starting from 2005/6 there has
been an aspiration to provide enough inputs to provide a core maize fertilizer
package for roughly 50% of Malawian smallholder farmers. Budget decisions
for subsequent years are likely to have been made on an incremental rather
than zero budgeting basis, with increases and decreases determined by politi-
cal objectives, funding availability, competition for funds between ministries,
and budgeted prices and costs.
Formal area allocations of coupons then involve the division of the national
budget for subsidized inputs between Extension Planning Areas (EPAs) within
districts. From 2005/6 to 2008/9 allocations of the total across EPAs were
made in two or more rounds. In 2005/6 and 2006/7 the first allocation was
reported to be proportionate to the previous year’s MoAFS estimates of maize
and tobacco hectarage in each EPA, but from 2007/8 onwards EPA allocations
were increasingly, and from 2009/10 exclusively, reported to be proportional

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to MoAFS estimates of the number of farm families per EPA, with, again from
2009/10, annual registration of farm families by villages within each EPA.3
Within EPAs, processes and formal stakeholder roles in coupon allocations
between and within villages have varied between years and areas and have also
differed from actual, informal roles. Overall, they have involved Traditional
Authorities (TAs), local government and MoAFS staff, Village Development
Committees (VDCs), and local stakeholders identifying beneficiaries to receive
coupons for redemption for different inputs at very reduced cash prices.
Printing of coupons has been funded and managed by the MoAFS and
carried out in Malawi in all programme years except 2011/12 (when DFID
funded printing outside Malawi). A requirement that coupons be clearly iden-
tified with unique beneficiary serial numbers by district and (in some years)
EPA, has meant that printing has been conditional on district and EPA alloca-
tions. Once printed, with security features that have varied from year to year
but have generally become more stringent with time, packs of coupons are
bundled and distributed to each EPA, via District Agriculture Development
Officers (DADOs). Coupon distribution to beneficiaries has involved the
same parties as allocation, with the addition of a police presence to keep law
and order and to safeguard the valuable packs of coupons.
A constant feature of programme design has been that intended recipi-
ents of maize fertilizers should each receive two coupons, to allow subsidized
purchase of one 50 kg bag of basal fertilizer (23:21:0 +4S) and one 50 kg bag
of urea. However, there has also been considerable variation over time and
between areas in allocation and distribution processes and criteria determin-
ing selection of beneficiaries and the numbers of coupons of different types
actually received per recipient.
Supplementary rounds of coupon allocations to areas and beneficiaries
from 2006/7 to 2008/9 were much more opaque as regards systems, crite-
ria, and numbers of coupons distributed. These were nominally intended to
address problems of unmet demand in the first round of distribution but were
widely considered to allow opportunities for often politically driven alloca-
tions outside formal systems.

5.4.2. Total coupon receipts

Two sources of information on coupon distribution and receipt can be com-
pared: programme records on coupon disbursement, and farm household
survey estimates of coupon receipt. These can also be compared with input
sales records on coupon redemption. There is, however, a major difﬁculty

3
Initial allocations based on crop areas or farm families were commonly modiﬁed for a variety
of generally undocumented technical, administrative, political, and other reasons.

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with this as the estimation of total coupon receipts from farm household
survey data requires the multiplication of mean receipts per household (esti-
mated from the survey) by the total number of farm households—but there
are major discrepancies between the estimates of the number of rural house-
holds based on the National Statistical Ofﬁce (NSO) 2008 census on the one
hand and MoAFS estimates of farm families on the other. The extent of these
discrepancies is shown in Figure 5.6.
These differences may have a number of causes:

a. the deﬁnitions of farm families and of rural households may be differ-

ent, with a larger number of smaller-farm families;
b. MoAFS processes may lead to households splitting for the purposes of
registration, to increase the number of coupons that they may be able
to receive;
c. ‘ghost’ families and villages may have been created by corrupt ﬁeld staff
or traditional leaders to enable them to obtain coupons;
d. the NSO may have missed some households in the census;
e. the NSO rural households listing excludes all households residing in
cities or in urban areas, but many urban households are also engaged in
agriculture and may receive coupons.

It is possible that the discrepancies in Figure 5.6 result from all these causes.
Examination of the figure certainly suggests that there has been some
‘inflation’ in MoAFS farm family estimates. The central region appears to
have had a remarkable growth in farm families from 2005/6 to 2009/10
(reaching 20% in 2009/10), with numbers then flattening off and actually
declining from 2010/11 to 2011/12. Combined with a spurt in growth in
the southern region from 2008/9 to 2009/10, this resulted in an estimated
increase of 14% in Malawian farm families in 2009/10. Northern region

MoAFS farm families (millions) NSO rural households (millions)

4.50 4.50
Allll
4.00 4.00 South
3.50 All 3.50 Centre
South North
3.00 3.00
Centre
2.50 North 2.50
2.00 2.00
1.50 1.50
1.00 1.00
0.50 0.50
0.00 0.00
/6

12
/

/1
05

/
09

11
20

20
20

Figure 5.6. MoAFS farm families and NSO rural households

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growth rates were also high from 2005/6 to 2007/8 and then ﬂattened off.
These regional and temporal variations pose questions regarding the reli-
ability of the farm family estimates, and suggest that the NSO estimates
may be more reliable—although they may also exclude some urban farm
households.4
Table 5.4 compares estimates of coupon issues and receipts from these dif-
ferent sources. Higher MoAFS farm family estimates lead to higher estimates
of total coupon receipts, exceeding MoAFS formal allocations in 2008/9 and
2010/11 (although there may have been substantial informal supplementary
allocations in 2008/9, this was not the case in 2010/11 when the excess is

Table 5.4. Estimates of fertilizer coupon issues and receipts from

different sources5

2006/7 2008/9 2010/11

A. Households receiving one or 54% 67% 79%

more coupons
B. Coupons received per recipient 1.7 1.5 1.4
household
C. Coupons received per house- 1.01 1.12 1.13
hold (all households)
D. Estimate of total coupons 2.51 2.79 2.73
received, NSO based rural
household estimates (millions)
E. Estimate of total coupons 3.32 4.11 4.42
received, MoAFS farm family
estimates (millions)
F. MoAFS voucher allocation 3.48 3.91 3.20
(millions)
Discrepancy as % of missing cou-
pons as % MoAFS allocations
G. Using NSO rural household 28% 28% 15%
estimates (D as % of F)
H. Using MoAFS farm family 5% −5% −38%
estimates (E as % of F)

Sources: 2006/7, 2008/9, and 2010/11 household surveys; Logistic Unit reports; author
calculations from National Statistical Ofﬁce (2008a) and data supplied by MoAFS.

4
The small increase in the NSO rural household growth rates from 2008/9 is due to post-2008
estimates relying on 2008 rather than 1997 census data.
5
Estimates of the percentage of households receiving coupons are in broad agreement with
survey results for six districts in central and southern Malawi reported by Holden and Lunduka
(2010b) with 68 and 75% of households receiving coupons in 2007/8 and 2008/9 respectively, and
1.4 and 1.5 coupons per recipient household in the same years. Chibwana et al. (2010) estimate
that 77% of households received fertilizer coupons in 2008/9 in samples from two districts in
central and southern Malawi.

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greatest). Lower NSO-based rural household estimates, however, lead to lower

estimates of total coupon receipts, considerably below MoAFS formal alloca-
tions in all three years.
Following the discussion above of Figure 5.6 and the use of NSO rural house-
hold deﬁnitions in the farm household estimates of coupons received per
household, we may expect more reliable estimates of total coupon receipts
using the NSO rural household estimates. This suggests that a total of 3.3 ris-
ing to 4.4 million fertilizer coupons were distributed to rural households in
the 2006/7, 2008/9, and 2010/11 seasons. We discuss later the implications of
this for estimates of diversion and fraud in the programme.
Comparable analysis for seed coupons is difﬁcult, as a result of changing
systems and quantities of seed coupon allocations. However, 2008/9 and
2010/11 survey estimates of coupon receipts per household multiplied by
estimated rural household numbers give total coupon receipt estimates that
are close to MoAFS records of total allocations.

5.4.3. Coupon distribution processes and performance

Section 5.4.1 has described broad processes for coupon distribution. In
this section we examine these in a little more detail, comparing formal
procedures adopted by the programme with those actually reported in
2006/7, 2008/9, and 2010/11 farm household surveys and focus group
discussions. We consider how procedures and criteria for coupon alloca-
tion and distribution have changed, the timing of these activities, their
outcomes in terms of the numbers of coupons distributed, and percep-
tions of these processes.
Formal instructions for coupon allocation and distribution have specified
who should be involved and procedures to be used. These instructions have
changed over time in response to both difficulties and complaints on the
one hand and examples of success on the other. Thus, in 2005/6 Traditional
Authorities (TAs) were tasked with allocating coupons between villages within
EPAs, and Village Development Committees (VDC) with allocating coupons
between households within villages. Complaints that some TAs and VDCs
were subverting allocations led to instructions in 2006/7 that allocations be
made by district, area, and village committees in accordance with standard
local government structures, with detailed terms of reference and member-
ship for each committee. Beneficiaries, were supposed to be ‘full time small-
holder farmers who cannot afford to purchase one or two bags of fertilizer at
prevailing commercial prices, as determined by local leaders in their areas’.
Guidelines also specified that coupons should be issued to beneficiaries ‘just
before they go to a market point to purchase inputs, to minimize chances of
abusing them’.

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In 2007/8 programme objectives and formal targeting criteria were

amended to give greater emphasis to concerns for vulnerable households.
Systems for allocation and distribution of coupons within districts were also
modified to give less power to TAs and more responsibility to MoAFS staff, fol-
lowing support from communities to disburse vouchers through MoAFS staff
following the 2006/7 programme experience. ‘Flexi-seed’ vouchers were also
introduced, allowing households who were not given a set of vouchers for
the maize seed and fertilizer package to nevertheless benefit from subsidized
maize, legume, or cotton seed. This was not, however, particularly popular as
there were very limited supplies of legume seed, cotton seed was wanted by
relatively few farmers, and many farmers saw it as a poor substitute for receipt
of fertilizer coupons. Flexi-seed coupons were discontinued in 2009/10 and
replaced by specific legume seed coupons.
In 2008/9 all farm families were registered and the list of registered farm
families was used in subsequent identification of beneficiaries in ‘open vil-
lage meetings’ led by teams involving MoAFS staff, local government staff,
religious leaders, VDC members, and civil society representatives. Beneficiary
lists were compiled by village and EPA and district. These lists were then
checked by the Logistics Unit against allocations before distribution registers
were printed with beneficiary names by village and delivered to the MoAFS.
Similar procedures were followed from 2009/10 to 2011/12 except that ben-
eficiaries were also supposed to have voter ID cards from the 2009 elections
and there were further increases in emphasis on beneficiary targeting to focus
on more vulnerable households—emphasizing child-headed, female-headed,
or orphan-headed households, those infected or affected with HIV and AIDS,
and guardians or carers of vulnerable people (all of whom should be also be
Malawians owning land).
Key informant interviews, information from community questionnaires,
and anecdotal evidence suggest that a wider variety of coupon allocation
and distribution procedures has been followed than would be expected
from consistent implementation of the formal instructions. Thus, in
2006/7 the involvement of the DDC (District Development Committee)
and VDC was almost, but not quite, universal with, for example, in one
surveyed district only one committee level under the DDC organizing bulk
transport of fertilizers for farmers. The extent and nature of involvement of
the TAs in the process varied widely, and was strongest in the central region
where there were reports of TAs subverting the process in various ways.
Targeting criteria reported also varied markedly between districts with, for
example, different emphases on farmers’ inability to otherwise afford fer-
tilizer purchase.
Wide variations in practice were also associated with the introduction of
open meetings from 2008/9. First the extent of their adoption varied, with 81

105
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and 96% of respondents reporting open meetings for allocation and distribu-
tion of fertilizer coupons in 2008/9, and similar figures for 2010/11. Where
open meetings were adopted, some FGDs described them as meetings where
pre-determined beneficiary lists were announced, while others reported
actual participatory selection of beneficiaries. Some respondents recognized
their value in informing people about the programme and consequently
helping to reduce struggles and conflicts, but perceptions also appear to be
conditional on perceptions about changing numbers of available coupons
compared to the previous year.
As regards the second, supplementary allocation of coupons, a large pro-
portion of respondents reported that these were distributed based on the
choices of traditional leaders and, in other cases, by politicians mainly tar-
geting their supporters and party sympathizers. However, Chinsinga (2012b)
documents reports of some more general political interference in coupon
allocation.
A significant and widely practiced variation from official procedures has
involved ‘redistribution’ of coupons. Coupon allocations should lead to all
beneficiaries getting two coupons for ‘maize fertilizer’ (one for NPK and one
for urea). However, substantial numbers of respondents report receipt of one
coupon (or even the proceeds of a part of a coupon). This is also reported by
Holden and Lunduka (2010b) and we discuss this further with regard to tar-
geting outcomes in Chapter 10.
We now turn from a description of coupon allocation and distribution pro-
cesses to consideration of performance in these activities as regards timing
and respondents’ perceptions of effectiveness. Discussion of diversion and
fraud in coupon allocation is deferred to its own section later in this chapter,
while targeting is considered later in Chapter 10.
Information on the timing of beneficiaries’ receipt of coupons is available
from the 2006/7, 2008/9, and 2010/11 household surveys. This is summa-
rized across all regions in Figure 5.7 and shows a clear improving trend over
the three surveys, but with only 40% of beneficiaries receiving their cou-
pons by the end of October in 2010/11 (70% in the south, 11% in the cen-
tre, and none in the north) there is still need for considerable improvement.
Community survey respondents reported similar patterns.
Survey respondents have also been asked to rate different aspects of pro-
gramme implementation from very good to very bad. In Table 5.5 scorings
on timing show small but steady annual improvements in perceptions of
timing since the start of the programme, with overall ratings moving from
‘bad’ to ‘not good, not bad’ from 2005/6 to 2010/11. Ratings of methods
of coupon distribution and of criteria for coupon distribution have not
changed much, and are broadly ‘not good, not bad’. Perceptions of numbers

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100%
90%
80%
70%
60%
50%
40%
2006/7
2006/7
30%
2008/9
20%
2010/1
2010/11
1
10%
0%
Oct Nov Dec Jan
Figure 5.7. Percentage of beneﬁciaries reporting receipt of maize fertilizer
coupons by end of each month

of coupons distributed have been declining. This may result from changes
in the average number of coupons received per recipient (see Table 5.4) as a
result of the increasing redistribution of coupons discussed earlier. Holden
and Lunduka (2010b) find that 28% of respondents in 2008/9 reported
‘insufficient coupons’ as the main problem with the programme, while
42% considered corruption to be the main problem. However Holden and
Lunduka (2010a) also report that 31% of respondents from the same sur-
vey suggested that more or enough coupons should be supplied, with 20%
suggesting that the coupon distribution system need to be improved, 10%
each suggesting providing more inputs and introducing a general fertilizer
subsidy, and 9% suggesting that chiefs be removed from involvement in
coupon distribution.
The final issue to be discussed on coupon distribution is the extent to which
farmers had to pay for coupons. We may expect some under-reporting of
this. Five per cent of fertilizer coupons were reported as being obtained with
some payment in both 2006/7 and 2008/9 (this is lower than the estimate of
14% for 2008/9 survey reported by Holden and Lunduka (2010b)). Reported
sources of such fertilizer included TAs and headmen, agricultural staff, VDC
members, traders, and fellow farmers. A much lower figure of 2% was found
in 2010/11. Reported prices varied dramatically, with medians of 600MK per
coupon in 2006/7, 2000MK in 2008/9 (when prices for unsubsidized ferti-
lizer were very high) and 1000MK in 2010/11 (Holden and Lunduka (2010b)
reported median prices of 1500MK for 2007/8 and 2500MK for 2008/9).

107
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Table 5.5. Scoring on different programme elements by year

2005/6 2006/7 2007/8 2008/9 2009/10 2010/11

Timing of 2.73 2.73 2.56 2.01 2.20 1.93

distribution
Methods of 2.89 2.94 2.97 2.81 2.69 2.74
coupon
distribution
Criteria for 2.95 2.92 2.83 2.79 2.83
coupon
allocation
Number of 2.96 3.02 3.07 3.16 3.20 3.36
coupons

Scores: 1 = very good; 2 = good; 3 = not good not bad; 4 = bad; 5 = very bad.

5.5. Coupon redemption

As with input and coupon distribution, we consider coupon redemption with

an overview of systems and then consider achievements and performance
over the life of the programme.

5.5.1. Redemption systems

Redemption of coupons for subsidized inputs essentially involves the pres-
entation of a valid coupon and any necessary payment to an authorized
retailer who, after checking the validity of the coupon, issues the speciﬁed
input. Three main systems have been used over the life of the programme:
redemption of fertilizer coupons by parastatals (SFFRFM and ADMARC),
redemption of fertilizer coupons by approved private retailers in the 2006/7
and 2007/8 seasons, and redemption of seed coupons by parastatals or pri-
vate retailers from 2006/7.6 We describe core features of each of these sys-
tems: a description of more detailed changes between years is provided in
Section 5.5.3.
Under the parastatal system for fertilizer redemption, fertilizer stocks are
distributed to ADMARC and SFFRFM markets (some of which are specially
opened during the input supply season) as described earlier. Beneﬁciaries then
present their coupons with the required farmer payment and the parastatal
issues the fertilizer. ADMARC and SFFRFM were then supposed to return to
the government both the money and coupons received from farmers. The

6
Some subsidized OPV maize seed was supplied through ADMARC and SFFRFM under the
2005/6 programme without coupons with a 70% subsidy, but there is no further documentation
of this.

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extent to which coupons have been returned has varied between years, while
information on reimbursement of farmer payments is not available. From
2006/7 onwards fertilizer subsidy sales information has been reported by
the Logistics Unit on the basis of stock reconciliations and, from 2006/7 to
2010/11 on the basis of weekly market reports.
Redemption of fertilizer coupons by approved private retailers in the 2006/7
and 2007/8 seasons was identical to redemption of coupons by parastatals as
regards transactions with farmers. However, reimbursement for sales (of the
retailer’s own stocks) was obtained by submission of invoices to the MoAFS
supported by redeemed coupons, with reimbursement per coupon at a previ-
ously contracted price covering subsidy costs (with retailers keeping farmer
payments as the unsubsidized part of the overall payment).
The seed coupon system has been based on annual agreements between
the MoAFS and seed supply companies in the Seed Traders Association of
Malawi (STAM). Under these agreements individual companies contract
with different retailers to supply them with seed approved for subsidized
sale, and then to receive from these retailers the details of subsidized sales,
with supporting coupons. The seed companies subsequently invoice the
MoAFS for each seed coupon returned to them as a result of its use in pur-
chasing their seed. The distribution between retailers and seed supply com-
panies of MoAFS payments and of any farmer payments are a matter for
negotiation between retailers and seed supply companies and are not a mat-
ter for MoAFS.
An important issue in coupon redemption is the setting of redemption fees
to be paid by farmers. As indicated earlier in Table 5.1, while fertilizer prices
have risen over the life of the programme, farmer contributions through the
redemption price have fallen by almost 50% in nominal terms (more in real
terms), from 950MK per bag to 500MK/bag for ‘maize fertilizers’, and the sub-
sidy has therefore increased from around 65% to over 90%. Fertilizer redemp-
tion prices have been politically determined, generally announced by the
president in political statements or at rallies. There is little evidence of any
technocratic involvement in the setting of these prices, which are very low:
when a price of 500MK/bag was announced for the 2012/13 season it was
widely criticized as a contributor to high and unsustainable and distortionary
programme costs undermining budgets for other MoAFS activities. Politics
has generally played a smaller role in the setting of seed prices, which have
been negotiated by seed companies and the MoAFS. However in 2007/8 agree-
ment that farmer redemption payments (‘top ups’) of up to 100MK could be
charged per 2 kg pack of hybrid seed had to be abandoned following a politi-
cal statement that all subsidized maize seed was free. Seed redemption prices
are less important than fertilizer prices, both politically and in their impact
on the programme budget.

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250 12

Actual
Fertiliser sales ('000 MT)
T 10 tobacco
200 fertilizer

Seed sales ('000MT)

Actual maize
8 fertilizer
150
Fertilizer
6 budgeted
100 Maize seed
4
Hybrid seed
50
2
Legume seed

0 0

2
/7

/9
6

/1
/

08
05

11
20

20
20

20
Figure 5.8. Subsidized fertilizer and seed sales by year
Source: Calculations from Logistics Unit (2011) and earlier reports.

5.5.2. Total redemption

Figure 5.8 shows the total volumes of fertilizer and seed redemptions by year.
Subsidized fertilizer sales increased from 2005/6 to 2007/8, and were con-
siderably over budget from 2006/7 to 2008/9 (with budgeted fertilizer sales
of 150,000 MT in 2006/7 and 170,000MT in 2007/8 and 2008/9). The lower
sales from 2009/10 were almost exactly on budget. Maize seed sales increased
from 2006/7 to 2010/11 but fell back in 2011/12. Hybrid maize seed sales
increased dramatically from 2007/8 to 2009/10, with reduced sales of OPV
seed, but OPV sales then grew again in 2010/11 and 2011/12—with hybrid
seed sales hardly growing in 2010/11 and then declining in 2011/12. There
were also dramatic increases in legume seed sales in 2009/10 and 2010/11,
with 2011/12 sales a little lower than in 2010/11.

5.5.3. Coupon redemption performance

Apart from the introduction of private sector seed and fertilizer sales in
2006/7 and the withdrawal of private sector fertilizer sales in 2009/10, the
only major changes in redemption processes between years have been vari-
ation in redemption payments required from farmers. These are set out in
Table 5.6. Variation in pack sizes for hybrid and OPV seed packs and in farmer
top up payments required for different varieties led to some competition and
farmer choice, where different seed stockists accessible to beneﬁciaries carried
different or a range of stocks.
Performance in coupon redemption can be considered in terms of avail-
ability of inputs for redemption, and timing and costs of redemption. These
are all related.
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Table 5.6. Coupon redemption parameters, 2005/6 to 2011/12

Fertilizers Maize seed pack Legume seed

top-up
payment (MK Size (kg) Top up Redemption Size (no Redemption
per 50 kg) farmer value (MK) farmer top value (MK)
payment up)
(MK)

2005/6 * OPV pack n/a* n/a* - -

size
2006/7 950 2 kg hybrid 0 400 - -
seed or
3 or 4 kg
OPV seed
2007/8 900 2 kg hybrid 0** 400 2 kg 400
seed or
4 kg OPV
seed
2008/9 800 2 kg hybrid 0 680 2 kg 680
seed or
4 kg OPV
seed
2009/10 500 5 kg hybrid <=100MK 1500 2 kg 350
seed or
10 kg OPV
seed
2010/11 500 5 kg hybrid <=100MK 1650 2 kg 740
seed or
7.5 kg
OPV seed
2011/12 500 5 kg hybrid <=100MK 1815 0MK for 815
seed or 2 kg
10 kg OPV
seed

* 950MK per bag for 23:21:0 and urea, 1450MK per bag for Compound D and CAN.
** Farmer top ups agreed initially but subsequent political announcements led to confusion and inconsistent
payments.

Lack or limited availability of inputs when needed has been a major dif-
ficulty that has frequently delayed purchase and use of subsidized inputs. We
have discussed in earlier sections how for fertilizers this has been caused by
late opening of seasonal markets, late distribution of inputs to markets, and
late distribution of coupons to beneficiaries—and how these three factors
interact—as late market opening and coupon distribution makes timely input
distribution to markets more difficult, and hence fertilizer stock-outs more
likely. Farmers and sellers have no flexibility in substituting between types of
fertilizer since coupons are specific to each type of fertilizer. With seeds, how-
ever, there has been more flexibility, with opportunities to exchange maize
seed coupons for different varieties of hybrid and OPV seed, if different stocks
are available.
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Table 5.7. Reported distances to buy inputs, time spent buying inputs, and costs for
transport and miscellaneous expenses

Hours travel & waiting Transport and Distance Distance to

misc expenses to nearest nearest private
(MK) ADMARC (km) selling point
(km)

Mean Median Mean median Mean Median Mean Median

2006/7 13 7 247 150 7 5 7 5

2008/9 17 9 304 200 9 5 14 8
2010/11 23 12 270 200 5 4 8 6

Stock-outs have been relatively common in all years of the programme,

have affected all inputs, and in 2006/7 were experienced by both private and
parastatal retailers.7 However when they manage to get their inputs farmers
are generally pleased with the fertilizers they get, but are sometimes disap-
pointed by lack of availability of hybrid maize seed and speciﬁc types of leg-
ume seed. We discuss access to maize seed further in Chapter 8.
Stock-outs lead to increased time and cost for farmers travelling to and from
and waiting at markets, and while it appears that hours travelling and waiting
have increased over the life of the programme there is no clear evidence of
changes in transport and other costs or in distances to markets (see Table 5.7).
Stock-outs also provide sales clerks with opportunities to demand extra pay-
ments for access to limited stocks. This is a problem that is widely reported in the
media and in focus group discussions and key informant interviews. Table 5.8
provides survey estimates of the extent and nature of these extra demands.
Table 5.8 shows no clear trend in the frequency or size of extra payments.
In 2006/7 the percentage of coupons requiring tips and mean redemption
price were lower at ADMARC/SFFRFM than at all other distributors, but this
masks considerable variation between different distributors, with some hav-
ing a slightly lower reported incidence of tipping than ADMARC/SFFRFM.
In 2008/9 and 2010/11 community survey respondents, focus group dis-
cussions, and key informant interviews all suggested that the payment of
bribes to redeem inputs was more widespread than is suggested by the survey
results, with focus groups suggesting that this was closely related to prob-
lems of queuing. Chinsinga (2009) also reported extra payments of 200MK
to 800MK per bag of fertilizer being demanded by some ADMARC staff (with

7
Holden and Lunduka (2010b) find that only 7% of respondents in 2008/9 reported ‘insuffi-
cient inputs’ as the main problem with the programme. However data from the same survey indi-
cate that 19% of households considered fertilizer to arrive too late, 6% considered it was on time
but insufficient, and 8% considered it both late and insufficient (equivalent figures for 2007/8
were 37%, 6%, and 6%, respectively) (Holden and Lunduka, 2010a).

112
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Table 5.8. Reported extra payments for coupon redemption (MK/bag fertilizer)

Year Retailers % Median Mean Mean Median

coupons price price extra extra
paid tips payment payment if
paid

2006/7 Private 27% 950 1,223 273 n/a

2006/7 Parastatal 18% 950 983 33 n/a
2008/9 Parastatal 14% 800 827 27 200
2010/11 Parastatal 9% 500 536 36 250–500

those unable to pay being required to wait two or three days before they
were served); extortion of cash from beneficiaries by criminal elements to
‘facilitate’ input acquisition; and organized theft through tricking farmers.
The Farmers Union of Malawi (2011) report that 5% of their sample of regis-
tered beneficiaries reported being asked to pay bribes for input redemption
although 42% considered it common or very common to be asked for such a
bribe.8 However, only 20% of those asked for a bribe reported that they had
paid it. The Farmers Union of Malawi (2011) FGDs also reported that women
were particularly vulnerable to these demands
It is difficult to determine if extra payments made for hybrid seed are cor-
rupt, as extra payments have been supposed to be made for some hybrid
varieties in some years. However, no payments should have been required for
OPV or legume seed, but 12% and 11% of respondents reported making some
payment for OPV and legume seed in 2010/11, respectively.

5.6. Diversion and fraud

Diversion of subsidized inputs away from intended beneﬁciaries is an issue

that has been raised in Chapters 2, 3, and 4. Diversion takes several forms,
from inclusion errors in targeting (whereby inputs go to smallholder farmers
who were not supposed to get them) through leakages (for example, as a result
of sales of vouchers or subsidized inputs at low prices) to outright fraud and
corruption, where people capture subsidized inputs as a result of direct crimi-
nal activity or as a result of political inﬂuence (and of course illegal political
capture is itself criminal). We make a distinction here between mis-targeting
within the smallholder sector and diversion outside the smallholder sector.

8
This divergence between perceived frequency and reported experience is interesting and may
inform interpretation of FGD information—perhaps suggesting that the incidence of these prob-
lems is overstated in FGDs.

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Targeting is the subject of Chapter 10. We consider here evidence regarding

the extent of leakage or diversion outside the smallholder sector.9
Illegal activities are inevitably clandestine and difficult to trace. There have
been numerous media reports of cases of theft and fraud regarding FISP cou-
pons and inputs (Tambulasi, 2009), successful prosecutions, and on-going
police, audit, and Anti-Corruption Bureau investigations. There are also fre-
quent allegations of fraud by village officials and extension agents in focus
group discussions and key informant interviews. It is, however, very difficult to
obtain objective and comprehensive estimates of the extent of these activities.
The lack of transparency in coupon allocation when combined with excess
demand for coupons leads to perceptions of and complaints about corruption
and diversion of coupons, and this may occur even in situations where these
perceptions and complaints may not be warranted. In addition, while there
may be many cases that are not discovered, acute interest in those cases that
are discovered may lead to over-estimates of their occurrence and scale.
Fraud may arise in a number of ways: through voucher allocation to non-
existent (‘ghost’) beneficiaries (or villages), with theft of the allocated vouch-
ers by Ministry of Agriculture staff and/or Traditional Authorities, diversion
of vouchers to people with power (government staff, traditional leaders, or
politicians) or to criminals for sale, direct allocation to non-beneficiaries,
and printing of extra or counterfeit vouchers within or outside the system.
There may also be thefts of inputs. Another type of corruption is operated by
some who act as gatekeepers, with village headmen or sales clerks demand-
ing bribes (extra payments or services) in exchange for coupons or coupon
redemption which beneficiaries are entitled to without such bribes. This last
form of corruption was discussed in Sections 5.4.3 and 5.5.3.
Although there should be control systems that prevent or at least moni-
tor these different types and sources of fraud, the existence and operation of
these systems have not always been clear, or, as with some audits, their imple-
mentation has been slow and a full picture has still to emerge. The extent and
investigation of diversion has also been affected by changing political condi-
tions, as discussed in Chapter 4.
The divergence in estimated number of households between the NSO cen-
sus and the MoAFS farm registry (discussed in Section 5.4.2) poses difficulties
in using household surveys to investigate this issue. For example, with the
NSO farm family estimate it appears that 2.7 million fertilizer coupons were
received by smallholder farmers in 2010/11 against a recorded allocation of
3.2 million, leading to an estimate of 0.5 million ‘missing’ coupons (15% of
those issued, compared to 28% in 2008/9). However, with the MoAFS farm

9
It should be noted that some apparent targeting errors within the smallholder sector also
involve the abuse of power and inﬂuence by people who are smallholder farmers.

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family estimate it appears that 4.4 million fertilizer coupons were received by
smallholder farmers in 2010/11 against a recorded allocation of 3.2 million,
leading to receipts exceeding issues by 38% (compared to 5% in 2008/9).
These difficulties are compounded by the lack of a nationally representative
sample for the 2010/11 FISP survey. However, they do suggest that if the NSO
figures are taken as being closer to the to the true population with the NSO (as
opposed to MoAFS) household definition (as suggested by earlier examina-
tion of the differences in regional changes in MoAFS figures and by the survey
using NSO households for sampling and the NSO household definition) then
high losses in 2008/9 have been substantially reduced in 2010/11.
We can, however, go further than this to make some very broad estimates
of leakage and diversion of subsidy vouchers and inputs outside the small-
holder sector. The basis of these is the diagram of possible voucher and subsi-
dized input flows in Figure 5.9. The diagram shows on the left hand side the
legitimate flows of vouchers and inputs within the smallholder sector, and
on the right the illegitimate flows of vouchers and inputs outside the small-
holder sector. Boxes in bold represent variables for which we have estimates
from household surveys or administrative records (although estimates for
smallholders’ cheap purchases are not available for 2006/7). This then allows
some estimation of the scale of diversion first of vouchers (by comparison
of estimates of voucher receipts and use by smallholders against programme
voucher redemptions) and then of subsidized seed and fertilizers (by com-
parison of estimated input acquisition and use by smallholders against total
programme supply). These estimations are prone to error, first as a result of
uncertainty regarding the total number of farm households (as discussed ear-
lier) and second as a result of making estimates by subtraction, which tends
to magnify percentage errors. Nevertheless, these estimates may be taken to
provide some broad indications of the changes in the scale of diversion in
the programme. These are set out in Table 5.9 for the 2006/7, 2008/9, and
2010/11 years when survey data were available. As in Section 5.4.2, we take
the NSO-based estimates of the number of rural households to be most reli-
able and consistent with the sample surveys.
The results of this analysis are presented in Table 5.9 (capital letters in
each row refer to the framework in Figure 5.9). This suggests that there were
very high leakages or diversions outside the smallholder sector in 2006/7
and 2008/9, with smallholders receiving only 63 and 68% respectively of
recorded coupon issues. Despite their smaller share of disbursed coupons in
2006/7, it appears that smallholders redeemed a higher percentage of their
coupons as compared with others, and as a result bought a greater share of
the subsidized fertilizers than in 2008/9. Of the fertilizers bought by oth-
ers under the subsidy in 2008/9, however, a large proportion (about 50%)
appears to have been sold to smallholders at lower than unsubsidized prices,

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Official coupon issues (A) Unrecorded, counterfeits (X)

Smallholders Others coupons

coupons received (B) Smallholders Others coupons received (C)
coupons sales (D) sales (E)

Smallholders Others coupons

coupon purchases (F) purchases (G)

Smallholder Smallholder redeemed Other redeemed Other

unredeemed coupons (I) coupons (J) unredeemed
coupons (H) coupons (K)

Smallholder keep Smallholders Others input

input (R) input sales (L) sales (M)

Smallholder Smallholder cheap Other cheap input Other redeemed

redeemed input use (N) input purchase (O) purchase (P) input use (Q)

Figure 5.9. Flows of coupons and subsidized inputs

so that the smallholder sector ended up using about 80% of the subsidized
supplies—though a little over 25% of this was not purchased with the full
subsidy. This is broadly comparable with Holden and Lunduka (2010b) who
estimate that in 2008/9 21% of total household fertilizer use was obtained
through cheap purchases of fertilizer (and 25% through purchased cou-
pons). In 2010/11, however, smallholder farmers received a higher, but still
not high enough, proportion of voucher issues (85%) and it is also estimated
that in addition almost all the diverted subsidy fertilizer sales were then
resold to smallholders (again at prices between full and zero subsidy). If
smallholders are assumed to have received around 50% of the subsidy when
buying originally subsidized fertilizers from other sellers then the propor-
tion of fertilizer subsidy captured by others fell from a little under 30% of the
subsidy in 2008/9 to a little over 10% in 2010/12. Since the subsidy volume
was approximately 25% higher in 2008/9, and the price of fertilizers was
approximately 65% higher, the estimated loss through diversion fell by just
under 80% from 2008/9 to 2010/11.10

10
A similar analysis for maize seeds in 2010/11 (Dorward and Chirwa, 2011) and administrative
records suggests substantial numbers of counterfeit maize seed coupons that year. These have less
national and political signiﬁcance and less individual and aggregate value than fertilizer coupons,
but nevertheless offer substantial income opportunities for criminal activities.

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Table 5.9. Estimated shares of coupon and subsidized fertilizer receipts by smallholders
and others1

2006/7 2008/9 2010/11

Coupons % recorded issues

Recorded issues (from MoAFS and Logistics Unit)—A 100% 100% 100%
Received by smallholders, exc. purchases—B 63% 68% 85%
Received by others (by subtraction)—A-B = C-X 37% 32% 15%
Redemptions Total (from Logistics Unit)—I + J 87% 102% 100%
Smallholders—I 63% 69% 78%
Others (by subtraction)—J 25% 34% 22%
Counterfeits/extras redeemed (min.) -13% 2% 0%
Fertilizers % subsidy sales
Total subsidy sales (from Logistics Unit)—I + J 100% 100% 100%
Smallholder redemption & use—N 72% 58% 78%
Others’ redemption—J by subtraction 28% 42% 22%
Smallholder low price purchases—O n/a 21% 21%
Total smallholder use—N + O n/a 79% 99%
Others’ low price/redemption use—P + Q n/a 21% 1%
1
Smallholder low price purchases (O) are estimated as all purchases below a cut-off price. In 2008/9, there was a
much greater range of fertilizer prices reported by respondents, and the cut-off point for ‘low price’ purchases was
set at 150MK/kg, around 70% of the standard commercial price. For 2010/11 examination of the data suggested a
cut-off point of 85MK/kg, around 85% of the standard commercial price. However some of the higher price purchases
could be for stock from the subsidy if some traders bought subsidized fertilizers and sold it as if it were commercial,
particularly when selling in smaller quantities. Allowance for this might suggest somewhat higher reselling of sub-
sidized purchases than estimated above, in which case estimates of ‘others low price redemption and use (P + Q)’
would fall. However, the broader conclusions of this section would not be signiﬁcantly changed—indeed some would
be strengthened.

Source: Author calculations from survey data.

Despite the apparently precise estimates presented here, these should be

taken as illustrative—sampling error will affect survey estimates and, as dis-
cussed earlier, there is uncertainty regarding the number of farm families and
the subtractions in the calculations may magnify errors. Nevertheless, the broad
conclusion that there were substantial reductions in the extent and value of
diversion of subsidized fertilizer from 2008/9 to 2010/11 is likely to be robust.
While it appears that there is still substantial diversion of fertilizer subsidy ben-
eﬁts away from smallholders, it is instructive to compare this with, for example,
the UK Income Support Allowance, which in 2009/10 suffered from estimates
of over-payments (estimates which are unlikely to be complete) of a little over
5% as a result of fraud and error (Department for Work and Pensions, 2012).
These conclusions regarding levels and changes in diversion and fraud are
compatible with the continued reports of variable but widespread diversion
of fertilizer coupons in rural areas (by government staff, TAs, headmen, and
VDC members). The apparent reduction in diversion of coupons and ferti-
lizers that never reach rural areas (‘Others’ low price/redemption use—P+Q’

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in Table 5.9 is dramatically reduced in 2010/11) is also compatible with a

reduced and changed political signiﬁcance and role of the programme after
the 2008/9 election, as mentioned earlier in Chapter 4. Further information
on these matters may become available in the future as ongoing audit inves-
tigations continue (but these tend to be slow with, for example, media reports
in 2012 regarding audit investigations of the 2007/8 and 2008/9 programmes)
and with the change in government in 2012 opening up the political space
for investigations of prior fraud.

5.7. Farmer support

Proper use of subsidized seed and fertilizer is an important determinant of the

impact of the FISP, and this would suggest that access to extension advice on
use of fertilizer and improved seeds should be an important component of
the programme. The household surveys in 2006/7, 2008/9, and 2010/11 do
not show any consistent changes by year but between 15% and 20% of farm-
ers (beneﬁciaries and non-beneﬁciaries) received extension advice on fertiliz-
ers and maize varieties, with advice on average being considered moderately
useful. A greater proportion of farmers in the north received advice than in
the other two regions, while a somewhat lower proportion of female-headed
households and poorer households receiving advice (as compared with male-
headed households and less-poor households).

5.8. Programme ﬁnance and costs

The final major implementation issue that we address in this chapter is the cost
of the programme. We consider overall programme cost to provide a measure
of fiscal resources used by the programme and of its sources. Examination of
the cost breakdown and comparison of actual and budgeted costs provides
further information on resource use and financial management.
Constructing a consistent set of financial information about the pro-
gramme over the period 2005/6 to 2011/12 faces a number of difficulties:

1. There are difﬁculties with the treatment of farmer payments for ferti-
lizer sold though ADMARC and SFFRFM. For inputs supplied through
the private sector, the government reimburses the supplier at an agreed
rate which is calculated as the cost of input supply less farmer payments.
However, for fertilizers supplied through ADMARC and SFFRFM, the
government bears the whole cost of supply and requires reimbursement
of farmer payments from ADMARC and SFFRFM. There are no publicly
available accounts of this, though anecdotal information suggests that

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SFFRFM has been repaying these monies in full for a number of years
while ADMARC only began to increase its payments in later years.
2. There are substantial gaps in reported costs in different years, leaving
analysis with decisions to make about estimating these in some years
but not others, and with doubts about their completeness when they are
included.
3. Fertilizers may be bought one year and carried over to the next as stock.
These costs have been handled in different ways in different years, and
when there are large price rises and falls between years these pose dif-
ficulties for allocating costs between years.
4. There are substantial programme costs that do not appear in any
accounts—for example, the costs of extension staff time allocated to the
programme, for at least three months of the year, are not included in
any financial costs for the programme.
5. Finally, and expanding on the previous two points, there are differences
between annual fiscal accounts of the programme on the one hand
(important for consideration of the programme’s fiscal impacts) and eco-
nomic analysis of the programme’s opportunity costs. While this differ-
ence may be conceptually clear, this is often not the case in practice.

As a result of these practical and conceptual difﬁculties in recording pro-

gramme costs, different statements of aggregate costs may be found in dif-
ferent contexts.
Our best estimates of programme costs from 2005/6 to 2011/12 are set out
in Table A5.1. This provides some detail on different information available
and unavailable in different years and is the basis for information presented
in Figure 5.10.
There are a number of points of interest in Figure 5.10. First, we note how
programme costs appeared to be increasing exponentially from 2005/6 to
2008/9, while the programme budget was supposed to rise more slowly and
steadily. This led to an increase in estimated expenditure from US$74 to
US$250 million from 2006/7 to 2008/9, with the programme accounting
for 68% and 16% of the MoAFS and national budgets and 6.6% of GDP
in 2008/9. However, while the 2009/10 budget continued to rise, 2009/10
actual programme costs fell dramatically below the budget, and although
costs rose again above the budget in 2010/11 and 2011/12 they remained
below half of the 2008/9 levels in relation to the national budget and GDP
(at or below 8% and 3% respectively). The major cost item causing pro-
gramme cost changes is clearly the cost of fertilizer (which here includes
procurement and transport to markets), as seed and other costs are respon-
sible for a small proportion of programme costs and show a steady increase

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250 70%

60%
200
50%

150 40%

30%
100

20%
50
10%

0 0%
2005/6 2006/7 2007/8 2008/9 2009/10 2010/11 2011/12

Other costs (US$ million) Seed costs (US$ million)

Fertilizer costs (net) (US$ million) Programme budget (US$ million)
Cost, % MoAFS budget Cost, % national budget
Cost, % GDP

Figure 5.10. Budgeted and actual programme costs

Sources: see Table A5.1.

over the life of the programme (due to increases in seed volumes and prices
and greater reporting of other cost items). Fertilizer costs are then the prod-
uct of volumes and prices, as shown earlier in Figures 5.4, 5.5, and 5.8,
respectively. Figure 5.8 shows that fertilizer volumes increased dramatically
from 2005/6 to 2007/8, and then fell back somewhat in 2008/9 (though
they were still above 2006/7 volumes) before being rigorously cut and held
to budget from 2009/10 onwards. The major cause of the price spike in
2008/9 was therefore high international fertilizer prices, as clearly shown
in Figures 5.4 and 5.5. The pattern of rising fertilizer volumes from 2005/6
to 2008/9, the commitment to these volumes despite very high prices and
costs in 2008/9, and then the rigorous cut in volumes after 2008/9 have to
be seen in the context of the changing political circumstances before and
after the May 2009 presidential and parliamentary elections, as discussed in
the previous chapter.

5.9. Summary

This chapter has set out the main features of the evolving design and imple-
mentation of the Farm Input Subsidy Programme from 2005/6 to 2011/12.
This has emphasized the scale and complexity of the programme, and ways

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FISP activities and achievements

in which design and implementation have evolved in response to lessons

learnt and, importantly, changing political conditions. Key programme ele-
ments as set out in Chapter 2 concern its stated food security and productivity
objectives, its focus on producers of staple crops, the importance of political
commitment to its establishment and operation, and the consequent effects
of that on targeting, rationing, and diversion. Other ongoing challenges are
noted, with regard to timeliness of input delivery to farmers and involvement
of the private sector in the fertilizer supply system, although cost comparisons
for private and public sector distribution are not clear cut. The changing fiscal
costs of the programme illustrate both the political pressures for programme
continuation and expansion (and resource diversion), and the potential for
scaling the programme back when political conditions and strategies change.
Implementation of the programme has clearly been affected by continua-
tion of the political considerations that led to its establishment, as discussed
in Chapter 4. Chinsinga (2012b) reports considerable frustration among
senior MoAFS staff at the way that the president’s political interest in the
programme inhibited discussion and implementation of technical sugges-
tions for programme improvement. These sensitivities also affected relations
between donors and programme management within MoAFS and engage-
ment with monitoring and evaluation activities. The high costs in 2008/9
also highlight the vulnerability of the programme to international fertilizer
prices (a vulnerability that is again likely to be evident in the 2012/13 season,
following the major devaluation of the Malawi Kwacha in 2012).
The programme shares many of the design and implementation features
of other recent subsidy programmes in Africa, as reviewed in Chapter 3. As
regards objectives, there is a focus on producer gains and on household and
national food self-sufficiency, with a lack of regard for consumer interests and
wider growth processes. There is also limited attention to improving input
efficiency, soil fertility replenishment, and fertilizer supply system develop-
ment. This focus is consistent with switching attention to monitoring and
evaluation and auditing over the life of the programme and associated with
the political management of the programme by the president. It is also con-
sistent with a relative lack of integrated attention paid both to complemen-
tary investments that will raise programme efficiency and to ‘graduation’, the
process by which beneficiaries and the economies in which they are embed-
ded may grow out of the need for agricultural input subsidies.11 As regards
implementation, the programme involves heavy reliance on private sector

11
Some of these issues are addressed in the 2011–16 Medium Term plan for the programme
(Government of Malawi, 2011) which has as its goal ‘to increase food security at household level
through agricultural output growth’ and its purpose ‘to increase agricultural productivity and
input market development’.

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fertilizer imports and a substantial targeted and rationed subsidy distributed

using vouchers, but limited success in household targeting. It also faces the
widespread problem of late delivery of inputs to beneﬁciaries.
These issues are the subject of Chapters 6 to 11 which consider beneﬁ-
ciary, wider and private sector impacts of the programme, targeting, and
graduation.

Table A5.1. Estimated programme costs, 2005/6 to 2011/12 (US$ million)

2005/6 2006/7 2007/8 2008/9 2009/10 2010/11 2011/12

Exchange rate, 140.00 140.00 140.00 140.00 141.31 151.55 166.71

MK/US$
Recorded costs
Seeds—flexi/ 0.00 0.00 1.89 5.24 2.83 6.66 6.26
legumes
Seeds—maize 0.00 5.23 4.58 7.33 17.13 21.64 15.12
Cotton 0.00 0.00 0.24 n/a 0.00 0.00 n/a
chemicals
Fertilizer b/f from 0.00 0.00 11.82 24.88 35.17 0.00 0.00
y-1
Fertilizer—new 51.62 61.16 77.60 237.63 57.18 115.28 112.63
supply
Fertilizer—pri- 0.00 17.43 24.53 0.00 0.00 0.00 0.00
vate retail
Transport costs n/a 4.76 5.99 9.24 6.33 5.95 5.54
Logistics Unit n/a 0.37 0.42 0.24 0.21 0.34 0.28
operations
ADMARC n/a n/a 0.00 0.06 1.06 2.24 1.57
operations
SFFRFM n/a 0.75 1.41 n/a n/a 2.05 0.98
operations
District financing n/a 0.19 n/a n/a n/a n/a n/a
Coupon n/a 0.11 0.09 n/a n/a n/a n/a
production
Communications n/a 0.20 n/a n/a n/a n/a n/a
Input quality n/a 0.05 n/a n/a n/a n/a n/a
monitoring
M&E n/a 0.29 n/a n/a n/a n/a n/a
Buyback finance 0.00 0.39 n/a 0.00 0.00 0.00 0.00
fees
Total recorded 51.62 90.92 128.58 284.63 119.92 154.16 142.38
costs

Less: Farmer 19.62 17.02 21.32 23.12 11.43 10.59 8.39

redemption
due
Unused stock (exc. buyback) 0.00 0.00 19.83 0.00 0.00 0.00
0.0

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FISP activities and achievements

Table A5.1 (continued)

2005/6 2006/7 2007/8 2008/9 2009/10 2010/11 2011/12

Net recorded 32.00 73.90 107.26 241.68 108.49 143.57 133.91

Costs

Estimated other
costs
Brought forward 0.00 0.00 n/a 0.62 1.76 0.00 0.00
stocks
MoAFS n/a n/a n/a 7.86 7.78 7.26 6.60
operations
ADMARC/ n/a n/a n/a 1.26 n/a n/a n/a
SFFRFM
Voucher printing n/a n/a n/a 0.14 0.14 0.13 0.00
Other agencies’ n/a n/a n/a 0.23 0.23 0.21 0.19
costs
Total est. other n/a n/a 10.11 9.91 7.60 6.79
costs
Total net costs, n/a n/a n/a 251.79 118.40 151.17 140.70
recorded &
estimated
Total costs, n/a n/a n/a 274.91 129.83 161.76 149.09
recorded &
estimated exc.
cf stock
Programme 36.43 53.57 82.14 139.14 155.04 129.99 129.48
budget
Funding
Direct donor 0.00 9.51 7.13 37.75 17.48 22.05 44.85
support
Balance: Malawi n/a 64.39 100.13 214.04 100.92 129.12 95.84
Govt.
Cost, % MoAFS n/a 46.8% 57.2% 67.6% 52.7% 60.1% 48.9%
budget
Cost, % national n/a 6.8% 8.2% 16.2% 6.5% 8.0% 7.1%
budget
Cost, % GDP n/a 2.5% 3.1% 6.6% 2.5% 3.0% n/a

Notes: Farmer redemption due on ADMARC and SFFRFM fertilizer sales. Malawi Government contribution based on
recorded and estimated costs shown.
Sources: Author calculations from Logistics Unit Annual reports, Nakhumwa (2006), School of Oriental and African
Studies et al. (2008), Dorward and Chirwa (2009, 2011a, 2012a), Dorward et al. (2010b), Malawi Government Annual
Budget Statements.

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6

Direct impacts of input subsidies

6.1. Introduction

In this chapter we examine evidence on the direct impacts of the subsidy fol-
lowing the causal chain set out in Figure II.1 in the introduction to Part II. The
most direct benefit of the subsidy programme is to increase maize production
at household level. This is also consistent with the programme’s objective of
increasing maize productivity and national and household food security in
Malawi as discussed in Chapter 5. Given difficulties in obtaining maize pro-
duction and productivity data (as mentioned in Chapter 1, see also Dorward
and Chirwa (2010b)), we discuss various estimates of programme maize pro-
duction impacts. We then draw on work reported in Chirwa et al. (2011d)
to look at the contribution of the subsidy programme on welfare indicators
for beneficiaries—food consumption, self-assessed poverty, income, assets,
incidences of shocks and stresses, health, and education. The collection of
panel data in the periodic evaluation of the subsidy programme and the
incorporation of the second Integrated Household Survey (IHS2) questions
in the design of 2006/7, 2008/9, and 2010/11 surveys allows comparison of
the same households from the 2002/3 or 2003/4 season and thus estimation
of the impact of the subsidy programme on direct beneficiary households, as
compared with non-beneficiaries, over time. Impacts are also assessed using
a partial equilibrium model (Dorward and Chirwa, 2012b) and with related
findings in other studies.
There are, however, two main caveats to the household level analysis of
direct beneficiary impacts. First, some of the indicators are subjective assess-
ments by households: thus with difficulties of calibration and differences
in the timing of interviews, caution must be exercised in interpreting the
panel level results. Second, if economy-wide effects (discussed in Chapter 7)
are very strong, with the subsidy benefiting many households which have
not been beneficiaries, the differential impacts at household level may be
weak regardless of direct benefits or the number of times a household has

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Direct impacts of input subsidies

had access to subsidized fertilizers in the past six agricultural seasons. In such
cases the econometric analysis may not be able to pick up small differences
between beneficiary and non-beneficiary households. It should also be noted
that although improved seeds are part of the subsidy programme, the analy-
sis of the impacts is focused on receipt of subsidized fertilizers as these are
generally correlated with receipt of subsidized seed and involve a much larger
subsidy.
The chapter is organized as follows. The next section presents the meth-
ods that are used to evaluate the direct impacts of the fertilizer subsidy on
beneficiary households. In Section 6t.3, we examine direct impacts on maize
production and food security. Section 6.4 evaluates the impacts on human
capital (health and education). Section 6.5 assesses the impacts on incomes,
self-assessed poverty, assets, and shocks, and Section 6.7 presents evidence
from qualitative beneficiary interviews. Finally Section 6.8 presents conclud-
ing remarks.

6.2. Methods of evaluating direct beneﬁciary impacts

We report on three main methods to assess direct beneﬁciary impacts of the

Farm Input Subsidy Programme.1 The first, reported in Chirwa et al. (2011d),
is panel regression, which exploits matched panel data for different rounds
of data collection: the second Integrated Household Survey (IHS2) covering
the 2002/3 and 2003/4 agricultural seasons, the Agricultural Input Subsidy
Survey (AISS) for the 2006/7 and 2008/9 seasons, and the Farm Input Subsidy
Survey (FISS) for the 2010/11 agricultural season. This is analysed using a
fixed effects panel data strategy with the following specification:

Yit α i δ t + ∑ kk = 52 βk δ t * F
FISSPik ) + Xi + ε it (6.1)

where i is the individual household, t is the wave of the survey (2004/05,

2006/7, 2008/9, and 2010/11), k indexes the household categorization of
access to subsidies over the past six years, α i are individual ﬁxed effects, δ t
is a dummy variable equal to 1 for each round of the survey (with 2004/5 as
the base category), otherwise equal to 0, and ( δ t * FISPk ) is the interaction
dummy that is equal to 1 only for households that received fertilizer subsidy
in access category k, Y is the impact indicator, and X is a vector of household
characteristics. The coefﬁcient β̂ gives the impact of the subsidy programme.
The FISS in 2010/11 tracked access to fertilizer subsidy since the programme

1
Estimation of maize production impacts also uses other methods, as explained in Section 6.3.

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started, and this has enabled us to account for the number of times the house-
hold has had access to fertilizer subsidies between the 2005/06 and 2010/11
seasons. Households are categorized into five groups represented by dummy
variables: never had access (base category), accessed 1–2 times, accessed 3–4
times, accessed 5 times, and accessed 6 times (continuously). The impact
indicators used in the regression model include food security, education and
heath, assets and welfare, and shocks.2 Alternatively, we measure access to
the subsidy programme by the quantity of subsidized fertilizers in place of
dummy variables. The panel analysis is based on the full panel sample (461
households) and a sub-sample of panel households that were identified as
poor based on per capita expenditure in the IHS2 (227 households). The latter
allows us to investigate the impact of the subsidy programme on households
that had the same initial condition prior to the subsidy programme.3
Table 6.1 presents the various indicators reported from Chirwa et al.
(2011d) for testing various hypotheses on the direct beneficiary impacts of
the subsidy programme. In addition to the broad hypothesized relationships
in Table 6.1, we also expect the subsidy to have larger impacts on households
that have had access to subsidized fertilizers in all the past six seasons com-
pared to those that have had less access. This implies that there should be a
positive trend in the value of the coefficients of times of receipt of subsidy as
the frequency of receipt increases from 1 to 6 times.
Table 6.2 presents the distribution of the panel sample of households in
Chirwa et al. (2011d) by the number of seasons the households have had
access to subsidized fertilizer. It is helpful to identify three groups regard-
ing households’ subsidy receipt: a small proportion who never had access to
subsidized fertilizer (no access), a much larger group who had access to subsi-
dized fertilizer at least once and up to five times in six seasons (intermittent
access), and those had access to subsidized fertilizer six times (continuous
access). These groups accounted for 4%, 51%, and 45% of households, respec-
tively. Most of the households are, therefore, repeat beneficiaries.4 In terms of
headship of households in 2010/11, 66% and 34% of the sample households
were male and female headed, respectively. The distribution of household by
the poverty status in IHS2 also shows that the overall sample has equal num-
bers of households that were poor and non-poor.

2
Panel data on education and health is only available from IHS2 and the 2010/11 FISS and the
panel analysis is based on two periods.
3
Ricker-Gilbert (2011) shows that OLS cross-sectional data analysis finds apparently signifi-
cant direct subsidy impacts when regressing some measures of beneficiary impact against subsidy
receipt, but that these relationships are not significant when investigated using fixed effects or
first difference models. We therefore rely on our own and others’ results only when they take
account of the effects of possible endogeneity of subsidy receipt.
4
However, these figures reflect receipt of subsidized fertilizers and do not account for the quan-
tity received and the last time it was received for those that received it less than six times.

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Table 6.1. Beneﬁciary household level impact indicators and hypotheses

Welfare category Impact indicators Impact: Alternative

hypothesis

Food security 1) Adequacy in food consumption Positive

in past month
Schooling and health 1) Primary school enrolment Positive
at household level
2) Incidence of under-5 illness Negative
Subjective poverty 1) Subjective assessment of poverty Positive
status
Shocks and stresses 1) Number of shocks experiences Negative
by household
2) Incidence of severe agriculture- Negative
related shocks

The second approach used to investigate direct beneﬁciary effects is quali-

tative analysis based on focus group discussions, key informants, and life
stories of some beneficiaries, collected in the 2006/7, 2008/9, and 2010/11
periods. In each of these rounds of surveys, and each of the 8–14 districts
of the surveys, detailed qualitative interviews were conducted covering sys-
tems of implementation of the subsidy programme, cropping patterns and
livelihoods, and local peoples’ and beneficiary’s perceptions of the impacts
of the programme on their welfare. The number of qualitative interviews var-
ied with the number of districts covered in the surveys. For instance, in the
2010/12 survey, which had the smallest number of districts (8 districts), qual-
itative data was collected through 8 focus group discussions, 24 key inform-
ants’ interviews, and life histories from 64 households.
The third method used to investigate direct beneficiary effects is a partial
equilibrium model, informal rural economy modelling (Dorward and Chirwa,
2012b), with analysis for two of the largest livelihood zones in Malawi from
2005/6 to 2010/11. These two livelihood zones, Kasungu–Lilongwe Plain
(KAS) and Shire Highlands (SHI) between them include just over 40% of rural
households in Malawi and also represent examples of less and more densely
populated areas in the centre and south of the country, respectively. Cluster
analysis of data from the IHS2 was used to develop a household/livelihood
classification within the livelihood zones.5 We report results from simula-
tions based on two scenarios. The basic scenario, simulated in both zones,
compares model outcomes ‘with subsidy’ with actual prices against outcomes
‘without subsidy’ with equilibrium prices. The ‘basic with household savings’
scenario, only simulated in the SHI livelihood zone, is the same as the basic

5
Dorward and Chirwa (2012b) provide details of the informal rural economy modelling and
speciﬁcation of household types and construction of individual household livelihood models.

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Table 6.2. Distribution of sample and number of seasons with access to subsidized
fertilizer

Number of Panel households Headship, Poverty status in Proportions of

seasons 2010/11 IHS2 poor & non-poor

Number % Male Female Poor Non- Poor Non-

poor poor

0 19 4 75 25 33 67 2 5
1 42 9 75 25 57 43 7 8
2 35 7 72 28 48 52 7 6
3 33 7 60 40 48 52 8 10
4 45 10 66 34 45 55 97 9
5 80 17 55 45 49 51 16 16
6 208 45 68 32 52 48 50 47
N 461 100 66 34 50 50 100 100

Note: Weighted ﬁgures.

Source: Chirwa et al. (2011d).

scenario except that it assumes 20% incremental savings carried forward

by each beneﬁciary household from increased income as a result of subsidy
receipt.

6.3. Impacts on maize production

The main justiﬁcation for implementing the Farm Input Subsidy Programme
has been to improve maize productivity and achieve food security at house-
hold and national level. Discussion in Chapters 2 and 4 of likely subsidy
impacts and linkages in Figure II.1 also suggest that increases in staple
food production and productivity should be one of the major drivers of
indirect subsidy impacts, through domestic price and real income effects.
Determination of subsidy impacts on maize production is therefore funda-
mental to the assessment of programme impacts.
Subsidy impacts on maize production have been estimated in a variety of
ways. The simplest and most commonly quoted indicators of impact have
been changes in estimated national maize production before and after the
subsidy (see, for example, Dugger (2007) and Denning et al. (2009)). These
show dramatic increases in estimates of national maize production, with esti-
mated maize production of 1.2 million MT in 2004/5 (before the subsidy)
followed by estimates of 2.6, 3.2, 2.8, 3.8, 3.4, 3.8, and 3.6 million MT in
the seven subsidy years 2005/6 to 2011/12 (these estimates are presented in
Figure 6.1 in terms of incremental production above pre-subsidy estimates).
There are, however, a number of difﬁculties with the use of increases in

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Direct impacts of input subsidies

national production estimates as estimates of subsidy impacts, or even as

indicators of subsidy success. First, there is no way of separating the impacts
of the subsidy on maize production from the impacts of other variables.
The most obvious of these is the weather, but other variables may also be
important—thus, poor production in 2004/5 was caused by a combination
of poor rains and late and limited commercial fertilizer deliveries and sales.
Second, it is not clear why estimated production should have increased so
dramatically during the life of FISP (as opposed to increasing mainly follow-
ing its inception). This appears to be the result of increasing estimated hybrid
maize yields (which rise by 20% from around 2,500 to around 3,000 kg/ha
from 2005/6 to 2011/12), an increasing proportion of maize area under hybrid
varieties (with a 70% increase in hybrid maize area over the same period), by
a small increase in overall maize area (7%), and by a very large differential
between hybrid and local maize yields (with hybrid maize yields increasing
from 160 to 240% of local maize yields). However, although hybrid maize
areas may have increased with increased volumes of subsidized seeds, it is not
clear what can have driven the large increases in hybrid maize yields when
volumes of subsidized fertilizer were falling back from 2007/8, although
Holden and Lunduka (2010b) estimate rising maize yields for both local and
hybrid maize from 2006 to 2009. A possible explanation for this is that ferti-
lizer use in one year has dynamic effects on yield in the following year. Thus,
Ricker-Gilbert and Jayne (2011) estimate that 100 kg of subsidized fertilizer
receipt increases immediate maize yield by 165 kg and receipt of 100kg fer-
tilizer per year over three years yields an extra 316 kg of maize in the fourth
year. Holden and Lunduka (2010b) also estimate that rising maize yields are
associated with small falls in overall maize area and maize area share (with a
net increase in maize production). Chibwana et al. (2012), however, estimate
increases in maize and tobacco area with the subsidy.
Third, the hybrid yield estimates are not consistent with other estimates
of farmers’ hybrid maize yields (Government of Malawi and World Bank,
2006; Ricker-Gilbert et al., 2009; Chibwana et al., 2010; Holden and Lunduka,
2010c; National Statistical Ofﬁce, 2010a). While these are admittedly very
variable, they are almost all below 2,000 kg/ha (Dorward and Chirwa, 2010a).
The very high national production ﬁgures are not consistent either, with
very high domestic prices from early in 2008 through much of 2009. These
discrepancies are illustrated in Figure 7.4 in Chapter 7, which plots estimated
maize availability against price by market season, with remarkably high
prices in many of the marketing seasons when production estimates would
have suggested that greater maize production and availability would have
led to low prices. We discuss possible reasons for this in Chapters 8 and 9,
but note here that one likely partial explanation is that production was over-
estimated in these years, most notably following the 2006/7 harvest with

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export of a little over 300,000MT of maize to Zimbabwe in the 2007/8 season.

Dorward and Chirwa (2010a) also show that there are difficulties in reconcil-
ing national production figures with estimates of consumption and export—
national production figures suggest that there should be greater availability
of maize than required by the population, and this in turn is not consistent
with high levels of food insecurity and child malnutrition (as shown for the
latter, for example, in Table 7.5)
Finally, there are doubts regarding the methodology used in deriving these
figures. This involves field extension workers taking samples of fields and
estimating yields for these and crop areas, and then the aggregation of yield
and area estimates up to district, Agricultural Development Division (ADD),
and national estimates. Sampling and estimation methodologies actually
employed by field extension workers are not very clear, and aggregate esti-
mates are subject to technical adjustments. Given past examples of over-esti-
mation of cassava areas and yields, tendencies for crop production figures
to be used in judging extension performance, the political importance of
national figures, and instances of apparent attempts in President Mutharika’s
government to influence sensitive statistics,6 there appear to be considerable
risks of upward bias of these estimates.
With estimates of national maize production therefore not being able to
provide estimates of the impacts of the subsidy programme, a better alterna-
tive should be to estimate incremental production from the use of subsidised
inputs, fertilizer, and improved seeds. Here we would ideally use estimates of
maize yield responses to incremental fertilizer and seed inputs resulting from
the subsidy programme. These could then be multiplied and added across
seed types for beneficiaries and for the programme as a whole. Estimates of
incremental input use as a result of the programme are examined later in
Chapter 8. We briefly consider here estimates of incremental production per
unit incremental input use made in a number of studies.
A number of studies have attempted to estimate yield responses to nitro-
gen on farmers’ fields and on-farm yield differences between varieties, from
on-farm trials and from farm surveys. School of Oriental and African Studies
et al. (2008) reviewed a number of these and concluded that 12, 15, and
18 kg grain per kg of N were reasonable estimates of responses of local (or
traditional), Open Pollinated (OPV) and hybrid varieties respectively, under
reasonable farmer management, with further gains of 100 and 200 kg per ha
for OPVs and hybrid varieties over local varieties, in the absence of fertilizer.

6
See, for example, the delayed and very limited release of yield estimates in National Statistical
Office (2010a), the 2012 Malawi Revenue Authority (MRA) scandal (where the MRA borrowed
money to inflate its reported cash holdings), and apparent downward estimates of the consumer
price index noted in National Statistical Office (2012) and discussed in Chapter 7.

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Direct impacts of input subsidies

A small number of studies since then have speciﬁcally examined fertilizer

and seed yield responses. School of Oriental and African Studies et al. (2008)
and Dorward and Chirwa (2010b) report that attempts to gather sufﬁciently
reliable information from farm household surveys in 2006/7 and 2008/9 had
not been successful, and the latter reported very wide differences in yield
estimates from different surveys with little attempt to reconcile differences.
Nevertheless, triangulation across national yield, production, and con-
sumption estimates does provide some guidance on which estimates are
likely to be more or less reliable.

• Chibwana et al. (2010) estimate from farm survey mean yield

differences of around 210 kg/ha between hybrid and local varieties, with
fertilizer responses of 11.5 and 9 kg grain per kg N for local and hybrid
maize respectively.7 While the basic differential between local and
hybrid is broadly consistent with other ﬁndings, the higher response
to local than to improved maize is not, and may be the result of the
parsimonious production function employed with no fertilizer/variety
interaction terms.
• Holden and Lunduka (2010c) report an average difference of 323 kg/ha
between ‘matched’ local and hybrid maize yields in their farm surveys,
and a fertilizer response of 9 kg grain per kg N.
• Makumba et al. (2012) derive fertilizer response estimates of 16.8 kg
grain per kg N for hybrid maize farmer-managed trials across the
country. These were achieved with high rates of fertilizer use (over
250 kg/ha), but comparison of high and low fertilizer rates on
researcher-managed on-farm trials suggests that response rates might
be considerably higher than this with lower fertilizer rates. Questions
about how marginal response rates depend upon overall fertilizer rates,
upon incremental application of subsidized inputs, and upon other
aspects of crop management (such as the time of planting, fertilizer
application, and weeding) further complicate the issue.

The approach taken by School of Oriental and African Studies et al. (2008),
with an approximate +/- 20% range to allow for the effects of over- or under-
estimation, therefore still seems as reasonable as any. This discussion, how-
ever, highlights the importance of improving maize yield and production
estimates in Malawi, not only for consideration of the direct impacts of the
subsidy programme, but for wider economic, agricultural sector and food
security planning and management.

7
These ﬁgures are calculated from ﬁgure 2 in Chibwana et al. (2010) and assume that fertilizer
is applied as 50% 23:21: 0 and 50% urea.

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Figure 6.1 therefore compares estimates of incremental maize production

for each year of the programme using first national production estimates
and then the approach taken by School of Oriental and African Studies et al.
(2008), with a +/- 20% range allowing for possible over- or under-estimation
and downward adjustments in some years (2005/6, 2007/8, and 2011/12)
to allow for the effects of poor rainfall in some parts of Malawi. It should be
noted that all these estimates ignore the impacts of storage losses (Denning
et al., 2009). Also for the purpose of obtaining a relatively simple estimate of
production impacts, the approach taken by School of Oriental and African
Studies et al. (2008) assumes that the nutrients in subsidized tobacco fertiliz-
ers from 2005/6 to 2008/9 provided benefits equivalent to those that would
have been obtained if the nutrients had been applied to maize, and ben-
efits from these nutrients are therefore measured in maize production. This
should lead to a limited over-estimate of incremental maize production but
not, when these figures are used in the benefit–cost analysis in Chapter 9,
an over-estimate of the value of programme benefits. Over-estimates of
maize production should be limited because tobacco fertilizers accounted for
between 10% and 17% of total subsidized fertilizers in these three years, and
suffered from much higher estimated displacement rates (School of Oriental
and African Studies et al., 2008). Figure 6.1 shows that if incremental national
maize production estimates are all attributed to the effects of FISP then this
requires a fertilizer response approximately double the responses used in the
School of Oriental and African Studies et al. (2008) estimates.

2,500
National crop production estiimates
High SOAS estimate (+20%)
2,000
Medium SOAS estimate
LLow SOAS estimate
ti t (-20%)
( 20%)
1,500
MT

1,000

500

0
2002/3 & 2005/6 2006/7 2007/8 2008/9 2009/10 2010/11 2011/12
3/4

Figure 6.1. Increases in maize production estimates above 2002/3 and 2003/4 base
Source: MoAFS Annual Crop Estimates, author calculations.

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Direct impacts of input subsidies

Estimates of increased maize production among beneﬁciaries are also

consistent with qualitative evidence from focus group discussions and
life stories of beneﬁciaries in Chirwa et al. (2011d) and discussed later
in Section 6.7. These suggest that the subsidy has increased food (maize)
production at household level. However, most of the more positive sto-
ries came from households that were already buying commercial fertiliz-
ers before the programme and those that received two bags of subsidized
fertilizers (rather than those that received less as a result of sharing of
fertilizers).

6.4. Impact on food consumption

Improvements in maize production should lead to improved food availabil-

ity and food security for beneficiary households. In all the panel surveys,
households were asked whether they considered their food consumption
in the month before the survey inadequate or adequate. In order to assess
the impact of food security, Chirwa et al. (2011d) created a dummy variable
representing adequacy in food consumption equal to one if the household
revealed that food consumption was adequate or more than adequate, and
to zero if it was inadequate and to investigate, using fixed effects, the impact
of the subsidy programme on food security. Estimation of the impact of the
number of times that subsidized fertilizer is received (as outlined earlier) indi-
cates that among households that received subsidized fertilizers continuously
(six times) about 22% more reported adequate food production as compared
with non-recipients, with the coefficient being statistically significant at the
5% level. Among those who had received subsidized fertilizers less than six
times, increasing frequency of fertilizer use also led to increasing frequency of
reported adequate food production. Separate estimation of the impact of the
quantity of subsidized fertilizer received also provided evidence of a positive
and significant impact on food consumption adequacy. These findings are
consistent with the evidence of increased maize production reported above,
with qualitative reports from focus group discussions (School of Oriental
and African Studies et al., 2008; Dorward and Chirwa, 2010a; Chirwa et al.,
2011d) and with the findings of Holden and Lunduka (2010a). They report
that receipt of subsidized inputs increases the probability of households
being net sellers rather than net buyers of maize, and also that 66% and 69%
of surveyed households reported improvements in household and commu-
nity food security as a result of the subsidy programme (although 60% of the
households in their sample were still net buyers of maize despite the subsidy
programme). However, only 30% of households reported that the subsidy
programme led to increased maize consumption.

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6.5. Impacts on education and health

6.5.1. Primary school enrolment

Chirwa et al. (2011d) also investigate the impact of beneficiaries’ access to
subsidized inputs on schooling based on enrolment of the primary school
age group between 5–13 year olds, while controlling for household charac-
teristics. This analysis uses a two-period panel, IHS2 (in 2003/4 and 2004/5)
and FISS (in 2010/11), in which members of households that were more than
5 years old were asked whether they were in school. This enabled the genera-
tion of an indicator of primary school enrolment at household level, com-
puted as the number of primary school age children in school divided by the
total number of primary school-going age children in the household. The
results indicate that the subsidy has a positive impact on schooling. Across
all households, there was a general increase in school enrolment between
the two periods, a change that was universally confirmed in focus group dis-
cussions and key informant interviews. The coefficients of the dummies for
receipt of subsidized fertilizer 1–2 times, 5 times, and 6 times are statistically
significant at the 5%, 1%, and 10% level, respectively, although there is no
clear trend in the value of the coefficients of the number of times of receipt
and primary school enrolment. Similar but weaker relationships are observed
for the model estimated only for households categorized as poor in the IHS2.
The estimated positive impact of subsidy receipt on educational enrol-
ment is consistent with anecdotal reports on programme impacts, with focus
group discussion reports (School of Oriental and African Studies et al., 2008;
Dorward and Chirwa, 2010a), and with Holden and Lunduka (2010a) who
report that 65% of respondent households perceived that there was a positive
impact of subsidy receipt on school attendance.

6.5.2. Health and nutrition

Improvements in food availability at household level due to access to sub-
sidized fertilizers may improve beneficiaries’ health in a number of ways—
through improved food security and nutrition from increased own production
and income, and from increased ability to finance health care. This can be
investigated in a number of ways. Chirwa et al. (2011d) examine the impact
of subsidy receipt on incidence of illness using data for households that had
under-5 members in 2004/5 and 2010/11. On average, about 59% of house-
holds in 2004/5 had under-5 members who were ill in the two weeks before
the survey, but this fell to 49% in 2010/11. The econometric evidence of the
impact of the subsidy programme on the health of children in beneficiary
households shows a negative relationship between access to subsidy and

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Direct impacts of input subsidies

incidence of under-5 illness: households that had access to subsidized ferti-

lizer five or six times were significantly more likely (at the 5% level) to have
under-5 children that had not fallen ill in the two weeks before the survey.
This impact was not commonly articulated in focus group discussions
and key informant interviews. However Holden and Lunduka (2010a) also
explored people’s perceptions of subsidy receipt on health, and report that
40% of respondents perceived that subsidy receipt improved health. Further
evidence on the impacts of subsidy access on health, but not of access to FISP
itself, is provided by Ward and Santos (2010), who examined the impact on
stunting from access to Targeted Input Programme inputs prior to 2004/5.
They found a significant reduction in stunting for each year of receipt of
TIP inputs, and based on strong international evidence on the relationship
between adult height and wages, discuss possible long-term beneficial effects
of increased adult height on earnings.

6.6. Welfare impacts

We now consider evidence for direct impacts of subsidy receipt on a number

of different variables related to welfare: subjective assessment of well-being,
real incomes, assets, and shocks and stresses.

6.6.1. Subjective wellbeing assessment

The panel surveys collected consistent information on self-assessment of
well-being, using households’ subjective assessment of their poverty status
based on a ladder ranging from 1 representing the poorest to 6 represent-
ing the richest. As reported in Chirwa et al. (2011d) we use these subjective
measures as outcome indicators of participation in the Farm Input Subsidy
Programme. The mean self-assessment of well-being for panel households
increased from 1.66 in 2004/5 to 2.34 in 2010/11(Chirwa et al., 2011d). After
controlling for household and year effects, households’ self-assessments
were higher by 54%, 69%, and 68% in the 2006/7, 2008/9, and 2010/11
surveys, respectively as compared with the pre-subsidy survey.8 However, the
estimated impacts of subsidy receipt by beneﬁciaries’ households are small
and not statistically signiﬁcant (with some estimates marginally negative).

8
Estimates for model (1) for all households and with dummies for the number of times sub-
sidized fertilizer was received. Similar positive coefficients of the year dummies were also found
with models (a) estimated only for households categorized as poor in the pre-subsidy survey and
(b) assessing subsidy receipt in terms of the total quantity of subsidized fertilezer received from
2005/6 to 2010/11. Coefficients were statistically significant at 1% or (for 2010/11 with the poor
households sample) at 5%.

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We therefore cannot reject the null hypothesis that receipt of the subsidy
does not statistically affect changes in self-assessment of poverty among
beneficiaries, and this suggests that the subsidy programme may have only
weak direct income effects on beneficiary households.
These results are consistent with sentiments expressed in qualitative inter-
views in which most households report that they are not able to produce sur-
plus maize which could be sold to earn extra cash income. As discussed below,
life histories with selected households revealed that although some have had
access to subsidized fertilizers continuously they may still struggle to produce
maize that takes them to the next harvest and have to rely on ganyu to earn
income to purchase food. Small but insignificant positive effects are consist-
ent with small direct improvements from subsidy receipt which may be over-
shadowed by wider positive changes affecting all households through indirect
market effects of the subsidy and other positive changes from 2002/3 and
2003/4 to 2006/7 and subsequent years. However, the differences between the
estimated dummy coefficients for 2008/9 and 2010/11 are very small, suggest-
ing that after a substantial improvement in perceived well-being from the pre-
subsidy to 2006/7 surveys, and a smaller improvement from 2006/7 to 2008/9,
there may have been little or no further improvement in perceived well-being
from 2008/9 to 2010/11. We discuss these issues in Chapter 7.
In contrast with these results, however, Ricker-Gilbert and Jayne (2010b)
do find a significant increase in satisfaction with life with increased receipt of
subsidized fertilizer between the pre-subsidy and 2008/9 surveys.

6.6.2. Household real incomes

Reliable estimates of real incomes are difficult to obtain in survey data, with-
out extensive and thorough analysis of expenditure data. Ricker-Gilbert (2011)
reports an analysis of the impact of subsidy receipt on reported incomes using
the same panel data set as Chirwa et al. (2011d), but excluding the 2010/11
panel. He finds no significant impacts of subsidy receipt on non-farm income
or on total household income, although net value of rainy season crop pro-
duction (a measure of farm income) is positively affected by subsidy receipt in
the year of receipt (but not subsequent years), with each extra kg of fertilizer
received increasing net crop income by 174MK (p = 0.01). While net crop
income is estimated from production estimates, non-farm income is derived
from respondent estimates, and total income is the sum of farm and non-farm
income. National Statistical Office (2005a) estimate mean (median) house-
hold expenditure and consumption for 2002/3 to 2003/4 years as 99,532MK
(72,000MK) and reported income as 50,000MK (36,123MK): reported incomes
are approximately 50% of reported expenditure and consumption suggesting
considerable under-estimates in reported incomes. Mean (median) non-farm

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Direct impacts of input subsidies

incomes for 2002/3 to 2003/4, 2006/7, and 2008/9 reported by Ricker-Gilbert

are 31,000MK (9700MK), 10,000MK (2600MK), and 39,000MK (13,000MK),
respectively. The extraordinary drop in 2006/7 (which is also reflected in total
household income estimates) is not explained and does not match patterns of
self-assessed well-being reported above or asset holdings reported below. This
raises serious questions about the reliability of non-farm and total household
income data and hence of the findings reported by Ricker-Gilbert (2011) on
the impacts of subsidy receipt on non-farm and total household incomes.
These concerns about the reliability of data on reported income suggest that
other analytical approaches may be preferred for estimating subsidy impacts
on real incomes. Changes in real incomes of targeted poor households were
therefore examined using the informal rural economy model introduced in
Section 6.2 and described more fully in Dorward and Chirwa (2012b). This
allows comparison of real income estimates for ‘target households’ (that is
poor male- and female-headed types) with and without the subsidy (with
an average receipt of 75 kg and 2 kg of subsidized fertilizer and hybrid maize
seed respectively per household) but with constant prices (that is without any
wider market equilibrium effects). Gains averaging around 7% (just under
1000MK) across poorer beneficiary households are estimated in the Shire
Highlands with lower gains (around 4%, just under 450MK) in the Kasungu–
Lilongwe Plains where poverty is less severe and poor households are less
capital constrained and have lower returns to capital. School of Oriental and
African Studies et al. (2008) also state that increases in beneficiary incomes
were reported in a number of focus group discussions in 2007.

6.6.3. Assets
Increased productivity and incomes resulting from subsidy receipt may allow
beneficiary households to increase their investment in assets. Increases in
human capital or assets (in education and health) were considered earlier in
Section 6.5. Here we examine evidence on investment in physical and live-
stock assets.
Holden and Lunduka (2010a) examined the impacts of subsidies on the
value of assets and on livestock ownership measured in tropical livestock
units. They find a general build-up in the real value of assets from 2006 to 2009
(particularly from 2007 to 2009), suggesting ‘that welfare has improved on a
broad scale’ (pp. 20), but they find no evidence of direct impacts of subsidy
receipt on asset accumulation. They conclude that their results ‘strengthen
the impression that the direct targeting effect of the subsidy program is less
important than the economy-wide effect of the program when it comes to
growth effects in the economy’ (pp. 21–2). There is no evidence of a general
increase in livestock endowments, nor of direct subsidy impacts on this.

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Ricker-Gilbert (2011) also explores possible direct impacts of subsidy receipt

on asset holdings. He reports no signiﬁcant impact of subsidy receipt on house-
hold livestock and durable assets for subsidy received in the survey year or in
each of the previous three years. However, in an earlier presentation Ricker-
Gilbert and Jayne (2010b) report positive but weak impact of subsidy receipt
aggregated over the previous three years on household total assets, consump-
tion, and productive assets (p = 0.12, p = 0.36, and p = 0.16, respectively).
Ricker-Gilbert (2011) also ﬁnds a very large increase in the value of assets in
the sample as a whole, with an increase of 73% in mean value of assets per
household and 27% in median value of assets per household, although mean
values show a large increase from 2002/3 and 2003/4 to 2007, while median
values show a large increase from 2007 to 2009. The large increase from 2007
to 2009 was also observed by Holden and Lunduka (2010a).

6.6.4. Shocks and stresses

Changes in the vulnerability of households to shocks and stresses are another
possible impact of subsidy receipt on household welfare. Households expe-
rience a number of shocks and stresses and many of these are agricultural
related.
Simple comparison of the frequency of reported shocks from the IHS2
(pre-subsidy) survey to the FISS (2010/11) survey shows a decline from 24%
to 13% in households that experienced lower crop yields due to weather or
rainfall as the most severe shocks between IHS2 and FISS, respectively. Other
agriculture-related shocks whose incidence declined were large falls in the
sale price of crops and a large rise in the price of food. The relative importance
of chronic and acute illnesses appears to have risen as a result of the decline
in importance of severe agricultural shocks.
Using the panel surveys we investigate whether there is a relationship
between the extent of subsidization and shocks experienced by households.
Chirwa et al. (2011d) estimate two fixed-effect regression models using IHS2
and FISS survey data, one using all panel households in the sample, the
other only using households that were classified as poor in the IHS2 sur-
vey before subsidy implementation. Both models show that the number of
shocks declined between 2004/5 and 2010/11. However, with respect to the
relationships between shocks and frequency of subsidized fertilizer receipt,
the estimated coefficients for dummy variables show that recipients of ferti-
lizer subsidies tend to experience more shocks than non-recipients (with all
coefficients statistically significant at the 10% or 1% levels and larger coef-
ficients for recipients that access subsidized fertilizer less than five times).
A possible explanation for this is that there is some season specific targeting
of the subsidy to households who have experienced shocks.

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Direct impacts of input subsidies

These issues were explored further with examination of the relationships

between frequency of access to subsidized fertilizers and the incidence of
severe agricultural related shocks (identified where these were reported as
the most severe shock). This analysis gave mixed results. For results obtained
with all panel households, subsidy receipt is not significantly related with the
incidence of agricultural shocks (estimated coefficients are positive but not
significant), but the overall incidence of severe agriculture-related shocks has
declined over time (with the decline significant at 5%). However, for the sub-
sample of panel households identified as poor in IHS2, there is no evidence
that severe agricultural related shocks have declined (the coefficient is mar-
ginally positive but not significant). In contrast to the results above, however,
it is striking that among poor households those with access to subsidized
fertilizers are less likely to have agriculture-related shocks as their most severe
shock (estimated coefficients are negative and significant at 1%, 5%, or 10%),
but there is no clear trend suggesting that higher frequency of access to sub-
sidized fertilizer is associated with more or fewer agricultural related shocks.
In summary, the evidence on changes in shocks and stresses is rather mixed.
Overall, the number of shocks experienced by beneficiary households has fallen
significantly over time, although those with access to subsidized fertilizers con-
tinue to experience shocks and stresses like other households. However, among
poor beneficiary households, agriculture-related shocks are less likely to be the
most severe shocks; hence the subsidy appears to have helped poor households
to become cushioned or resilient against agriculture-related shocks.

6.7. Impacts in life stories of beneﬁciary households

Analysis of beneﬁciary life stories gathered in 2010/11 reveals a mix of per-

ceived impacts of subsidy receipt on their well-being. While there are posi-
tive stories about the increase in food production at household level among
most households that receive subsidies, the life histories illustrate the chal-
lenges of the programme in delivering sustained direct benefits to beneficiary
households. In most life histories of beneficiaries, particularly among the
most vulnerable groups (female-headed, elderly-headed, and child-headed
households), the stories were that the subsidy programme has enabled them
to produce ‘a bit more food’ than when they had no access to the subsidy. The
qualitative analysis points to the following issues:

• In most cases, households that report success with the subsidy

programme are those that are already relatively well-to-do and
purchased commercial fertilizers before the subsidy programme. For
instance, one of the beneﬁciaries who has had access to the subsidy over

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Implementation and Impacts

five seasons, was also buying coupons that enabled him to profit from
tobacco cultivation, and claimed that together this transformed his life
from the ‘poor’ to the ‘well-to-do’ category.
• Households that reported receipt and use of two fertilizer coupons, are
likely to talk positively about the extent to which the subsidy improved
their food production for such years compared to households that
received less than two bags of subsidized fertilizers.
• Sharing of coupons is widespread, and most households that have
participated in the subsidy programme attribute the perceived failure
of the programme to significantly change their lives to inadequate
amounts of fertilizers. This is particularly the case for households that
have never used fertilizers prior to the subsidy programme. There are
many life stories that described how the full package of the subsidy
was beginning to change their lives, only to experience drifting
back to poverty due to the dilution of the subsidy as a result of the
redistribution that takes place at village level.
• There is also a tendency for beneficiaries to thinly spread the subsidized
inputs over a larger parcel of land. Even among households that
received two bags of subsidized fertilizers, the sentiments were that
the subsidized fertilizer was not adequate for the amount of land the
household had for maize cultivation. This is exacerbated by the lack
of technical advice on the appropriate use of fertilizers, with most
households reporting lack of access to agricultural extension services.
• There is widespread recognition that the subsidy has helped beneficiary
households to produce a ‘bit more maize’ and more importantly has
reduced the purchase price of maize even in the lean months of January and
February. Most of the beneficiaries interviewed, particularly those that were
still not able to produce enough own maize to last them to the next season,
consider the low price of maize as one major benefit of the programme.
• Households that are not able to produce maize to last to the next harvest
tend to purchase from the market. Most poor households engage in
ganyu to earn incomes to buy maize and most reported that ganyu wage
rates have been increasing while maize prices have been falling and
maize is locally available. This has enabled the poor to afford purchase
of maize based on ganyu incomes which have also improved over time.
Due to higher wages, households reported that they have reduced the
amount of time they spend on ganyu and there has also been an increase
in opportunities to operate off-farm income generating activities.
• Poor and vulnerable households such as female- and/or elderly-headed
households that received subsidy fertilizers rarely supplement the
supply of fertilizers with commercial purchases, leading to application
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Direct impacts of input subsidies

of subsidized fertilizers on larger parcels of land. Generally, where

subsidized fertilizers are supplemented by commercial fertilizers, such
households were buying commercial fertilizers prior to the subsidy or
they are better off households that are also receiving subsidies. The
quantitative analysis also shows that among beneﬁciaries there is much
lower use of supplementary commercial fertilizers by poor households
as compared with non-poor households.

As Chirwa et al. (2011d) note, the case studies of beneﬁciaries highlighted

two challenges that have implications on direct beneﬁciary impacts of the
subsidy programme: targeting and sharing of coupons at village level. We
discuss these issues in Chapters 10 and 11.

6.8. Summary

This chapter has reviewed the direct beneficiary impacts of the subsidy pro-
gramme using quantitative and qualitative data collected over time in a vari-
ety of different studies. Use of a partial equilibrium model also helped to
triangulate the results from the analysis of the quantitative and qualitative
data. A broadly consistent picture of direct subsidy impacts emerges from
this, which we summarize in Table 6.3 and discuss below.
As Table 6.3 shows, the evidence examined in this chapter suggests that sub-
sidy receipt has immediate or current season beneficial impacts on beneficiar-
ies’ maize production, net crop income, food consumption, and household
income (though impacts may be limited, particularly with food consumption).
There appear to be no immediate impacts on ownership of physical assets,
estimates of immediate impacts on subjective well-being are mixed (one study
finding positive impacts, the other finding no impacts) and the observed posi-
tive relationship with shocks is counter-intuitive and perhaps best explained
by reverse causality. There is then evidence of lagged impacts on beneficiaries’
maize production and food consumption (again with limited impacts). There
appear to be no lagged impacts on ownership of physical assets, on net crop
income, or on subjective well-being, there is no evidence from sufficiently
robust data to draw any conclusions on lagged impacts on household income,
and the observed positive relationship with shocks is again counter-intuitive
and possibly due to reverse causality. The models estimated for examining
direct subsidy impacts on school enrolment and child health do not allow
examination of immediate impacts separately from lagged impacts.
The finding of lagged impacts on maize production is consistent with resid-
ual effects of fertilizer application on soil nutrients (as suggested by Ricker-
Gilbert (2011)) and/or with reduced cash flow constraints as postulated earlier
in Chapter 4. Lagged impacts on food consumption are then consistent with

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Implementation and Impacts

Table 6.3. Summary of ﬁndings on direct subsidy impacts

Current season impacts Lagged season Wider seasonal

impacts changes

Maize production +ve +ve +ve

Net crop income +ve X +ve
Food consumption +ve but limited +ve but limited +ve for 2006/7 &
8/9
School enrolment ? +ve +ve
Child health ? +ve +ve
Subjective well-being Mixed (+ve, X) X +ve
Household income ?, +ve ? ?
Physical assets X Mixed (weak +ve, X) +ve
Shocks +ve* +ve* -ve

Notes: * Possible reverse causality.

+ve: evidence for positive change; X: evidence does not suggest change.
-ve: evidence of negative change; ?: lack of evidence.

this. The lack of lagged impacts on net crop income, despite these impacts
on maize production, are consistent with the observed lack of lagged impacts
of subsidy receipt on tobacco production despite the existence of immediate
positive impacts (Ricker-Gilbert, 2011). If the limited immediate and lagged
gains from increased maize production are invested in food consumption,
school enrolment, and health, this may explain the lack of direct lagged
impact on subjective well-being and on investment in physical assets. The
ability of econometric models to identify direct impacts may also be limited
by the widespread practice of sharing of subsidized fertilizer (as described in
Chapter 5) and by general increases in maize yields and production, net crop
income, food consumption, school enrolment, child health, subjective well-
being, and asset ownership (as summarized in the last column of Table 6.3).
As regards the impact of sharing of subsidized fertilizer, it was certainly
the opinion of a number of respondents in focus group discussions and
life histories that this severely reduced the scale and persistence of subsidy
impacts, raising questions about possible thresholds for persistent impacts.
However, the absence of apparent impacts on accumulation of physical assets
should not obscure the important long-term social and economic beneﬁts of
investment in ‘consumption’ that lead to increased school enrolment and
improved child health.
It is also important that the possible roles of the subsidy in driving general
improvements should not lead to under-estimates of overall subsidy impact,
through a narrow focus on direct beneﬁciary impacts. This is therefore the
focus of Chapter 7.

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7

Economy-wide effects of input subsidies

7.1. Introduction

Examination of economic theory on subsidy impacts in Chapter 2 stressed

the importance of considering wider market effects of large-scale input sub-
sidy programmes for staple crops. This was set out in the conceptual frame-
works at the end of Chapter 2, in discussion of possible impacts on Malawian
farmers’ livelihoods in Section 4.4 of Chapter 4, and in the Introduction to
Part II. Nevertheless, it was noted in Chapter 3 that these impacts have been
largely ignored in consideration of both the objectives and impacts of recent
subsidy programmes in Africa.
This chapter follows on from discussion of direct subsidy impacts in
Chapter 6 and considers evidence of the economy-wide impacts of the FISP. It
builds on observation of a range of general beneﬁcial changes summarized in
Table 6.3 (increases in maize production, net crop income, food consumption,
school enrolment, child health, subjective well-being and physical assets, and
decreases in ganyu labour supply). The chapter is organized into six sections
after this introduction. The next section outlines different sources of evi-
dence and analytical methods considered in subsequent sections, which con-
sider in turn the main potential economy-wide impacts identiﬁed in Figure
II.1. We then consider in turn the evidence on subsidy programme impacts
on macro-economic stability (in Section 7.3), on maize trade (in Section 7.4),
on maize prices and wages (in Section 7.5), and on other variables (in Section
7.6). Section 7.7 then provides concluding remarks.

7.2. Sources of evidence and analytical methods

There are two main tasks in determining both direct and economy-wide
impacts of the subsidy programme: ﬁrst the identiﬁcation of changes associ-
ated with the programme, and second attributing or determining the causal

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Implementation and Impacts

dependence of these changes to or on the programme. For direct impacts,

there are often opportunities to compare households or areas ‘with and with-
out’ and ‘before and after’ subsidy receipt. A variety of experimental and ana-
lytical approaches can then be used to address problems of selection bias—for
example, using panel data and ﬁxed effects analytical methods as outlined in
Section 6.2 in the previous chapter.
Such approaches are not available when considering economy-wide
impacts of a large-scale programme such as the Malawi Farm Input Subsidy
Programme, as economy-wide effects spread through the economy ‘with and
without’ comparisons cannot be made. We therefore draw on four different
approaches when examining possible impacts of the programme:

• examination of changes in variables where an economy-wide subsidy

impact is expected, with consideration of likely changes that might
have been expected in the absence of the programme;
• regression analysis (using panel data) relating the extent and nature of
subsidy access in an area to area wide variables;
• computable general equilibrium (CGE) models; and
• a partial equilibrium model linking different household livelihood
models to maize and labour markets.

These approaches all have their own strengths and weaknesses, and there
are different challenges in their implementation and application in different
contexts. We discuss each briefly.
Examination of changes is a starting point for any analysis of possible econ-
omy-wide programme impacts. Apart from difficulties in obtaining relevant
and reliable data on some variables, the major issue here is the problem of
attribution of change to a particular cause—or indeed the recognition that
where there has been no change this could be the result of the subsidy pro-
gramme counteracting the effect of some other change. We identify three
broad changes that roughly coincide with the implementation of the subsidy
programme from 2005/6 to 2011/12 and that would be expected to have
widespread benefits: improved macro-economic management, good tobacco
prices, and generally favourable rainfall—although there is some variation
in each of these within the period. Thus, there were major improvements
in macro-economic management from 2004 onwards, which are perhaps
best demonstrated by the fall in interest rates, debt, and debt servicing
from 2004/5 to 2007/8, but resurgent debt in 2008/9 and subsequent raised
interest rates (National Statistical Office, 2011).1 Rainfall was also generally

1
We do not discuss rates of inflation here as National Statistical Office (2012: p. 207) casts some
doubt on the reliability of inflation figures.

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Economy-wide effects of input subsidies

favourable over the period 2005/6 to 2010/11. Although there were local
incidences of ﬂooding and dry spells that caused local production shortfalls,
these did not lead to widespread lowering of yields and production. There
were more widespread dry spells in 2011/12: these did not lead to a major
reduction in national production estimates by the MoAFS, but substantial
areas were affected, leading to estimates of 1.63 million people affected by
serious food shortages (FEWS NET, 2012). Similarly, burley tobacco prices rose
in 2007 with high prices continuing in 2008 and 2009 before falling back in
2011 and recovering somewhat in 2012. Total burley tobacco incomes follow
a similar pattern though sometimes with a lag as farmers expand (contract)
tobacco areas following high (low) prices (see Figure 7.1).
Improved macro-economic management and good rainfall are prob-
ably best considered as necessary but not sufﬁcient conditions for rapid
positive change in the rural economy and in rural people’s livelihoods,
and it is therefore necessary to look elsewhere for drivers of such change.
World Bank (2010a) argues that Malawi’s growth is export-led with weak
linkages between maize production and economic growth due to limited
sales and thus limited multipliers. This is supported by high correlation
between annual per capita export volumes and per capita GDP from 1960
to 2007, and low correlation between annual per capita maize production
and per capita GDP from 1990 to 2005. This argument places considerable
emphasis on the role of tobacco in driving broad-based growth. It ignores,

3.0
Price (US$/Kg)
Indexed US$ sales value, 2000 = 1
2.5

2.0

1.5

1.0

0.5

0.0
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

Figure 7.1. Burley tobacco prices and sales values, 2000–11

Source: Tobacco Control Commission.

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Implementation and Impacts

however, the importance of low maize prices and high maize productivity
to real incomes of large numbers of net food-buying farmers. It may well
be the case that in the past there has been very limited correlation between
per capita maize production and per capita GDP. However, low growth in
maize productivity may be one of the causes of Malawi’s low GDP growth,
with exports the major driver of the limited growth that there has been.
In teasing out the effects of high tobacco prices from those of the subsidy
programme it may be instructive to note that tobacco prices started to rise
with the 2007 harvest, whereas the subsidy programme affected the 2006
harvest. This suggests that changes prior to the middle of 2007 are unlikely
to have been driven by improved tobacco prices.
Regression analysis relating area wide subsidy access and other variables is the
second approach that may be used to investigate some of the subsidy pro-
gramme’s economy-wide impacts. This approach only works for changes in
relatively local markets that are not well integrated. There are a number of
studies that show that Malawian maize markets are relatively well integrated
(Chirwa and Zakeyo, 2006; Meyer, 2008). Less is known about the integra-
tion of labour markets, but one would expect integration to be low in mar-
kets for ganyu labour (with intermittent demand, the importance of social
relations, and relatively immobile suppliers of ganyu). Ricker-Gilbert (2011)
exploits this to investigate the impact of subsidy receipt on wages across dif-
ferent communities. This approach has not, to our knowledge, been applied
to investigate other possible economy-wide subsidy impacts, but it would
appear to have potential application in studying impacts of subsidy-induced
labour market changes, but not subsidy-induced maize market changes. There
are challenges to the collection of reliable data on rural wages. However, these
are reduced where panel data are employed since analysis of changes in wages
among respondents between surveys demands consistency in wage measure-
ment within responses by the same households at different times, rather than
consistency in wage measurement across households (where standardized
definitions of tasks are very problematic).
Computable general equilibrium (CGE) models should in principle be the best
approach for investigating economy-wide programme impacts. Apart from
the costs involved in developing such models, there are two main difficul-
ties in the use of this approach: obtaining reliable data on the wide range
of variables and relationships that make up such models, and constructing
models to properly capture key features of the livelihoods, markets, and
economies modelled. These challenges are also discussed in Chapter 9, where
possible uses of CGE models in benefit–cost analysis are examined. We note
here, however, that more conventional CGE models, including those that
have been developed for Malawi, may be considered ‘top down’ models in
the sense that in broad terms they start from analysis of national accounts

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Economy-wide effects of input subsidies

to develop a Social Accounting Matrix (SAM) for the economy as a whole,

and then work down to model in fairly broad terms the main sectors in the
national accounts (Dorward et al., 2004b; Benin et al., 2008; Douilleta et al.,
2012). This approach does not, however, adequately describe the seasonal
constraints and market failures affecting poorer households and hence the
potential role of the subsidy in addressing the low productivity maize pro-
duction trap, as argued earlier in Chapter 4 (see also Dorward et al., 2004b).
An alternative approach, the ‘Local Economy-wide Impact Evaluation’ or
LEWIE model, is currently being developed to address this problem (Taylor,
2012) with an illustrative application to analysis of the Malawi subsidy pro-
gramme (Filipski and Taylor, 2011). Although this method is expected to
provide valuable insights into economy-wide impacts of the subsidy in the
future, existing information from CGE models is limited. Nevertheless, the
use by Bufﬁe and Atolia (2009) of a ‘standard’ CGE model to investigate FISP
impacts provides useful insights given its assumptions, and these insights
are made more useful by Filipski and Taylor (2011) in their examination of
potential changes in analysis when some of these assumptions are changed.
Partial equilibrium models that link different household livelihood models
to maize and labour markets are the fourth broad approach used in investigat-
ing economy-wide subsidy impacts. These suffer from similar but narrower
challenges as CGE models as regards the need for reliable data on a wide range
of variables and relationships. We use an Informal Rural Economy’ or IRE
model (described brieﬂy in Chapter 1 and more fully in Dorward and Chirwa,
2012b) to explore both the direct impacts of the programme (as described in
Chapter 6) and economy-wide impacts which arise from impacts on maize
and labour supply and demand and hence on maize prices and wages.

7.3. Macro-economic environment and role of input subsidies

The contribution of the subsidy programme to economic growth and macro-

economic aggregates is difficult to disentangle as there are so many factors
that affect macro-economic stability. However, we compare macro-economic
developments between 2000 and 2005 (the pre-FISP period) with those
between 2006 and 2011 (the FISP period).
The macro-economic environment since the introduction of the Farm
Input Subsidy Programme has remained relatively stable with high growth
rates and low inflation (Chirwa et al., 2011d). Table 7.1 shows the average
performance of the economy between 2000 and 2011. With respect to growth
in gross domestic product, the official figures record average growth between
2000 and 2005 (pre-FISP period) of 1.7% per annum compared to 7.8% per
annum in the subsidy period, with the agricultural sector an important driver

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Implementation and Impacts

Table 7.1. Economic growth performance, 2000–10 (% per annum)

Indicator 2000–5 2006 –11 2005 2006 2007 2008 2009 2010

Real GDP 1.7 7.8 3.3 6.7 8.6 9.7 7.7 6.7
growth
Real 2.1 10.3 7.8 12.3 12.3 11.8 10.4 6.6
agricultural
growth
Manufacturing 0.1 5.4 4.3 4.6 3.6 9.9 4.8 4.2
growth

Source: Chirwa (2011) and Chirwa et al. (2011d).

of recent growth: in the pre-FISP period, the agricultural sector GDP only
grew by 2.1% per annum compared to 10.3% per annum during the subsidy
period. Allowance for bounce-back in 2006 following the bad rains in the
previous year lowers this figure by a little over 1%.
However data on GDP growth in the FISP period need to be interpreted
cautiously for two reasons. First, annual crop production estimates are used
in the calculation of GDP. As was discussed earlier in Chapter 6, there are
concerns that crop production estimates in the FISP period may be some-
what over-estimated. If this is the case then GDP will also be over-estimated,
given the close relation between the performance of the agricultural sector
and the economy. Determining the possible scale of such over-estimates
is difficult but it is unlikely to lead to an inflation of GDP by more than
1.5% over the FISP period as a whole. This could then be a small contribu-
tor to higher GDP growth in the FISP period. Possible distortions to the
GDP deflator as a result of under-estimates of CPI are, however, possibly
much larger. National Statistical Office (2012) use an unexplained revised
estimate of inflation of just under 130% between the 2003/4 and 2010/11
Integrated Household Surveys. Comparison of the published CPIs for 2003
and 2010, 154.3 and 319.8, (Reserve Bank of Malawi, 2012) suggests infla-
tion of approximately 107%, in which case the real GDP in 2011 might be
some 17% lower than indicated by current published estimates. This could
reduce annual GDP growth estimates by some 2.5 percentage points.2 If
these calculations are broadly correct, they have very serious implications
for Malawi’s growth record since 2005. Nevertheless, agricultural sector per-
formance in the FISP period would still be impressive, averaging a little
under 8%—or a little under 7% if the 2006 recovery from bad 2005 rains is
factored in.

2
Although for ease of explanation the effects of possible under-estimation of CPI are aver-
aged across the 2006 to 2011 period, in fact distortions are more likely to have arisen from 2008
onwards when maize prices started rising.

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Economy-wide effects of input subsidies

The agricultural sector has therefore grown consistently during the subsidy
period, and this has helped overall economic growth. Growth rates in both
gross domestic product and in agricultural output may be partly attributed to
the subsidy programme, although as discussed earlier they may also be partly
attributed to high tobacco prices and to improved macro-economic manage-
ment, and have been aided by the good rains experienced in most seasons
since 2005/6. The dry spell that hit some parts of the country in 2009 and
lower tobacco prices and higher interest rates since then have contributed to
the marked decline in agricultural growth after 2009.
There have also been fiscal implications of the subsidy programme, particu-
larly as much of the financing comes from domestic revenues. As detailed in
Chapter 5, the high costs of the programme have increased resource allocations
to the agricultural sector and the subsidy accounts for a significant proportion
of the national budget. Chirwa et al. (2008) note that due to the subsidy pro-
gramme, Malawi became one of the first African countries to achieve a 10%
budgetary allocation to the agricultural sector, in accordance with the African
Union (AU) and New Partnership for African Development (NEPAD) target
for stimulation of agricultural growth. However, this increased spending on
the agricultural sector has come at the expense of increasing budget deficits
and increasing debts. Figure 7.2 shows official figures for trends in fiscal defi-
cit/GDP ratio and public debt/GDP ratios from 1999 to 2010. The deficit as
a proportion of gross domestic product has worsened during the period of
implementation of the subsidy programme. The deficit after grants increased
substantially in 2008 and 2009, in line with the very high expenditures on the

-5%

-10%
Deficit before grants
Deficit after grants
-15%

-20%
1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

Figure 7.2. Fiscal deﬁcit/GDP ratio, 1999–2010

Source: Computed by authors based on Reserve Bank Database.

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Implementation and Impacts

FISP in 2008/9 reported in Chapter 5 (with other expenditures related to the

2009 elections) before a surplus was registered in 2010.
There has also been some worsening of domestic debt, which increased
from 8.2% in 2006 to 15.7% in 2010. The rising costs of the subsidy pro-
gramme from 2006/7 to 2008/9 and, as noted earlier in Chapter 5, its general
failure to keep within budget (except for 2009/10) may have contributed to
these trends—together with other pressures on public expenditure associated
with the 2009 election. However it is also important to consider the budg-
etary implications of possible maize import and humanitarian distribution
costs for government if the absence of the subsidy would have led to lower
and possibly insufﬁcient national maize production.

7.4. Maize exports and imports

There are difﬁculties in obtaining good data on international maize trade

ﬂows in Malawi, partly due to the restrictions imposed on maize exports and
imports and due to informal and hence unreported trade across borders with
Mozambique, Zambia, and Tanzania. There are conﬂicting estimates of trade
across different reports (for example, Jayne et al., 2010; FAOStat; and FEWS
NET reports). In broad terms, however:

• Malawi is more commonly a maize importer than exporter, with

relatively small annual informal imports and no formal imports in most
years, unless there is a national food shortage demanding large-scale
formal imports and increasing informal imports.
• Informal imports have been fairly constant during the subsidy years,
after major imports in 2006 following the poor 2004/5 harvest.
• Following the large estimated harvest in 2007, the government allowed
formal exports of maize amounting to around 400,000 tonnes through
the granting of licenses for export, particularly to Zimbabwe (licenses
were granted to exporters that had unsold stock from the 2006 harvest,
with permission for ADMARC to export up to 100,000 metric tons of
maize, with the rest exported by private exporters).
• This was followed by a dramatic maize price surge, peaking at 90MK/kg
and formal imports from South Africa of around 40,000 MT in 2008/9
(Jayne et al., 2010).
• According to FEWS NET (2011) the government also issued export
licences from July 2010 to August 2011, allowing an increased export of
maize mainly to Kenya and Zimbabwe, although it has been difﬁcult to
track records of these exports.

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Economy-wide effects of input subsidies

This suggests that the overall domestic maize supply has improved except
in 2008/9 (following the 2007/8 harvest). However these ﬁgures need to be
interpreted together with information on domestic maize prices, to which we
now turn.

7.5. Impacts on maize prices and rural wages

Maize is the main staple food in Malawi. The price of maize has the largest
weight in the food price index of the consumer price index. Increased maize
production as a result of the subsidy programme should push maize prices
down and promote more general price stability and benefit net maize buyers
among both beneficiaries and non-beneficiaries of the subsidy programme.
Changes in maize prices are therefore a critical determinant of real wages and
consideration of changes in real wages thus requires consideration of changes
in both maize prices and nominal wage rates. We examine these in turn.

7.5.1. Maize prices

One of the expected beneﬁts of the farm input subsidy is to reduce both
the price of maize relative to rural incomes (Dorward, 2013) and its intra-
and inter-seasonal price variability. Figure 7.3 shows nominal and real maize
prices between 2001 and 2011 in Malawi Kwacha and US dollars per kilogram.
Both inter-seasonal and intra-seasonal variability of prices are evident, and
prices have not behaved as might be expected. The FISP period has experi-
enced higher average and peak nominal maize prices than the pre-FISP period

(a) Prices in Malawi Kwacha/kg (b) Prices in US Dollars/kg

80 0.60
National - nominal pric
prices National - nominal pric
prices
70 National - real prices National - real prices
0.50
60
0.40
50

40 0.30

30
0.20
20
0.10
10

0 0.00
01

11
20

Figure 7.3. Nominal and real maize prices in Malawi, 2001–11

Source: Computed by authors based on MoAFS Price Monitoring Data.

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Implementation and Impacts

with prices in the FISP period reaching a peak of 70MK per kilogram (US$.50
per kilogram) in January/February 2009 compared to a peak of 50MK per kilo-
gram (US$0.39 per kilogram) in February 2006. As regards real prices (deﬂated
by the CPI), averages in the pre-FISP and FISP period are not substantially dif-
ferent: as the moving averages show they are a little higher in the FISP period
when measured in Malawi Kwacha and a little lower when measured in US$.
Between 2001 and 2011 there were three surges in the price of maize: in
2001/2, 2005/6, and 2008/9. Chirwa (2009) notes that price surges in 2001/2
and 2005/6 are mainly explained by reductions in maize production owing to
poor weather conditions (with heavy rains in March and dry spells and ﬂoods
in some areas exacerbated by low input uptake in 2000/1; and late distribu-
tion of inputs and poor rains in many areas in 2004/5).
The surge in maize prices in the 2008/9 market season should not be
attributable to such supply-side issues because of relatively good rains and
improved access to subsidized seeds and fertilizer. High prices in 2008/9
(and other market seasons) also raise questions about MoAFS’ high national
maize production estimates. Figure 7.4 shows 1993/4 to 2010/11 maize prices
(average annual prices from MoAFS market surveys, in US$) against esti-
mated quantity consumed per capita, calculated from Ministry of Agriculture
and Food Security crop production estimates, census data, and exports and
import estimates compiled from various sources.3 This perspective on prices
and supply estimates draws attention to an apparent shift in the relationship
between net supply and prices from around the 2006/7 production season.
Chirwa (2009) suggests several reasons for the high maize prices in 2008/9
despite estimated high maize production levels in the 2007/8 production
season.

1. Poor quality of information about domestic supply from the govern-

ment, both in terms of domestic production and stocks in reserves, cre-
ated speculative behaviour. Even with record reported maize production
levels, maize prices remained high, creating uncertainty about domestic
supply, with asymmetric information among different agents.
2. The unsatisﬁed contract to export to Zimbabwe from the 2006/7 harvest
also fuelled speculation that there was a domestic maize shortage. By
February 2008, only 302,000 metric tons of maize had been exported
to Zimbabwe by the private sector through the National Food Reserve
Agency (NFRA), and Malawi failed to satisfy the contract of maize exports
to Zimbabwe (FEWS NET, 2008). In addition, there was speculation that

3
Production estimates from a production season are linked to prices in the following market-
ing season. Thus, for example, the very high prices experienced in the 2008/9 market season are
shown in Figure 7.4 against the 2007/8 production season.

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Economy-wide effects of input subsidies

0.35
Mean maize price 2005 US$/kg

2007/8

0.3 2006/7–2010/11 1
2000/
00 1 production
i
1993/4 1994/5 seasons
0.25 1997/8
1997/ 8
2
2004/ 5 2008/9
1996/7 2001/2
2
0.2 1998/9 2010/11
1993/4 to 2005/6 1995/6
production seasons 2009/10
2006/7
0.15 2003/4
2002/3 2005/6
1999/00
0.1
0.10 0.15 0.20 0.25 0.30
Per capita maize crop estimates plus net imports (MT)

1995/6–2004/5 2005/6–2009/10 Regression estimate, Ed=–0.51

Figure 7.4. Maize prices and estimated quantity consumed per capita from 1993/4 to
2010/11 production seasons7
Source: Adapted and updated from Dorward and Chirwa, (2011c).

exports to Zimbabwe would continue from the 2007/8 harvest, which

was also a surplus year according to the MoAFS crop estimates. The pri-
vate sector was having difﬁculty in sourcing maize from the market and
this sent signals that there were supply shortages and prices began to
increase substantially.
3. The behaviour of state agencies, ADMARC and the National Food Reserve
Agency (NFRA), who were offering higher purchase prices to farmers than
the private sector, and the government’s imposition of a ban on private
trader purchases, also appeared to signal domestic supply shortages.
4. High international maize prices, amid continued reported surplus maize
production, created speculation that the export market for maize would
be lucrative, leading to stockpiling and purchasing maize from farmers
at higher prices by the private sector.
5. A further possible cause of tighter markets could be government pur-
chases of maize for stockpiling of the national grain reserve following
the construction of a 60,000 MT new storage capacity.

Table 7.2 shows average nominal maize prices in Malawi and major cities
between 2001 and 2011, and suggests that during the FISP period the aver-
age national prices and the prices of maize in the major cities have almost
7
The regression estimate is discussed in Chapter 9.

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Table 7.2. Average nominal maize prices, 2001–11

Malawi Kwacha per kilogram US Dollars per kilogram

Period National Mzuzu Lilongwe Blantyre National Mzuzu Lilongwe Blantyre

Pre-FISP 18.12 17.32 18.43 19.16 0.19 0.18 0.19 0.2

(8.84) (8.48) (8.66) (10.03) (0.09) (0.07) (0.09) (0.09)
Post- 33.53 35.13 35.6 38.02 0.23 0.24 0.25 0.26
FISP (13.83) (12.12) (14.07) (19.56) (0.1) (0.09) (0.1) (0.14)

Note: Figures in parenthesis are standard deviations in monthly prices.

Source: Computed by authors based on MoAFS Price Monitoring Data.

doubled in Malawi Kwacha terms. Monthly variability of maize prices (meas-

ured in standard deviations) has also increased in the FISP period, although
the coefficient of variation has fallen slightly. Prices and price variability have
also increased in US$ terms, though not as dramatically. It appears therefore
that the subsidy programme has not significantly reduced either prices or
food price risks.
It seems clear then that maize prices have not fallen in real or nominal
terms over the period of FISP implementation. However, this does not nec-
essarily mean that the FISP has not exerted downward pressure on maize
prices but rather that other pressures pushed prices up in 2008/9 (as discussed
above). In the absence of such pressures maize prices did fall and remain low
throughout the 2006/7 marketing season, following the introduction of FISP
in 2005/6 and before government interventions tightened the market after
the 2007 harvest. Prices were also low throughout the 2010/11 market sea-
son, prior to the macro-economic problems that surfaced in mid 2011.
CGE and partial equilibrium models also suggest that FISP should lead to
maize price falls in the absence of interventions or macro-economic or other
changes affecting maize prices. Simulations by Buffie and Atolia (2009) esti-
mate long-run falls in domestic food prices of 2% to 5%, with higher short-
run falls of up to 9%. Filipski and Taylor (2011) estimate that the 2005/6
subsidy would have led to a 5% increase in maize production in a model that
assumes perfectly competitive markets (they also unfortunately assume that
maize prices are determined exogenously on the world market and therefore
do not estimate any price changes). The introduction of credit constraints
on input purchases (one part of the low maize productivity trap discussed
earlier in Chapter 4) reduces the overall agricultural production impacts of
the FISP to a little over 2% (specific impacts on maize production are not
stated) but an alternative specification that introduces unemployment and
efficiency wages results in the FISP increasing agricultural production by
over 13%. The Informal Rural Economy partial equilibrium models also give

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Economy-wide effects of input subsidies

consistent estimates of increases in maize production of 10% to 20% across

all households with the FISP, although direct beneﬁciary impacts tend to be
higher (Dorward and Chirwa, 2012b). Aggregate production increases lead to
lower maize prices, with median falls across different years varying from 8%
to 40% under different scenarios. Given the clear endogeneity of Malawian
maize prices, the large maize production impacts of the FISP in these simula-
tions should have substantial price impacts.
It is, therefore, surprising that falls in real maize prices are not observed,
despite the upward pressures on maize prices discussed above. This discus-
sion, however, has examined only nominal prices and real prices deﬂated
by the CPI. As noted by Dorward (2011) and Dorward (2013), real consumer
prices are often best examined in relation to incomes, and in this regard there
is evidence that real maize prices have fallen relative to wages. We therefore
turn now to consider evidence of changes in nominal wage rates.

7.5.2. Wages
One of the expected economy-wide benefits of such a large-scale input subsidy
programme is its influence on rural wages relative to maize prices. As outlined
in Chapter 4, rural wages may increase due to the low supply of casual labour
and high demand for labour among labour-hiring farming households. With
low and stable maize prices, the increase in rural wages should increase real
incomes of poor households. We discussed maize price movements in Malawi
before and after the introduction of the FISP in Section 7.5.1. We now con-
sider wage rates in both nominal terms and relative to maize prices.
Despite difficulties in obtaining reliable data on rural wage rates, there
is evidence of rising wage rates in rural areas following the introduction of
FISP. School of Oriental and African Studies et al. (2008) report survey data
findings that median wage rates rose by 33% from 2005/6 (following a poor
2004/5 crop production season) to 2006/7 (following the 2005/6 subsidy and
better rains) per day across the two years. Focus group discussions and key
informant interviews also reported increases in wages and increased bargain-
ing power for sellers of labour in a tighter market, with a shift from price
setting by buyers of ganyu to sellers of ganyu and wage increases of 50% or
more in some areas. School of Oriental and African Studies et al. (2008) also
report anecdotal evidence of increased ganyu rates from commercial farm-
ers who faced difficulties in obtaining hired labour without paying higher
wage rates. FEWS NET (2007) also reported reduced search for employment
by ganyu labour in November 2007 with increased scarcity and cost of hired
labour reported by farmers wishing to hire labour.
As noted earlier in Chapter 6, Ricker-Gilbert (2011) reports contractions in
labour supply over the period 2003/4 to 2008/9, with a large contraction in

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Implementation and Impacts

labour supply before 2006/7 followed by a smaller expansion before 2008/9.

He does not report changes in wage rates, although with relatively stable
labour demand (and he only reports agricultural labour demand) higher
real wage rates would be expected. Dorward et al. (2010a) state that focus
group discussions and key informant interviews in 2008/9 reported contin-
ued improvements in ganyu wage rates and bargaining positions for sellers
of ganyu (as in 2006/7). Household survey estimates of changes in nominal
wage rates from 2006/7 to 2008/9 suggest increases of around 70%, so that
over the period 2005/6 to 2008/9 they just about kept abreast with maize
price increases, although this involved a dramatic increase in real wages from
2005/6 to 2006/7 and then a smaller decline from 2006/7 to 2008/9.
Chirwa et al. (2011d) find that nominal wages have continued to increase
in rural areas since 2009, and when coupled with falling maize prices this
implies increased real wages among households participating in the labour
market. Figure 7.5 shows mean farm-gate purchase prices for maize, selling
prices for tobacco prices, and ganyu wage rates between 2009 and 2011, as
reported by survey respondents in 2011. With respect to maize prices, the
overall prices at which households buy maize show strong seasonal effects
in all districts (with January prices considerably higher than June prices)
and falling prices from 2009/10 to 2010/11 (Figure 7.5a). This is consistent
with maize market prices shown earlier in Figure 7.3. Tobacco prices gener-
ally fell slightly between 2009 and 2010 (Figure 7.5b), although in Blantyre
and Zomba households reported improved tobacco prices. Again this is con-
sistent with national data on tobacco prices in Figure 7.1. With respect to
wages (Figure 7.5c), there is a steady increase in ganyu cropping season wages
reported by households over the period January 2009 to January 2011, and
these increases occurred in all the districts that were surveyed. Wage increases
are broadly similar across all districts in percentage terms.
These wage rates and maize price developments were also widely reported
in focus group discussions and in life histories of some of beneficiaries. In
most life histories of beneficiaries, engaging in ganyu to earn income to pur-
chase food is a common strategy among poor households and improvements
in wages and reduction in maize prices made maize more affordable even for
poor households. This is confirmed in Figure 7.5d which shows real increases
in ganyu wages in terms of its maize grain purchasing power (variability in
prices between areas may be due to bias and reporting inconsistencies, but
data collection methods attempted to minimize changes in bias between sur-
veys, and hence estimates of percentage change in wages within in each area
should be and appear to be more consistent). Overall, the reported maize
purchasing power of daily ganyu wages increased by 47% between January
2009 and January 2010, with the highest reported increase of 80% in Ntcheu
district and lowest increase of 34% in Phalombe district.

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(a) Maize prices MK/kg (b) Tobacco prices MK/kg
60 140
Jun 2009 Jan 2010 Jun 2010 Jan 2011 Jun 2009 Jun 2010
50 120
100
40
80
30
60
20 40
10 20
0 0
e e o l u e u e lo l
ba gu h eu ba yr ol be Al ba ng w he ba yr be Al
un n gw tc om nt y om u ng tc om nt yo om
zim as N Z a Th al zim as l o N Z la Th al
M K Lilo Bl M K Li B
Ph Ph

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1400 50 Jan 2010 Jan 2011
Jan 2009 Jan 2010 Jan 2011 45
1200
40
1000 35
800 30
25
600 20
400 15
10
200 5
0 0
e e lo l u e u re lo l
ba gu eu ba yr be Al ba ng w he ba ty be Al
un n gw t ch o m nt h yo o m u g tc m hyo om
zim s lo N Z a T a l zim as l on N Zo an T al
M Ka Li Bl M K Li Bl h
Ph P

Figure 7.5. Average farm-gate maize prices, tobacco prices, and ganyu wages, 2009–11
Source: Chirwa et al. (2011d), computed from FISS3survey data.

157
Economy-wide effects of input subsidies

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Implementation and Impacts

It appears then that real wages increased from 2005/6 to 2006/7, fell back
somewhat from 2006/7 to 2008/9, and then increased again from 2009 to
2010. How far can this be attributed to the impact of FISP? The four approaches
set out in Section 7.2 may be examined to investigate this, in addition to
focus group discussions and key informants attributing increased wage rates
to the impact of FISP in household surveys (School of Oriental and African
Studies et al., 2008; Dorward et al., 2010a; Chirwa et al., 2011d).
Considering first general patterns of change, the two primary explanations
for improved rural wages are improved tobacco prices and earnings, and
the FISP. It appears that while nominal wage rates increased over the period
2005/6 to 2009/10, real wage rates improved from 2005/6 to 2006/7, fell back
somewhat from 2006/7 to 2008/9, and then rose again from 2009 to 2010/11.
Tobacco prices rose in 2006/7 and therefore cannot explain increases in
nominal or real wage rates from 2005/6 to 2006/7. These increases might be
explained by improved crop production in 2005/6 as compared with 2004/5
as a result of both the FISP and improved weather. Increased nominal wage
rates from 2006/7 to 2008/9 would be consistent with the effects of increased
maize production as a result of relatively good weather and the FISP and/or
the effects of higher tobacco prices received from 2007 onwards. Increased
nominal wage rates from 2008/9 to 2010/11 would be consistent with the
effects of falling maize prices as a result of the removal of maize market distor-
tions with continued high production (with good weather and the FISP) and
with continuing relatively high tobacco prices (these remained above 2005/5
levels: as Figure 7.1 shows 2009 and 2010 prices were similar to 2007 prices,
higher than 2006 prices, but lower than 2008 prices).
Further evidence of the impact of the FISP on wage rates is provided by
Ricker-Gilbert (2011) in his use of regression analysis to examine the relation-
ship between the amount of subsidy received in communities and median
ganyu wage rates in these communities. He finds significant (p = 0.01) positive
relationships between wages and subsidy receipt, commercial fertilizer price,
hybrid maize price, tobacco price, and coefficient of variation of rainfall. He
also finds significant (p = 0.01) negative relationships between wages and the
standard deviation of subsidy receipt per household and long-run average
rainfall. The estimated effects of subsidy receipt and of maize and tobacco
prices are particularly interesting, with an average of 50 kg per household
estimated to increase nominal wages by 10%, and an increase in 1 standard
deviation decreasing nominal wages by 0.1%. An increase in tobacco prices
by 50MK/kg (very approximately the increase in 2007, 2008, and 2009 above
2005/6 and earlier prices) is estimated to also raise nominal wages by 10%.
An increase in maize prices of 30MK/kg would lead to an increase in nominal
wages of a little over 4%. However, since a 30MK/kg increase in maize prices
represents an increase of 100% or more over 2003/4 or 2006/7 maize prices,

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and maize accounts for a signiﬁcant proportion of expenditure of the poorer

people who hire their labour out for ganyu work, the small increase in nomi-
nal wages will not be enough to prevent a fall in real wage rates.
Positive impacts of FISP are found in both the CGE models discussed ear-
lier in the chapter. Buffie and Atolia (2009) find real unskilled wages rising
by up to 5% immediately after the introduction of FISP, and then declining
slightly or significantly depending in later years on the sources of programme
finance. Filipski and Taylor (2011) also report FISP leading to an increase in
rural wages with their ‘perfect competition’ model, although the scale of this
increase is not reported. There is no specific mention of wage effects with
the model allowing for liquidity constraints. Where they postulate efficiency
wages, the impact of the subsidy is not on wage levels but on employment,
and the impact of the subsidy on labour income is very large.
The importance of economy-wide effects on real wages is also supported
by informal economy model simulations of the two largest livelihood zones
(Shire Highlands and Kasungu–Lilongwe Plain) in Malawi between 2005/6
and 2010/11 (Dorward and Chirwa, 2012b). Small increases in wages and
larger post-harvest falls in maize prices combine to give increases in the wage
to maize price ratio, with average increases in the pre-harvest period of 19%
and 5% for the Shire Highlands and Kasungu–Lilongwe Plain respectively,
and 73% and 32% in the post-harvest period. These ‘basic scenario’ simula-
tions are consistent with the earlier discussion of potential impacts in Section
4.4, with differences between the two zones explained by the greater propor-
tion of poor households in the Shire Highlands livelihoods zone.

7.6. Other variables

The previous section considered different sources of information on possible

subsidy impacts on maize prices and wages. This reflected both the impor-
tance of these impacts (indicated, for example, by their central position in the
causal impact chains set out in Figures 2.2, 4.2, and II.1) and the availability
of information and analysis on these impacts. There are, however, a range
of other potential FISP impacts that are important for welfare and economic
benefits, but where there is less evidence on impact. In this section we review
changes in these variables over the period in which FISP has been imple-
mented. Arriving at firm conclusions regarding change is difficult. A number
of data sources are supported by anecdotal evidence in suggesting improve-
ment on many variables over the period 2005 to early 2011, after which there
were increasing political and economic difficulties associated with a number
of President Mutharika’s policies. However the third Integrated Household
Survey (IHS3, National Statistical Office, 2012), reporting on the situation

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Table 7.3. Household food consumption over the past 1 month, 2006/7–8/9 (%)

Season Less than adequate Just adequate More than adequate

2006/7 38 51 10
2008/9 10 63 27

Note: Interviews with households were conducted in May and June, shortly after harvest.
Source: Dorward et al. (2010a).

in 2010/11, contains a number of statistics that present a much less positive

picture. Finding consistency across these estimates and other data sources,
including those on estimated FISP impacts, is problematic.

7.6.1. Food availability and consumption

National food production and per capita availability indices show increases
in national food security in Malawi since the implementation of the FISP in
2005/6. As discussed earlier in this chapter, there are questions about the reli-
ability of some of the national crop production estimates on which these are
based (possible discrepancies between maize production estimates and prices
were discussed earlier, and there are longstanding queries about inconsisten-
cies between national crop estimates and survey estimates of root crop areas
and production).4 Nevertheless, there is general agreement that the food
security situation has improved in the country partly owing to incremental
use of fertilizers and improved seeds provided under the subsidy programme
and partly owing to the good weather conditions that Malawi has had during
this period. These trends of national food security are consistent with house-
hold survey findings that show improved self-assessment of food security.
Table 7.3 shows the proportion of households with different food consump-
tion between the 2006/7 and 2008/9 seasons from a survey of beneficiaries
and non-beneficiaries of FISP. Overall, there is a shift to more households
reporting adequate and more than adequate food consumption.
However, National Statistical Office (2012) finds that 33% of households
experienced situations on food insecurity, with 42% of the rural population
being food insecure in 2010/11. Concerns also arise about the large numbers
of people continuing to experience food insecurity and needing emergency
humanitarian support. This appears to be particularly serious in 2012/13 with
estimates that about 1.6 million people in 15 districts, mainly in southern
Malawi, will be unable to meet adequate basic food requirements (FEWS NET,
2012). This is mainly due to prolonged dry spells and poor rains: similar situ-
ations in previous years have been associated with local droughts or floods
and are arguably unrelated to the FISP.
4
This is illustrated by the divergence between estimates in Ministry of Agriculture and Food
Security (2007) and National Statistical Office (2010a).

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7.6.2. Incomes and poverty

Earlier discussion of FISP focus group discussion and key informant reports
of FISP impacts on real wages implicitly or explicitly linked this to improved
real incomes. Estimates of subsidy impacts on nominal wages (Ricker-Gilbert,
2011) when combined with estimates on maize production also suggest
increases in real incomes for poorer non-beneficiaries as well as beneficiaries.
There are explicit results from the different CGE models of Buffie and Atolia
(2009) and Filipski and Taylor (2011), with Buffie and Atolia (2009) estimating
short-term real income increases of the poor (many of whom may not receive
subsidized inputs) rising by 4% to 8%, and Filipski and Taylor (2011) estimat-
ing that the introduction of liquidity and labour market imperfections into
their model increases the income gains of non-beneficiaries from spillover
effects. The IRE partial economy model of Dorward and Chirwa (2012b) also
estimates substantial real income gains from wage and maize price change
impacts, averaging 10% and 3% across all households in the ‘basic scenario’ in
the Shire Highlands and Kasungu–Lilongwe Plains respectively. In this, poor
non-beneficiary households gain most, non-poor beneficiaries, and poor non-
beneficiaries gain direct and indirect benefits respectively, and non-poor non-
beneficiaries generally lose from the indirect impacts through higher wages
and low maize prices. In the Shire Highland Livelihood Zone (SHI), simulated
‘indirect gains’ to real incomes for target households are considerably higher
than the direct gains from subsidy receipt (13% as compared with 7%). These
indirect gains are higher than simulated for the Kasungu–Lilongwe Plain (KAS)
because of the former’s high rates of poverty incidence, high land pressure,
and larger numbers of poor people relying more on sales of ganyu labour and
spending a higher proportion of their income on maize purchases.
If the farm input subsidy raises the income of the poor then it should also
play a role in poverty reduction. Indeed evidence of the impacts of the FISP
on the wage to maize price ratio and the impact of tobacco prices on wages (as
reported earlier) should have led to falls in poverty from 2005/6 to 2010/11.
Given the scale of the FISP, these should show up in national poverty statis-
tics. Evidence on changes in poverty at the national level is, however, mixed.
Table 7.4 shows the trend in different estimates of the poverty head count
ratio between 1998 and 2011. The national head count poverty rate in 2005,
prior to the implementation of the subsidy programme, was estimated at 52%
while in the rural areas it was estimated that 56% of the population were liv-
ing below the poverty line. Seasonally adjusted model-based estimates from
welfare monitoring surveys suggest that the poverty rate increased in 2005/6
following the poor 2004/5 crop season and subsequent food shortages,
then declined sharply between 2006 and 2007 before stabilizing from 2007
to 2009 (Chirwa et al., 2012). The urban poverty rate is estimated to have

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fallen by almost half in this period. However, recent poverty estimates based
on the 2010/11 integrated household survey suggest that between 2004/5
and 2010/11 the national poverty rate was much higher than predicted by
the WMS estimates, and only fell by 2% between 2004/5 and 2010/11, sug-
gesting only a marginal change in the well-being of the population. This
would be consistent with high maize prices putting a brake on growth in real
incomes in these years: one would then expect low maize prices in 2010/11
to stimulate further growth in real incomes and falling poverty. However,
poverty incidence in rural areas is estimated at over 56% in 2010/11 (National
Statistical Office, 2012), much higher than expected, with a fall of only 1.5%
from 58.1% in 2004/5 to 56.6% in 2010/11.
The very limited fall in estimated poverty incidence from 2004/5 to
2010/11, as reported by National Statistical Office (2012), is difficult to recon-
cile with estimates of wider changes (in labour supply, wages, crop income,
school enrolment, child health, subjective well-being, asset ownership, and
experience of shocks) reported in different surveys discussed in this and the
previous chapter. However the continued high reported poverty incidence in
2010/11 (with high incidence of ultra-poverty) is consistent with a number of
other estimates of change from 2004/5 to 2010/11 (National Statistical Office,
2005a, 2012): increases in moderate stunting, wasting, and underweight and
small reductions in ownership of tables, radios, and sickles. On the other
hand, these findings are less easy to reconcile with other estimates from
these surveys: falls in severe stunting, wasting, and underweight; increases
in ownership of beds and bicycles; increases in permanent and semi-perma-
nent housing with decreases in traditional housing; increases in access to
improved water sources and use of improved sanitation; and decreases in the
proportion of people reporting inadequate food, clothing, and health care.5
Furthermore, examination of changes in poverty incidence across districts
shows a wide range of changes.6 These apparent inconsistencies pose impor-
tant questions that need to be resolved, suggesting inconsistencies in either
the IHS2 or the IHS3.

7.6.3. Nutrition
As with the poverty incidence estimates, one would expect economy-wide FISP
impacts on real incomes to lead to national improvements in the nutrition
status of children in Malawi. Anthropometric indicators, however, present an

5
These improvements are found across all income quintiles.
6
These, for example, range from an astonishing almost halving of poverty incidence in six
years in Thyolo and Rumphi Districts, from 65 to 37% and from 62 to 37% respectively, to a rise
in poverty incidence from 38 to 57% in Lilongwe, from 66 to 82% in Chikwawa, and from 51 to
61% in Mzimba District (next to Rumphi).

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Table 7.4. Trends in poverty headcount in Malawi, 1998–2011 (%)

1998 2004/5 2005* 2006* 2007* 2008* 2009* 2010/11

National 54.1 52.4 56 58.4 41.3 41 40 50.7

Urban** 18.5 25.4 24 25 11 13 14 17.3
Rural** 58.1 55.9 53 47 44 44 43 56.6

Note: * Predicted poverty rates based on an econometric model using welfare monitoring survey data (Mathiassen,
2006 and National Statistical Office, 2005b) with seasonal adjustments as in Chirwa et al. (2012).
**WMS urban and rural figures are not seasonally adjusted.
Sources: Government of Malawi and World Bank (2006), National Statistical Office (2005b, 2007, 2008b, 2009,
2010b, 2012), Chirwa et al. (2012)

apparently confusing picture (Table 7.5). This expectation requires first that
the FISP has raised the real incomes of poorer households, and second that
such increases in real income lead to improved child nutrition. We consider
here first evidence of wider changes in children’s nutritional status, and then,
more briefly, evidence that higher incomes do lead to improved child nutri-
tion. There are, however, difficulties in interpreting anthropometric meas-
ures across different surveys as a new standard population reference for the
calculation of under-nutrition measures was developed by the WHO in 2006,
replacing the 1977 NCHS/CDC/WHO reference. Estimates calculated using
the different reference populations are not comparable (de Onis et al., 2006;
National Statistical Office and ICF Macro, 2011), but the 2010 Demographic
and Health Survey (National Statistical Office and ICF Macro, 2011) usefully
provides estimates derived from both standard population references, and we
include both of these in Table 7.5 to provide some indication of the way that
the different standard population references may affect comparisons across
surveys.
Stunting is the measure that should provide the best indicator of longer
term child nutrition, as it is less affected than underweight and wasting by
seasonal variations in food intake and disease. Simple comparison of the esti-
mates in Table 7.5 suggests that there has not been much of a fall in under-
nutrition from 2000 to 2011. However, allowance needs to be made for the
change in standard reference population for the 2010 DHS and 2010/11 IHS3
surveys. These two surveys give similar estimates using the 2006 WHO refer-
ence population (47.1% and 48.1% prevalence of moderate stunting, respec-
tively). The DHS2010 estimate translates into a much lower prevalence when
calculated using the 1977 NCHS/CDC/WHO reference. There would presum-
ably be a similar adjustment to the 2010/11 IHS3 (making it something like
42.5%) providing no evidence of any increase in stunting and suggesting
that if anything it may have fallen. Similar arguments apply with regard to
estimates of severe stunting, with much stronger evidence for a fall in the
prevalence of severe stunting.

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Table 7.5. Nutritional status of children under 5 years, 2000–11 (%)

Indicator 2000 2004/5 2006 2009 2010 2011

(DHS) (IHS2) (MICS) (WMS) (DHS) (DHS) (IHS3)

Stunting 49 43.2 46 36 41.5 47.1 48.1

Severe stunting - 17.8 20.5 - 15.4 19.6 14
Wasting 5.5 4.6 3.5 1 3.7 4 11.4
Severe wasting - 1.3 0.5 - 0.9 1.5 1
Underweight 25.4 22.2 20.5 17 17.8 12.8 30.6
Severely - 7.4 3.6 - 3 3 1.2
underweight

Note: DHS = Demographic and Health Survey, IHS = Integrated Household Survey, MICS = Multiple Indicator Cluster
Survey, WMS = Welfare Monitoring Survey.
*: compared against 1977 NCHS/CDC/WHO reference.
**: compared against WHO Child Growth Standards adopted in 2006.
Sources: National Statistical Office and ORC Macro (2001), National Statistical Office and ICF Macro (2011), National
Statistical Office (2007, 2010b, 2012), Government of Malawi and World Bank (2006).

Measurement of wasting and being underweight requires accurate weigh-

ing of children. On both these indicators the 2010/11 Integrated Household
Survey (IHS) stands out for very high prevalence estimates as compared with
other surveys (even allowing for adjustments for the different reference popu-
lations, which are very small for wasting). This contrasts with the percentage
underweight estimates in the 2010 Demographic Household Survey (DHS),
estimates which are particularly low compared to earlier surveys when stand-
ardized against the same reference population. The 2010/11 IHS estimates of
the prevalence of severely wasted and underweight children are however rela-
tively low, particularly when possible adjustments are made to the prevalence
of severe wasting to standardize the reference population.
Overall, it is difﬁcult to drawn any ﬁrm conclusions on changes in chil-
dren’s nutritional status from these different estimates. There are, however,
possible indications that the prevalence of moderate stunting has fallen a
little (although it is still very high) but that there has been a more substantial
reduction in the prevalence of severely stunted and of moderately and severely
underweight children (if we ignore the 2010/11 Integrated Household Survey
estimate of the prevalence of moderately underweight children as an outlier).
The various surveys reported in Table 7.5 also have the potential to provide
evidence on links between income and child nutrition. Both the IHS sur-
veys report anthropometric results by consumption quintile, and all surveys
report estimates separately by region and for urban and rural areas. Neither
the 2004/5 nor 2010/11 IHS show any clear decline in stunting or severe
stunting in higher income quintiles. However in the 2010/11 IHS the propor-
tion of children who are moderately or severely wasted or underweight falls

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Economy-wide effects of input subsidies

in higher income quintiles. This is the case for the 2004/5 IHS2 estimates of
moderate and severe wasting but not for estimates of the prevalence of under-
weight children. Both the 2006 MICS and the 2010 DHS show declining stunt-
ing and underweight prevalence (moderate and severe) with higher wealth
quintiles, but only the 2010 DHS shows this for wasting. International cross-
country analysis (for example, Headey, 2011a; Webb and Block, 2012) sug-
gests a stronger relationship between income growth and stunting and a
weaker one between income growth and wasting at lower income levels.
Examination of regional differences in anthropometric measures in Malawi
may shed a little more light on the relationships between these measures
and income and on the consistency between different surveys. Both the IHS2
and the IHS3 estimate highest median incomes and lowest poverty incidence
in the central region, and lowest median incomes and highest poverty inci-
dence in the southern region, with the northern region in between. With
regard to anthropometric measures the different surveys present somewhat
inter-regional comparisons as regards particular measures, but in broad terms
the northern region seems to have a lower prevalence of under-nutrition
while the central region tends to have the highest prevalence, despite higher
median income and lower poverty incidence than the other regions.

7.7. Summary

The chapter set out to review the economy-wide impacts of the Farm Input
Subsidy Programme in Malawi. These are important to arguments put for-
ward in Part I regarding the importance of such impacts for large-scale input
subsidy programmes supporting staple crop production. Examination of
these impacts involved identification of changes potentially associated with
the implementation of the FISP and consideration of the attribution of these
changes to the FISP and to other potential influences (such as macro-economic
management, rainfall, and tobacco prices) using four principle approaches:
consideration of patterns of change in different variables; regression analysis;
simulations with CGE models; and simulations with a partial equilibrium
Informal Rural Economy model.
Although most macro-economic indicators show an environment of
macro-economic stability, some of the indicators—such as fiscal deficits and
domestic debt—have been unfavourable within the period of implementa-
tion of the subsidy programme. While good macro-economic management
made the implementation of the FISP possible, the FISP may have then con-
tributed both to good agricultural growth and to fiscal deficits and domestic
debt (in and following years when FISP costs were not well controlled). There
are possible difficulties with published estimates of GDP growth, but even

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allowing for these, agricultural sector performance in the FISP period would
still average a little under 8%—or a little under 7% if the 2006 recovery from
bad 2005 rains is factored in.
The analysis of the economy-wide effects of the input subsidy programme
must recognize some mixed and puzzling results. While there are multiple
sources of evidence for the positive effect of the subsidy programme on pro-
duction, high maize prices from 2007 to 2009 are not obviously consistent
with this, but a number of explanations for this are put forward. Evidence
for rising nominal and real wages (as measured against maize prices) is very
strong, derived from a variety of different information sources and analytical
approaches. Regression analysis linking wage rates to subsidy receipts in dif-
ferent areas is particularly revealing as it also provides insights into the effects
of changes in tobacco prices and maize prices on nominal and real wage rates.
Evidence of the FISP causing increases in real wage rates and consequent rises
in real incomes is also provided by qualitative date from rural people and by
CGE and IRE modelling. These sources also suggest that there have been or
should have been increases in real incomes, especially among poor buyers of
maize and sellers of ganyu labour, and consequent falls in poverty incidence.
However while there is a substantial body of evidence suggesting that this
has been the case, the very recently released Integrated Household Survey
poverty incidence estimates for 2010/11 are only very slightly lower than
the 2004/5 estimates. We are not currently able to resolve the inconsistencies
between these conﬂicting sets of information.

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8

Impacts on input market development

8.1. Introduction

The implementation of the Farm Input Subsidy Programme (FISP) in Malawi

since the 2005/6 agricultural season has involved the interaction of the
government of Malawi, the private sector, the development partners, Civil
Society Organisations (CSOs), non-governmental organizations, tradi-
tional leaders, and smallholder farmers. These have played various roles in
the implementation and success of the programme. The private sector has
played a critical role in the procurement, transportation, and retail of farm
inputs, but their involvement in the programme has changed over time.
The private sector is involved in several aspects of the subsidy programme
including the procurement of fertilizers, the transportation of fertilizers to
various markets, the retail sale of fertilizers, and the production and sale of
improved seeds.
There are potential beneﬁts from the inclusion of the private sector in the
implementation of a large and nationwide agricultural input subsidy pro-
gramme, as noted in Imperial College et al. (2007). First, it is believed that
most of the activities can be done more efﬁciently by the private sector, which
is less prone to the bureaucracy associated with state delivery of services.
Second, the involvement of the private sector is seen as a strategy for develop-
ing the private market system, especially in remote areas where the incentives
for private sector investment in markets are weak. Third, the involvement of
the private sector may allow the government to use scarce resources on other
activities, by reducing the cost of the subsidy to the government. Fourth, the
participation of the private sector in input retailing may reduce the displace-
ment effects of the input subsidy programme.
This chapter assesses the impact of the Farm Input Subsidy Programme
on the development of the private sector. The next section reviews the roles
and nature of private sector participation in the input supply systems and
the subsidy programme. Section 8.3 highlights the overall input purchases

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and use. Section 8.4 analyses the changes that have occurred in the fertilizer
market and the experiences of private sector participation in the subsidy pro-
gramme. Section 8.5 looks at the impact of the subsidy programme on the
seed industry. Section 8.6 highlights the challenges and opportunities for
greater private sector participation in the implementation of the subsidy pro-
gramme. In Section 8.7 we conclude and highlight the issues and options for
improving private sector participation in the implementation of the subsidy
programme.

8.2. Roles of various players in input supply systems

The public and private sectors play various roles in the supply of farm inputs
in Malawi, from procurement of inputs to retailing of inputs to farmers.
The Malawi Government is directly involved in the supply of farm inputs
through its two state-owned firms, the Agricultural Development and
Marketing Corporation (ADMARC) and the Smallholder Farmer Fertilizer
Revolving Fund of Malawi (SFFRFM). These state-owned firms compete
with private sector enterprises comprising large-scale enterprises, coopera-
tive, retail chain stores, and small-scale agro-dealers. With the introduction
of the farm input subsidy, state enterprises and private firms have played
varying roles over the life time of the programme. The input suppliers have
a number of associations and networks including the Fertilizer Association
of Malawi (FAM), the Seed Traders Association of Malawi, Agricultural Input
Suppliers Association of Malawi (AISAM), and a network of input suppli-
ers under the Citizen Network for Foreign Affairs (CNFA)/Rural Market
Development Trust (RUMARK). In addition, the National Association of
Smallholder Farmers of Malawi (NASFAM), a farmer cooperative, also pro-
vides input access to smallholder farmers on a commercial basis through
a network of input supply shops. While state-owned enterprises have had
consistency in the supply of inputs, the private sector participates in the
subsidy programme in various ways in the fertilizer and seeds components
of the programme. On the one hand, the relative roles of the private sec-
tor in the fertilizer component of the programme have varied over time as
regards their participation in and exclusion from retail sales while remain-
ing important partners in the procurement of fertilizers for the programme
and commercial sales. On the other hand, private sector participation in
the seed component of the programme has been consistent. Apart from
participation in the subsidy programme, the private sector also procures
fertilizers and seeds for commercial sales in various market outlets across
the country.

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Impacts on input market development

Private sector

Public
Fertilizer Association sector

Large/well-established
Procurement

Small/new entrants SFFRFM

Commercial Coooperative ADMARC
FW/Agora Export Trading
Yara NASFAM Nyiombo
Omnia
Optichem
Sealand
Muli Brothers
Simama
Transglobe
Distribution and retail

Importer managed
ExTrd shops 19 + 6 AD Coop Independent of importer Market
FW/AG shops 05/06-103; 06/07-81 managed units
Chains Agro-dealers
Nyiombo shops 06/07-66 NASFAM ADMARC
RAB/Kulima Gold
Yara depots 05/06-1; 06/07-7 >220 active (668)
(43) Shops 06/07-55
SFFRFM
Supermarkets (05/06-28)
Shops 06/07-?? (06/07--56)

Agro-dealer support programmes

CNFA & AISAM

Figure 8.1. Structure of the fertilizer industry in Malawi in 2010

Source: Kelly et al. (2010) and School of Oriental and African Studies et al. (2008).

8.2.1. Fertilizer markets under FISP

The structure of the fertilizer industry in Malawi has evolved since the
introduction of the input subsidy programme, with exits and entries, but it
remains dominated by a few players with vertical and horizontal relation-
ships. Figure 8.1 shows the characteristics and level of participation of various
players in the supply of fertilizers in procurement, distribution, and retail. At
procurement level, the private sector players can be categorized into large/
well-established private firms (commercial firms and cooperatives) and small/
new entrants, while in the public sector there is SFFRFM and ADMARC. The
private sector firms and SFFRFM import fertilizers for both the subsidy pro-
gramme and commercial sales while ADMARC has only procured for the sub-
sidy programme. The private sector firms participate in the procurement of
fertilizers for the programme in a competitive tendering process. In addition,
the two state-owned enterprises, ADMARC and SFFRFM, also take part in the
fertilizer tendering process.
Over time, the business opportunities in the supply of fertilizers to the pro-
gramme have led to new entrants in the importation of fertilizers. Dorward
et al. (2010b) note that there has been increased participation of the private
sector in the supply of fertilizers to the programme, be it in terms of number
of players and the relative volume handled by the private sector relative to

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Implementation and Impacts

volumes handled by the state-owned enterprises or parastatals. Most impor-

tantly, private sector participation in the procurement of fertilizers has been
consistent since the programme started in 2005/06. There has been growing
interest in the supply of fertilizers to the programme. Logistics Unit (2012)
shows that in the 2011/12 season, 65 enterprises submitted bids to supply
fertilizers to the subsidy programme of which 20 were awarded contracts, an
increase from 11 companies in the 2007/8 season (Logistics Unit, 2008).
Procurement is vertically linked to the distribution and retail of fertilizers to
farmers, with some of the private sector ﬁrms and the two state-owned enter-
prises owning retail outlets in different parts of the country. The large private
ﬁrms and some small to medium-scale new entrants also supply unsubsidized
fertilizers to a network of agro-dealers and retail chain stores or supermarkets.
However, the participation of the private sector in the retailing of subsidized
fertilizers has been limited. Although the private sector plays a dominant
role in the procurement of fertilizers, its participation in fertilizer retailing
to smallholder farmers under the subsidy programme has varied, with the
private sector participating only in the 2006/7 and 2007/8 agricultural sea-
sons (Dorward and Chirwa, 2011c). In these two seasons, smallholder farmers
were able to redeem fertilizer coupons at some of the major retailers of fertiliz-
ers, but smallholder agro-dealer sellers were excluded from the redemption
of fertilizer coupons. Otherwise, ADMARC and SFFRFM have been the only
market outlets through which smallholder farmers have redeemed their sub-
sidy fertilizer coupons.
The other important role played by the private sector in the implementa-
tion of the subsidy programme is the transportation of fertilizers from the
national depots to retail outlets in various parts of the country. There is no
participation of state-owned enterprises in this activity, and this service is
purely provided by private transporters through competitive bidding. The
transporters of fertilizers from depots to unit markets are selected by the
Ministry of Agriculture through a bidding process (Logistics Unit, 2008). In
the 2011/12 season, a total of 23 transporters participated in the distribution
of fertilizers from SFFRFM depots to various unit markets across the coun-
try (Logistics Unit, 2012) compared to 16 transporters in the 2008/9 season
(Logistics Unit, 2009).

8.2.2. Seeds market

In contrast to the fertilizer market, the seeds market is a private sector-based
system, with no state-owned enterprise playing a role in the procurement of
seeds. Figure 8.2 shows the structure of the seed industry in Malawi at vari-
ous levels of the supply chain. The seed industry comprises the growers and
retailers. The growers form the Seed Trade Association of Malawi (STAM) and

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Impacts on input market development

Seed Trade Association of

Malawi

International Malawian-OPV only

Procurement

Hybrid only Hybrid & OPV

Pioneer Monsanto SeedCo Pannar Funwe Demeter ASSMAG

Most outlet
l s and retailer
l rs stock seeds off multiple compani
m ies
Input distributors Other formal Independents Government

FW/AG shops 05/06-103; 06/07-81

chains
Market Units
Retail

Nyiombo shops 06/07-66 Agrodealers

ATC ADMARC (668)
RAB shops 06/07 55 NASFAM
F >220 active SFFRFM (05/06-28) (06/07--56)
Voucher handling

FW/Agora Rab/Kulima Chipiku A

ATC Agrimark Transglobe NASCOMEX
AISAM

Each of 7 seed compani

m ies receives
v vouchers for sales off their
i product
r s
Pioneer Monsanto SeedCo Pannar Funwe Demeter ASSMAG
V

Logistics Unit

Figure 8.2. Structure of the seed industry in Malawi in 2010

Source: Kelly et al. (2010) and School of Oriental and African Studies et al. (2008).

are classified by ownership into international firms and domestic firms; by

2011/12 there were18 seed growers in Malawi. The international companies
are involved in the production of hybrid and open pollinated varieties while
Malawian-owned companies tend to specialize in open pollinated varieties
and legume seeds. The international firms include Pioneer and Monsanto
who specialize in hybrid maize, and Pannar and Seed Co specializing in both
hybrids and open pollinated varieties (OPV). The domestic firms specialize
in OPVs and legume seeds and include Funwe, Demeter, and the Association
of Smallholder Seed Multiplication Group (ASSMAG). The retail sector of the
seed industry consists of seed growers’ distributor outlets, agro-dealers, coop-
eratives, supermarkets, and parastatals (ADMARC and SFFRFM).
The private sector has been a major player at all stages of seed supply and
distribution of seeds in the subsidy programme. Its exclusive role in seed
procurement and retail has been consistent since the commencement of the
programme in 2005/6. Both large international and smaller domestic firms
(including smallholder seed multiplication groups) have been awarded con-
tracts to supply hybrid and OPV maize seeds and legumes to the programme.
In the 2007/8 season, for instance, six growers of seeds participated in the
supply of maize seeds to the subsidy programme with one specializing in
hybrid seeds, two in both hybrids and OPV, and three specializing in OPV
seeds. More recently, as we observe below, the number of companies for sup-
plying maize and legume seeds to the subsidy programme has increased.

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Implementation and Impacts

The delivery of the seed component of the programme has, since 2006/7,
been consistent with the promotion of private sector development in input
markets. In the 2005/6 season, all the distribution and retailing of seeds under
the subsidy programme was done through ADMARC and SFFRFM (Imperial
College et al., 2007). However, beginning with the 2006/7 season, seed pro-
curement has been handled purely by the private sector, and seed suppliers
have been distributing the seeds to retailers (parastatal and private sector retail-
ers) across the country. The 2006/7 season also saw the inclusion of small-scale
agro-dealers in the redemption of seed coupons (Dorward and Chirwa, 2011c)
and Logistics Unit (2008) notes that maize seed dealer outlets were unrestricted
and seed producers entered into various arrangements with small-scale input
agro-dealers and retail chain stores in addition to ADMARC and SFFRFM outlets.

8.3. Overall input purchase and use

There are difficulties in estimating the overall purchases and use of fertilizers
due to lack of consistent data on commercial sales of fertilizers. However, we
use import figures to estimate fertilizers available for commercial sales after
accounting for subsidized fertilizers. The official import data include fertiliz-
ers for both estates and smallholder farmers. Figure 8.3 shows the trends in
imports, disaggregated between subsidy fertilizers and fertilizers available for
commercial sales, using industry data from 2004 to 2006 (School of Oriental
and African Studies et al., 2008) and NSO import data from 2007. The trend
in the fertilizers available for commercial sales after subtracting the subsidy
from imports shows a marginal increase between the 2004/5 and 2005/6 sea-
son and a sharp decrease in 2006/7.1
After falling in 2006/7, the trend from 2007/8 is for increasing availability
of commercial fertilizers in addition to increases in total imports of fertilizers.
However, available commercial fertilizer in 2010/11 is still below the 2004/5
level (the year before the commencement of the subsidy programme). A small
reduction in subsidized fertilizer between 2007/8 and 2008/9 is associated
with a substantial increase in the quantity of fertilizer available for commer-
cial sales in 2008/9. There is a decline in importation of fertilizers and avail-
ability of commercial fertilizers in 2009/10 but an increase in imports and
available commercial fertilizers in 2010/11 while the subsidy levels remained

1
Industry data on total fertilizer sales from 1998 to 2006 as reported in School of Oriental and
African Studies et al. (2008) are not consistent with NSO import data over the same period, and
are on average around 80,000 MT per year higher. If this continues from 2007 then commercial
sales from 2007 would be around 80,000 MT higher than indicated in Figure 8.3. It should also be
noted that annual estimates on sales may not be accurate due to carry forward of stocks, but these
should average out over two or more seasons.

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Impacts on input market development

400
Imports Actual subsidy Commercial supply
350

300

250
'000 MT

200

150

100

0
2004/5 2005/6 2006/7 2007/8 2008/9 2009/10 2010/11 2011/12

Figure 8.3. Fertilizer imports and fertilizer use, 2004/5–11/122

Sources: National Statistical Ofﬁce (2009)—Statistical Year Book Data Set; Dorward
and Chirwa (2011c) and School of Oriental and African Studies et al. (2008).

unchanged. The decline in 2009/10 is also associated with a sharp decline

in the previous season’s price for burley tobacco. Chirwa et al. (2011a) note
that 2008/9 prices for burley were signiﬁcantly low towards the end of the
marketing season compared to three previous seasons. This might have led to
reduced demand for commercial fertilizers.
Interestingly, available commercial fertilizer in 2010/11 was more than
subsidized fertilizer. The subsidy programme in the 2010/11 season excluded
tobacco fertilizers, and the increase in the available commercial fertilizers
may reﬂect lower displacement due to the focus of the programme on maize
fertilizers. As noted in School of Oriental and African Studies et al. (2008),
the subsidy on tobacco fertilizers had higher displacement than the sub-
sidy on maize fertilizers. Then, in 2011/12 there is another drop in imports,
subsidized fertilizers, and available commercial fertilizers. Tobacco was also
excluded in 2011/12 but the decline in available commercial fertilizer may be
partly due to the collapse of tobacco prices in 2010/11 season which led many
smallholder farmers to abandon tobacco production in the 2011/12 season.
The 2011/12 crop estimates show that tobacco production was expected to
decline by more than 36%. Except for bad years for tobacco, these results
show that there has been an overall increase in fertilizer importation and an
increase in the fertilizers available for commercial use, suggesting that after
an initial decline the subsidy programme might have stimulated fertilizer use.

2
‘Commercial supply’ estimated by subtraction of subsidy from imports for 2007/8 and
thereafter.

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Implementation and Impacts

Table 8.1. Household survey estimates of total seed purchases (‘000 metric tons)

Subsidized Unsubsidized Total

Season Hybrid & Legume Hybrid & OPV Legume Hybrid Legume
OPV seed seed seed seed & OPV seed
seed

2007/8 1.7 - 4.3 - 6.1 -

2008/9 4.7 - 5.4 - 10 -
2009/10 5.4 0.9 3.6 1.6 10.9 2.5
2010/11 8.2 1.6 4.8 2.8 15.9 4.4

Note: Estimates based on NSO population estimates.

Source: Dorward and Chirwa (2011a).

Data on overall purchases and use of seeds are not readily available. However,
national estimates from household surveys show that the quantity of hybrid
maize seeds used increased. Table 8.1 shows that total hybrid and OPV maize
seeds use has increased by 160% between 2007/8 and 2010/11 season, while
legume seeds use almost doubled between 2009/10 and 2010/11 largely due
to increased levels of seed subsidization.

8.4. Developments in the fertilizer markets

8.4.1. Changes in competition in fertilizer procurement

The introduction of the Farm Input Subsidy Programme has attracted a num-
ber of entrepreneurs in the fertilizer import sector. Figure 8.4 presents the
trend in the number of ﬁrms that participate in the procurement of ferti-
lizers under the subsidy programme. There are two parastatals involved in
the procurement of fertilizers, ADMARC and SFFRFM, but only SFFRFM has
been active in the bidding while ADMARC has beneﬁted from uncompeti-
tive allocation as a parastatal, except in 2011/12 where it also participated
as a bidder. There are increasing trends in both the number of private sector
bidders interested in procuring fertilizers and the number of bidders who
were awarded contracts to supply subsidy programme fertilizers, particularly
from the 2009/10 season. The number of interested private bidders increased
from 24 companies in 2009/10 to 65 companies in 2011/12. The subsidy pro-
gramme has over time attracted new companies whose traditional business
is not importation of agricultural inputs. Similarly, the number of successful
awards of contracts has also increased from 10 private companies in 2009/10
to 20 private companies in 2011/12. Some of the new companies, as well as
the more established ones, have had links with different political parties, and

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Impacts on input market development

(a) Number off bids

70
Private Parastatal
60

40
30

0
2007/8 2008/9 2009/10 2010/11 2011/12

(b) Number off awards

25
Private Parastatal
20

0
2007/8 2008/9 2009/10 2010/11 2011/12

Figure 8.4. Number of bids and awards in fertilizer procurement,

2008/9–11/12
Source: Logistics Unit (2008, 2009, 2010, 2011, 2012).

these may have affected their participation in the programme. With respect
to parastatals, SFFRFM has always participated and succeeded in the supply of
subsidy fertilizers while ADMARC has only been awarded contracts to supply
in the 2009/10 and 2011/12 agricultural seasons. However, what is not clear
is whether the new entrants in fertilizer imports are also importing fertilizers
for commercial sales.
Apart from the entry of other players in the supply of fertilizers under
the programme, there have also been notable exits, such as the National
Association of Smallholder Farmers of Malawi (NASFAM), Rab Processors,
and Yara who participated in 2006/7 but have not since continued to partici-
pate in the programme (Kelly et al., 2010). Yara closed down its international
representation in Malawi, turning over an exclusive right to import Yara fer-
tilizers to Agricultural Resources Limited. These exits are therefore only in

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Implementation and Impacts

(a) Value
250
Parastatal Private
200

US$ million 150

100

-
2007/8 2008/9 2009/10 2010/11 2011/12

(b) Value shares

100%
90%
80%
70%
60%
50%
40%
30%
20%
10%
0%
2007/8 2008/9 2009/10 2010/11 2011/12

Figure 8.5. Value and value share of subsidized fertilizers supplied by

sector, 2007/8–11/12
Note: The ﬁgures are new procurement during the season.
Source: Logistics Unit (2008, 2009, 2010, 2011, 2012).

subsidized fertilizers; the ﬁrms have continued to supply fertilizers in the

market on commercial basis.
Figure 8.5 shows the share of fertilizers supplied to the programme by the
private ﬁrms and parastatals in terms of value of supplies. Panel (a) shows
large annual variations in the value of fertilizer purchases by the private
sector between 2007/8 and 2010/11. In panel (b), however, there is a steady
increase in the share of the value of supplies accounted for by the private
sector, increasing from 71% in 2008/9 to 95% in 2010/11, but falling to 78%
in 2011/12. In monetary terms, the highest realized value to the private sec-
tor occurred in 2008/9, amounting to $203.75 million, consistent with the
high volume procured by the private sector but also reﬂecting high interna-
tional fertilizer prices.

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Impacts on input market development

8.4.2. Changes in competition in the fertilizer retail market

There are several kinds of players in the fertilizer retail market including
importer-managed outlets, cooperative-managed outlets, chain stores and
supermarkets, agro-dealers, and parastatals’ unit markets (Kelly et al., 2010).
The participation of the private sector in the retail marketing of subsidized
fertilizers has been the most difficult aspect in relation to the development of
the private input markets across the country. As noted above, the private sec-
tor was allowed to redeem fertilizer vouchers only in the 2006/7 and 2007/8
seasons.
In the 2006/7 season, a total of 174,688 metric tons of subsidized fertilizers
was sold to smallholder farmers with ADMARC and SFFRFM sales accounting
for 72% of fertilizer sales and the private retailers accounting for 28% (School
of Oriental and African Studies et al., 2008). The private sector continued
to participate in retail of subsidized fertilizers in 2007/8, with the innova-
tion of a remote market premium. According to Logistics Unit (2008), ‘in cer-
tain extension planning areas (EPAs) within the districts where private sector
involvement had been limited in the previous year, it was agreed to pay the
retailers an additional sum of either 100MK or 200MK per voucher depend-
ing based on last year’s sales figures for each EPA’. Kelly et al. (2010) find that
the ‘remoteness’ premium encouraged the private sector to provide inputs in
more locations in 2007/8 than in the previous season, although there was no
evidence that such outreach was on a medium to long term basis.
Those in favour of private sector participation in fertilizer subsidy retail sales
point to several benefits, including efficiency, freeing government resources,
facilitating a strategy for promoting input markets in remote areas, broaden-
ing of choice of and competition between outlets for smallholder farmers,
and reducing transaction costs and costs of queuing. However, opponents of
private sector participation in the subsidy fertilizer retail market argue that
the private sector cannot be trusted as they may be exchanging coupons for
other merchandise rather than fertilizers in the absence of an audit system,3
the available stocks held by private sector firms cannot be verified, that there
is a high incidence of fraud in the private sector, and that private sector sales
make it difficult to control the cost of the subsidy programme. These argu-
ments were cited as grounds for the government’s decision to exclude the
private sector from retail sales of subsidized fertilizer from 2008/9 onwards.
Counter-arguments are that there is also evidence of fraud and corrup-
tion by some parastatal sales clerks, and that effective cost control should be
achieved through control of coupon issue—as has been achieved from the

3
There were anecdotal claims in the media that some farmers were obtaining iron sheets in
exchange for fertilizer coupons in some private sector input outlets.

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Implementation and Impacts

2009/10 season (although difﬁculties are also illustrated by major problems

with excess seed costs in 2010/11 as a result of problems in detecting large
numbers of counterfeit seed vouchers).

8.4.3. Fertilizer sales trends: evidence from household surveys

The household surveys shed light on the trends in the commercial sales of
fertilizers among smallholder farmers. Figure 8.6 shows the various retail
channels from which households reported purchasing their commercial fer-
tilizers in the 2006/7, 2008/9, and 2010/11 seasons. The proportion of house-
holds accessing private company market outlets for commercial purchases
has increased significantly from about 6% in the 2006/7 season to about 30%
in 2010/11. This increasing trend is also evident in the use of club or farmer
cooperatives as a source of commercial fertilizers. The purchase of fertilizers
on a commercial basis from parastatals has been falling, from 18% in 2006/7
to about 13% in the 2010/11 season. These figures suggest that commercial
sales of fertilizers have flourished in the presence of the subsidy programme.
Although, the private sector has been excluded in the retail of subsidized
fertilizers, the subsidy programme might have stimulated demand for com-
mercial fertilizers, thereby promoting private sector development.

35%
2006/7
30% 2008/9
2008/9
2010/11
25%

20%

15%

10%

0%
t

ny
r

ke
de

-o
hb

pa
ar

FR
a

co
Tr

m
SF

/
ne

co
C/
ca
e/

e
AR
Lo

at
iv
at

iv
Pr
l

AD
Re

Figure 8.6. Sources of households’ commercial fertilizer purchases, 2006/7–10/11

Source: Computed by authors based on AISS1, AISS2, and AISS3.

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Impacts on input market development

The evidence on household use of different marketing channels for pur-

chase of commercial fertilizers in Figure 8.6 is also supported by information
on the average volumes of commercial fertilizers purchased by households,
shown in Figure 8.7. On average, the volume purchased from traders has
fallen signiﬁcantly from about 50 kg in 2006/7 to about 10 kg in 2010/11.
Sourcing fertilizers from relatives or neighbours increased, but this may be fer-
tilizer that could either have been subsidized and resold or received through
remittances. There is an increase in average volumes purchased from the local
market initially, but this declined between 2008/9 and 2010/11. There is a
declining trend, however, in average commercial purchases from parastatals
(ADMARC and SFFRFM). The increasing trends in the volume purchased from
farmer cooperatives and private company outlets suggest positive private sec-
tor market development. For instance, in the 2006/7 season, households pur-
chased on average 9 kg of commercial fertilizers, but this increases to 42 kg
in 2008/9 and 60 kg in 2010/11, despite fertilizer price increases. This further
suggests that the subsidy programme may have helped in stimulating com-
mercial demand for fertilizers, and certainly has not depressed it over the
longer term, as private marketing activities have continued to ﬂourish in the
medium term.

70
2006/7
60
2008/9
50 2010/11
Kilograms

0
t

y
er

ke
bo

n
-o
ad

pa
ar

co
gh
Tr

F
lm

m
SF

/
ei

co
C/
n

ca
e/

e
AR
Lo

at
iv
at

iv
Pr
l

AD
Re

Figure 8.7. Mean quantities of commercial fertilizer purchases per household,

2006/7–10/11
Source: Computed by authors based on AISS1, AISS2, and AISS3.

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Implementation and Impacts

Interestingly, although the international fertilizer price almost tripled in

the 2008/9 season (Dorward and Chirwa, 2011c), there was an increase in the
purchase of commercial fertilizers from private company retail shops. This
is also consistent with the lower estimated displacement in 2008/9 season
(Ricker-Gilbert and Jayne, 2010a). Similarly, Chirwa et al. (2011d), using a
matched panel, note general increases in the purchase of commercial fertiliz-
ers between 2008/9 and 2010/11 among poor and non-poor households and
a decrease in average subsidy fertilizers received by households.
These positive changes in private sector market development are also
consistent with earlier studies. For example, Kelly et al. (2010) note that
the perceived number of retailers selling only fertilizers increased, while
those selling both seeds and fertilizers fell between the 2006/7 and 2008/9
agricultural seasons, although community surveys revealed little change in
the number of input suppliers. Nonetheless, there were also a number of
exits from seed and fertilizer markets during the period. Similarly, a higher
proportion of retailers revealed that their business performance in terms
of sales and proﬁts had increased between 2007/8 and 2008/9 (Kelly et al.,
2010).

8.4.4. Displacement of commercial fertilizer sales

The Farm Input Subsidy Programme could have several impacts on the input
market system depending on the scale, targeting, and other implementation
modalities. On the one hand, a poorly-targeted large-scale programme results
in displacement of commercial sales and introduces disincentives for private
investments in input markets. On the other hand, a well-targeted programme
can stimulate additional demand for commercial fertilizers among subsidized
households by improving the productivity and proﬁtability of their farming
activities and their ability to ﬁnance fertilizer purchases. The displacement
effects are a function of targeting among other factors such as fertilizer prices
and prices of agricultural produce: where subsidized fertilizers are provided
to farmers that can afford commercial purchases, the displacement of com-
mercial sales is likely to be high, thereby depressing incremental production.
Thus, poor targeting, in which better-off farmers also tend to be recipients
of subsidized fertilizers, may lead to substantial displacement of commercial
sales by subsidized sales, resulting in a reduction of production and welfare
impacts of the subsidy programme.
The relative promotional and displacement effects are examined in
Table 8.2 which shows the quantity of subsidized and commercial fertilizers
acquired by households in the 2009/10 and 2010/11 seasons by IHS2 pov-
erty status (2002/3 and 2003/4) compared with commercial fertilizers in the
IHS2. Among poor households the average quantity of subsidized fertilizers

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Impacts on input market development

Table 8.2. Quantity of subsidized and commercial fertilizers by IHS2 poverty status (kg)

Years Poor households in 2003/4 Non-poor households in 2003/4

with
subsidy Subsidy Commercial Subsidy Commercial
access

N 2009 2010 2003/4 2009 2010 N 2009 2010 2003/4 2009 2010

0 4 0 0 82 58 55 11 0 0 691 132 128

1 17 3 12 37 61 79 18 10 17 123 246 250
2 15 44 20 176 126 92 13 32 17 221 157 181
3 18 52 36 68 29 80 23 35 44 174 98 99
4 22 59 50 130 54 70 22 49 39 79 141 151
5 37 51 38 52 31 51 37 54 40 162 72 102
6 114 70 66 72 40 51 112 75 74 116 61 63
All 227 54 47 78 48 61 236 53 49 165 100 109

Source: Computed by authors based on IHS2 and FISS3 data.

declined from 54 kg in 2009/10 to 47 kg in 2010/11, while commercial ferti-

lizers increased from 48 to 61 kg. A similar trend is observed among non-poor
households, and may be related to economy-wide impacts of the programme.
The data also shows that both poor and non-poor households supplement
subsidized fertilizers with commercial fertilizers, but among the poor the
higher the number of seasons a household beneﬁts from the subsidy, the
lower the supplementation with commercial fertilizers. No consistent pattern
emerges with respect to non-poor households that are subsidized.
A comparison of the 2009 and 2010 commercial purchases with the
2003/4 purchases shows a mixed picture among different households. On
the one hand, among the category of poor households, only those that
have had access to the subsidy in seasons 1 and 3 are on average purchas-
ing more in 2010 than in 2003/4. On the other hand, among the non-poor
households, only for households that have had access to the subsidy in
seasons 1 and 4 do we witness purchases above the 2003/4 levels. This sug-
gests some crowding out of commercial fertilizer sales due to the subsidy
programme, although the decline in commercial purchases also occurred
among households that have never received subsidized fertilizers. However,
it should also be noted that the average prices of commercial fertilizers sub-
stantially increased from 37MK per kg in 2003/4 to 97MK per kg in 2010/11,
an increase of 162% over the period; this might have dampened the demand
for commercial fertilizers.
School of Oriental and African Studies et al. (2008) using national ferti-
lizer sales data and taking into account the price effects, estimated displace-
ment rates of 20% and 42% in 2005/6 and 2006/7, respectively, without any
allowance for the effects of fertilizer and maize or tobacco price changes

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Implementation and Impacts

on demand. The displacement rates were substantially higher for tobacco

fertilizers compared to maize fertilizers. Using household survey data and
a matched sample of smallholder farmers, Ricker-Gilbert et al. (2010) note
that the proportion of smallholder farmers purchasing commercial fertilizers
fell from 40% in 2003/4 to 16% in the 2006/7 season. The regression results,
from a double hurdle model allowing for fertilizer and maize or tobacco
price changes, revealed a displacement rate of 22%, with 18% among poorer
households and 30% among non-poor farmers (Ricker-Gilbert et al., 2010).
Using a similar model, Ricker-Gilbert and Jayne (2010a) estimate an average
displacement rate of 3% in 2008/9.
Chirwa et al. (2011d), using household data for 2002/3, 2003/4, and
2010/11 seasons, find that for a matched sample of households that bought
commercial fertilizer in the 2002/3 and 2003/4 seasons, a 1% increase in sub-
sidized fertilizers led to a 0.39% reduction in commercial sales, but this fell to
an elasticity of –0.15 (or a net displacement rate of 15%) for the whole sample
of panel households who bought commercial fertilizers in either of the sea-
sons. The decrease in the elasticity suggests that the subsidy programme does
not only have displacement effects, but also promotional effects when one
accounts for households that did not initially purchase commercial fertilizers.
The displacement rates in the seed market tend to be higher, although there
is also anecdotal evidence suggesting that the subsidy programme is stimulat-
ing demand for improved maize seeds. School of Oriental and African Studies
et al. (2008) note that in 2006/7 one of the major suppliers of improved seeds
reported a sales increase of 52% over 2005/6 levels, with many suppliers
qualitatively indicating improvements in sales. Kelly et al. (2010) also find
evidence of the positive impact of the subsidy programme on seed sales in
the 2007/8 and 2008/9 agricultural seasons. In addition, a large proportion of
retailers surveyed were in favour of the continuation of the seed subsidy: 95%
of those that participated and 76% of those that did not participate in the
2008/9 agricultural season (Kelly et al., 2010). However, Mason and Ricker-
Gilbert (2012) find that a 1 kg increase in subsidized seed acquired by the
household reduces commercial improved maize seed purchases by 0.56 kg
in Malawi (a displacement rate of 56%), higher than in Zambia where the
displacement rate is 49%. Improved seeds are substantially cheaper than sub-
sidized fertilizers, and relatively more households can afford to buy commer-
cially thereby increasing displacement rates relative to the displacement rates
in fertilizer markets. However, it must be recognized that estimation of both
fertilizer and seed displacement rates involves difficulties in categorization of
some purchases as subsidized or unsubsidized. This is likely to be particularly
difficult for seeds, where purchases of recycled hybrid seed may be difficult to
distinguish from purchases of new seed.

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Table 8.3. Number of seed suppliers to the subsidy programme, 2006/7–11/12

Seed type 2006/7 2007/8 2008/9 2009/10 2010/11 2011/12

Hybrid maize 3 3 3 4 3 5
OPV maize 5 5 4 4 4 6
Tested bean - - - 4 2 5
Tested - - - 4 4 10
groundnut
Soya bean - - - 2 2 3
Pigeon pea - - - 1 1 5
Cow peas - - - 1 1 1
Cotton - - 2 - - -
Number of ﬁrms 6 6 8 8 9 12

Note: Some ﬁrms supply more than one type of seed, so the total number of ﬁrms is not the total for the columns.
Source: Logistics Unit (2008, 2009, 2010, 2011, 2012).

8.5. Developments in the seed market

8.5.1. Changes in competition in the seed market

The private sector has, from 2006/7, consistently participated in the distribu-
tion and retailing of seeds under the subsidy programme, as noted above.
Improved maize seeds and legumes have been made available to the pro-
gramme by the private sector in all years, though the retailing of seeds under
the programme was implemented from the 2006/7 season. This has meant
players in the seed value chain—including seed producers, agro-dealers, and
supermarkets—have been participating in the subsidy programme. Previous
evaluation reports such as School of Oriental and African Studies et al. (2008)
and Kelly et al. (2010) have pointed to the positive impact of the subsidy pro-
gramme in promoting private sector businesses in input provision.
In terms of the structure of the seed industry, there have been some limited
changes in the number of seed growers, but the major changes in the struc-
ture seem to have occurred at retail level. Table 8.3 provides the distribution
of firms supplying various seeds to the subsidy programme and shows that
the number of firms supplying seeds has increased from 6 in 2006/7 to 12 in
2011/12. Two new growers entered into the market in 2009/10: Seed Tech
supplying maize hybrid and OPV, and National Association of Smallholder
Farmers of Malawi (NASFAM) supplying groundnut seeds (Logistics Unit,
2010). In 2010/11 the number of firms supplying seeds to the programme
increased to nine, with the exit of Agricultural Input Suppliers Association
of Malawi (AISAM) and entry of Panthochi supplying OPV maize seeds and
Peacock supplying tested groundnut seeds to the programme (Logistics Unit,
2011). In 2011/12, 12 companies supplied seeds to the programme with

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the re-entry of AISAM, ASSMAG, and Seed Tech and a new entry, Pindulani
(Logistics Unit, 2012). Although the number of ﬁrms has increased over the
years, Kelly et al. (2010) note that this has not resulted in competitive pricing
as the supply prices to the programme are negotiated between STAM and the
government: this competition has just broadened the choice of seeds for the
farmers.
Nonetheless, the seed industry is highly oligopolistic, with new entrants
just providing fringe competition. Data from the Logistics Unit shows that
the two largest suppliers of seeds to the subsidy programme account for 71%
of maize voucher redemption and the three largest suppliers account for 87%
of maize voucher redemptions. Similarly, in the legume seed market, the two
and three largest suppliers to the subsidy programme account for 65% and
75% of voucher redemptions, respectively.
There is, however, an increase in the level of competition at retail level in
terms of the number of competitors in the local communities. Kelly et al.
(2010) ﬁnd that agro-dealers reported a 15% increase in competitors between
2005/6 and 2008/9, while distributors reported a 3% increase in the num-
ber of competitors. However, community surveys revealed that only 22% of
the communities believed that the number of seed sellers accessible in their
community had increased, while 57% maintained that the numbers had
remained the same between 2006/7 and 2008/9 (Kelly et al., 2010).

8.5.2. Trends in subsidized seeds sales

As described in Chapter 5, under the subsidy programme, smallholder farm-
ers are provided with maize seed vouchers and flexible vouchers that they
can use to purchase legume seeds. In 2007/8 and 2008/9, flexible vouchers
were also allowed for maize seed redemption, but they have been restricted
to legumes since the 2009/10 season. Table 8.4 presents the size of the seed
component of the subsidy programme, which provides indicators of private
sector participation. In terms of coupons redeemed, maize is the main com-
ponent and when flexible vouchers were also accepted for maize seeds a high
proportion of them were also redeemed for maize seeds. One reason for this
was the problem of availability of legume seeds in the earlier seasons of the
programme (School of Oriental and African Studies et al., 2008).
On average, the programme has distributed to smallholder farmers 5840
MT of hybrid maize seeds, 1,837 MT of OPV maize seeds and 2,256 MT of
legume seeds per year. As discussed in Chapter 5, there has been a steady
increase in hybrid seeds obtained by smallholder farmers since 2007/8 until
a fall in 2011/12. The volume of OPV maize seeds dropped substantially in
2008/9 but then increased steadily from the 2009/10 season. The consequent
value of private seed business promoted directly by the subsidy amounted on

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Impacts on input market development

Table 8.4. Size of the seed component of the subsidy programme, 2007/8–11/12

Variable 2007/8 2008/9 2009/10 2010/11 2011/12

Coupons redeemed
(N)
Maize coupons 1,603,302 1,561,329 1,614,070 1,988,066 1,376,216
Flexi 518,264 929,382 - - -
coupons—maize
Flexi 142,043 87,228 1,142,738 1,310,420 1,245,172
coupons—legumes

Seeds distributed
(MT)
Hybrid maize seeds 2,944 4,532 7,619 8,521 5,586
OPV maize seeds 2,597 833 1,033 2,129 2,591
Legume seeds - - 1,551 2,727 2,490
Cost of seeds
($ millions)
Maize seeds 8.18 11.94 17.171 23.237 16.487
Legume seeds 0.99 0.63 2.837 7.147 6.734

Source: Logistics Unit (2008, 2009, 2010, 2011, 2012).

average to US$19.1 million per year over the five agricultural seasons (exclud-
ing farmer top up payments for hybrid maize). Figure 8.8 shows the values
and value shares of this seed business and the increasing share of legumes
in the cost of the seed supplies obtained by smallholder farmers from the
subsidy programme. This reflects substantial improvements in the availabil-
ity of legume seeds in the market under the programme, such that legumes
accounted for nearly 30% of the seed component in the 2011/12 season com-
pared to only 5% in the 2008/9 season.
With respect to the relative cost of maize seeds and legume seeds
(Figure 8.8(b)), there is an increasing share of legumes in the cost of the seed
supplies obtained by smallholder farmers from the subsidy programme. With
the increase in the number of seed growers providing legume seeds, the trend
reflects substantial improvements in the availability of legume seeds in the
market under the programme, such that legumes accounted for nearly 30%
of the seed component in the 2011/12 season compared to only 5% in the
2008/9 season.

8.5.3. Seed purchases, use and preferences: evidence

from household surveys
The role of the private sector in the marketing of seeds can be deduced from
household survey data obtained in the 2006/7, 2008/9, and 2010/11 seasons.
Figure 8.9 shows the use of various market channels to access improved maize

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(a) Cost of maize and legume seeds

25
Maize seed
Legume seed
20

US$ milion 15

0
2007/8 2008/9 2009/10 2010/11 2011/12

(b) Value shares of maize and legume seeds

100%
90%
80%
70%
60%
50%
40%
30%
20%
10%
0%
2007/8 2008/9 2009/10 2010/11 2011/12

Figure 8.8. Values and value shares of subsidized maize seed sales,
2007/8–11/12
Source: Computed based on Logistics Unit (2008, 2009, 2010, 2011, 2012).

seeds (hybrid and OPV) by households in the survey years.4 The parastatals,
ADMARC and SFFRFM, are the main retail markets from which smallholder
farmers obtained their improved seeds, with about 70% of farmers utilizing
these outlets. With respect to private outlets, use of private companies by
households to obtain improved seeds has been increasing from 10% of house-
holds in 2006/7 to 17% in 2010/11. There is also increasing use of relatives or
neighbours as a source of improved seeds, from 4% of households in 2006/7
to 13% in 2010/11. These sales through relatives or neighbours could be of
recycled seeds or remittance seeds offered for resale or subsidy seeds offered
for resale.

4
For each market channel, we compute the proportion of households using the market chan-
nel, and due to multiple uses of markets by some households the total for the year is more than
100%.

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Impacts on input market development

80%
2006/07
70%
2008/09
60%
2010/11
50%
40%
30%
20%
10%
0%
t

ny
r

er
ke
e
ad

th
hb

pa
o-
ar

O
Tr

/c
ig

m
S
ne

co
C/
ca
e/

e
AR
Lo

at
tiv

iv
la

Pr
AD
Re

Figure 8.9. Households accessing improved maize seeds by retailer, 2006/7–10/11

Source: Computed by authors based on AISS1, AISS2, and AISS3.

With respect to quantities of seeds bought commercially or using the seed

subsidy vouchers, Figure 8.10(a) shows first for total hybrid and OPV seed
purchases and then for each type separately an average decline per household
of commercial purchase and an increase in subsidy purchase between 2008/9
and 2010/11. The 2010/11 figure also reflects the increase in the number of
seed coupons provided under the programme compared to the 2008/9 season.
Farmers are also purchasing more hybrid maize seeds both commercially and
under the subsidy programme compared to OPV maize seeds. While commer-
cial purchases of OPV maize seeds have remained the same, for hybrid maize
seeds commercial purchases declined from an average of 2.1 kg in 2008/9
to 1.6 kg in 2010/11 per household. In both cases of hybrid and OPV maize
seeds, there is an increase in subsidy redemption. These declining trends sug-
gest that the subsidy programme is crowding out commercial purchases, as
discussed above with regard to displacement estimates, although the overall
use of improved seeds has been increasing.
With respect to the relative participation of state and private retailers
between 2008/9 and 2010/11, Figure 8.10(b) shows that there was a substan-
tial decline in average purchases of commercial seeds through private retailers
but a greater increase in subsidized seed purchases by households. Similarly,
average commercial purchases of hybrid maize seeds fell but average subsi-
dized purchases of hybrid maize seeds increased. In contrast, average pur-
chases of commercial seeds from state marketing outlets marginally declined
(from 0.16 kg to 0.07 kg) between 2008/9 and 2010/11 largely due to a fall

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(a) Changes in subsidized and commerical purchases

4.50
2008/9 2010/11
4.00
3.50
3.00
kilograms

2.50
2.00
1.50
1.00
0.50
-
Hybrid & OPV Hybrid & OPV Hybrid maize Hybrid maize OPV maize - OPV maize -
- commercial - subsidy - commercial - subsidy commercial subsidy

(b) Changes in sales outlets

4.5
Hybrid & OPV - commercial Hybrid & OPV - subsidy
4.0
Hybrid maize - commercial Hybrid maize - subsidy
3.5 OPV maize - commercial OPV maize - subsidy

3.0

2.5

2.0

1.5

1.0

0.5

-
2008/9 2008/9 2010/11 2010/11
State Private State Private

Figure 8.10. Volumes of improved maize seeds purchased per household,

2008/9 and 2010/11
Source: Computed by authors based on AISS2 and AISS3.

in hybrid maize purchases. Although, the proportion of households access-

ing the private market system is small relative to households accessing state
markets, as observed above, the average purchases of seeds per household
purchasing is higher from private market outlets than from parastatal outlets.
Agro-dealers have played an important role in facilitating access to inputs in
rural areas. Chinsinga (2011) notes that with FISP there has been an increase
in the number of seasonal agro-dealers, a situation that has been supported
by the practice of seed companies who collect the unsold inventories from
contracted agro-dealers during the off-peak FISP period.
There has been a proliferation of maize seeds varieties in the market, which has
broadened the choice for farmers. However, under the subsidy programme this

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Table 8.5. Inputs actually obtained against those wanted by farmers in 2010/11(%)

Inputs obtained As Other inputs wanted

wanted
Hybrid OPV maize Soya Groundnut Beans
maize

Hybrid maize 84 13 1 0 0 0
OPV maize 58 40 0 2 0 0
Soya 56 0 0 0 35 9
Groundnut 94 0 0 0 2 4
Beans 85 0 0 0 15 0

Source: Dorward and Chirwa (2011a)

choice is constrained by the availability of preferred seeds and seed varieties in

different markets and times when farmers require the seeds. Table 8.5 illustrates
the seed preferences by farmers in the 2010/11 season. For maize seeds, there is
higher preference for hybrid maize seeds with 84% getting the hybrid variety
they wanted and 13% getting alternative hybrid varieties. This preference for
hybrid maize is also reflected in the 40% of those that got OPV seeds but wanted
hybrid seeds. Lunduka et al. (2012) find that farmers prefer hybrid maize seeds
in Malawi due to high yields and their drought tolerance, while OPV maize
seeds are preferred due to their early maturity. Among the legume seeds, farmers
tend to prefer groundnuts and bean seeds and a higher proportion of them got
what they wanted. The higher preference for groundnut seeds is also reflected in
the additional 35% that got soya seeds who wanted groundnut seeds.
There are regional variations in seed preferences, but most farmers in dif-
ferent regions usually got the seeds and the seed varieties that they wanted
(Dorward and Chirwa, 2011a).These figures suggest that hybrid maize seeds
are the preferred maize seeds for smallholder farmers. The differences between
what was obtained and what farmers wanted were, however, noticeable for
legume seeds, with groundnut seeds being most in demand, but due to scar-
city many farmers having to opt for soya seeds. Groundnuts and bean seeds
are the legume seeds most wanted by smallholder farmers.

8.6. Challenges and opportunities of private sector participation5

The participation of the private sector in the input subsidy programme is

challenging but can also provide opportunities for improving the imple-
mentation and efﬁciency of the programme. For instance, on the one hand,

5
This section draws heavily on Chirwa and Dorward (2012).

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major challenges are the exclusion of the private sector from the retailing
of subsidized fertilizers and policy inconsistency in its role in the subsidy
programme. On the other hand, however, private sector participation could
provide opportunities for achieving multiple development objectives and for
improving efﬁciency in the implementation of the programme.

8.6.1. Challenges in private sector participation

Several challenges have been experienced with regard to the roles of the
private sector in the implementation of the subsidy programme. First, the
timing of the award of tenders, particularly for supply of fertilizers to the
programme, has been a major source of difficulty, as discussed in Chapter 5.
The longer the time between submission of tenders and the awards of ten-
ders the more likely the prices are to change and this can lead to protracted
negotiation about supply prices for fertilizers. There have been cases in which
companies awarded tenders have been unable to supply at the tender prices
due to increased costs of supply. However, there is evidence that this has
improved over time. Kelly et al. (2010) note that most stakeholders in 2008/9
were of the view that the announcement of tenders improved but the tenders
were awarded late. Dorward et al. (2010b) argue that the delays in award of
tenders increased private sector risks as both the prices of fertilizers and fuel
had risen dramatically in the period between June 2006/7 and June 2008/9.
There have been improvements in the timing of announcement of tender
awards more recently (Dorward and Chirwa, 2011c).
Second, there is often a problem of trust between the private sector and the
government and this has contributed to the continued exclusion of the pri-
vate sector in the retailing of subsidized fertilizers. The lack of trust emerges
from both sides. From the government side, there are some in government
that believe that private sector firms with their profit motive are likely to
exploit their engagement to the detriment of smallholder farmers and pub-
lic welfare. Chinsinga (2011) documents some of the profit and quick-gain
motives of some of the agro-dealers in input supply markets. There have been
allegations, based on anecdotal incidents reported in the media but not sub-
stantiated, that some private sector retailers were accepting fertilizer coupons
in exchange for non-fertilizer items. This reinforced the views of those scepti-
cal of the private sector that the private sector was unable to self-regulate its
behaviour in the programme. Others have also argued that when the private
sector was involved in the retailing of subsidized fertilizers, there was high
incidence of tips paid by farmers. However, Kelly et al. (2010) find that the
incidence of tips and malpractices was higher in parastatals than in private
sector retails, although the differences were not statistically significant, and
the incidents of accepted fake vouchers were higher in parastatals outlets.

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Furthermore, even with exclusion of the private sector in subsidized fertilizer

retailing, smallholder farmers still report an increased incidence of tips from
ADMARC and SFFRFM outlets (Dorward et al., 2010b; Dorward and Chirwa,
2011c). The mistrust of the private sector is also exacerbated by the absence of
an audit system on the stock movement of inputs as a way of detecting mal-
practices. From the private sector’s point of view, the government’s inconsist-
ent decisions on private sector participation in retail of subsidized fertilizers,
and delays in making inclusion or exclusion decisions, characterize policy
instability, creating uncertainty for private input market development. This
was particularly the case in 2008/9 when a decision was made about private
sector involvement and contracts for inclusion provided, but the govern-
ment reversed the decision without prior notice (Kelly et al., 2010). By the
time the government had made the decision to exclude the private sector,
the private companies had already stocked their retail shops in readiness for
redemption of vouchers.
Third, the subsidy programme has attracted new entrants that were hitherto
uninterested in the fertilizer business, particularly from domestic companies,
some just created to bid for contracts to supply fertilizers to the programme
(Holden and Tostensen, 2011). Some of these companies were highly con-
nected to the political establishment, but when awarded contracts they had
difficulties in fulfilling their deliveries. For non-established agricultural input
suppliers, their main interest is the short-term gains from participation in the
programme rather than the medium to long-term development of the input
supply market. Chinsinga (2012a) notes that most of the contracts in the
provision of transport services were awarded to companies politically linked
to the ruling party. Logistics Unit (2012) notes that although it became clear
in the 2011/12 programme that some of the suppliers were unlikely to sup-
ply, the government continued to grant extensions and the final deliveries
occurred in February 2012 instead of the end of October 2011. The existence
of vested interests is one reason for non-compliance with the terms of the
fertilizer supply. Although there have been improvements in the timing of
deliveries, late deliveries were evident and this problem has been attributed
to the lack of penalty clauses in the contracts (Dorward et al., 2010b; Dorward
and Chirwa, 2011c; Logistics Unit, 2011). Large numbers of new entrants in
seed sales may also be associated with poor service to farmers (Chinsinga,
2011) and in 2010/11 may have contributed to the use of large numbers of
fake vouchers in subsidized purchases.
Fourth, in the seed component of the subsidy programme, there is some
collusive behaviour of seed suppliers in deciding the supply price of seeds
offered to the programme. Although the subsidy programme has attracted a
number of players in seed production and supply, the pricing arrangement
is tantamount to collusive pricing due to the desire by the government to

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have a uniform top up for farmers (Kelly et al., 2010).There is no competitive

tendering in the seed supply to the subsidy programme, in contrast to the fer-
tilizer supply system, although in recent years, a variable ‘top up’ payment by
farmers on subsidized hybrid seed packages has provided some competition
and benefited some smallholder farmers. Thus, in 2010/11, seed companies
were allowed to apply a discretionary maximum farmer payment of 100MK
per maize seed voucher topping up the government redemption value of
1,650MK, and all hybrid seeds providers applied the maximum top up while
only one OPV provider made a top up charge (Logistics Unit, 2011, 2012).
Finally, there is evidence that the payment system used by the government
for supplies and services rendered to the programme by the private sector is
inefficient. Logistics Unit (2012) reports some companies waiting six months
to be paid after delivery of fertilizer supplies. Similarly, seed companies had
outstanding invoices for three months in the 2010/11 season (Logistics Unit,
2012). The Logistics Unit final weekly report for the 2011/12 programme
indicated that the government still owed seed companies, fertilizer compa-
nies, and transporters for supplies and services provided during the 2010/11
subsidy programme. These delays in payment are likely to lead to the high
supply price of inputs and services as suppliers factor in the risk of delayed
payments in their prices.

8.6.2. Opportunities from greater private sector participation

Greater involvement of the private sector in the subsidy programme not only
promotes private sector development in input markets but can also improve
efficiency in the implementation of the programme. There are several ways
in which the private sector can play a positive role in input market develop-
ment. First, increased involvement of the private sector provides the opportu-
nity for increasing the efficiency of implementation of the programme. This
can be achieved by increasing the number of outlets from which smallholder
farmers can redeem their input coupons and broadening their choice of mar-
kets. The increase in the competition may consequently improve the quality
of services at market outlets and reduce the incidence of tips at the markets.
Kelly et al. (2010) note that although the incidence of tips was not signifi-
cantly different between parastatals outlets and private sector outlets, small-
holder farmers were more likely to ‘never pay tips’ in private sector outlets.
The increase in the number of outlets can also reduce the opportunity cost of
queuing—a phenomena that has been evident in the programme.
Second, the involvement of the private sector can also encourage pri-
vate investment in rural input markets. This requires consistency and trans-
parency in the government’s decisions to build the confidence needed for
investment. There are also opportunities for designing future private sector

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Impacts on input market development

participation on the basis of performance-based indicators, such as veriﬁable

expansion of retail outlet coverage. Alternatively, the private sector could
bid to supply specific quantities of subsidized fertilizer in under-served areas
identified by the government. These areas could be served directly by the
private companies or through private company sub-contraction to agro-
dealers. As the analysis above has shown, private sales of fertilizers have
flourished suggesting an increased demand for fertilizers, but it is not clear
whether this has also facilitated the expansion of the private sector into
poorly served areas. Such performance rewards, combined with increased
demand for fertilizers, could provide the incentives needed for the private
sector to invest in more input market infrastructure on a permanent or
seasonal basis.
The third area in which the subsidy can exploit opportunities of private
sector involvement is storage facilities. With the exclusion of the private
sector from subsidized fertilizer retailing, all the programme fertilizers have
to be delivered at one of three SFFRFM depots for uplifting to SFFRFM and
ADMARC markets. The exclusion of the private sector has thus created pres-
sure on storage facilities at both the depots and parastatals unit markets. This
has introduced inefficiencies and increased the incidence of stock-outs in
unit markets. Logistics Unit (2012) notes that the shortage of storage space in
markets in the critical early months of the programme in 2011/12 meant that
although 63% of total annual fertilizer supply was available in the central
depots, only a little over 60% of this was uplifted to unit markets. The limited
storage capacity of SFFRFM depots in the past years of private sector exclusion
from subsidized fertilizer retailing has led to congestion (Logistics Unit, 2011,
2012), a situation that could be alleviated by more involvement of the private
sector in retail markets.
Fourth, better methods of targeting that reduce displacement and there-
fore increase demand for commercial purchases could help in input market
development. In Chapter 10 we discuss some targeting options that have the
potential to reduce displacement and the practical difficulties associated with
these options. Fifth, improvements in the timing of coupon distribution, that
is distributing earlier, can help farmers to plan for commercial purchases and
thereby help commercial sales and encourage investment in input markets.
Earlier distribution of coupons can bolster input sales as those that do not
receive coupons and those that receive coupons but want to top up would be
certain about their commercial purchases. In this case, involvement of the
private sector could also offer opportunities for earlier purchase of inputs by
farmers and hence more effective yield gains. Finally, there are also opportu-
nities that may arise with the use of electronic vouchers, which could enable
the private sector to invest in an electronic system resulting in shared costs,
benefiting both government and private suppliers.

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8.7. Summary

This chapter set out to review the impacts of the subsidy programme on the
development of the private sector in farm input supply. The private sector has
played a major role in the subsidy programme since 2006/7. It continues to
play an increasing role in the importation and procurement of fertilizer for
the subsidy programme, but was only allowed to retail subsidized fertilizers
in the 2006/7 and 2007/8 seasons, and agro-dealers were excluded even then.
Otherwise, the retailing of subsidized fertilizers has been monopolized by the
two parastatals, ADMARC and SFFRFM. In the seed sector, however, various
players in the seed value chain, including agro-dealers, have been allowed to
participate in seed production and retailing of subsidized improved maize
seeds and legumes, and indeed the production and distribution of subsidized
seeds has been managed entirely by the private sector.
Overall, although the subsidy has had some negative impacts on private
sector development in the form of short-run displacement of unsubsidized
commercial sales, in the medium to long term it appears to have been cata-
lytic in raising the demand for fertilizers and improved seeds. In the fertilizer
markets, the private sector is increasingly the main supplier of fertilizers to
the programme, and their exclusion from the retail market for subsidized
fertilizers does not appear to have dampened demand for commercial ferti-
lizers in the medium term. In the seeds market, the increase in the seed sub-
sidy from 2009/10 seems to be crowding out commercial sales. However, like
the fertilizer market, in the medium to long term the massive seed subsidy
may stimulate demand for improved seeds as farmers witness the benefits
of technology adoption. In addition, there is an increase in the number of
private sector players in both the fertilizer and seed markets, although exits,
especially in the fertilizer market, are evident. However, the challenge is to
translate the increase in competition into reasonably priced inputs and high
quality services offered to smallholder farmers in under-served areas.
There are benefits from expanding the role of the private sector, in reducing
programme costs, increasing efficiency, and alleviating problems of storage
capacity in parastatal markets. However the involvement of the private sec-
tor will require mutual trust among stakeholders, systems of transparency
and accountability, and policy consistency and credibility. These conditions
could create an environment that is conducive to private sector investment
in input markets. As the demand for commercial fertilizers increases, assum-
ing current trends continue, there may be scope for a gradual reduction in
the subsidy programme. However, this will require strategic investment in
input markets by the private sector to sustain such demand and a strategic
approach to programme graduation, an issue we discuss later in Chapter 11.

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Impacts on input market development

While the volume of subsidized fertilizers has been falling from its peak
in 2007/8, the growing demand for commercial purchases by smallholder
farmers should also provide incentives for private companies to strategically
position themselves by expanding their networks in under-served areas. One
way this could be achieved might be by developing sustainable partnerships
within the agro-dealer network that exists in rural areas. There is also scope
for increasing private participation in the fertilizer retail market through per-
formance-based contracts to supply under-served areas.
Nonetheless, it is important to continuously monitor the impact of the
subsidy programme on private sector markets and to monitor the integ-
rity and efficiency of the private sector in input supply. As we argue later in
Chapter 11, improving the efficiency and competitiveness of input suppli-
ers is one of the conditions that can facilitate graduation from the subsidy
programme, at household, area, and national levels. In particular, periodic
surveys tracking programme effects on smallholder farmers’ commercial
purchases and on input markets should generate useful information for
evidence-based decision making about private sector roles and government
engagement with and policy for input market development. An important
element of this engagement should be the monitoring of market efficiency
through analysis of market structure (considering the number and charac-
teristics of players, their market power, and vertical restraints), behaviour in
the market, and resultant benefits in terms of efficiency that promotes small-
holder development and welfare.

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9

Beneﬁt–cost analysis, 2006/7 to 2010/111

9.1. Introduction

In this chapter we develop benefit–cost estimates for the FISP, using methods
that have relatively simple analytical and data demands (to allow their appli-
cation in practical policy analysis) but nevertheless yield reasonably robust
estimates that allow valid comparisons with estimates of the costs and ben-
efits to potential alternative investments.
The chapter is structured as follows. After this introduction we first con-
sider the purpose and principles for benefit–cost analysis (BCA) and common
methods used in BCA. We then review problems and challenges identified
with previous BCA on the FISP. This leads on (in Section 9.5) to technical
suggestions for methodological improvements in estimating benefit–costs of
FISP and we then apply these methodologies to estimate returns to invest-
ment over the life of the programme. Readers without a particular meth-
odological interest in benefit–cost analysis may like to skip this section. We
conclude with a discussion of the implications of the analysis for FISP’s design
and implementation.

9.2. Beneﬁt–cost analysis purposes and principles

Beneﬁt–cost analysis (BCA) of input subsidy programmes has two main

functions.

• It gives an indication of the returns to speciﬁc programmes as compared

to returns that might be achieved from alternative investments,
and can thus guide overall government investment and spending
decisions. Estimates of such returns are also commonly used for more

1
This chapter draws heavily on Dorward and Chirwa (2011b).

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Beneﬁt–cost analysis, 2006/7 to 2010/11

general comparisons of the returns to different types of investments

(for example, between agricultural input subsidies, research, and
infrastructural development) in order to guide investment choices
between programmes.
• It provides information about the variables that are important
in determining costs and benefits of a specific programme or
type of programme, and hence can guide programme design and
implementation decisions to increase benefits relative to costs.

These two uses of BCA are both important, but they present analysts with
something of a dilemma. The first requires the use of common standards
across different programmes, perhaps in different sectors, to give compara-
ble results across investment alternatives. These standards generally involve
standardized methods, but it is often difficult to apply such methods across
programmes that affect people and the economy in different and complex
ways and in different policy contexts. These difficulties need to be recog-
nized when making comparisons between BCA results obtained for different
programmes. The second purpose of BCA requires not so much standards for
comparable estimates of returns, but accurate estimates of the relative impor-
tance of different variables affecting these returns in particular investments—
and here there may be more value in tailoring methods to match specific
programme features. This, however, leads to a danger that the results may
not be comparable with results from analysis of other investments, but may
nevertheless be (wrongly) used for making such comparisons.
Taking these two purposes together with an overall objective that BCA
should provide rigorous, reliable, and objective estimates of benefits and
costs, we suggest the following seven principles for the choice and implemen-
tation of BCA methods (these are not set out according to any prioritization).
BCA methods applied in any situation should be

1. Practicable: They must be applicable to the data and analytical resources

(skills and software, for example) that are available (or can reasonably
be obtained).
2. Externally consistent: They must provide measures that are comparable
with generally accepted good practice in definitions of costs and ben-
efits (for example, in definitions of financial and economic benefits).
3. Contextualized: They must take account of particularities that affect the
benefits and costs of a programme as regards the processes by which
costs and benefits are linked, the effects of other policies and invest-
ments on these, and the conditions affecting these.

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Implementation and Impacts

4. Holistic: They must take account of all the significant benefits and costs
associated with a policy or investment programme, both direct benefits
and costs to recipients or beneficiaries and indirect benefits and costs to
others.
5. Internally consistent: They must properly represent the significant rela-
tionships between investments and behaviours by different stakehold-
ers, taking account of ‘counterfactuals’ (comparing actual behaviours
and outcomes under a programme or investments against those that
would have occurred in its absence).
6. Transparent: Assumptions, measures, data sources, shortcomings, and
possible bias and inaccuracies in methods and their results must be
stated and discussed.
7. Cost-effective: BCA methods should be chosen, developed, and imple-
mented to ensure that costs of analysis are commensurate with the
value of the information provided.

The cost-effectiveness of methods is of course affected by the costs of

BCA methods in providing information and in value of the information
provided.

• Costs are determined by resource demands for gathering extra

information needed and for analysis (as discussed above under
practicability and as we discuss below as regards demands for different
methods).
• The value of the information provided is determined by its quality and
by the scope for its use.
• The determinants of quality are external and internal consistency,
holism, and contextualization (as discussed above) and the
strengths and weaknesses of analytical methods (which we discuss
below).
• Scope for use of information is determined by transparency of results
(as discussed above), by the strengths and weaknesses of different
methods (which we discuss below), and by the potential ‘decision
space’ for changes in policy choices, design, and implementation in
the light of new information provided by BCA.
There are particular challenges in applying the ﬁrst four of the principles
above to the speciﬁc situation in which the FISP operates.

1. Practicable. There are severe limitations in data availability (for

example, on crop areas and yields, the yield and production effects of
subsidized seed and fertilizer, and the number of farm families in the

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Beneﬁt–cost analysis, 2006/7 to 2010/11

country). There are also limited financial and human resources avail-
able for analysis, but the determination of the ‘counterfactual’ situa-
tion of what would have happened without a subsidy is very complex,
properly requiring consideration of changes throughout the whole
economy as a result of changes in farm incomes, in food prices, and in
the real incomes of consumers. The data and resource limitations lead
to a fundamental question about the practicability of making any reli-
able estimates without substantial improvements, particularly in data
availability.
2. Externally consistent. Limited availability of good quality data poses
problems for the application of good practice in BCA. A further dif-
ficulty arises with the longstanding history of policy interventions
inhibiting maize imports and exports, as this makes it very difficult to
identify true economic prices for maize—conventionally, import and
export parity prices should be used in economic analysis, but one may
legitimately ask if liberalized market policies are a real policy option
for the Malawian Government (see Tschirley and Jayne (2010) for a
nuanced discussion of these issues). If import parity prices are to be
used in the analysis then it is very difficult to determine what national
prices would actually have prevailed with and without the subsidy (this
adds to the already difficult task of estimating counterfactual ‘without
subsidy’ prices for comparison against the ‘with subsidy’ situation—a
‘double counterfactual problem’).
3. Contextualized. The effects of the subsidy on livelihoods are complex,
widespread, and in many ways specific to the problems faced by poor
Malawian smallholders (with the low maize productivity trap and
policy context discussed in Chapter 4). Analysis has to take account
of these contextual issues—but this may lead to conflict with the
two previous principles—requiring more complex, non-standard
analysis.
4. Holistic: The scale and nature of the FISP means that it has widespread,
complex, and varied effects on the livelihoods of different farm house-
holds, on consumers, and on maize and labour markets. Ideally this
requires holistic consideration of dynamic and interacting changes in
rural livelihoods and in rural and national markets. This presents very
large data and analytical challenges. This is clearly related to the prob-
lems of contextualization, with similar potential for conflict with the
principles of practicality and external consistency—for example: can
simpler methods be modified to represent key effects of wider, complex
changes and also generate results that allow meaningful comparison
with BCA on other investments?

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Implementation and Impacts

9.3. Beneﬁt–cost analysis methods

Investment and policy analysis methods can be classiﬁed according to the

extent to which they focus on direct, ‘partial equilibrium’ effects of an invest-
ment or policy on the beneficiaries in the relevant sector as against wider,
indirect ‘general equilibrium’ effects on beneficiaries and non-beneficiaries
across all sectors in an economy. Increasing consideration of wider indirect
effect increases the analytical complexity and data requirements. However
although these effects may not be important for smaller scale interventions,
they may dominate the direct effects for large-scale investments in the agri-
cultural sector if these affect food prices and the productivity of large areas of
land and large amounts of labour. Where more complex and demanding gen-
eral equilibrium methods are used, these should properly represent markets’
and different stakeholders’ behaviours and interactions. Where more simple
partial equilibrium methods are used, then these should where possible build
in simple adjustments to simulate possible wider economy effects.
It is helpful to distinguish between three basic methodological approaches
to BCA for large-scale policy investments:

a) Regression models which estimate returns to investments by analysing

comparative data sets across different regions in a country, for example,
and estimate the impacts of investments on welfare measures or eco-
nomic growth (for example, Fan et al. (2007)), implicitly taking account
of multipliers and wider general equilibrium market effects.2
b) Computable general equilibrium (CGE) and multi-market models that ana-
lyse the effects of investments by simulating economic behaviour with
and without investments—with general equilibrium models simulat-
ing economy-wide effects, and multi-market models examining effects
across a more restricted set of markets (for example, Bufﬁe and Atolia
(2009) use a CGE analysis of the Malawi FISP to consider the relative
beneﬁts of investment in the FISP against investment in infrastructure,
but do not undertake a formal BCA of the FISP).
c) Partial equilibrium models that examine investment’s welfare impacts on
producers and consumers (see, for example, C. P. Timmer (1989) for
Indonesia).

2
These regression models are different from those discussed earlier in Chapter 7. The models
discussed there can provide insights into economy-wide impacts, but their use in capturing all the
major economy-wide impacts of a programme are limited if there is substantial market integration
and price transmission across different areas. This will often be the case for cereal markets within
countries.

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Beneﬁt–cost analysis, 2006/7 to 2010/11

Table 9.1. Broad characteristics of three model types

Regression models CGE/Multi-market Partial equilibrium

models models

Data demands Very challenging: time Very challeng- Demand (& ideally
series data for different ing: national & supply) informa-
& relatively independ- multi-sectoral tion on specific
ent regions: invest- data on supply, commodity/
ment, welfare & other demand, pro- ies of interest;
variables ductivity, market direct productiv-
performance, & ity impacts of
factor ownership; investment/policy
direct productiv- interventions
ity impacts of
investment/policy
interventions
Capacity to describe Good: intrinsic in analysis Good: the key Weak: no explicit
multi-market, of broader welfare benefit of these consideration, but
indirect effects effects models, but can introduce ad
depends on hoc adjustments
quality of model to allow for these
formulation & effects
data
Capacity to describe Good: should be intrinsic Weak: very challeng- Weak: no explicit
differential market in analysis of broader ing as regards consideration, but
failure effects welfare effects but data demands & can introduce ad
may not capture some model formulation hoc adjustments
spillovers to allow for these
effects
Capacity to isolate Depends on range of Good, depending on Can be good,
effects of specified conditions in data quality of model depending
intervention(s) set—difficult if covariant on context &
changes or if there are processes
varying spillovers across
regions
Strengths Good data sets & properly Multi-market effects, Relatively simple
executed analysis can counterfactuals data & methodo-
give very holistic empiri- logical demands
cal analysis
Weaknesses Very demanding require- Complex & demand- Does not take
ments as regards ing; proper account of market
historical/empirical representation of effects—these can
data sets—this can limit market failures & only be addressed
breadth of application differential behav- with simple
of models; assumptions/ iour of producers relatively ad hoc
context may not be & consumers very adjustments
explicit or generalizable; challenging—oth-
may not account for erwise misleading;
some spillover effects assumptions/
context may not
be explicit

These models differ as regards their data demands, the nature of the analyti-
cal challenges they present, and their ability to allow for market failures, dif-
ferential effects on different types of consumers and producers, linkages and

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Implementation and Impacts

multipliers across markets, and the interactions between these. Table 9.1 sets
out the broad characteristics of these three types of model.
It is clear from Table 9.1 that the three different approaches have different
and in many ways complementary features, strengths, and weaknesses. We
can conclude from this that

• In different contexts there will be different choices of method to best

follow the principles outlined earlier.
• In all cases analysts must recognize and take account of the limitations
of their methods and data, and document these to ensure that those
using their results are able to properly interpret them.
• Those using BCA results to compare returns from different investments
or to guide policy or investment design and implementation must take
great care to ensure that differences in analytical methods, issues, and
data quality are properly allowed for in their considerations.
• In the particular situation of the Malawi FISP
• it is impossible to conduct regression analysis as the empirical
situations and data available do not allow this;
• CGE and multi-market models are very demanding of analytical
resources and data, and consequently these models may be used
for stylized analysis of possible effects, but will be too expensive in
implementation, too complex in application/interpretation, and too
reliant on weak data to provide a practicable method for regular and
detailed year by year analysis;
• the more limited data and analytical demands of simpler partial
equilibrium models mean that they are the most practicable (though
there are still signiﬁcant challenges here).

9.4. Problems and challenges with beneﬁt–cost analysis (BCA)

of the FISP

Dorward and Chirwa (2009, 2010a) and School of Oriental and African
Studies et al. (2008) have used standard partial equilibrium methodology
for estimating the economic benefit–cost ratio and fiscal efficiency of the
subsidy programme. They recognize, however, that this method does not
take account of wider benefits to poor consumers from lower food prices,
and that paradoxically a greater fall in the price of maize provided a lower
estimate of programme benefit when in fact larger price falls should lead to
wider growth and poverty reduction benefits. They also consistently identify

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a number of concerns with the use of their results in comparing estimated

returns from subsidies and from other investments. These concerns are also
relevant to the limited reports of benefit–cost and related analysis by others
(For example Buffie and Atolia (2009) and Denning et al. (2009)) and to dis-
cussion of these results.
The concerns may be broadly classified into related problems first with
data, second with methodology, and third with wider theoretical issues.
These problems are of course related, as

• methodologies embody theory and require, and are limited by, data, and
• theories require, and are embodied in and limited by, methodologies.

The three major theoretical questions concern

(a) the measure of beneﬁts,

(b) the extent of beneﬁts and processes of change, and
(c) the valuation of incremental production.

The measure of beneﬁts: Ideally beneﬁts should represent welfare changes

to recipients and non-recipients. This, however, raises questions about the
nature of welfare, methods of measurement or estimation, and the relative
importance and weighting of welfare changes for different stakeholders (for
example, questions about the relative importance of welfare changes in
poorer and less-poor people, and about the relative importance of welfare
changes in people now and in the future). Economic theory provides widely
used measures of welfare changes through the concepts of consumer and pro-
ducer surplus. There are, however, severe methodological and data difficul-
ties in the estimation of supply curves needed for the estimation of changes
in producer surplus. As a result, changes in real income are commonly used
as proxy measures of welfare in benefit–cost analysis, and generally provide
similar answers (Sadoulet and de Janvry, 1995; Alston et al., 2000). The rela-
tively simple analysis in School of Oriental and African Studies et al. (2008),
Dorward and Chirwa (2009), and Dorward et al. (2010a) provides reasonable
estimates of changes in aggregate real income across producers and consum-
ers, but no information about the distribution of these benefits between pro-
ducers and consumers or between beneficiaries and non-beneficiaries. This
differentiation is important for the use of weights to address distributional
questions about welfare changes for different types of people.
The extent of benefits and the processes of change: We argued in Chapters 2 and
4 that subsidy programme benefits can have wide-ranging and far-reaching
dynamic effects where they directly overcome financial market failure and
investment affordability problems of recipients, and address these same prob-
lems for poor non-recipients through staple food prices and higher wages;

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and that they should also generate more conventional multiplier growth
effects (where, for example, increases in recipients’ income lead to increases
in consumption of locally produced goods and services, and hence increases
in incomes for local providers of these goods and services). Haggblade et al.
(2007a) suggest agricultural multipliers (excluding dynamic effects from
overcoming market failures) range from 1.3 to 1.5 in sub-Saharan Africa,
while Davies and Davey (2008) report estimated multipliers of 2 to 2.45 from
conditional cash transfers in Dowa (though these fixed price estimates may
be reduced by 30% to allow for supply constraints, to give estimates of 1.4
to 1.7). Diao et al. (2003) estimate a multiplier of 1.5 from increases in grain
productivity in Malawi while Benin et al. (2008) estimate a multiplier of 1.1
from increases in maize productivity in Malawi.
Dynamic effects and multipliers are implicitly allowed for in BCA using
regression analysis (for example, Fan et al. (2007)), and they should be explic-
itly modelled in general equilibrium analysis, although this is seldom the
case for the dynamic effects of overcoming market failures. Multipliers and
dynamic effects are not allowed for in estimates derived from partial equi-
librium methods, and this leads to a biased under-estimate of returns when
these estimates are compared with estimates of other investments’ returns if
these estimates are derived from regression or general equilibrium analyses.3
The valuation of incremental production: The concerns discussed above about
the measure of benefits and their extent and distribution are concerned with
the valuing of incremental production, in a very broad sense. Here, however,
we discuss two narrower issues: first the choice of prices for valuing output
and second the discount rate to use.
As noted earlier, there are legitimate questions about the feasibility of liber-
alized market policies as a real policy option for the Malawian Government,
and hence if economic analysis should use border or domestic prices. Either
way there are then serious methodological challenges in determining ‘coun-
terfactual’ prices for a situation without the subsidy (with a ‘double coun-
terfactual’ problem if combinations of domestic and border prices are to be
used). Dorward et al. (2010a) and School of Oriental and African Studies
et al. (2008) use information on border prices with informed judgement to
address the ‘double counterfactual’ problem to estimate what border prices
would have prevailed with and without the subsidy in the absence of policies
restricting imports.

3
We do not attempt to consider the health and education beneﬁts discussed in Chapter 7 in
the beneﬁt–cost analysis in this chapter. In using market prices as the basis of valuation we are
also ignoring questions raised about the value of maize to people who cannot afford to buy it at
higher prices.

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They also do not use an explicit discount rate when comparing programme
benefits and costs. However any comparison of the programme’s benefit–
cost ratio with internal rates of return estimated for longer term investments
involves an implicit assumption that benefits are achieved one year after
investment. It might, however, be argued that costs are incurred in December
to January (when seeds and fertilizers are paid for and applied to the field) but
benefits are obtained in June (when crops are harvested), giving a return after
6 or 7 months. It might also be considered, however, that benefits from lower
maize prices and increased consumption are enjoyed over the period June
to May, yielding a return over an average of around 12 months. These two
alternatives have major implications for estimates of internal rates of annual
return, as the former has a net Internal Rate of Return (IRR) 70–80% higher
than the net benefit–cost ratio (BCR, net benefits divided by costs).
The discussion above addresses theoretical and related methodological
concerns with the standard use of partial equilibrium analysis in BCA for
the FISP. These concerns are exacerbated by and linked to difficulties with
the quality and availability of critical data on yield responses to subsidized
inputs, on overall production data, and on the number of rural and farm
households—difficulties that have been noted repeatedly in earlier chapters.

9.5. Improving FISP beneﬁt–cost estimates4

Consideration of these theoretical, methodological, and data difﬁculties

together with the earlier discussion of purposes and principles for BCA sug-
gests a number of approaches to improving the BCA of the subsidy pro-
gramme. These involve

1. Continued use of partial equilibrium analysis, with its relatively limited

demands for data and analytical resources, but with more formal coun-
terfactual price estimation.
2. Extension of the method to distinguish between producer and con-
sumer gains and, among producers, between subsidy recipients and
non-recipients.
3. Consideration of possible dynamic effects of growth and liquidity
multipliers.
4. Consideration of results with alternative estimates of the time period for
returns.

4
This section contains quite detailed consideration of methodological issues in improving BCA
methods. Readers without speciﬁc technical interests in this may prefer to skip the section and go
straight to Section 9.6.

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All these approaches involve elaboration of the estimation of programme

benefits, as estimation of programme costs is not conceptually problem-
atic (although, as discussed in Chapter 5, there are difficulties in obtaining
reliable data on some cost items). Total costs incurred in input acquisition
(including transport and distribution costs) are added to programme admin-
istration costs, with application of shadow exchange rates to non-tradable
costs in the later years of the programme when the Malawi Kwacha is gener-
ally considered to have been over-valued. Costs of acquisition for subsidized
inputs that displace unsubsidized inputs are subtracted from the programme
costs, as these provide no incremental benefits and are simply a transfer from
government to the recipients of those subsidized inputs. Although they con-
sequently have little effect on the benefit–cost ratio of the programme (being
excluded from both benefits and costs), they do affect the Net Present Value
(NPV) of the programme, and hence its fiscal efficiency (which we define as
NPV/fiscal costs).

9.5.1. Methodology for formal estimation of prices and producer and

consumer gains
To improve on existing estimates of programme beneﬁts we therefore begin
by formalizing price estimation, focusing on the effects of the subsidy
programme on maize production.5 Figure 9.1 shows how for an autarchic
economy6 a production subsidy causes a downward shift in the market price
supply curve (S to S*) and this leads to an expansion in supply (from Q to Q*)
and a fall in consumer price for the product (from P to P*).
The change in real income for producers is analysed in terms of the effects
of changes in output prices, costs, and volumes produced and sold.

ΔYP = ⎡⎣QP * + Q * − Q )P * − ΔQ
ΔQ F C * − (Q * − ΔQ F )C⎤⎤⎦ − [ Q
QP − QC ] (9.1)

ΔYP = (Q * −Q )P * −Q ( P − P ) − ΔQ F C −(Q * −Q − ΔQ F )C (9.2)

5
The 2006/7, 2008/9, and 2010/11 household surveys reported in Dorward et al. (2010a) and
School of Oriental and African Studies et al. (2008) show that almost all the incremental fertilizer
use as a result of the subsidy programme was applied to maize and there is no evidence of shifts in
cropping patterns in 2008/9 as a result of the subsidy programme. (Holden and Lunduka (2010c)
also ﬁnd no evidence of shifts in cropping patterns, although Chibwana et al. (2012) suggest some
shifting into maize by subsidy recipients.)
6
The assumption of autarchy is a reasonable analytical starting point for the Malawi maize
market, given the high transport costs in exporting to or importing from the world market. We
consider later the effects of informal imports from surrounding countries (notably Mozambique),
actual or potential price ceilings from potential imports from South Africa, and exports to
Zimbabwe in 2007/8.

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D
S S*
Produce price ($)

P a b
P* c
f e d

g h
Q Q* Produce quantity
t

Figure 9.1. Input subsidy impacts on output supply and price

Source: Adapted from Dorward (2009b).

where YP * = producers’ income after subsidy

YP = producers’ income before subsidy
Q* = production after subsidy
Q = production before subsidy
P* = output price after subsidy
P = output price before subsidy
ΔQ F = increase in production from use of subsidized inputs
C = producers’ average unit costs for output before/without subsidy
C * = producers’ unit costs for extra output (i.e. excluding subsidized costs)
The change in producers’ income therefore consists of changes in sales
value less the costs of production with the subsidy, plus the savings on unsub-
sidized production where this has been displaced by subsidized production.
The change in sales value is made up of a loss due to the fall in product
price for the original amount produced (area abdf in Figure 9.1), but a gain
from extra production at the lower price (area dchg in Figure 9.1).7 With
totally elastic demand there would be no price loss and all the subsidized
production would be extra production, hence under these circumstances

7
In the long run the loss of producer incomes from falls in unsubsidized maize production and
in prices may be smaller than estimated here as rising real incomes for consumers will raise prices
for non-maize and non-farm goods and services, which can replace their lost and/or lower value
maize production.

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ΔYP = (Q * −Q )P * −Δ
ΔQ F C * . With totally inelastic demand there would be
no increase in production and all the subsidized production would displace
unsubsidized production, hence ΔYP = −Q ( P − P *) + ΔQ F (C − C *). Under these
circumstances ΔYP = 0 and hence

Q( P P *) Q F (C C *)

The change in real income for consumers consists of the savings on existing
purchases due to the price fall (abdf in Figure 9.1) plus the savings in extra
purchases which are best valued in terms of savings on previous expenditures
(area bcd in Figure 9.1).

1
Change in consumer real income = ΔYC = ( P − P *)Q + ( P − P *)(Q * −Q ) (9.3)
2

Total change in producers’ and consumers’ real income can be estimated by

the sum of changes in producer and consumer incomes:

1
ΔYT = (Q * −Q )P * −Δ
ΔQ F C * −(Q * −Q − ΔQ F )C + ( P − P *)(Q * −Q ) (9.4)
2

The method for estimating overall beneﬁts in equation 9.4 is broadly that
used in Dorward et al. (2010a) and School of Oriental and African Studies
et al. (2008). They use analysts’ informal judgement of ‘double counterfac-
tual’ prices with and without the subsidy respectively to estimate P* and P
in the absence of government bans on formal imports. P can, however, be
estimated using formal estimates of price elasticity of demand (E D), together
with information on prices and production with the subsidy. ( *) can
then be substituted as follows:

1 P*
( *) = ( * Q) (9.5)
ED Q *

We can then substitute for ( *) into equations 9.2, 9.3, and 9.4 as follows:
Change in producer real income

1 P*
ΔYP = (Q * −Q )P * −Q (Q * −Q ) − ΔQ F C * −(Q * −Q − ΔQ F )C (9.6)
ED Q *

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Change in consumer real income

1 P 1
ΔYC = (Q * −Q )(Q + (Q * −Q )) (9.7)
ED Q * 2

Change in producer and consumer real income

1 P* (9.8)
ΔYT = (Q * −Q )P * −Δ
ΔQ F C * −(Q * −Q − ΔQ F )C + (Q * −Q )2
2 ED Q *

Equations 9.6 to 9.8 still present problems in that we require an estimate of

( * Q ). However, the seasonal separation of supply and demand means
that if we can initially ignore farmers’ expectations of lower prices in the fol-
lowing season then incremental production will be equal to the increase in
production from use of subsidized inputs, so that ( * Q ) = ΔQ F . Introducing
this into equations 9.6 to 9.8 gives the following estimates of changes in real
income:

1 P*
Change in producer real income ΔYP = ΔQ F ( P * −C *) − Q ΔQ F (9.9)
ED Q *

1 P* ⎛ 1 ⎞
Change in consumer real income ΔYC = ΔQ F ⎜ Q + ΔQ F ⎟ (9.10)
ED Q * ⎝ 2 ⎠

Change in producer and consumer real income

1 P* (9.11)
ΔYT = ΔQ F ( P * −C *) + ΔQ F 2
2 ED Q *

All of the analysis in this section has been derived from our initial considera-
tion of a closed economy (Figure 9.1). It does, however, also apply to a small
open economy with a wide band between import and export parity prices.
Thus, if increased production causes an economy to eliminate imports of QM
so that the price falls to P*, below import parity PM, then this can be han-
dled by estimating gains in consumer and producer real incomes allowing for
these prices.8

8
Note that where producers outside an economy export into that economy but at prices largely
determined within the economy (as is broadly the case with Mozambican exports to Malawi),
then the loss of producer income suffered by these producers due to the price fall is not a loss to
the domestic producers and the domestic economy.

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In these circumstances then assuming that ( * Q ) = ΔQ F as above then

ΔYP = ΔQ F P * −(Q − Q M )( PM − P ) − ΔQ F C (9.12)

1
ΔY
YC = Q ( PM − P *) + ( PM − P *)( ΔQ F − Q M ) (9.13)
2
and

1
ΔYT = ΔQ F P * + Q M ( PM − P *) − ΔQ F C * + ( PM − P *)( ΔQ F − Q M ) (9.14)
2

Use of equations 9.9 to 9.11 or 9.12 to 9.14 depends on the relative values of
PM and P: equations 9.9 to 9.11 are used if PM > P, and equations 9.12 to 9.14
are used if PM < P, where P is estimated from equation 9.5. If, in addition, PM
< P* then PM replaces P* in equations 9.12 to 9.14, and there are no consumer
beneﬁts or producer losses from price changes. The equations above can also
be adjusted to allow for exports if P* is below the export parity price PX. In
this case PX replaces P* in equations 9.12 to 9.13 if the subsidy would move
domestic prices from above import parity to below export parity prices, or in
equations 9.2 to 9.3 (with replacement of ( * Q ) by ΔQ F ) if the subsidy
would move domestic prices which are already import parity to below export
parity.
The methodology developed in this sub-section demonstrates the basic
validity of the BCA approach used in Dorward et al. (2010a) and School
of Oriental and African Studies et al. (2008), but also allows a breakdown
between producer and consumer beneﬁts with more formal estimates of P
and Q* if estimates of ΔQ F and of price elasticity of demand (E D) are available.

9.5.2. Estimation of price/quantity demand relations and of

incremental production
We now develop estimates of overall returns to the subsidy and of separate
producer and consumer benefits using the methodology developed above.
First, however, estimates are needed of price elasticity of demand (E D) and of
ΔQ F . These estimates are unfortunately not without their own difficulties.
We first consider the estimation of price elasticity of demand (E D) or (more
generally) of the relationship between price and quantity demanded. Figure 7.4
in Chapter 7 shows maize prices and estimated quantities consumed per cap-
ita. This highlights an apparent discrepancy between the 1993/4 to 2005/6
and 2006/7 to 2010/11 data sets, with higher prices in the latter set. Possible

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explanations for this were discussed earlier in Chapter 7, but it raises wider
questions regarding the impact of increases in production on maize prices.
If production estimates from 1993/4 to 2005/6 are broadly correct, then this
suggests that the 1993/4 to 2005/6 data should provide a reasonable estimate
of price elasticity of demand with constant wages—although there may be
upward shifts in demand when wages rise.
Three regression models were estimated of log quantity on log price quantity
from maize price data and supply estimates from 1993/94. The first is derived
from data from the 1993/4 to 2009/10 seasons with the inclusion of a dummy
variable for subsidy effects from 2005/6 onwards and a time variable to allow
for changing base per capita demand over time. This gave an estimate of price
elasticity of demand of –0.24 (n = 17, t = 1.5, R2 = 0.56). Given concerns about
the reliability of data from 2006/7 to 2009/10 as discussed above, and implau-
sibly high estimates of ‘without subsidy’ prices when subsequently applying
this model, it was rejected. The second model regressed log quantity on log
price quantity from the 1993/4 to 2005/6 seasons9 and gives an estimate of
price elasticity of demand of –0.38 (n = 13, t = 1.9, R2 = 0.24). The third used
the same data set with the inclusion of a time variable to allow for changing
base per capita demand over time, and gives an estimate of price elasticity of
demand of –0.51 (n = 13, t = 2.2, R2 = 0.33). The third model was preferred as
regards its better fit and inclusion of a time effect, and was therefore used in
the analysis that is reported below and is shown in Figure 7.4.
Having considered the estimation of the relationship between price and
quantity demanded and hence of price elasticity of demand (E D), we now
consider the estimation of ΔQ F , incremental production from the subsidy
programme. The difficulties of obtaining reliable and precise estimates of
ΔQ F were discussed earlier in Chapter 6. As noted there, Dorward et al.
(2010a) and School of Oriental and African Studies et al. (2008) have there-
fore estimated incremental production assuming that every kg nitrogen (N)
in incremental fertilizer application leads to 12 kg incremental grain produc-
tion when applied on local maize and to 18 kg incremental grain production
when applied on hybrid maize.10 This approach was also followed here, with
incremental fertilizer application as a result of the subsidy programme esti-
mated from 2006/7, 2008/9, and 2010/11 survey estimates of displacement of
unsubsidized fertilizer sales by subsidized fertilizer sales.

9
Restriction of the data series to the 1993/4 to 2005/6 seasons (a) provides more consistent
estimates than are obtained from the 1993/4 to 2009/10 series and (b) standardizes for the effects
of possible inconsistency in production estimates and of higher nominal wages in later years.
10
See School of Oriental and African Studies et al. (2008) for summary of a range of different
studies from which these estimates were derived.

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Table 9.2. Base beneﬁt–cost analysis, 2005/6–10/11

Year ED P P* PM PX BASE BENEFITS

Net BCR FE
beneﬁt
US$/kg
(US$ mill)

2005/6 0.51 0.24 0.14 0.29 0.14 12.4 1.17 0.34

AE mean = 0.14 n/a n/a -7.6 0.90 -0.21
2006/7 0.51 0.25 0.13 0.32 0.17 47.8 1.49 0.65
AE mean = 0.15 n/a n/a 6.0 1.06 0.08
2007/8 0.51 1.83 0.35 0.30 0.15 39.4 1.30 0.41
AE mean = 0.25 n/a n/a 8.9 1.07 0.09
2008/9 0.51 1.16 0.25 0.28 0.13 -39.0 0.87 -0.16
AE mean = 0.28 n/a n/a -40.2 0.87 -0.16
2009/10 0.51 0.46 0.17 0.28 0.13 31.9 1.18 0.23
AE mean = 0.26 n/a n/a 35.4 1.20 0.25
2010/11 0.51 0.95 0.19 0.35 0.20 127.9 1.55 0.88
AE mean = 0.30 n/a n/a 106.0 1.46 0.73

Notes: ED, P, P*, PM and PX represent respectively demand elasticities, without and with subsidy maize prices (in
,
current US$), and import and export parity maize prices (calculated from SAFEX prices with import and export
transport costs of $100/MT and $50/MT respectively). BCR (benefit–cost ratio) is calculated as total economic benefit
divided by total economic costs; FE (Fiscal Efficiency) as net benefit (total economic benefit less total economic costs)
divided by total fiscal costs. Under ED, ‘AE’ stands for Analyst Estimates as reported in Dorward et al. (2010a) and
School of Oriental and African Studies et al. (2008). ‘n/a’ indicates ‘not applicable’

9.5.3. Formal estimation of prices and producer and consumer gains

Using these estimates of the relationship between price and quantity
available and of the incremental production from the subsidy we can now
estimate changes in overall incomes from equations 9.11 and 9.14 over
a range of assumptions, as shown in Table 9.2 for the years 2005/6 to
2010/11.11
Table 9.2 presents for each year the border adjusted prices estimated in one
row with the demand elasticity discussed earlier (and shown in Figure 7.4)
and, in another row, using analysts’ judgements. Different columns then
show estimates of net benefits, benefit–cost ratios (BCRs) and fiscal efficien-
cies (FEs) without any growth multipliers.
The main point of interest in Table 9.2 is the differences between results
obtained by prices estimated using demand elasticity calculations and those

11
Elasticities of demand per se were not used in these calculations, due to averaging problems
over price and quantity ranges; instead the estimated equations were used to calculate price and
quantity changes.

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obtained by analysts’ judgements:12 estimated returns are generally higher

with prices estimated using demand elasticity calculations than with those
obtained from analysts’ judgements. This arises partly from lower prices
in analysts’ estimates, particularly in the earlier years, due to more weight
being given to the possibility of substantially lower price imports from
Mozambique in 2005/6 and 2006/7 and (to a lesser extent) in 2007/8 and
2009/10.13

9.5.4. Effects of growth and liquidity multipliers

There is no particular methodology for the building of growth and liquidity
multipliers into partial equilibrium analysis. We use equations 9.9, 9.10, 9.12,
and 9.13 to estimate producers’ and consumers’ relative gains and losses, and
then multiply these by relevant estimates of agricultural multipliers. As dis-
cussed earlier, a number of studies estimate agricultural multipliers of around
1.4 in sub-Saharan Africa and Malawi. We therefore initially multiply farm
benefits and costs by 1.4. In order to allow for possible multiplier effects of
alternative use of resources invested in the programme, we use a multiplier of
1.2 for alternative investments (the lower number to allow for the high mul-
tiplier effects of increases in income to poor rural people). Table 9.3 shows
the results of this analysis together with results without the use of multipliers
(also shown earlier in Table 9.2).
The table shows that estimates of net benefits, benefit–cost ratios, and fis-
cal efficiencies generally increase when the effects of multipliers are allowed
for, and these increases can be substantial. Further analysis (summarized in
Table 9.4) using different multipliers for different types of people (produc-
ers, consumers, and subsidy recipients) shows that if poorer households have
higher multipliers (as they normally do) and account for a higher share of
national maize consumption than of national maize production, then subsi-
dies that lead to domestic price falls will, other things being equal, generally
lead to higher returns, as will greater targeting of the poor as subsidy recipi-
ents (Dorward and Chirwa, 2011b).

12
Differences in results across different years are due to variation in maize prices (with high
domestic prices from 2007/8 requiring analysis using import parity prices for the ‘without subsidy’
situation—and even for the ‘with subsidy’ situation in 2007/8), and in fertilizer prices (which rose
steadily from 2005/6 to a peak in 2008/9). Differences in some results from those presented in
Dorward and Chirwa (2011b) are due to allowance here for weather-affected yields, as set out in
the incremental production estimates presented in Chapter 6.
13
Where ‘without subsidy’ domestic prices would be higher than import parity, the formal
price estimation also allows for part of the subsidized production to substitute for imports (so
that consumer beneﬁts are not derived from a simple average of import parity and ‘with subsidy’
domestic price).

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Table 9.3. Beneﬁt–cost analysis without and with growth multipliers

Year ED BASE Growth multiplier

Net BCR FE Net BCR FE

beneﬁt beneﬁt

US$ mill US$ mill

2005/6 0.51 12.4 1.17 0.34 23.0 1.24 0.63

AE -7.6 0.90 -0.21 -3.7 0.95 -0.10
2006/7 0.51 47.8 1.49 0.65 77.5 1.61 1.05
AE 6.0 1.06 0.08 14.7 1.15 0.20
2007/8 0.51 39.4 1.30 0.41 71.6 1.42 0.75
AE 8.9 1.07 0.09 22.7 1.17 0.24
2008/9 0.51 -39.0 0.87 -0.16 -9.8 0.97 -0.04
AE -40.2 0.87 -0.16 -9.2 0.97 -0.04
2009/10 0.51 31.9 1.18 0.23 69.1 1.31 0.49
AE 35.4 1.20 0.25 58.8 1.34 0.42
2010/11 0.51 127.9 1.55 0.88 204.5 1.69 1.41
AE 106.0 1.46 0.73 134.8 1.58 0.93

Notes: ED represents demand elasticities. BCR (benefit–cost ratio) is calculated as total economic benefit divided by
total economic costs. FE (Fiscal Efficiency) is calculated as net benefit (total economic benefit less total economic
costs) divided by total fiscal costs. Under ED, ‘AE’ stands for Analyst Estimates as used in BCA reported in Dorward
et al., (2010a); School of Oriental and African Studies et al., (2008). AE multiplier estimates derived from multiplier
effects on base estimates with ED = 0.51. Economic costs exclude costs of displaced fertilizers. Data from Dorward
et al., (2010a); School of Oriental and African Studies et al., (2008) and Table 9.2.

Table 9.4. Alternative estimates of returns to FISP investments, 2005/6–10/11

Annualized return over

Estimation ED Annual return 10 months

Net
beneﬁt
US$ mill BCR FE AIRR FE

Basic estimate 0.51 36.72 1.26 0.39 1.32 0.49

AE 18.09 1.09 0.13 1.11 0.16
Simple multiplier 0.51 46.30 1.31 0.58 1.39 0.73
AE 16.65 1.12 0.14 1.14 0.17
Differentiated 0.51 36.56 1.34 0.60 1.42 0.76
multipliers (a)
AE 11.45 1.13 0.19 1.16 0.23
Differentiated 0.51 63.41 1.44 0.84 1.55 1.07
multipliers (b)
AE 27.86 1.22 0.30 1.26 0.37

See notes on previous tables. Simple (unweighted) averages. Differentiated multipliers with consumer multiplier of
1.4, producer multiplier of 1.2, and recipient multiplier of 1.1 (a) or 1.4 (b). Annualized return if BCR is achieved over
10 months.

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Beneﬁt–cost analysis, 2006/7 to 2010/11

9.5.5. Sensitivity of BCA estimates to time of return, yields, and

displacement
It was noted earlier that the use of benefit–cost ratios implies an annual return
on investment. However, it might be argued that returns are achieved over a
shorter period, for example 7 months from fertilizer purchase and application
to harvest. This can lead to substantial increases in the Annual Internal Rate
of Return (AIRR), depending on the BCR—for a BCR of 1.2 the AIRR would
increase by 14% to just under 1.4, while for a BCR of 1.3 the AIRR would
increase by 21% to just under 1.6. Allowance for returns over 10 months (as
illustrated in Table 9.4) gives smaller increases in BCR.
For a given initial ‘without subsidy’ situation, returns to investment are
also affected by changes in yield and displacement effects with the subsidy.
Higher yields lead to higher returns from increased volumes of incremental
production, but they also tend to lead to lower prices—increasing returns to
consumers and losses to producers. The latter effect becomes important where
differential multipliers are used. Where prices are very high and remain above
import parity price then there are no price effects.
Increased displacement reduces incremental production, with opposite
effects to those discussed above with increasing yields. Reduced returns are,
however, counteracted to some extent by reduced costs, and this means that
the BCR falls less than the Fiscal Efficiency (indeed if costs fall by a smaller
proportion than benefits then the BCR may rise slightly while the FE falls sig-
nificantly). Dorward and Chirwa (2011b) provide more detailed information
on the sensitivity of investment returns to these changes.

9.6. Summary

We conclude with a brief summary and review of the ﬁndings in this chapter
and discuss their wider relevance to the economic viability, design, imple-
mentation, and evaluation of the Malawi FISP and other subsidy programmes.

9.6.1. Review of ﬁndings

This chapter has considered purposes, principles, and alternative BCA meth-
odologies against particular theoretical, methodological, and data challenges
faced in BCA of the FISP. We have then put forward a formal methodology
for improving the estimation of producer and consumer gains and losses and
used this to provide alternative estimates of the programmes’ annual net ben-
efit, benefit–cost ratio, and fiscal efficiency from 2005/6 to 2009/10, with
further investigation of the effects of multipliers (from growth linkages and

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Implementation and Impacts

liquidity benefits for poor households). The results (using a simple average
over the five years) are summarized in Table 9.4.
Without consideration of any growth multipliers, the estimated average
BCR of the six years of the subsidy programme ranges from 1.09 (the esti-
mates using analysts’ estimates of prices) to 1.26 (with formal estimation of
demand and an elasticity of demand of 0.51). Adding in multipliers raises the
estimated BCRs to between 1.12 and 1.22, using analysts’ price estimates, and
between 1.31 and 1.44 with more formal demand estimation. Further allow-
ance for returns over 10 months raises the range of the AIRR to between 1.14
and 1.55 (with multipliers). These are high estimated returns and suggest that
returns estimated using simple partial equilibrium analysis are downwardly
biased by, in particular, exclusion of the effects of growth multipliers.
However, precise estimation of the BCR remains difficult, for reasons that
are set out in this and previous chapters. Nevertheless, leaving aside the pos-
sibility of achieving returns in less than a year, and taking formal price esti-
mation as more reliable than analysts’ estimation, suggests that the average
BCR is likely to be around 1.35 after allowing for the effects of multipliers,
with fiscal efficiency of around 0.6. Lower estimates using analysts’ price esti-
mates give an estimated BCR of around 1.15 and fiscal efficiency of 0.2. These
estimates are sensitive to yield responses (and hence both programme imple-
mentation and weather), and international maize prices. The latter have been
higher in recent years, and are likely to remain high, and there is consider-
able potential for higher yield responses than those assumed here. Higher
displacement would not affect the BCR very much but would lower fiscal
efficiency.

9.6.2. Economic viability of the Malawi FISP

Overall these returns are high and suggest that the FISP has provided a good
return on investment—with scope for improved efficiency and effectiveness
to make returns much higher in the future. However there are, of course, also
risks of poor implementation, unfavourable weather, and changes in prices
that depress returns.
The extent to which the FISP represents the best use of investment funds
depends upon competition for funds between different investments and
their relative returns. Buffie and Atolia (2009) find, using CGE analysis, the
net benefits of the FISP depend critically upon the relative returns to fertilizer
use and to investments in roads, and upon the extent to which investment in
FISP crowds out investments in infrastructure. They conclude that a strategy
of mixed investments is probably best. However Filipski and Taylor (2011)
find that CGE model results are sensitive to model formulation regarding
seasonal finance constraints on input purchases—which were not allowed for

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Beneﬁt–cost analysis, 2006/7 to 2010/11

by Buffie and Atolia. Fan et al. (2007) report that investments in education,
roads, agricultural research and development, credit subsidies, and input sub-
sidies (in that order) all yielded high returns in such a mixed investment
strategy in the early stages of the Green Revolution in India.14
There is very limited specific information on returns to alternative invest-
ments, such as in roads and in agricultural research and development in
Malawi, and it is common to rely on estimates from other African countries
or from Asia. These tend to show very high returns to these investments.
Buffie and Atolia (2009) use returns to infrastructure investment of between
10 and 30% (a BCR of 1.1 to 1.3), citing evidence from Fan et al. (2003) and
Pohl and Mihaljek (1992). Alston et al. (2000) report a modal rate of return
of 43% to agricultural research from a meta-analysis of studies but report
very wide ranges in estimates with some possible biases indicated by lower
estimates in peer reviewed and ex ante (as opposed to ex post) studies and in
studies in LDCs. Estimated returns from the FISP are comparable with these
estimates. None of these returns allow for wider impacts, such as the health
and education benefits discussed in Chapters 6 and 7 and the long-run effects
of reduced food shortages and malnutrition on children’s mental and physi-
cal development and subsequent adult productivity. Any such allowance
would have to take into account likely differences across the different invest-
ments being compared, as other investments may also yield such benefits
without including them in the estimation of returns to investment.

9.6.3. Implications for subsidy programme design and implementation

The formal price analysis and introduction of multipliers in the BCA in this
chapter reinforces previous studies’ discussions of the lessons from BCA for
FISP and other subsidy programme design and implementation: returns
will be improved by measures that increase yield responses to fertilizer (for
example, earlier input delivery, greater emphasis on integrated soil fertility
management, improved application, more cost effective formulations, more
technical advice, more targeting to the poor) and that reduce displacement
(for example, better regional and household targeting, better control of diver-
sion and fraud, earlier registration and input delivery). The inclusion of mul-
tipliers in the BCA strengthens the importance of all of these issues, as gains
from improved efﬁciency and effectiveness are multiplied. It also adds fur-
ther weight to the importance of targeting, of ensuring that maize marketing

14
Rationing of large unit subsidies in the FISP should make it more efﬁcient than India’s univer-
sal subsidies; and its impact on liquidity constraints in the absence of a credit programme should
mean that it generates some of the beneﬁts that Fan et al. report for credit subsidies in India. Fan
et al.’s estimates of returns to subsidies relative to roads may be under-estimated to some extent as
a result of higher cross-region spillover effects from subsidies, not captured in the model.

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Implementation and Impacts

policies allow increased maize production to lower maize prices (as beneﬁts
to poorer subsidy recipients and consumers tend to have higher multipli-
ers) and suggests that to maximize linkages and reduce leakages (Dorward
et al., 2003) there should be complementary investments in measures facili-
tating the growth of the non-farm economy and of non-staple agriculture
(for example, horticulture, legumes, and livestock) in response to subsidy-led
growth real in real incomes.

9.6.4. Implications for future data collection and beneﬁt–cost analysis

The partial equilibrium methods developed in this chapter have sought to
follow and find appropriate compromises between the seven principles set
out in Section 9.2: being practicable, externally consistent, contextualized,
holistic, internally consistent, transparent, and cost-effective. The method is
relatively simple in terms of its data needs and the calculations required but
nevertheless it takes account of the context and complex processes affecting
FISP returns, and it also addresses the key questions that policy makers and
technicians ask (regarding both FISP’s overall returns—for comparison with
other investments—and the critical variables that determine its effectiveness
and efficiency). It could be improved by further research leading to better esti-
mates of maize price determinants and of growth multipliers, and by more
robust estimation of (quite probably changing) demand elasticity for maize
and better information on yield and production effects of subsidized inputs.
Its application does, therefore, highlight the need for good data in Malawi’s
agricultural sector. This is a major challenge. Malawi has excellent data on
market prices, and the biennial FISP evaluation surveys have provided valu-
able information on targeting and use of subsidized inputs. However there
are continuing difficulties with data on the total number of farm households,
on cropping areas and yields, and on yield responses to inputs and agronomic
management. Improved data on these variables is critical not just for the
evaluation of the FISP, but for much wider policy development, monitoring,
and evaluation.

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Part III
Strategic issues

The final part of the book, before the conclusion, consists of two chapters
that look at two strategic issues relevant to all agricultural input subsidy
programmes: targeting and graduation.
Targeting is an issue that has received attention in the theoretical and ana-
lytical literature on agricultural subsidies, as evidenced in Chapters 2 and
3. Targeting systems and outcomes of the Malawi FISP were considered briefly
in Chapter 5. Chapter 10 examines these issues in more detail and considers
challenges and options for improving targeting systems and outcomes in the
Malawi FISP.
Like targeting, graduation has received considerable attention in the design,
implementation, and analysis of social protection programmes. It has, how-
ever, received very little attention in agricultural input subsidy programmes
where it has been considered largely in terms of the need for and difficulties
with ‘exits’. The processes by which the need for subsidies becomes redun-
dant and the criteria and mechanisms for programme exits have received
much less attention. Chapter 11 takes the concept of graduation as used in
social protection and develops it for application in the specific context of the
Malawi FISP.

Targeting and access to input subsidies

10.1. Introduction

Targeting, the process of directing subsidized inputs to particular areas and

households within those areas, plays a critical role in the Farm Input Subsidy
Programme and is a hotly debated issue in its implementation. It is widely
recognized that efficiency in targeting is one of the critical factors determin-
ing the effectiveness and impact of the subsidy programme. Targeting also
has implications for private sector input market development, actual gradu-
ation, and sustainability of the programme. A well-targeted farm input sub-
sidy programme should lead to incremental use of inputs, by minimizing
displacement of commercial sales and ensuring that only those that need
production support access the inputs. The choice of the types of targeting
systems which are intended to deliver particular targeting outcomes depends
on the targeting objectives and the objectives of the programme. Targeting
objectives are determined by technical and political programme objectives
and by an understanding of how subsidized inputs are used in different con-
texts and of how this affects input productivity and its economic and social
impacts. Targeting, therefore, is not only important, it is also controversial,
highly political (at national and local levels), and difficult to implement in a
large-scale programme due to challenges and costs in its implementation and
supervision.
This chapter sets out a conceptual framework for examining alternative
targeting objectives and methods and their applicability in different situa-
tions. It then uses this conceptual framework and household survey analysis
to examine the practice and outcomes of targeting in different programme
years. The next section of the chapter reviews the framework for targeting
farm input subsidies at national, district, and beneficiary levels. Section 10.3
examines factors that determine access to subsidized farm inputs, focusing
on household characteristics and programme processes. Section 10.4 analy-
ses how the subsidy programme affects or is affected by gender relations by

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Strategic issues

investigating intra-household allocation of farm inputs to different plots.

Section 10.5 reviews the difﬁculties experienced by the most vulnerable
groups in accessing subsidized farm inputs. Section 10.6 offers proposals for
alternative targeting options and their implications. Finally, Section 10.7 pro-
vides concluding remarks.

10.2. Targeting at national, district, and beneﬁciary levels1

10.2.1. Targeting objectives and impacts

Targeting objectives depend on the objective of the programme and Table 10.1
illustrates how these may be related. It neither attempts to provide a compre-
hensive description of the range of possible programme objectives nor to
explore in any depth their implications for targeting and targeting objectives.
It does, however, introduce key issues that need to be considered about the
impacts of targeting and the critical outcomes that targeting systems attempt
to influence. In the case of the farm input subsidy, programme objectives
might include increasing national and household production and food
security, national food self-sufficiency, beneficiary asset building and gradu-
ation, environmental protection improving welfare of vulnerable groups,
and wider, inclusive social and economic growth. There is therefore a link
between programme objectives and targeting objectives.2 For instance, if the
programme objective is to increase production then the targeting objective
may be to maximize input use (minimizing displacement) and productivity
of incremental input use. This would entail identifying geographical areas
and household types with low displacement and high input use efficiency,
such as poorer, able-bodied, good farmers in productive maize growing areas.
Similarly, if the programme objective is to improve beneficiary household
food self-sufficiency, then the targeting objective would be to target food defi-
cit or insecure households in productive maize growing areas who are able to
redeem coupons and use them effectively.
Different objectives may be related in two ways. First, some of them may
be complementary (as, for example, between maximizing production, as dis-
cussed above, and promoting national food self-sufficiency). A different set of
relationships between targeting systems, outcomes, and impacts is presented
in Figure 10.1. This distinguishes between the targeting system (intentions,
implementation, and costs), targeting outcomes (the number of beneficiaries,
the inputs received per beneficiary, the characteristics of beneficiaries, and

1
This section draws heavily on Dorward and Chirwa (2012c).
2
Dorward and Chirwa (2012c) provide a detailed analysis of the links between programme
objectives and targeting objectives and their implications.

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Targeting and access to input subsidies

Table 10.1. Programme objectives and their implications for targeting

Programme objective Targeting objectives Implications

A1 Increased production Maximize incremental input Identify geographical areas
use (minimize displace- & household types with
ment) & productivity of low displacement (i.e.
incremental input use. unable to buy unsub-
sidized inputs) & high
input use efficiency—
poorer, able-bodied,
‘good’ farmers in produc-
tive maize growing areas?
A2 National food self-sufficiency As above As above
B1 Beneficiary household food Target food deficit/insecure Identify such households
self-sufficiency households in produc-
tive maize growing areas
& able to redeem the
coupons & use the inputs
effectively—complemen-
tary safety nets to aid
financing of redemp-
tion by poor targeted
households
B2 Beneficiary household food As in B1 above As in B1 above
security
B3 Social protection for Target most vulnerable Identify such households.
beneficiaries households in produc- Complementary safety
tive maize growing areas nets to aid financing of
& able to redeem the redemption
coupons & use the inputs
effectively
C1 Wider household food As in (A1) above Complementary policies
security to promote access to
maize markets with low &
stable prices in rural and
urban areas, higher ganyu
wages, complementary
social protection (e.g.
cash transfers)
C2 Social protection for all As in (C1) above As in (C1) above
households
C3 Poverty reducing broad- Some combination of (B2), Combination depends on
based growth (B3), and (C1) above, the relative effective-
ness/efficiency of direct
impacts for targeted
beneficiaries and indirect
impacts benefiting the
poor more generally
D Programme As in (C3) Together with develop-
graduation—area ment of (private sector)
input supply systems and
produce markets

(continued)

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Strategic issues

Table 10.1. (continued)

Programme objective Targeting objectives Implications

E Programme As in (B1) May need mechanisms to

graduation—households help beneficiary
household saving/other
forms of affording input
access to enable
graduation (ability to
afford unsubsidized
fertilizer) after speci-
fied time as programme
beneficiary
F Environmental protection As in (C3) Together with focus
on areas with fragile and
sloping soils, particular
land pressure and
pressure on forested
hills. Complementary
promotion of integrated
soil fertility management

Source: Dorward and Chirwa (2012c).

OTHER POLICIES
Stakeholder interests
t Number of
beneficiaries
Incremental input
TARGETING
T SYSTEM
use/beneficiary
r
Budget,
d tarr geting
g & rationing
intentions (criteria, systems)
s
Targeting implementation Inputs/beneficiary r
Targeting costs
t Input combinations Incremental production
Quantities of each & productivity
input beneficiary

Beneficiary
characteristics TARGETIN
T G IMPACT
IM TS
Resources,
objectives Wage & maize ze
price effe
f ctts
Area characteristics
Soils, climate, land
pressure, markets
TARGETING
Beneficiary Non-beneficiary
OUTCOMES welfare & asset welfare & asset
gains gains

Figure 10.1. Targeting variables and impacts

Source: Dorward and Chirwa (2012c).

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Targeting and access to input subsidies

the characteristics of areas in which the beneficiaries reside and farm), and
targeting impacts. These interact with other policies and stakeholder interests.
The targeting system influences targeting outcomes through broad targeting
design and implementation (determining the quantities of subsidized inputs
in different areas, and hence the characteristics of areas receiving inputs and
of potentially eligible beneficiaries) and through more detailed processes of
coupon allocation, issue, and redemption (determining the quantities of sub-
sidized inputs received by different individuals and households, and hence
the characteristics of beneficiaries and the number of beneficiaries receiving
different input combinations). These of course interact, and intentions are
commonly modified or subverted to some extent during implementation.
This needs to be explicitly allowed for in targeting system design.
The major targeting impacts are affected by four issues which determine
the effectiveness of the Farm Input Subsidy Programme: displacement, input
productivity, economy-wide effects, and graduation. First, displacement
implies that a household’s access to subsidized inputs reduces their purchase
of unsubsidized inputs such that the incremental input use from the subsidy
is less than the amount of subsidized inputs. Displacement rates are affected
by beneficiary characteristics, with higher displacement rates among non-
poor beneficiary households and lower rates among poor beneficiary house-
holds (Ricker-Gilbert et al., 2010). It is also likely that displacement will be
lower in areas where market access is poorer and inputs more expensive.3
This suggests that to reduce displacement, targeting should be aimed at areas
with poorer market access and a greater proportion of poorer households,
and, within those areas, at poorer households. Second, input productivity is
affected by beneficiaries’ farming skills and knowledge, crop management,
application of complementary inputs, timely planting and weeding, and
overall rates of input application, rainfall, and soils. This implies that tar-
geting should focus on areas with higher productivity potential in order to
maximize production and on possibly less-poor households able and keen to
make the most productive use of the inputs. Third, as argued in earlier chap-
ters, economy-wide effects of the subsidy result from falling maize prices and
higher wages benefiting the poor, and helping to achieve pro-poor growth
objectives. Linkage or multiplier effects are also likely to be higher where
poorer households are the main income beneficiaries (as argued in Chapters
7 and 9). The implications for targeting are that inputs should be focused on
households yielding the greatest incremental production benefits (allowing
for possible trade-offs between higher input productivity and displacement if

3
Ricker-Gilbert et al. (2010) report that participation in unsubsidized fertilizer purchase is
depressed with increasing distance to a paved road, whereas subsidized purchases increase with
distance to a paved road. Chirwa et al. (2011b) do not ﬁnd any signiﬁcant effect of distance to
paved road on participation in unsubsidized fertilizer purchases.

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Strategic issues

less poor households use inputs more productively), with concerns for wage
and linkage impacts strengthening arguments for more targeting of poorer
households and poorer areas Finally, graduation (described in Chapter 11 as
the process by which programme benefits to poor, vulnerable households
and areas enable them to improve assets and livelihood opportunities suf-
ficiently to allow withdrawal of subsidies without reversion to their former
vulnerable state) is affected by both beneficiary and area characteristics. As
discussed in Chapter 11, this is critical for promoting programme impacts
and controlling costs and involves the crossing of thresholds by beneficiary
households and/or areas. Targeting for graduation should then try to con-
centrate resources on households and/or areas for whom graduation, the
crossing of thresholds, is easiest. Determination of these is, however, very
difficult.
It is clear that even if programme objectives have a relatively simple focus
on national food self-sufficiency, targeting has to address difficult trade-offs
between higher displacement and possibly higher incremental input pro-
ductivity among less poor beneficiaries. There are greater and more com-
plex trade-offs if wider pro-poor growth and graduation objectives are also
important, requiring more attention to welfare gains, growth linkages, and
complex graduation processes among poorer beneficiaries. Determination of
ideal targeting outcomes is also made more difficult if objectives are unclear,
contested, highly variable, and changeable; if there is limited information
about differences in displacement, input productivity, labour market, and
graduation effects of different subsidy allocations to different households
and areas; and if the effectiveness of subsidies in meeting different objectives
for and through different households and areas is also affected by a range of
other policies and by macro-economic and other changeable and uncertain
conditions.

10.2.2. Targeting criteria and processes

If targeting desirable outcomes are determined by programme and hence tar-
geting objectives then, as set out in Figure 10.1, targeting criteria and pro-
cesses should be designed and implemented to deliver these outcomes. It
is helpful to consider targeting within the FISP in terms of six main stages:
(1) setting of targeting criteria; (2) identification of areas and beneficiaries;
(3) allocation of coupons; (4) distribution of coupons; (5) redistribution of
coupons; and (6) redemption of coupons. Processes and criteria within each of
these activities are formally defined by the government through the MoAFS,
and Table 10.2 presents the major changes in targeting processes and criteria
in the FISP from 2005/6 to 2009/10 (systems and criteria have been largely
unchanged from 2009/10 to 2011/12).

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Table 10.2. Major changes in targeting processes, 2005/6–9/10

2005/6 2006/7 2007/8 2008/9 2009/10

Area targeting criteria District allocation District & EPA allocation Initial district & EPA Initial district & EPA District & EPA allocation
nominally by EPA maize by maize & tobacco allocation by farm allocation by farm criteria not clear, variable
& tobacco areas, but areas, but highly variable household & maize & household& maize between districts. Overall
highly variable between between districts. Ad hoc tobacco areas, highly & tobacco areas, criteria opaque but more in
districts. Ad hoc district district allocation of variable between but highly variable line with farm households/
allocation of supplemen- supplementary districts. Ad hoc between districts. Ad district.
tary coupons. coupons. allocation of hoc district allocation
supplementary of supplementary cou-
coupons. Overall pons. Overall
criteria opaque. criteria opaque.

Beneﬁciary targeting Beneﬁciary selection Full time smallholder n/a Resource poor local Resource poor local
criteria criteria unclear. farmers unable to resident with land; resident with land;
afford purchase of guardians looking after guardians looking after

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1 or 2 unsubsidized physically challenged. physically challenged.
fertilizer bags. Vulnerable households Vulnerable households
(child- or female-headed, (elderly-, child-, or
PLWHA) female-headed,
PLWHA)

District/TA/Village District allocation by District allocation by District allocation by District allocation by District allocation by
coupon allocations MoAFS HQ, Village MoAFS HQ. Village MoAFS HQ. Village MoAFS HQ. EPA/village MoAFS HQ. EPA/village
allocation by TAs, allocation by DDC, allocation by DDC, allocation by MoAFS allocation by MoAFS
ADCs, TAs. ADCs, TAs. staff, DDC, ADCs, TAs. district staff, DDC,
ADCs, TAs.
Beneﬁciary identiﬁcation/ Largely by TAs, VDCs Systems highly variable Systems highly variable Use of farm household Farm household register,
coupon allocation between areas—by between areas—by register, open meet- allocation in MoAFS
‘local leaders’ TAs, ‘local leaders’ TAs, ings for allocation led led open meetings
VDCs, MoAFS staff. VDCs, MoAFS staff. by MoAFS (participation (unclear participation).
Reallocation by VH Reallocation by VH unclear). Reallocation by Voter reg. nos & ID
common. common. VH common. required. Reallocation
by VH common.

(Continued)

2005/6 2006/7 2007/8 2008/9 2009/10

Coupon distribution See above: allocation See above: allocation Distribution varied, Open meetings for Open meetings led by
system and distribution and distribution more by MoAFS and disbursement led by MoAFS (unclear par-
simultaneous simultaneous VDCs. Open disburse- MoAFS (degree of ticipation). Voter reg.
ment led by MoAFS. participation unclear). numbers & ID required
Redistribution by VH Redistribution by VH for receipt & redemption.

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common common Redistribution by
VH common
Coupon redemption Only through SFFRFM & Fertilizers also through Fertilizers also through Fertilizers also through Fertilizers only through
systems ADMARC major retailers; flexible major retailers; flexible major retailers; flexible ADMARC & SFFRFM;
maize seed coupons seed coupons through seed coupons through separate maize &
through wide range of range of seed retailers; range of seed retailers; legume seed coupons
seed retailers cotton inputs through cotton inputs through through retailers,
ADDs ADDs variable top up for
maize seed max 100MK

Coupon targeting and distribution processes were described in Chapter 5,

Sections 5.4.1 and 5.4.3, and are not described here although they are sum-
marized in relevant rows of Table 10.2. Here we discuss in more detail the
criteria used in beneficiary selection.
Selection of beneficiaries is supposed to be guided by targeting criteria. In
2008/9, for example, beneficiaries of FISP were supposed to meet any of the
following criteria (Ministry of Agriculture and Food Security, 2008)

• resource poor Malawian that owns a piece of land;

• guardians looking after physically challenged persons;
• bona ﬁde resident of the village;
• vulnerable, such as child-headed, female-headed, or orphan-headed and
those infected or affected with HIV and AIDS.

However, there have been a number of changes in beneficiary and area target-
ing criteria over the life of the programme. For instance, beneficiary targeting
criteria have shifted from an initial focus on ‘full time smallholder farmers
unable to afford purchase of 1 or 2 unsubsidized fertilizer bags’ to put more
emphasis on poor and vulnerable groups. There are, however, difficulties in
applying these criteria due to ambiguities and tensions among different tar-
geting criteria, difficulties in establishing measures for these criteria, large
numbers of deserving households, and lack of understanding and other inter-
ests among those conducting beneficiary targeting. As a result even with the
best will in the world there is considerable ambiguity and inconsistency in
the application of these criteria, and this creates space for abuses by those
able to control the selection processes. Political considerations further com-
plicate matters. As noted earlier in Chapter 5, from 2005/6 to 2008/9 the
‘supplementary distribution’ of coupons provided major opportunities for
politically motivated targeting of coupons to particular districts, to particular
areas within them, and to particular individuals (Chinsinga, 2012b).
Overall, despite significant changes to improve beneficiary targeting
criteria and processes, there are continuing fundamental difficulties with the
lack of clarity in targeting criteria, the large numbers of households satisfying
the criteria, and inconsistent application of criteria by local leaders and gov-
ernment staff. These difficulties continue to limit the achievement of desired
beneficiary targeting outcomes.

10.2.3. Targeting outcomes

Targeting outcomes can be considered in terms of area and beneﬁciary tar-
geting. Changes in area allocation criteria have led to changes in coupon
distribution between regions, with increases in coupons redeemed in the

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Strategic issues

2.5

2.0
Vouchers per household

1.5

1.0

0.5

North Centre South All

0.0
2005/6 2006/7 2007/8 2008/9 2009/10 2010/11 2011/12

Figure 10.2. Maize fertilizer voucher redemption per household per region,
2005/6–10/11
Source: Dorward and Chirwa (2012c).

southern region reducing regional differences in redemptions per household.

Figure 10.2 shows the changing pattern of maize fertilizer redemptions per
household by region from 2005/6 to 2010/11.
It also appears that districts with higher potential (roughly categorized
by altitude) were generally allocated proportionally more coupons than
low potential areas in 2006/7, but differentiation fell between 2006/7 and
2010/11. This normally involved reduced allocations across the board in dis-
tricts with lower allocations, not the complete exclusion of significant areas.
There is no evidence of greater proportionate allocation to districts with
more poor households, although this increased substantially from 2006/7 to
2010/11 due to the shift in relative coupon allocations to districts with larger
numbers of poor people in the south.
This should have led to increased subsidy access by poor people and in
turn reduced displacement, increased incremental production, and increased
maize and labour market effects, benefiting poor non-beneficiaries as well
as poor beneficiaries (School of Oriental and African Studies et al., 2008).
These should, other things being equal, improve programme effectiveness
and efficiency in promoting national and household food production, self-
sufficiency, food security, social protection, and poverty reduction for both
beneficiaries and non-beneficiaries.
These effects may, however, be undermined if incremental production
per unit input is lower for new beneficiaries in the south as compared with

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Targeting and access to input subsidies

previous beneficiaries in the centre and north and if targeting of the poor is
less effective in the south. Others, such as Mason and Ricker-Gilbert (2012),
find that district allocations of the subsidized inputs appear to be politically
driven with households in districts that the ruling party won in the general
election receiving on average 1.7 kg more subsidized seeds and 11.4 kg more
subsidized fertilizers than districts lost by the ruling party.
The targeting outcomes at beneficiary level reveal that a large proportion of
households receive less than 2 fertilizer coupons, partly due to the redistribu-
tion process that takes place at village level. Survey data show that the pro-
portion of households who lose or gain coupons as a result of redistribution
(those household with only one coupon) has increased steadily from 2006/7
to 2010/11 (from 27% to 36% to 41% across 2006/7, 2008/9, and 2010/11) and
that this is most common and has increased most in the south (Table 10.3).
However, apart from a lower occurrence of redistribution in the north, the
changes appear to be largely the result of increases in the numbers of cou-
pons and proportions of households receiving coupons in the south—if we
examine the households receiving one coupon as a percentage of households
receiving any coupons (i.e. excluding households not receiving any coupons),
then this remains relatively constant across the three survey seasons (around
30% in the north, between 52% and 63% in the centre, and around 57% in
the south).
Rural people’s perceptions of targeting outcomes also do not suggest
strong targeting to benefit poorer or more vulnerable households, nor any
increases in such targeting. Table 10.4 illustrates the characteristics of rural
households by the number of coupons for subsidized fertilizer in 2008/9,

Table 10.3. Fertilizer coupon receipts per household, 2006/7–10/11 (%)

Coupons/hh Zero 1 coupon/hh 2 coupons/hh >2 coupons/hh

Survey year 06/7 08/9 10/11 06/7 08/9 10/11 06/7 08/9 10/11 06/7 08/9 10/11

% all households by number of coupons/hh

North 38 28 24 18 14 23 37 50 47 7 8 5
Centre 45 35 31 28 39 38 21 20 24 5 3 1
South 49 33 11 28 37 47 19 24 35 4 3 2
National 46 33 21 27 36 41 22 25 31 5 3 2

% recipient households by number of coupons/hh

North n/a n/a n/a 29 19 31 60 69 63 11 11 7
Centre n/a n/a n/a 52 63 60 39 32 38 9 5 2
South n/a n/a n/a 55 58 56 37 38 42 8 5 2
National n/a n/a n/a 50 56 55 41 39 42 9 5 3

Source: School of Oriental and African Studies et al. (2008), Dorward et al. (2010b), and Chirwa et al. (2011b).

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Strategic issues

Table 10.4. Mean attributes of households by number of fertilizer subsidy coupons

received, 2008/9

Household characteristics Fertilizer coupon numbers per household Sig.

Zero 0.5 to 1 1.5 to 2 >2 All

% female-headed 26 31 24 17 27 *
households
Owned area in hectares 1.16 1.09 1.48 2.17 1.27 **
Value durable assets (MK) 19,621 15,630 20,340 28,111 18,702
Value livestock assets (MK) 18,689 22,947 41,807 58,946 28,699 *
Subjective score of HH food 1.5 1.5 1.6 1.7 1.5 *
consumption over past
12 months (1 = inade-
quate, . . . ., 3 = more than
adequate)
Subjective score on welfare 2.3 2.2 2.5 2.8 2.3 **
(1 = very unsatisﬁed, . . . .,
5 = very satisﬁed)
Month after harvest that 7.2 7.1 7.9 8.6 7.4 *
maize ran out

Notes: * = one or more differences signiﬁcant at p = 0.05, ** = one or more differences signiﬁcant at p = 0.01.
Source: Dorward et al. (2010b).

and the pattern is similar to other survey years in 2006/7 and 2010/11 as
targeting continues to tend to favour the non-poor. Holden and Lunduka
(2012a) find similar evidence, suggesting that the non-poor are more likely
to get subsidized fertilizers than the poor. The characteristics of households
receiving one coupon show a persistent pattern of poverty across the sur-
vey years. Land and other asset holdings and subjective welfare indicators
suggest that across different survey years these households are consistently
nearly as poor or sometimes poorer than households not receiving any cou-
pons. The relative bias against the poor suggests that when redistribution
occurs it is poorer households who share one of their coupons (less-poor
households with two coupons tend to hold onto both), and poorer house-
holds who receive the redistributed coupons. This involves both exclusion
errors (with exclusion of poor and vulnerable households who ought to
be included according to the targeting criteria) and inclusion errors (with
inclusion of less-poor households who ought to be excluded according to
the targeting criteria). Holden and Lunduka (2012a) find that targeting effi-
ciency in 2008/09 was poor and no better than under the targeted input pro-
gramme in 2000/1 and 2001/2. This poor targeting is attributed to leakages
of coupons and fertilizers before they reach the households (as discussed in
Chapter 5) and poor targeting criteria. However, the lack of clarity in target-
ing criteria and the large numbers of relatively less-poor people (who can
nevertheless be considered to meet the targeting criteria) make it difficult
to identify exclusion and inclusion errors with any precision or confidence.

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Targeting and access to input subsidies

10.3. Factors determining access to subsidies4

The lack of clarity of the targeting criteria implies that they are subject to dif-
ferent interpretations and application at local level. Several studies have used
multivariate regression analysis to isolate factors that are important deter-
minants in access to subsidized farm inputs (School of Oriental and African
Studies et al., 2008; Chirwa et al., 2011c), whether those that received cou-
pons were more likely to be food insecure (Holden and Lunduka, 2012a),
and factors determining the quantity of subsidized fertilizers received by the
household (Ricker-Gilbert, 2011). Access to inputs is measured in two ways:
receipt of fertilizer coupons and amount of subsidized fertilizers acquired by
the households. Chirwa et al. (2011c) use a probit regression approach for
estimating the likelihood of accessing subsidized fertilizer coupons and a
tobit approach for determining factors that affect access to quantities of sub-
sidized fertilizers. Several factors are used to explain access to subsidized farm
inputs and these include household characteristics (composition, headship,
and assets); farming characteristics (land size, degree of commercialization,
cash crop cultivation, quantity of commercial fertilizers bought in previous
season); poverty and vulnerability indicators (own poverty assessment, ade-
quacy in food consumption, participation in safety nets, receipt of subsidy
in previous season); and other control variables (labour market participation,
remittances, business enterprise, open forum allocation of coupons, and
regional ﬁxed effects). Table 10.5 shows results from probit and tobit regres-
sion estimates of factors affecting access to subsidized fertilizers.
Several insights emerge from the results on the determinants of access
to subsidized fertilizers. First, with respect to the age of the household, the
results show that age matters. As the age of household heads increases, such
households are more likely to receive coupons and the probability of getting
a coupon increases by 0.3%. However, households that are headed by the
elderly (those above 64 years) are unlikely to receive fertilizer coupons and
the probability falls by 13%. Similarly, with respect to quantity of fertilizers
acquired, there is a positive relation between age and quantity acquired but
the elderly are disadvantaged. This is contrary to the emphasis on special vul-
nerable groups that has been placed recently in the targeting criteria for the
subsidy programme. It may also be the case that elderly-headed households
are labour-constrained for farming activities and are least likely to use the
coupons in farming.
Second, households with larger parcels of land under cultivation are more
likely to receive subsidized fertilizer coupons and tend to acquire larger

4
This section draws heavily on Chirwa et al. (2011c).

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Strategic issues

Table 10.5. Estimates for factors affecting access to subsidized fertilizer in 2008/9

(1) (2)
Whether obtained Kilograms of subsidized
subsidized fertilizer fertilizer acquired
coupons
PROBIT TOBIT

Variables dF/dx z coeff z

Age of household head (years) 0.0032 3.11a 0.227 1.69c

Male headed household (0/1)* 0.0021 0.08 1.698 0.49
Elderly headed household (0/1)* -0.1304 -2.75a -7.94 -1.49
Household size (adult equivalents) -0.0113 -2.02b -1.172 -1.62
Value of assets in US dollars in 2008/9 0.00001 -0.67 -0.004 -1.09
Cultivated land in hectares in 2008/9 0.0561 3.03a 12.947 4.75a
Tobacco cultivation in 2008/9 (0/1)* 0.172 5.29a 27.639 7.21a
Maize marketing in 2008/9 (0/1)* 0.1126 3.22a 15.934 3.32a
Quantity of commercial fertilizers bought in -0.0002 -2.50b -0.014 -1.28
2007/8 (kg)
Own poverty assessment as poor in 2007/8 -0.0802 -2.19b -15.299 -2.62a
(0/1)*
Adequate food consumption in 2008/9 0.0202 0.91 6.501 2.23b
(0/1)*
Business enterprise in 2007/8 (0/1)* 0.0051 0.23 0.432 0.15
Labour market participation in 2007/8 (0/1)* -0.0411 -1.83c -8.217 -2.85a
Remittance receipts in 2007/8 (0/1)* 0.0747 3.26a 5.049 1.63
Access to social safety nets in 2007/8 (0/1)* 0.0704 2.36b 4.666 1.4
Access to fertilizer coupons in 2007/8 (0/1)* 0.446 20.21a 56.109 15.82a
Open forum allocations 2008/9 and poor 0.0981 3.39a 13.167 3.36a
2007/8 (0/1)*
Central region (0/1)* -0.0367 -1.11 -24.973 -6.35a
Southern region (0/1)* -0.0321 -0.99 -18.023 -4.51a
Constant - - 3.257 0.35
Number of observations 1982 1982
Pseudo R-squared 0.2703 0.0406

Note: The dependent variable in (1) is a dummy variable for access to subsidized fertilizer coupons received in the
2008/09 agricultural season. (*) dF/dx (marginal effect) is for discrete change of dummy variable from 0 to 1. The
dependent variable in (2) is the quantity of subsidized fertilizers acquired in the 2008/9 season. Robust t-statistics
with superscripts a, b, and c denote signiﬁcance at the 1, 5, and 10% levels, respectively.
Source: Chirwa et al. (2011c).

quantities of subsidized fertilizers than those with smaller parcels. The posi-
tive relationship is expected since land is one of the main criteria for targeting
smallholder farmers. Third, the household’s commercial orientation is also
an important factor as reﬂected in the signiﬁcance of tobacco cultivation and
marketing of maize in both models. This implies that fertilizer coupons are
likely to go to those smallholder farmers that earn cash incomes from agri-
culture with the potential to purchase fertilizers at prevailing market prices.
This would not seem to support current targeting objectives and criteria, and

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Targeting and access to input subsidies

suggests the existence of inclusion errors. However, households that bought

commercial fertilizers in the previous season are less likely to be allocated
subsidized fertilizer coupons, and purchase of commercial fertilizers margin-
ally leads to reduction in the probability of accessing coupons. This suggests
weak adherence to targeting that should reduce inclusion errors and ineffec-
tiveness and inefficiency from subsidizing farmers who would have bought
commercial fertilizer without the subsidy.
Fourth, households that view themselves as poor are less likely to receive
coupons. In the first two years of the subsidy, evidence of households having
cash for coupon redemption was a precondition in some communities for
households to receive fertilizer coupons (Imperial College et al., 2007; School
of Oriental and African Studies et al., 2008). With respect to the quantity of
fertilizers acquired, the poor acquire 15.4 kg less subsidized fertilizers than
the non-poor. School of Oriental and African Studies et al. (2008) find similar
results on the effect of own poverty evaluation on the likelihood of receiv-
ing fertilizers, with wealthier households receiving disproportionately more
coupons than poor households.
Fifth, participation in the labour market either through salaried or ganyu
employment in the 2007/8 season reduced the household’s chances of receiv-
ing coupons in the 2008/9 season. Similarly, households that participated
in the labour market tended to acquire 8.2 kg less subsidized fertilizers than
non-participants in the labour market. This implies that those in salaried
employment are excluded as they are capable of purchasing fertilizers at com-
mercial prices and those in ganyu employment may be those households that
do not have adequate land and use their labour resource in ganyu labour.
Nonetheless, ganyu labour is also the second most important source of cash
for redeeming the coupons (School of Oriental and African Studies et al.,
2008; Dorward et al., 2010b).
Sixth, receipt of remittances in the previous season increases the prob-
ability of receiving coupons, but this does not significantly determine the
quantity of subsidized fertilizers acquired by the household. Remittances are,
however, an important source of cash for redemption of coupons and for
purchase of farm inputs in the rural areas.
Seventh, access to other social safety nets in the previous season is positively
associated with receipt of fertilizer coupons in the 2008/09 season, although
this does not significantly affect the quantity of subsidized fertilizers acquired by
the household. This implies that participants in other social safety nets are not
excluded from the fertilizer vouchers, and if these safety nets are well targeted
then they can provide additional information about the vulnerable households
in the communities. Some of the social safety nets, such as cash-for-work or
public works programmes, if well coordinated can ease the cash constraint of
vulnerable households and enable them to redeem the fertilizer coupons.

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Strategic issues

Eighth, households that benefited from the subsidy in the previous season
were more likely to receive the coupons in the next season. The probability
of receiving fertilizer coupons increases by 45% for households targeted in
the previous season who tend to acquire 56.1 kg more subsidized fertilizers
than those that did not receive coupons in the previous season. The target-
ing impacts of this of course depend upon the criteria used in targeting the
previous year and on criteria used in excluding previous beneficiaries and
including new ones.
Finally, transparency and accountability in allocation of coupons at the
local level tends to be beneficial for the poor. Open forums for allocating
coupons increase the chance of targeting those that ranked themselves in
the poor category. Similarly, the poor tend to acquire 13.2 kg more of subsi-
dized fertilizer when open forums are used than when coupon allocations are
discrete. This suggests that community-based targeting may be superior to
allocations that involve traditional leaders and committees, as was previously
the case in the 2005/6 up to the 2007/8 season.
Overall, the results suggest that although the poor are not excluded from
access to subsidized farm inputs, where they receive subsidized inputs they
tend to receive fewer coupons and acquire less subsidized fertilizers than the
non-poor. Holden and Lunduka (2012a), Ricker-Gilbert (2011), and to a lesser
extent Chibwana et al. (2010) reach similar conclusions, with households
receiving coupons being better off in terms of their livestock endowments
and assets than those that did not receive coupons. The re-distribution of
coupons at the village level tends to increase such a bias in which the poor
tend to share the coupons and the non-poor tend to retain the two expected
fertilizer coupons. The results also suggest that the fortunes of the poor in
accessing subsidized farm inputs, and hence improvements in targeting effi-
ciency, can increase with increased use of coupon allocation processes such
as open forums. Hence, transparency and accountability of systems are criti-
cal in achieving development results and outcomes. School of Oriental and
African Studies et al. (2008) and Ricker-Gilbert and Jayne (2011) also found
that in 2006/7 and 2008/9 the receipt of subsidized fertilizer was also associ-
ated with the presence of a resident MP in the community.

10.4. Gender and use of subsidized inputs5

Gender issues in FISP are considered in the targeting criteria, where

female-headed households are categorized as part of vulnerable groups requir-
ing particular attention in the targeting of subsidized farm inputs. However,

5
This section draws heavily on Chirwa et al. (2011e).

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Targeting and access to input subsidies

it is also important to consider how gender relations are affected or affect the
use of subsidized inputs at household level.
The analysis of gender issues in the FISP has mostly concentrated on dif-
ferential access between male-headed and female-headed households.
Figure 10.3 shows the proportion of male-headed and female-headed house-
holds receiving fertilizer coupons from survey data in the 2006/7, 2008/9,
and 2010/11 agricultural seasons. A relatively higher proportion of male-
headed households had access to subsidized fertilizer coupons as compared
with female-headed households in 2006/7 and 2010/11, while in the 2008/9
season a slightly higher proportion of female-headed households got subsi-
dized fertilizer coupons than male-headed households.
However, School of Oriental and African Studies et al. (2008) also find that
male-headed recipient households tended to receive more maize fertilizer
coupons than female-headed recipient households, with male-headed house-
holds receiving on average 1.55 coupons compared to 1.45 coupons received
by female-headed households in 2008/9 (with 1.7 compared to 1.3 coupons
received per households in 2006/7). Holden and Lunduka (2012a), in a study
of six districts in central and southern Malawi, find that 11% of female-
headed households received the full package of 2 bags compared to 29% of
male-headed households. With respect to communities’ perceptions on who
is likely to receive coupons, there were no significant differences between

90
80
80
70 75
60 66 68
Percent

50 57

40 46
30
20
10
0
2006/7 2008/9 2010/11

Male headed Female headed

Figure 10.3. Proportion of male- and female-headed households receiving ferti-

lizer coupons, 2006/7–10/11 (%)
Source: Computed from School of Oriental and African Studies et al. (2008), Dorward et al.
(2010b), and Dorward and Chirwa (2011a).

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Strategic issues

male-headed and female-headed households across regions (Dorward et al.,

2010b).
Chirwa et al. (2011e) exploit detailed plot level information on decision-
making on farming activities by specific members of the household to under-
stand intra-household decision making in allocation of subsidized fertilizers
on male- and female-controlled plots. Using probit regression models, the
gender of the household member who controls input and farming decisions
on the plot is the main variable of interest. The control variables in the model
include farmer characteristics and other household characteristics such as plot
size, age of household head, headship of household, cultivation of tobacco,
sale of maize, access to safely nets, previous access to subsidized fertilizers,
and district dummies. Female membership was interacted with household
receipt of fertilizer coupons, male-headed membership, and with household
with commercial fertilizers. Table 10.6 presents results of probit regressions
showing: (1) intra-household use in households with any fertilizers (regard-
less of the source of the fertilizers); (2) intra-household use in households
with subsidized fertilizer (with or without additional unsubsidized fertilizer);
and (3) intra-household use in households that only used subsidized fertiliz-
ers (with no purchases of unsubsidized fertilizer).
First, the results show that significant gender differentials exist in the allo-
cation of fertilizers to plots within the households, with female-controlled
plots less likely to have fertilizer applications compared to male-controlled
plots. This is only in the case where we pool the sample of subsidized and
unsubsidized households. The probability of applying fertilizer falls by 0.28
points for female-controlled plots, and the marginal effect is statistically sig-
nificant at the 1% level. These results are similar to the findings in other
studies in African agriculture such as Doss and Morris (2001) and Chirwa
(2005), although in both those studies the coefficients of female control
were statistically insignificant. However, model (1) results also show that
female-controlled plots in coupon-recipient households were more likely to
be fertilized as compared with male-controlled plots and female-controlled
plots in female-headed households. Access to subsidized fertilizers improves
the odds for female-controlled plots, with the probability of fertilizer appli-
cation increasing by 35% compared to female-controlled plots in male-
headed and non-coupon recipient households. This implies that for a female
household member in a coupon recipient household the mean increase in
the probability of applying fertilizer on the plot is 0.07 points compared to
a decrease of 0.28 points for a female member in a household without sub-
sidized fertilizers.
Female-controlled plots in male-headed households were less likely to
be fertilized than either male-controlled plots or female-controlled plots
in female-headed households. This is consistent with observations in focus

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Targeting and access to input subsidies

Table 10.6. Marginal effects from probit estimates of intra-household fertilizer use

Dependent variable: Plot (1) (2) (3)

controlled by member in
household was fertilized All households Use any fertilizer Only use subsidy
(0/1) fertilizer

dF/dx t-ratio dF/dx t-ratio dF/dx t-ratio

Female household member* -0.2844 -3.50a 0.078 1.3 0.0401 0.42

Female member in coupon 0.3502 13.09a - - - -
recipient household*
Female member in male- -0.2848 -3.32a -0.1581 -2.03b -0.073 -0.65
headed household*
Female in household with 0.2154 7.30a 0.0729 2.66a - -
commercial fertilizer*
Plot size in hectares 0.4308 12.59a 0.4664 11.99a 0.4502 8.42a
Male-headed households* 0.1223 1.65c 0.0535 0.84 0.012 0.12
Age of household head -0.0008 -1.45 -0.0003 -0.64 0 -0.07
Number of adult equivalents -0.0043 -1.12 -0.0085 -2.37b -0.0086 -1.66c
Log of household land size in -0.2389 -15.05a -0.1672 -13.34a -0.2527 -11.52a
hectares
Household that grew tobacco* 0.1368 6.88a 0.1067 6.19a 0.0755 2.51b
Household that sold maize* 0.1255 4.90a 0.0817 3.59a 0.0937 2.82a
Household had commercial 0.151 8.59a 0.0776 4.58a 0.0101 0.31
fertilizers in 2007*
Household own assessment as -0.063 -2.99a -0.0447 -2.29b 0.0069 0.22
poor in 2007*
Household had access to 0.0109 0.49 0.0017 0.08 0.0276 0.96
safety nets 2007*
Household had subsidized 0.1698 9.44a 0.057 3.05a 0.0389 1.43
fertilizers 2007*
District ﬁxed effects? Yes Yes Yes
Number of observations 4727 3551 1944

Pseudo R-squared 0.2281 0.1826 0.2003

Notes: (*) dF/dx is for discrete change of dummy variable from 0 to 1. Superscripts a, b, and c denote statistically
signiﬁcant at 1, 5, and 10% level, respectively.
Source: Chirwa et al. (2011e).

group discussions in Chirwa et al. (2011c) that typically, in male-headed

households, resources are likely to be controlled by husbands. However, this
is only the case when commercial fertilizers are also available to the house-
hold (models (1) and (2)) but it is not the case when households have access
to subsidized fertilizers only (model 3). The results show that being a female
member controlling a plot in a male-headed household reduces the probabil-
ity of applying fertilizers by 28% in the model of subsidized and unsubsidized
households (model (1)), but this bias reduces to 15% in subsidized house-
holds (model (2)). Hence, the bias against female-controlled plots in male-
headed households is reduced as compared with the case when commercial

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Strategic issues

fertilizer is also available at the household level. In model (1), the results
imply that the mean decrease in the probability of a female-controlled plot
being fertilized in a coupon-recipient and male-headed household is 0.21
points. In model (2), the decrease in the mean probability of applying fer-
tilizer on female-controlled plots in male-headed households is only 0.08
compared to a decrease of 0.57 points for the same situation in model (1).
Second, the results also show that access to commercial fertilizers in the
2008/09 season also favoured women-controlled plots in the application of
fertilizers and raised the probability of application of fertilizers on the plot by
21% compared to male-controlled or female-controlled plots in households
without commercial fertilizers. This is lower than the increase in the prob-
ability of 32% with household receipt of subsidized fertilizer. Third, larger
plots are more likely to be fertilized than smaller plots. However, plots that
belong to households with larger land holdings tend to be less fertilized. This
may be due to the fact that most rural households are cash constrained to
afford fertilizers and tend to be very selective on the plots that they apply
fertilizers to.
Fourth, commercialization of agricultural activities, using indicators such
as cultivation of tobacco and sale of maize, and acquisition of commercial
fertilizer in the previous season by households is positively related to the
probability of the plots being fertilized. This commercialization enables
households to invest in fertilizers across all plots. Fifth, self-reported poverty
in the 2007/8 season may be one of the constraints to the 2008/9 application
of fertilizers by households, with plots that belong to poor households less
likely to be fertilized regardless of availability of commercial or subsidized
fertilizers. Finally, households’ access to subsidized fertilizers in the previous
season increases the probability of the plot being fertilized, demonstrating
the positive cumulative effects of fertilizer adoption or continued access to
subsidized fertilizers. However, this relationship is only statistically signiﬁ-
cant at the 1% level in models where commercial fertilizers are also available
among households but not signiﬁcant among purely subsidized households.
Overall, although female-headed households are less likely to receive cou-
pons, potentially joint decision making prevails when it comes to use of
subsidized fertilizers within the household, hence reducing the bias against
female-controlled plots. This may be due to the fact that most of the subsi-
dized fertilizer is meant for the cultivation of maize for subsistence needs, in
which case women may have a stronger countervailing power as providers of
basic food needs at the household level. It is therefore important that analy-
sis of gender issues in the subsidy programme goes beyond examination of
differential access of subsidized fertilizers among male-headed and female-
headed households, and also includes examination of intra-household use
of subsidized fertilizers. The study implies that social transfers that focus on

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Targeting and access to input subsidies

provision of basic services, such as input subsidy for household food security,
are likely to be efﬁciently used even if they are targeted at the household level
instead of at individual household members.

10.5. Challenges of access for the most vulnerable groups6

As noted in Section 10.2 above the targeting criteria in the FISP have recently
emphasized the need to reach out to the most vulnerable groups, such as
resource poor female-headed households, resource poor elderly-headed
households, resource poor orphan-headed households, HIV-positive resource
poor household heads, resource poor physically-challenged households, and
resource poor households looking after elderly and/or physically challenged
persons (Farmers Union of Malawi, 2011). These vulnerable groups may expe-
rience more challenges in accessing coupons and acquiring subsidized ferti-
lizers due to the processes and problems experienced in the implementation
of the programme. Mvula et al. (2011) provide a detailed analysis of some of
the challenges that the most vulnerable households experience in accessing
subsidized farm inputs, and we highlight some of the major issues in this sec-
tion. The problems of access to farm inputs relate to access to coupons and
access to subsidized fertilizers.
With respect to access to subsidized fertilizer coupons, several problems
were documented, which include shortage of coupons earmarked for the vil-
lages, missing of beneficiary names that were identified and verified, sharing
of coupons, alleged sales of coupons by government agents and traditional
leaders, and the process of beneficiary identification and coupon distribu-
tion. These findings are consistent with assessment by Farmers Union of
Malawi (2011) where they find that among the 30% of respondents reporting
problems of coupon distribution, the main problems were: not enough cou-
pons (34% of respondents reporting problems, 10% of all respondents); not
receiving coupons though eligible (23% of respondents reporting problems,
7% of all respondents) and being forced to share a coupon with those who did
not register (17% of respondents reporting problems, 5% of all respondents).
Although these problems tend to be common to all beneficiaries, they tend
to be worse for vulnerable groups. For instance, limited numbers of coupons
available for villages against the number of resource poor households and vul-
nerable households tends to result in the most vulnerable households being
left out. Similarly, the widespread reported practice of sharing of coupons on
average favours less-poor beneficiaries (in that poor beneficiaries share their
coupons but less-poor beneficiaries do not) and makes vulnerable groups

6
This section relies heavily on Mvula et al. (2011).

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benefit less than the official entitlement. The poor tend to share among the
poor or share with the less-poor not in the beneficiary list. Less-poor benefi-
ciaries tend to be less affected by the village level politics of sharing and usu-
ally retain their normal share of the coupons. In addition, the requirements
for identification documents excluded some of the most vulnerable groups
from access to the subsidy.7
Even with a coupon there are severe challenges in the process of acquiring
subsidized fertilizers, with major implications for the most vulnerable groups.
These challenges, discussed in Chapter 5, include long queues at the coupon
redemption points, payment of ‘tips’, stock-outs, presence of thieves at the
markets, distances to markets, lack of money to redeem coupons, and rudeness
of some input selling clerks. First, long queues at input suppliers (requiring
some households to spend days and nights buying inputs) and long distances
to selling points are a major challenge for the most vulnerable groups such
as female-headed, physically challenged, and elderly-headed households.
Second, frequent stock-outs at markets lead to scrambles for farm inputs when-
ever they are in stock and this disadvantages female-headed households and
the elderly, particularly where there is no provision for special queues for vul-
nerable groups. Third, where ‘tips’ or bribes are demanded by sellers of subsi-
dized inputs these are not affordable for the most vulnerable groups. Finally,
incidents of theft, difficulties in transportation of inputs, and lack of money to
buy inputs are problems that particularly affect women and the elderly.
Overall, the problems in accessing coupons for most vulnerable households
were not widespread, while the difficulties in redeeming coupons were most
severe for most households, particularly the most vulnerable groups. Access
to subsidized inputs was more problematic for vulnerable groups due to long
queues, frequent stock-outs, long distances to markets, and payment of tips
and bribes. These raise the transaction costs and opportunity costs which
most vulnerable groups could not afford. The most vulnerable households
had particular challenges in finding money to redeem the coupons let alone
payment of tips to purchase subsidized inputs.

10.6. Options for targeting8

Given the difﬁculties noted in previous sections with targeting processes,

criteria, and outcomes, we now consider three possible alternative targeting

7
As noted in chapter, voter ID cards have been required for beneﬁciary registration from the
2009/10 season. This proved particularly difﬁcult for child-headed and elderly-headed households
that were either under voting age or too old to participate in the general elections.
8
This section draws on Dorward and Chirwa (2012c).

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Targeting and access to input subsidies

approaches. We consider ﬁrst a universal but smaller per household subsidy

providing 50 kg of fertilizer to all households (termed the ‘universal pro-
gramme’), second ‘tighter pro-poor targeting’ where the same total volume
of subsidized fertilizer is targeted with a 100 kg ration to the poorest house-
holds, and third ‘pro-poor mixed targeting’ where the same proportion of
households get 100 kg and 50 kg of fertilizer as in 2010/11, but these are bet-
ter targeted with the poorest households getting 100 kg, less poor households
getting 50 kg, and the least poor getting none.9
The ﬁrst approach, universal provision of 50 kg fertilizer, is effectively
legitimizing and extending the widespread practice of redistribution. It has a
number of advantages:

• Elimination of targeting costs and difﬁculties.

• Increased transparency and accountability, as all households know their
entitlement.
• High correspondence between planned targeting outcomes and those
achieved.
• Increased effectiveness in targeting the poor as compared with 2010/11,
as all the poor would receive some subsidized inputs.
• Despite some increase in the number of less-poor households receiving
fertilizers, the total quantity of fertilizer going to less-poor households
would be similar to 2010/11 as households would receive only 50 kg per
household. This may be seen as offering compensation for lower prices
for less poor farmers’ surplus maize.
• Reduced demands on coupon allocation and distribution processes may
allow earlier coupon distribution and input purchase and use, greater
farmer conﬁdence in subsidy receipt, and also release staff time for more
extension support to farmers.

There are, however, also difﬁculties with this approach. First, it may appear
to be a reversion to the former ‘starter pack’ approach, although there are
substantial differences with the larger scale of the subsidized ‘pack’ and in
its objectives, and this may make it politically unacceptable. Second, there
are concerns that incremental production from a smaller ration of subsidized
inputs for each household may not provide poor households with enough
productivity gains to ‘lift’ them over productivity and asset thresholds needed
for graduation. Finally, graduation could only be achieved if the whole pro-
gramme were withdrawn from all beneﬁciaries in an area at the same time.

9
For simple exposition, and also reﬂecting the high economic and social value of fertilizer, we
frame these options in terms of fertilizer allocations. In practice matching allocations of maize
and legume seed should be considered with fertilizer allocations.

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Progressive beneﬁciary graduation and targeting would undermine the core

benefits of universal targeting. However graduation might be pursued by pro-
gressive lowering of the subsidy with increasing beneficiary redemption pay-
ments, with cash transfers to households not able to graduate.
The second approach, tight pro-poor targeting of 100 kg fertilizer, is broadly
the approach that is supposed to be used currently. If implemented effectively
this would provide the lowest displacement and the highest pro-poor growth
potential. There are, however, serious difficulties in applying this method, as
discussed in this chapter, and targeting outcomes do not match aspirations.
Improving the implementation of this approach must address current diffi-
culties in both setting and applying measurable targeting criteria.
The third approach, mixed pro-poor targeting of 50 and 100 kg fertilizer,
is closest to the approach that is actually currently used, where there is redis-
tribution of subsidy coupons. However, whereas in the current system most
redistribution seems to involve sharing by poor recipients with poor non-
recipients, a more pro-poor approach would prioritize poorer recipients keep-
ing their 100 kg fertilizer allocation, while less-poor recipients would get
50 kg each, and the least poor would get nothing. While this lacks the strong
transparency and accountability of the universal approach, it may provide
better targeting and have wider community and political support than the
tight pro-poor approach. In some ways this might allow easier implementa-
tion—but it will still run up against the interests of powerful people who
may be excluded from subsidy benefits, and will still face challenges in set-
ting and applying criteria to identify target households. These are likely to
make it more difficult to implement. It might also allow a natural beneficiary
graduation system with households being shifted from a 100 to 50 kg to zero
fertilizer allocation.
Nonetheless, all systems face major practical challenges in determining
the number of eligible farm families in each area. Attention is also needed
to processes of coupon redemption, as these can be highly exclusionary to
poorer and more vulnerable people. Options include distribution centre
committees, more private sector involvement in subsidized input sales to
promote competition (as discussed in Chapter 8), more effective market
monitoring and auditing, and better integration with cash transfers for
the productive poor who cannot afford redemption payments. In addition,
the development of methods for better identifying beneficiaries is a key
requirement for improving targeting, unless it is accepted that difficulties
with this (together with power, politics, and problems of lack of account-
ability and transparency) make the universal approach the best practical
approach.
Two main approaches may be considered for improving targeting: proxy
wealth/income measures, and community targeting. Both these methods

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Targeting and access to input subsidies

• require formal identiﬁcation of targeting criteria and systems that, when

implemented, provide improvements that justify their costs;
• pay insufﬁcient attention to difﬁculties associated with the large
number of households clustered around the poverty cut-off point, and
hence local concerns about ‘fairness’; and
• need to overcome interests of less-poor groups, with enforcement
of more transparent and accountable allocation and distribution
processes–with open and inclusive processes and/or published recipients
lists and allocation criteria.

There is potential merit in the use of proxy poverty indicators, for exam-
ple, but also major costs and challenges in gathering and using reliable data.
Houssou and Zeller (2011) propose an indicator-based system for setting tar-
geting criteria for FISP and argue that this approach would be more target-
and cost-effective than the 2006/7 system in improving welfare transfers to
the poor.10 This approach presupposes (a) that the integrated household sur-
vey data and its estimation of income poverty (with its various challenges)11
provide more valid poverty measures than more subjective local definitions
which may take account of wider definitions of poverty,12 (b) that poverty
targeting is the most effective way of meeting the range of programme objec-
tives discussed earlier in Section 10.2, (c) does not recognize the complex
interactions between area and beneficiary targeting that are important in the
practicalities of targeting, and (d) does not pay sufficient attention to diffi-
culties noted earlier with large numbers of households clustered around the
poverty cut-off point, and hence local concerns about ‘fairness’.13
Nevertheless, given the cost implications, it may be useful to consider and
develop alternative ways of implementing this (for example, criteria might
be developed by a process of participatory consultations with rural people,
and a small number of low cost indicators combined into a points system
for household prioritization in subsidy allocation). Community targeting
with open meetings is the approach supposed to be used for identifying FISP

10
Ten indicators are proposed (household size, radio ownership, cement floor of house, bicycle
ownership, use of electricity for lighting, panga ownership, educational qualification in house-
hold, use of bed net, rubbish disposal facility, and household head literacy) and also area based
factors based on Agricultural Development Divisions.
11
See, for example, Chirwa et al. (2012) on poverty estimation difficulties as a result of
seasonality.
12
See for example, World Bank (2000) for discussion of issues such as vulnerability, power, voice,
assets, wealth, and well-being as poverty concepts alongside income or expenditure measures.
13
Houssou and Zeller (2011) do consider different patterns of distribution, including a ‘fair
targeting’ approach that does not lift anyone above the poverty line—but this involves reducing
subsidy receipts for households just below the poverty line to ensure that it does not lift them over
it—a very challenging process, both politically and administratively.

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Strategic issues

beneﬁciaries. There is widespread concern that traditional leaders, govern-

ment ofﬁcials, and others are appropriating coupons and/or directing them
to themselves and/or friends and relatives. This perception is promoted by
lack of transparency in allocation, misunderstanding of coupon allocations
and targeting processes, and widespread belief that there should be more cou-
pons. It may be difﬁcult for targeting to be perceived to be fair if less than
around 80% of households are targeted, and community targeting needs
fairly costly training and facilitation with checks and balances to stop elite
capture.

10.7. Summary

Targeting is one of the critical elements of the Farm Input Subsidy Programme
with implications for displacement, productivity, economy-wide effects, and
graduation. It is also important that targeting criteria and processes are con-
sistent with the objectives of the programme in order to maximize the impact.
Different programme objectives may entail different targeting objectives
with implications for targeting criteria and processes. Hence, there should
be a strong link between programme objectives, targeting systems, target-
ing outcomes, and programme impacts. These links have not been clearly
articulated in the Farm Input Subsidy Programme, although targeting occurs
at both area and beneficiary levels. While changes have occurred over the
life time of the programme, the alignment between programme objectives
and targeting objectives and outcomes, and their interaction with political
objectives and processes, remains an important issue in the implementation
of the programme.
Changes in area targeting have resulted in more equitable distribution of
input vouchers per household with per household regional differences nar-
rowing over time. There has been considerable scope for and some evidence
of political considerations and processes affecting area distributions, particu-
larly in the earlier years of the programme. Major issues remain on how allo-
cations to areas, villages, and perhaps most importantly to beneficiaries are
determined. No major changes have taken place in the targeting criteria and
processes of targeting at beneficiary level, apart from increasing emphasis on
vulnerable households and the promotion of open forums at community
level in the identification of beneficiaries and allocation and distribution of
coupons.
The broadness of the beneficiary targeting criteria, covering a large
proportion of poor households, has allowed wide variations in the applica-
tion of the criteria at community level. This has resulted in biases in receipt
of subsidized farm input coupons against the poor, with the non-poor more

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Targeting and access to input subsidies

likely to get coupons and then likely to get more coupons than the poor.
The wide and increasing practice of redistribution and ‘sharing’ of coupons
reduces the bias where by the poor are less likely to receive coupons. On the
other hand, however, it increases the likelihood of poorer recipients receiving
fewer coupons than less-poor recipients. However, open forum meetings for
allocation of coupons appear to increase the likelihood of the poor receiv-
ing fertilizer coupons and acquiring more than the poor in areas where the
coupon allocation was not made in an open manner. There are also gender
biases in receipt of coupons and access to subsidized fertilizers, with female-
headed households receiving fewer coupons than male-headed households.
However, this gender bias is not evident in the allocation of subsidized fertiliz-
ers on plots controlled by different members of the households. The analysis
of intra-household use of inputs shows that female-controlled plots are less
likely to have fertilizer applied when commercial fertilizer is available in the
household, but this bias vanishes among households that acquire subsidized
fertilizer inputs. Overall, however, the extent of elite capture does not appear
to be as great as that reported by Pan and Christiaensen (2012) in Tanzania.
Options for targeting have been considered for improving patterns of
coupon distribution among poorer and less-poor households, with discus-
sion of alternative targeting criteria and processes to achieve these patterns.
Regressive patterns appear to be undesirable due to associated high displace-
ment (leading to low incremental production even if there is higher input
productivity) and low linkage effects. Three alternative approaches are con-
sidered—‘tight pro-poor targeting’, ‘mixed pro-poor targeting’, and universal
(but more tightly rationed) access. Although ‘tight pro-poor targeting’ is the
current desired outcome, difficulties in setting criteria and with distribution
and redistribution processes lead to outcomes that are very different from
those that are desired. In any case, except for the universal approach, tar-
geting requires efficient and cost-effective ways of improving the criteria for
identifying beneficiary households.

247
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11

Graduation1

11.1. Introduction

Graduation has emerged as an issue in debates about the future of the farm
subsidy programme at the interface of a number of issues. The high costs of
the programme pose serious questions about its ﬁscal and macro-economic
sustainability and suggest a need for a process that goes beyond simple exits
(as discussed in Chapter 2) to allow a phased scaling down that builds on
(rather than undermines) the growth, food security, and market development
impacts of the programme.

11.2. Conceptualizing graduation

Graduation is a concept that is found in discussions about the impact,

dependency, exit, and sustainability of social protection programmes,
addressing questions about the extent to which the financial transfers to
beneficiaries should and can enable them to exit from the programme of
assistance and hence reduce the scope and costs of social protection over
time. Governments with tight budgets may be more willing to support social
protection if access is time-bound or if there are clear prospects of a higher
proportion of the target beneficiaries voluntarily exiting over time. The issue
of graduation from social protection is thus closely linked to the develop-
mental or transformative role of social protection, and also to the need to
avoid ‘dependency syndrome’ among beneficiaries (Devereux, 2010).
These issues are highly relevant to the FISP, and Chirwa et al. (2011a)
discuss the application to the FISP of the conceptualization of graduation in
social protection. A review of this conceptualization leads to the conclusion

1
Much of this chapter draws heavily on Chirwa et al. (2011a).

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Graduation

that graduation is viewed as the achievement of ‘the potential to embark on

sustainable, independent livelihoods without social protection’ (p. 3). This
requires further ‘unpacking’, leading them to define potential graduation as
the use of transfers to achieve a shift in livelihood activities with ‘stepping
up’ (intensification and increased productivity in existing activities) and
‘stepping out’ (into new more productive activities), and reduced emphasis
on ‘hanging in’ (avoidance of ‘falling down and out’) (Dorward et al., 2006,
2009a). These changes involve investing some of the transfers into produc-
tive activities and the building of assets, capabilities, or livelihood changes
that allow beneficiaries to embark on sustainable, independent livelihoods
without transfers. Actual graduation is then the removal of access to a trans-
fer programme that does not leave current beneficiaries supported by the
programme unable to pursue sustainable independent livelihoods. The dis-
tinction between actual and potential graduation is explored in Figure 11.1,
where a movement from left to right (from A or C to B or D) represents the
termination either of access to programme benefit or of a programme itself,
a movement from A to C downwards represents potential graduation, and a
movement from A to D represents actual graduation.
These concepts can be applied at different scales of analysis (individual,
household, area, or programme), where they raise questions about the
relationships between graduation at different scales. These are particularly
important when considering a large-scale programme with both household
and economy-wide effects.
The more obvious relationship is dependence of graduation at wider scales
on the graduation of its components—for example, the dependence of

Social protection programme

Access Termination of
access

Unable A. Targeted B. Exclusion

Termination
inclusion error
Household
ability to Actual
pursue graduation
sustainable Potential
independent graduation
livelihood

Able C. Inclusion Termination D. Targeted

error exclusion

Figure 11.1. Termination, potential graduation, and actual graduation

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Strategic issues

programme graduation on achievement of some minimum scale of (poten-

tial) area graduation, and of area graduation on achievement of some mini-
mum scale of (potential) household graduation). This raises questions about
the criteria used at different scales, in both the definition of (potential)
household graduation and the required number or percentage of households
graduating (or conversely the maximum number or percentage of ungradu-
ated households) for area and/or programme graduation.
However, Chirwa et al. (2011a) also note that lower units’ potential gradu-
ation may sometimes depend upon the continuation of transfers (rather than
graduation or termination) at a wider scale of analysis. The most likely causes
of this in a social protection programme will be where there are significant
insurance or indirect effects from transfers. The first case may arise when
the presence of a programme offering transfers gives households insurance
against livelihood shocks and stresses and this allows them to take ‘stepping
up’ and ‘stepping out’ investment risks even when they are not direct ben-
eficiaries of a programme. Their pursuit of (and hence graduation to) inde-
pendent sustainable livelihoods may then be dependent on the presence of
a transfer programme rather than on their direct receipt of benefits from it.
Households that seem to have graduated from the programme may in fact
still be dependent on its existence, though not, under normal circumstances,
on their direct engagement with it. An example of such indirect effects is
where there are significant multiplier effects from households in receipt of
transfers, for example where these lead to greater demand by recipient house-
holds of particular services whose supply provides income for other house-
holds. Where this is the case then withdrawal of transfers from a significant
number of households in an area may lead to a reduction in these multi-
pliers and undermine the livelihoods of households who appeared to have
achieved independent sustainable livelihoods.
Consideration of these multi-scale relationships allows the definition of an
apparently simple core requirement for graduation: that removal of access to
a programme (termination) does not leave beneficiaries currently supported
by the programme unable to pursue sustainable independent livelihoods.
This requirement is only apparently simple because there are major practi-
cal and theoretical challenges in defining and measuring criteria for deter-
mining the point at which beneficiaries can be weaned off a transfer with
some minimum acceptable standard of welfare or probability of achieving
a stable or upward welfare or livelihood trajectory. Devereux (2010) argues
that there are difficulties in identifying both indicators or variables and
critical attainments of welfare and self-reliance, such as threshold values of
incomes and assets that will not result in graduating households reverting
back to situations of vulnerability. These thresholds may involve some mini-
mum income line, the accumulation of control and access to assets (physical,

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Graduation

social, human, financial, and natural capital) that are necessary for sustain-
able livelihoods that can cope with shocks and stresses. These however, are
likely to vary with household structure (for example, gender composition
and dependency ratios), with socio-economic and cultural context, with live-
lihood strategies and opportunities, and with complex interactions between
the different forms of capital listed above. Critically, graduation measures
need to be concerned with the achievement of conditions (inputs and pro-
cesses) necessary for the pursuit of sustainable independent livelihoods rather
than the achievement of welfare outcomes which may tell us little about live-
lihoods, independence, or sustainability.
A further complexity arises with the conceptualization of poverty traps
operating at wider scales of analysis in local economies (Rodenstein-Rodan,
1943; Dorward et al., 2005a, b, 2009). This is linked to different scales or
units of graduation, as discussed above, and demands consideration of
variables and thresholds for determining area and programme graduation.
Determination of potential graduation for areas and programmes is likely
to involve some threshold number or percentage of beneficiary graduation
at the area or programme level, and consideration of volumes of livelihood
activities at these wider scales.
A final comment is needed on the importance of social and political influ-
ences on processes and decisions in graduation from transfers. Termination
decisions are highly political, in terms of local, national, and bureaucratic
policies concerned with, respectively, questions about which people and
groups of people benefit from transfers; which areas, constituencies, and eth-
nic groups benefit; and how limited resources are allocated between agencies
and sectors.

11.3. Graduation pathways for the Malawi Farm Input

Subsidy Programme

We now consider a deﬁnition of graduation speciﬁc to the FISP in order to

identify possible processes, pathways, and criteria for graduation and design
and implementation features that could promote graduation within the pro-
gramme. This brings together insights from more general discussion of gradu-
ation processes (in Section 11.2) with particular understanding of the role of
FISP in promoting livelihood development and economic growth, as set out
in Chapters 2, 4, 6, and 7.
Our discussion of graduation processes in transfer programmes in Section
11.2 emphasized the processes of stepping up and stepping out; multi-scale
aspects of interactions between graduation and termination; and alternative
income, livelihood activity, and asset variables and thresholds in deﬁning

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Strategic issues

potential graduation. Other issues discussed by Chirwa et al. (2011a) include

the importance of a range of different conditions facilitating (or imped-
ing) graduation (including the depth and incidence of poverty among ben-
eficiaries and non-beneficiaries; the value, nature, and duration of benefits;
complementary services, and the wider socio-economic environment); and
socio-political factors. Graduation was defined as the removal of access to a
transfer programme that does not leave current beneficiaries supported by
the programme unable to pursue sustainable independent livelihoods.
Discussion of the impacts of FISP throughout this book have raised similar
issues regarding stepping up and stepping out processes; multi-scale interac-
tions; changes in livelihood activities as critical elements in economic growth
and structural change within local and wider economies; and the importance
of complementary services and the wider socio-economic environment.
Issues which were implicitly rather than explicitly considered include effects
on livelihoods of the depth and incidence of poverty among beneficiaries
and non-beneficiaries; and the value, nature, and duration of subsidized ben-
efits. Socio-political considerations in area and household targeting have also
been discussed more specifically in Chapters 4, 5, and 10, while input market
development is a major issue in Chapter 8.
Our consideration of multi-scale and dynamic subsidy programme contri-
butions to development suggests that the core requirement for graduation
from the subsidy programme should be that removal of access to the subsidy
programme does not critically reduce land, labour, and capital productivity
in maize production in the livelihoods of beneficiaries and in the economy
as a whole. This provides a definition of graduation analogous to our ear-
lier general definition of actual graduation from transfer programmes and
it also, and importantly, allows the identification of a number of ‘potential
graduation conditions’ which are required in some combination as a result of
and during the implementation of the FISP for subsequent actual graduation.
These comprise

1. Falls in unsubsidized farm-gate input prices and costs compared to pre-

programme prices and costs.
2. Reduced requirements for the purchase of previously subsidized inputs
due to increased efficiency in use.
3. Reduced requirements for the purchase of previously subsidized inputs
due to substitution by cheaper inputs.
4. Increase in working capital among poor beneficiary households for the
purchase of previously subsidized inputs.
5. Poor beneficiary households’ diversification out of maize production
through either transfer of land to other high value production use

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Graduation

(diversiﬁcation or stepping out of maize within agriculture) or transfer

of land to another user with diversiﬁcation or stepping out of agricul-
ture into non-farm activities.
6. Access to low-cost credit by poor beneﬁciary households for the pur-
chase of previously subsidized inputs.

These conditions share a number of features:

• None of these potential and desirable changes can be ruled out

as irrelevant or impossible, nor can any be identified as being of
paramount importance.
• Thresholds within each of these conditions cannot be determined
independently of achievement of other conditions.
• They are all dependent on the multi-scale processes of stepping up and
stepping out to create the systemic conditions under which sufficient
change can be achieved for them to contribute to graduation by some
households.
• They can all benefit from promotion in design and implementation.

We can, however, note that they are likely to vary in the extent to which they
will be accessible to different households and in the speed at which necessary
changes will happen. These changes also, of course, require different types of
promotion in programme design and implementation and in complemen-
tary investments.
Table 11.1 summarizes the likely processes and requirements needed for
each of the ‘potential graduation conditions’ listed above. The ﬁnal two col-
umns of the table classify these by the scale at which changes operate and
the speed at which it is reasonable for the changes to become effective in
promoting potential graduation. All processes and requirements operate at
multiple scales, relying on wider structural, policy, and service changes at
national and area level to support and be supported by each other and by
changes within businesses or households’ livelihood activities. The speed
of change then depends upon households’ initial structures and resource
holdings, their receipt of subsidized inputs over the life of the subsidy pro-
gramme, events and shocks affecting their welfare and resources, and both
policy-induced and other changes in the local and wider socio-economic
environment.
Most of the entries in Table 11.1 require little elaboration. For reduced input
prices (1), there are a large number of reports on the potential for reducing
prices for inorganic fertilizers by improving transport systems and manage-
ment during importation and distribution, by switching from 23:21:12 to
a cheaper but equally effective formulation, and possibly by investing in a

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Strategic issues

Table 11.1. Graduation processes, requirements, and sequencing of changes

Potential graduation Likely processes and requirements Scale Order

conditions

1. Reduced input prices Efﬁcient & competitive importers, Business, area, 1

supplier(s), transporters; improved national
transport infrastructure
2. Increased efficiency in Improved agronomy, complementary Household, area, 1
input use seed, inorganic & organic fertilizers, national
soil management. Investment in
agricultural research and extension
3. Substitution by cheaper Increased legume cultivation with Household, area, 1
inputs rotational fallows. Good legume national
seed supply, produce demand &
markets. Stable & reliable low maize
prices & high maize productivity for
transition before subsidy removal
4. Increase working capi- Increased incomes, diversified incomes Household, area, 1
tal for input purchases with reduced income seasonality national
5. Diversification out of Stable & reliable low maize prices, Household, area, 2
maize production strong demand for high value farm national
products and/or non-farm goods &
services, land markets & safety nets
6. Access to low-cost Increased & diversified incomes, Household, area, 2
credit for input innovative & low-cost micro-finance national
purchases systems.

fertilizer blending plant in Malawi (for example, Munthali, 2007). Increasing

working capital of beneficiary households (4) is the most commonly consid-
ered pathway for potential graduation in social protection programmes (as
discussed earlier). Its effectiveness in actually allowing potential graduation,
however, is also very dependent upon a household’s initial asset status relative
to some threshold needed for sustainable independent livelihoods, and upon
structural issues (such as household composition) and exposure to adverse
shocks. Diversification out of maize production (5) is likely to take some time
as it depends upon wider structural change and developing confidence of
low and stable maize prices in consumer markets. It is, however, likely to be
a condition for the development of access to low-cost credit (6), since this is
only likely to be possible with some form of micro-finance system where bor-
rowers engage in different micro-enterprises with different seasonal patterns
of income and expenditure and different risks (see, for example, Dorward
et al., 2001).
Turning now to consider (3)—‘increased efficiency in input use’—there
is considerable evidence for the potential of raising returns to fertilizer use
by greater use of high yielding seed, more timely planting, more effective

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Graduation

soil health management, timely weeding, more effective fertilizer applica-

tion methods, and greater use of complementary organic fertilizers (Maize
Productivity Task Force, 1997; Snapp et al., 2010). Holden and Lunduka
(2012b) report encouraging findings of complementary use of organic and
inorganic fertilizers in a sample of farmers from six districts in the Southern
and Central Regions of Malawi.
Organic fertilizers and legume intercropping and rotation can also substi-
tute for and augment inorganic fertilizers—listed under (4) above, ‘substi-
tution by cheaper inputs’. However, major difficulties with the adoption of
such systems have been the labour and/or land requirements for fallows, for
tree planting and maintenance, and for growing green manures and mulches
(for example, Barrett et al., 2002). These labour and land requirements are
particularly problematic and high for land- and labour-constrained poor
households who suffer most from the Low Maize Productivity Trap outlined
in Chapter 4. Such households might be expected to gain significant benefits
from an improved maize/semi-perennial legume (pigeon pea and ground-
nut inter-crop) rotation system which can offer equivalent maize production
to unfertilized maize but with added legume grain sales and high protein
consumption (Snapp et al., 2010). However, adoption of these systems faces
major transition problems as a result of lost maize production when intro-
ducing a legume crop in the first year of a rotation. Participation in the sub-
sidy programme, however, offers opportunities to address this problem in
three ways:

1. By increasing maize productivity on people’s land, the programme

should help farmers to get more maize from their land, so that if they
allocate say 1/3 of their land to groundnuts/pigeon peas in year 1 and
use fertilizer on the other 2/3 of their land, they could still have roughly
the same or more maize as they would with all their land under maize
production without the subsidy, plus the legume grain. In year 2 they
could do the same but because of the beneﬁts from the land rotated
under the previous year, they would get more maize, and by year 4 they
would have all their land under rotation.
2. By reducing the price of maize and raising wages, the programme should
also make farmers less desperate to grow all their own maize, allowing
them to buy any shortfall for less. This should reduce the risks of not
producing enough maize during the transition.
3. By raising real incomes the programme should increase the demand for
legumes within households and in the wider market, raising the value
to households of their legume grain production.

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Strategic issues

11.4. Programme design and implementation to

promote graduation

The identiﬁcation of different and complementary potential graduation path-

ways has immediate implications for two aspects of programme design and
implementation: first the programme should be implemented in ways that
actively promote these graduation pathways, and second actual graduation
procedures should be built into programme implementation.
The interventions needed to promote graduation pathways vary between
pathways and generally align with and strengthen the importance of exist-
ing programme or development objectives. Thus, interventions to promote
lower input prices and to increase efficiency in input use and substitution by
cheaper inputs should all raise the efficiency of the programme—and indeed
have substantial contributions to make in their own right, independent of
the programme. Similarly, increases in working capital among poor benefi-
ciary households should be aligned with programme objectives. Encouraging
diversification out of maize and agriculture and promoting access to low-cost
credit are valuable general objectives for rural development, but are not so
obviously complementary to the implementation of FISP, and may therefore
need special (and specialized) attention alongside FISP.
What is striking, however, about the graduation conditions, processes,
requirements, and scales of change detailed in Table 11.1 is the importance
of the multi-scale interactions between national, area, and household pro-
cesses of change. This is supported by the analysis reported in Chapter 7 sug-
gesting that indirect benefits may be larger than direct beneficiaries for poor
beneficiaries in poorer areas, with beneficiary graduation therefore critically
dependent upon wider processes of change and potential area graduation.
This requires a holistic multi-scale approach that coordinates programme
design and implementation with complementary policies and investments
that operate outside the programme—in infrastructure, research, extension,
stable maize markets, and the development of the non-farm economy. Since
(as set out in Chapter 2, in the causal pathway in Figure II.1 and in the links
between Chapters 6 and 7) this holistic approach is needed to obtain maxi-
mum food security and wider development benefits from the programme,
there should be strong synergies between an emphasis on graduation and the
wider pursuit of greater and lower cost achievement of a wide set of potential
programme benefits.
As regards actual graduation (and termination) procedures, three broad
approaches may be followed, singly or in any combination: (a) reductions
in subsidy per household; (b) a reduction in the number of areas or dis-
tricts served by the programme with phased withdrawal of the programme
from particular areas or districts; and (c) withdrawal of the programme from

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Graduation

particular households. Options (b) and (c) require criteria for determining
graduation or termination of the subsidy by area or household, and these
should be closely linked to targeting criteria and systems— the discussion on
targeting in Chapter 10 is therefore critically relevant and consideration of
the targeting alternatives discussed there should take account of the gradu-
ation options discussed here. One concern raised in focus group discussions
and life histories about a smaller universal subsidy was that such subsidies
were too small to improve households’ livelihoods sufficiently for them
make any progress towards graduation (see Section 6.7), although this per-
haps would not be such a concern if the subsidy was effectively driving posi-
tive economy-wide effects in maize prices, wages and livelihood, and local
economy diversification. Where area and household targeting are employed
then graduation (and hence targeting) criteria are likely to include considera-
tion, at household and area scales, of budgetary constraints, political factors,
efficiency differentials, and potential graduation.
Political issues associated with different approaches to graduation require
a special mention. Political difficulties with reducing the scale of the subsidy
per household by increasing farmer payments are evident from the determi-
nants of falling nominal payments for subsidized fertilizer as reported earlier
in Section 5.5.1. Farmer’s concerns expressed in focus group discussions and
life histories (summarized in Chapter 6) suggest that there are also political
difficulties with reducing household entitlements to one bag of fertilizer and
associated seed. Reducing the number of subsidized households rather than
the scale of subsidies to all households (by withdrawal of subsidies from
particular areas and/or particular households) may face greater political
opposition from smaller numbers of people. Political calculations will then
consider which interest groups are politically most important or powerful
with respect to the aspirations, strengths, and weaknesses of political leaders
with responsibility for and/or power over the programme. Such calculations
may not give technocratically preferred graduation policies, or any gradua-
tion policy at all.
Potential graduation may be measured using variables related to the poten-
tial graduation changes identified in Table 11.1. Attention should also be
paid to questions about relationships between area graduation/termination
and household graduation as touched on earlier in Section 11.2. Just as there
are synergies between measures that will promote graduation and those that
will promote wider achievement of programme objectives, there should be
similar synergies between the development and use of graduation criteria and
wider monitoring and evaluation of programme achievements. It is, how-
ever, also important to note that the use of poor criteria or procedures in
trying to promote graduation is also likely to damage the effectiveness of the
wider programme (if, for example, termination rather than graduation were

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Strategic issues

to be an important target in programme implementation, either explicitly or

as a result of poor setting or application of graduation criteria).

11.5. Summary

In this chapter we have considered ways in which the concept of graduation

may be usefully applied to the FISP. The conceptualization of graduation as
the removal of access to transfers that does not leave current beneficiaries
unable to pursue sustainable independent livelihoods allows a distinction to
be made between potential graduation, actual graduation, and termination of
access. It also helps in consideration of the differences and inter-relationships
between graduation and termination at different scales, such as household,
area, and programme. These conceptual issues suggest that measures of grad-
uation should use variables and thresholds that measure assets and activities
supporting sustainable independent livelihoods rather than income meas-
ures, and such measures need to take account of the different opportunities,
threats, and difficulties facing different people in different contexts.
This conceptualization provides an explicit focus on graduation which,
as shown in Chapter 3, appears to be lacking from most programmes, and
indeed, as is evident in Chapter 2, is also lacking from most wider discussion
of programme exits, despite the widespread consideration of time-bound
exits as a key feature of ‘smart subsidies’ (for example, Minde et al., 2008;
Morris et al., 2007). This conceptualization has important implications for
core political and technical issues in programme design and implementation.
Application of these lessons to graduation in agricultural input subsidy pro-
grammes like the Malawi FISP requires some understanding of the processes
by which these programme promote sustainable independent livelihoods. In
the Malawi FISP this allows a specific definition of graduation as a removal
of access to the subsidy programme that does not reduce land, labour, and
capital productivity in maize production. ‘Potential graduation conditions’
that promote this include reduced input prices, increased efficiency in input
use, substitution by cheaper inputs, increased working capital for input pur-
chases, diversification out of maize production, and access to low-cost credit
for input purchases. Identification of these potential graduation conditions is
valuable for suggesting types of change that programme designers and imple-
menters should seek to promote, as well as variables that may be used in mak-
ing decisions about graduation criteria and processes. Further work is needed
to determine what criteria (variables and thresholds) may be best for judg-
ing potential graduation at different scales. However, graduation, the with-
drawal of access to subsidies, is an intensely political issue, and both political
and technical considerations will be important determinants of graduation

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Graduation

policies and their implementation. The importance of wider indirect impacts

of the programme for potential household and area graduation also suggests
that there should be strong synergies between on the one hand a greater
emphasis on graduation within the programme and on the other a more
effective and efﬁcient achievement of a food security and wider development
objectives.

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12

Conclusions

12.1. Introduction

This book attempts to contribute to greater understanding of agricultural

input subsidies’ potential contributions and pitfalls as instruments promot-
ing food security, poverty reduction, social protection, and wider economic
growth in poor agrarian economies. This has been approached through a
theoretical and practical discussion of agricultural input subsidies and their
impacts (in Chapters 2 and 3), through detailed examination of Malawi’s
experience in implementing a large-scale agricultural input subsidy pro-
gramme (in Chapters 4 to 9), and (in Chapters 10 and 11) through considera-
tion of targeting and graduation as two speciﬁc issues needing more strategic
attention in the design and implementation of large-scale agricultural input
subsidies in contemporary low-income agrarian economies. This conclud-
ing chapter draws these three topics together, and links them to a discus-
sion of a major concern for agricultural input subsidies: their sustainability.
We consider each of these topics (subsidies’ changing theory and practice,
Malawi’s experience, targeting and graduation, and sustainability) in turn.
We conclude by considering possible lessons and ways forward from this for
the wider application of agricultural input subsidies in Africa.

12.2. Subsidies’ changing theory and practice

Consideration of conventional and more recent theoretical and empirical anal-

ysis of agricultural input subsidies in Chapter 2 suggests a number of potential
contributions that input subsidies can make to economic development in poor
agrarian economies. In addition to reducing food insecurity, ameliorating soil
fertility problems, and increasing land and agricultural labour productivity,
they can also drive wider, dynamic processes of pro-poor growth, structural
change, economic diversiﬁcation, and market thickening and development.

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Conclusions

There are, however, a number of necessary conditions in order for sub-

sidy programmes to make these contributions. The principle conditions are
targeting of subsidies to address market failures (in, for example, access to
knowledge or to input or capital markets) with significant and normally
labour-demanding productivity increases for crops produced by large num-
bers of smallholders. Such crops will generally be staple crops, with a ‘double
benefit’ if staple food markets are relatively isolated from international mar-
kets, in which case the provision of inputs may also promote possible market
or pecuniary externalities from staple crop cultivation. Programme design
and implementation should then pay attention to, or at least be integrated
with, policies promoting wider processes of growth and, where double ben-
efits can be achieved, to net buyer’s interests in programme impacts.
Large per unit price subsidies may be needed to address ‘affordability’ con-
straints on input purchases and use, and these lead to a particular need for good
targeting and rationing systems. Poor systems may reduce programme effec-
tiveness and efficiency as problems of ‘exclusion’ limit receipt of subsidized
inputs by farmers facing market failures and able to make the most productive
use of these inputs. Problems of ‘inclusion’, on the other hand, raise costs of
supply to farmers whose productive input use is not otherwise constrained by
the market failures addressed by the subsidy, and whose receipt of subsidies
therefore does not yield benefits from incremental production. Inclusion of
such farmers may also inhibit the development of unsubsidized input supply
markets, and these may also be damaged by subsidy systems that undermine
private sector investment incentives. Poor design and/or implementation of
graduation policies may lead to increasing problems of exclusion, together
with rising and unsustainable subsidy costs, falling benefits, and increasing
opportunity costs from crowding out of more productive investment of scarce
government resources. Effective input subsidies may also need attention to
complementary policies and investments—needed to improve direct input
uptake and production impacts, or to facilitate wider, dynamic benefits.
Finally, political commitment is critically important for major resource
investments in large-scale input subsidies. However this itself raises major
difficulties where such commitment is driven by short-term patronage inter-
ests rather than longer term developmental interests.
The examination in Chapter 3 of recent subsidy programmes in sub-
Saharan Africa suggests that recognition of and attention to these issues is
mixed—across countries and issues. Thus, almost all the national programmes
reviewed involved large-scale subsidies for inputs for staple food production
by large numbers of smallholders, with substantial price reductions, generally
addressing (implicitly at least) affordability constraints on farmers’ input pur-
chases. This is associated with a general focus on producer benefits, including
producers’ food security (though in Mali and Senegal it was also intended to

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Conclusions

reduce urban rice prices). Late delivery of inputs, and hence reduced returns
to farmers, were common. In no programme was there any reported recogni-
tion of potential wider dynamic growth benefits, nor any consideration of
graduation processes and criteria. With regard to graduation, aspirations of
time limits and scaling down were expressed in some cases, but there was
no apparent in-depth consideration of processes by which the need for sub-
sidies would be reduced (apart from some explicit support to input supplier
development).
Support to input suppliers was therefore one issue where intentions and
practice varied across programmes—with some programmes giving it little
or no attention, others recognizing its importance without effective action
(and perhaps in practice undermining it), and others seriously pursuing it.
Attention to targeting was similarly varied as regards stated intentions, but
there were few if any cases of the achievement of effective targeting. Voucher-
based entitlement systems were common but not universal. Integrated atten-
tion to complementary policies and investments was relatively rare and where
present appeared to be restricted to direct promotion of programme effective-
ness in raising on-farm input productivity or supporting input supplier devel-
opment. Political factors around programme initiation and implementation
are not widely discussed, but are specifically reported in some programmes
and their general importance and influence may be inferred for most.

12.3. The Malawi experience

The introduction of the large-scale Farm Input Subsidy Programme in 2005/6

in Malawi and its subsequent continuation have to be understood in the
context of Malawi’s specific political, social, economic, food security, and
agricultural policy history and conditions as set out in Chapter 4. These led
to the emergence of ‘fertilizer politics’, with popular demands for fertilizer
subsidies providing political opportunities that also had a technical rationale
in addressing food insecurity and, with the ‘low maize productivity trap’,
potential wider dynamic benefits for peoples’ livelihoods and wider eco-
nomic growth. The first four years of the programme were, however, also
shaped by very specific political challenges facing the minority government
of President Bingu wa Mutharika.
The detailed description of the FISP in Chapter 5 shows that the FISP focused
largely (but not exclusively at first) on staple crop production, operated on
a very large scale (reaching an impressively large number of dispersed small-
holders), provided large (and generally growing) price reductions explicitly
addressing affordability constraints on input purchases, and focused on pro-
ducers’ (as opposed to buyers’) welfare and food security. The programme

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Conclusions

did not explicitly articulate any longer term dynamic growth objectives, and
consideration of graduation processes was initially absent, but has become
more of an issue over time. However, the issue of graduation has not found its
way into policy articulation and programme design. Engagement with input
suppliers has varied—with fairly consistent engagement with private sector
seed suppliers and fertilizer importers and transporters, but policy reversals
on the involvement of private sector fertilizer retailers. Targeting objectives,
criteria, and methods have evolved, but without dramatic changes in out-
comes. Complementary policies and investments have focused on direct pro-
motion of complementary inputs (seeds and maize storage chemicals), with
some attention to extension messages and some complementary research on
integrated soil fertility technologies.
There have been substantial changes in various aspects of programme
design and implementation over the life of the programme. These have incor-
porated growing experience, responded to emerging problems and differ-
ent stakeholder interests, and recognized local solutions and good practice.
Changes have involved removal of cash crop subsidies and modifications to
targeting and allocation systems, to tender award and importation processes,
and to coupon design and printing. These have led to improvements in tim-
ing of input purchase and distribution and in control of some aspects of fraud.
There is also greater emphasis on the need for transparency in allocation
and distribution of coupons, although in practice this has proved difficult
to implement. However there are, inevitably, continuing challenges on these
issues, and little evidence of improved targeting. Political considerations have
appeared to dominate others, certainly up to the 2008/9 elections, and these
appear to have been a major influence on the growing programme scale and
costs from 2005/6 to 2007/8 (exceptionally high fertilizer prices led to a spike
in costs in 2008/9, with subsequent costs being more tightly controlled).
The discussion of direct programme impacts in Chapter 6 is constrained
by weaknesses in critical data on crop production and the number of farm
families. However it suggests that production impacts have been smaller than
might be suggested by increases in official production estimates following
the introduction of the subsidy, with very high maize prices in some years.
Nevertheless, it still appears that there were substantial production impacts.
Study of specific impacts on beneficiary households shows immediate ben-
efits in maize production, net crop income, household income, and to a lesser
extent food consumption, with continued (lagged) benefits on beneficiaries’
maize production, and to a lesser extent food consumption. School enrol-
ment and child health also appear to have benefited from subsidy receipt.
No significant impacts of subsidy receipt were detected on subjective well-
being and investment in physical assets, but this may be affected by invest-
ment of gains from increased maize production in food consumption, school

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Conclusions

enrolment, and health. The widespread practice of sharing subsidized fertiliz-

ers and more general increases in subjective well-being and asset ownership
may also mask direct benefits. However, as discussed in Chapter 10, use of
fertilizer on female controlled plots is increased by subsidy receipt.
As argued in Chapter 2, large-scale subsidy programmes like the Malawi
FISP should have beneficial economy-wide impacts affecting both subsidy
recipients and non-recipients. Chapter 7 reports difficulties with attribution
of macro-economic changes to the FISP and with possible unreliability in
GDP estimates. However, implementation of the FISP appears to be associ-
ated with good agricultural GDP growth, although high costs of the FISP in
2008/9 were also a contributor to an increased budget deficit—along with
other expenditures related to the 2009 elections. There has also been some
improvement in maize trade balances (except in 2008/9). There is stronger
evidence of increases in real wage rates as a result of the FISP (despite more
mixed evidence on maize price impacts), some evidence of increased national
food availability and improved child nutrition, and mixed evidence on
national changes in income and poverty incidence. Chapter 6 also reports
wider positive changes in maize production, net crop income, subjective
well-being, physical assets, school enrolment, and child health. Overall there
is evidence of economy-wide changes, but it is not as strong as one would
expect and hope for from a programme as large as the Malawi FISP.
FISP’s engagement with and impacts on suppliers, fertilizer importers and
retailers, and seed growers and retailers is reported in Chapter 8.
The increasing use of private fertilizer importers has been associated with
an increase in the number of firms tendering and being awarded tenders, but
some of these have not been able to deliver timely supplies. Tenders have also
been affected by late awards and payments, which increase supplier costs and
risks and hence prices, although there have been some improvements in ten-
der procedures during the life of the programme. Engagement with fertilizer
retailers has been limited, with six retail firms contracted to sell subsidized fer-
tilizers in 2006/7 and 2008/9, and sudden termination of these arrangements
at the start of the 2008/9 season. There is potential for re-engagement with
private retailing of subsidized fertilizers, but this requires increased mutual
trust and would be more effective if it was open to a wider range of retail
outlets, including agro-dealers (and applying lessons from experience with
seed retail systems). Potential benefits from private sector involvement with
retailing of subsidized fertilizers include greater efficiency with lower costs,
freeing and adding to government resources (including staff, transport logis-
tics, and storage facilities), potential promotion of input outlets in remote
areas, broadening of farmer choice with competition between outlets, and
reduced farmer transaction costs and queuing. Impacts of the programme
on private retail sales of fertilizer have been mixed, with some displacement

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Conclusions

of unsubsidized purchases by subsidized purchases, but also more recent evi-

dence of some ‘crowding in’ and increases in unsubsidized purchases.
Seed procurement has been exclusively from private organizations, with
the number of suppliers growing from 6 to 12. These suppliers are respon-
sible for seed distribution to both parastatal and private retailers including
agro-dealers, removing from government all responsibilities for managing
and coordinating supply and also removing the risk of unsold stock holdings.
Despite the increase in the number of seed suppliers, the market remains
oligopolistic with collective negotiation of prices charged to the government
for subsidized seed supply. Large increases in the number of agro-dealers sell-
ing subsidized seeds have, however, contributed to increased competition
and farmer choice among retail outlets. There is limited industry informa-
tion available on unsubsidized seed sales. Farmers reported purchases suggest
substantial rates of displacement of unsubsidized by subsidized maize seed
purchases, but large increases in total purchases due to the large increases in
subsidized maize seed supply.
Chapter 9 identifies a number of challenges in estimating the benefits and
costs of the FISP, and of input subsidy programmes in general. These include
problems with data availability, with practicable methodologies that capture
both indirect and direct impacts, and with consistency and comparability
across estimates of costs and returns for different investments. Extension of
standard partial equilibrium methods to include estimates of economy-wide
impacts increases estimated benefit–cost ratios for the programme. This sug-
gests that the programme has yielded an average BCR of around 1.35 after
allowing for the effects of multipliers but ignoring potential long-term benefits
from improved food consumption on children’s physical and mental develop-
ment and long-term development of human capital. The most valuable use
of these methods, however, is in identification of design and implementa-
tion parameters with critical impacts on programme efficiency and effective-
ness. Returns would be improved by measures that increase yield responses to
fertilizer (for example, earlier input delivery, greater emphasis on integrated
soil fertility management, improved application, more cost effective formula-
tions, more targeting to the poor) and that reduce displacement and costs (for
example, better regional and household targeting, better control of diversion
and fraud, earlier registration and input delivery). The inclusion of multipliers
in the BCA strengthens the importance of all of these issues and also adds fur-
ther weight to the importance of targeting, of ensuring that maize marketing
policies allow increased maize production to lower maize prices, and of com-
plementary investments in measures facilitating the growth of the non-farm
economy and of non-staple agriculture in response to subsidy-led growth in
real incomes. Difficulties with the availability of data needed for benefit–cost
analysis highlight the need for critical agricultural production statistics.

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Conclusions

This summary of FISP’s features shows that it shares many of the features of
the other African programmes reviewed in Chapter 3: indeed many of these
programmes were influenced by reports of dramatic success with the Malawi
programme. These features include its emphasis on staple crop production, its
scale, its large price reductions, its focus on producers’ welfare and food secu-
rity, its lack of dynamic growth objectives or consideration of graduation, its
variable engagement with inputs suppliers, the challenges it has faced with
targeting, and limited complementary policies and investments, focusing on
complementary inputs and to a lesser extent research and extension.
The very limited information on the impacts of the programmes discussed
in Chapter 3 makes comparison with FISP’s impacts difficult. Reports of late
delivery of inputs are common, as are reports of impacts on private sector
input suppliers—though these are sometimes positive and sometimes nega-
tive. Incremental input use and increased production and productivity are
reported for some. There is only one programme where an ex post estimated
benefit–cost ratio is reported, and the benefits considered are restricted to
the direct value of incremental production. There is virtually no considera-
tion of macro-economic impacts, and no discussion of wage rate or wider
growth impacts. Most of the estimates in Chapters 6 and 7 of the direct and
indirect impacts of the Malawi FISP are unique. Detailed consideration of the
political, livelihood, and economic background and context of the FISP is
also unique, though less detailed examination of the policy and rural liveli-
hood context is not uncommon. This raises critical questions as regards the
uniqueness and importance for the Malawian programme of the emergence
of ‘fertilizer politics’, of the particular challenges facing President Bingu wa
Mutharika’s minority government in the first four years of the programme,
and of the nature and extent of the ‘low maize productivity trap’ in Malawi.

12.4. Targeting and graduation

Targeting is an issue that was given a considerable amount of attention in

Chapter 2 as a critical element in input subsidy programmes, with impli-
cations for displacement, productivity, economy-wide effects, graduation,
programme costs, and distribution of direct beneficiary benefits. It is an
important issue across the Malawi FISP and a number of the programmes
reviewed in Chapter 3—either because it is being attempted but not very suc-
cessfully, or because it does not appear to be considered an important issue.
Chapter 10 develops ideas introduced in Chapter 2 with a conceptual
framework looking at the links between targeting and programme objectives
and distinguishing between area and beneficiary targeting. Both of these face
political difficulties, of different kinds, while there are also common practical

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Conclusions

information and methodological difﬁculties with beneﬁciary targeting. It is

suggested in the Malawian context that these difficulties are sufficiently seri-
ous for there to be a strong case for providing a universal but smaller subsidy
to all households. This would also reduce opportunities for diversion and
fraud that arise from lack of transparency and accountability in targeting
processes.
Discussion of such targeting options, however, also raises complex questions
about graduation thresholds and processes. As outlined in Chapter 2, a major
criticism of agricultural subsidies has been their tendency to continue long
after they have outlived their usefulness in overcoming specific market fail-
ures. As a result ‘exits’ are a core feature of ‘smart subsidies’. These tend to
focus on subsidies’ roles in farmers’ learning about input benefits and use, and
on development of private sector input suppliers. There is, however, relatively
little explicit consideration of other processes by which access to subsidies
may lead to recipient households no longer needing them. Chapter 11 there-
fore extends the concept of ‘graduation’ from social protection programmes
to the multi-scale dynamic processes of structural change promoted by large-
scale agricultural input subsidy programmes in poor agrarian economies.
A definition of graduation as the removal of access to subsidies without criti-
cal livelihood or wider reductions in land, labour, and capital productivity in
staple crop production allows, in the Malawi case, the identification of a set
of ‘graduation conditions’. These in turn allow identification of processes and
requirements needed to achieve potential graduation conditions, and design
and implementation focus on these processes and requirements. Adopting
this approach in programme design and implementation could offer major
benefits, not only by its promotion of graduation but through its focus on the
core processes by which agricultural input subsidy programmes can stimulate
and facilitate core developmental processes of productivity growth, market
development, and structural change. Success here could in turn reduce the
political pressures that militate against graduation and the withdrawal of
subsidies from particular groups of people or areas.

12.5. Sustainability

An important issue that has not been addressed in previous chapters is sus-
tainability. Short-term programmes that have strict time-bounds and exits
do not need to be sustainable, although they should promote sustainable
change. However, international experience suggests that quick exits from
large input subsidy programmes are difﬁcult and rarely achieved. It has been
argued in Chapters 2 and 4 and in various parts of our analysis of the Malawi
FISP that longer term subsidy implementation is often needed to achieve and

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Conclusions

embed wider structural changes. In such circumstances a range of different

aspects of programme sustainability become important—we consider fiscal,
political, and agro-ecological sustainability.
Fiscal sustainability basically means that programmes must be fiscally
affordable. Problems of high costs and crowding out of competing and com-
plementary investments are a common concern. Fiscal sustainability there-
fore requires constant striving for reductions in programme cost without
compromising programme outputs and impacts. This may be promoted by
a range of measures promoting programme effectiveness and efficiency—for
example, better use of private suppliers, control of fraud, improvements in
input purchasing and distribution systems, more effective agronomic prac-
tices, budgeting and cost control, improved timing of input distribution, bet-
ter targeting, increased farmer contributions, and judicious complementary
investments, with constant adjustments to match changing circumstances.
What is affordable depends, of course, upon available funds and compet-
ing claims on those funds. Ellis and Maliro (in press), for example, suggest
that, based on Malawi’s expenditures on subsidies and cash transfers, a mix
of subsidy and social transfer programmes could be affordable, with space
for strategic choices on combinations of policies providing both safety nets
and livelihood opportunities. However, high international fertilizer prices
can pose particular problems, as experienced by Malawi in 2008/9. If these
costs are not passed on to farmers in higher contributions then this can lead
to dramatic increases in programme costs. However, passing such costs onto
farmers may make inputs unaffordable, and hence defeat the purpose of the
subsidy and undermine farmer confidence in the processes of change that are
being promoted.
Continued political commitment to programme investment is essential for
the resource allocations needed to sustain large-scale agricultural input pro-
grammes. Such programmes are politically attractive as fast and highly vis-
ible responses to food security problems, with potential opportunities for
directing patronage to garner political support. Challenges are faced here in
combining often short-term political interests with the longer term technical
requirements of effective targeting and cost control to make the most devel-
opmental use of invested resources. The analysis of Poulton (2012) may be
helpful here, where he suggests that effective agricultural policies result from
convergence between technocratic and political interests, but effectiveness
may weaken over time with divergence in interests. Such divergence is likely
unless governments face quite substantial threats that are best countered by
sustained government support from rural electorates.
Finally, we consider the agro-ecological sustainability of input subsidy pro-
grammes. In the programmes reviewed in Chapter 3 and in the case of Malawi
there is a strong emphasis on inorganic fertilizer subsidies. Very low fertilizer

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Conclusions

use in many African countries, as discussed in Chapter 1, is not sustainable,

neither socially in supporting rural populations nor agro-ecologically, as con-
tinual cultivation without fertilization leads to soils losing their structure
and becoming prone to erosion, while falling yields and growing popula-
tions encourage farmers to expand or shift cultivation to forests and steeper
slopes—with consequent erosion and loss of trees. Over- or poor applica-
tion of fertilizers can also have damaging impacts on water courses and on
soil health and fauna, while inorganic nitrogenous fertilizer use encourages
greenhouse gas emissions from the release of nitrous oxide (N2O) and from
CO2 emissions from large energy use in its manufacture.
Judicious combinations of organic and inorganic fertilizers in integrated
soil fertility management (ISFM) offer the potential for lower cost, economi-
cally and ecologically efficient processes for increasing land and labour pro-
ductivity. Input subsidy programmes that promote this could, in principle, be
designed and implemented. Section 11.3 discusses ways that subsidized inor-
ganic fertilization of maize could be combined with legume cultivation to
reduce the need for and cost of inorganic fertilizers, increase the efficiency of
their use, and promote agricultural and livelihood diversification. Developing
and implementing such subsidy approaches presents a great opportunity and
challenge.

12.6. Conclusions

We conclude by returning to the fundamental problems with which this

book opened: low cereal yields and input use, particularly of fertilizers, as a
major cause of continuing poverty in many countries in sub-Saharan Africa.
Can large-scale agricultural input subsidies help overcome these problems?
Druilhe and Barreiro-Hurlé (2012) consider that large-scale agricultural
input subsidies have become a de facto part of agricultural policies in many
countries in sub-Saharan Africa. They conclude that most of the programmes
they reviewed had been successful in raising agricultural production, but that
they were generally poorly designed, poorly implemented, ‘highly politi-
cised, very costly, lack any strategy for phasing out, and are unsustainable in
the long term’. Despite some smart subsidy innovations in targeting and in
support to private sector distribution, ‘the new subsidies carry many of the
problems of the past’ (p. 36). They then discuss possible disadvantages of sub-
sidies (for example, over-reliance on fertilizer subsidies as a ‘magic bullet’),
but conclude that ‘their quick and visible results and direct political payoff’
means that they continue to be very attractive to governments. They go on
to recommend means for improving implementation, which may be sum-
marized as integrating subsidy programmes with complementary measures

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Conclusions

promoting wider rural development and social protection, clear and comple-
mentary (not multiple and conflicting) objectives, simultaneous measures
addressing supply and demand constraints on fertilizer use, and greater use of
‘smart’ design and implementation features, including appropriate targeting
and entitlement systems, market friendliness, exit strategies, and monitoring
and evaluation. They recognize, however, that these ‘smart design’ features
make implementation more challenging.
These are in many ways admirable conclusions and recommendations.
They may, however, be considered to be both too narrow and unambitious on
the one hand and unrealistically over-ambitious on the other. They are too
narrow and unambitious because they do not recognize the potential of such
programmes to drive and support broad-based economic growth and eco-
nomic structural change if they are able to fulfil their potential. On the other
hand they are unrealistically over-ambitious because they do not address
the fundamental paradox of political interests and processes both driving
the introduction of large-scale agricultural input subsidies and undermining
their better implementation.
Identifying mechanisms and processes which avoid this political paradox
is very difficult. One approach that might help, however, could involve rais-
ing ambition with greater recognition of the role of agricultural input sub-
sidies and their inclusion in national, rather than sectoral, economic policy.
This could carry its own risks and difficulties, diluting responsibility outside
the Ministry of Agriculture (normally responsible for such programmes) and
reducing commitment to its success. However it could also lead to greater
commitment by the Ministries of Finance and of Economic Development to
ensuring timely availability of financial resources and to sharper monitor-
ing of implementation, resource use, and outputs that extended beyond the
agricultural sector to encompass much wider impacts (as, for example, set out
earlier in Figure II.1). Reduced responsibilities for the Ministry of Agriculture
would no doubt risk bureaucratic and power difficulties, but if handled well
could be used to increase local government and private sector involvement
in programme implementation—one means of reducing implementation
challenges with ‘smart subsidies’. This could free up Ministry of Agriculture
staff and other resources for greater involvement in the promotion of effi-
cient input use with, for example, complementary use of organic fertilizers
in integrated soil fertility management. Politically, spreading interest in and
visibility of the longer term and wider objectives of such programmes across
what are often the more powerful government ministries could provide more
political and technical interest in improved design and implementation. This
might fit well with urban middle-class demands for accountability in the use
of likely increasing earnings from hydrocarbons and minerals in many coun-
tries in sub-Saharan Africa.

270
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Conclusions

These ideas may or may not work. They would face many challenges: in
their genesis and adoption and in their execution. A particular initial chal-
lenge is in identifying the circumstances where agricultural input subsidies
do and do not have the potential to drive wider economic growth—the nec-
essary conditions summarized in Section 12.2 above. The wider impacts of
the Malawi programme, though smaller than one would have hoped, suggest
that this potential does exist in Malawi and much stronger wider impacts
could be realized with greater programme effectiveness and efﬁciency and
with better integration with complementary policies and investments. This
is a prize worth pursuing in Malawi and, though Malawi’s situation is in some
ways unique, it is likely to be a prize worth pursuing in other sub-Saharan
African countries too.

271
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Author index

Abudulai, A. 40 Datt, G. 2
Adams, D.W. 32 Davey, J. 80, 204
Adodo, K. 51, 52 Davies, S. 80, 204
Africa Progress Panel 1 de Janvry, A. 2, 203
African Union 1 de Onis, M. 163
AGRA, 26 Delgado, L.C. 76
Akande, T. 51 Denning, G. 6, 128, 132, 203
Alassan, I. 48 Department for Works and Pensions 117
Alston, J.M. 216, 217 Dercon, S. 3
Ariga, J. 5, 24 Devereux, S. 33, 63, 80, 81, 248, 250
Atolia, M. 147, 154, 159, 161, 200, 203, Diao, X. 204
216, 217 Djurfeldt, G. 24, 32
Dorward, A.R. 2, 9, 10, 11, 17, 24–8, 30–3,
Banful, A.B. 47, 51 35, 36, 39, 40, 43, 46, 57, 61, 68, 71–3,
Barreiro-Hurlé, J. 46, 56, 59, 60, 269 76, 81, 88, 91, 93, 116, 123, 124, 127,
Barrett, C.B. 26, 40, 255 129–31, 133, 134, 137, 147, 151, 153,
Benson, T. 22, 30 155–6, 158–61, 169–70, 172–4, 180,
Benin, S. 147, 204 189–91, 196, 202, 203, 204, 206–8, 210–15,
Bigsten, A. 51 218, 222, 224, 230–2, 235, 237, 242, 249,
Binswanger, H.P. 32 251, 254
Block, S. 165 Doss, C.R. 238
Booth, D. 65–6, 67, 68 Douilleta, M. 147
Brooks, J. 40 Druilhe, Z. 46, 56, 59, 60, 269
Bryceson, D. 71 Duﬂo. E. 33, 39
Bufﬁe, E.F. 147, 154, 159, 161, 200, 203, Dugger, C.W. 6, 128
216, 217
Bumb, B.L. 22, 30, 31 (The) Economist 6
Burke, W.J. 50 Economist Intelligence Unit 23
Edun, O. 51
Cammack, D. 62, 65, 66 Ellis, F. 2, 16, 17, 48, 71, 268
Chibwana, C. 104, 129, 131, 206, 236
Chinsinga, B. 6, 68, 82, 106, 112, 121, 188, Fan, S. 24, 28, 200, 204, 217
190, 191, 229 FAO 4
Chirwa, E.W. 9, 10, 77, 116, 124, 126, 127, Farmers Union of Malawi 113, 240, 241
128, 129, 133, 134, 135, 136, 138, 141, 147, Feder, G. 32
148, 149, 153, 155, 156, 157, 158, 159, 161, FEWSNET 145, 150, 152, 155, 160
163, 170, 172, 173, 180, 182, 189, 190, 191, Filipski, M. 39, 147, 154, 159, 161, 216
213, 225, 231, 233, 234, 236, 238, 239, 248,
250, 252 Gale, F. 34
Christiaensen, L. 2, 54, 247 Ghana News Agency 47, 48
Civil Society for Poverty Reduction 50, 51 Govereh, J. 51
Collier, P. 3 Government of Malawi 121, 129, 163, 164
Covarrubias, K. 80 Gregory, I. 33, 39, 51
Crawford, E.W. 17, 27, 30, 31 Gulati, A. 34

289
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Author index

Haantuba, H. 50 Morris, M.L. 17, 22, 30, 31, 37, 46, 55, 73,
Haggblade, S. 2, 76, 204 238, 258
Harrigan, J. 66, 67, 68, 79 Muleba, M. 50
Hazell, P. 3, 23, 26 Munthali, W.M. 254
Headey, D. 2, 165 Mvula, P.M. 10, 241
Hoff, K. 73
Holden, S. 104, 106, 107, 112, 116, 129, 131, Nagy, J. 51
133, 134, 135, 137, 138, 191, 206, 232, 233, Nakhumwa, T.O. 91, 93, 123
236, 237, 255 National Statistical Ofﬁce 11, 12, 63, 65, 70,
Houssou, N. 245 71, 79, 102, 103, 129, 130, 136, 144, 148,
159, 160, 162–164, 173
ICF Macro 163, 164 Newberry, D. 32
Imperial College 65, 167, 172, 234
Olayide, O. 51
Jayne, T.S. 5, 6, 22, 30, 31, 32, 49, 50, 51, 71, ORC Macro 65, 164
73, 129, 136, 138, 150, 180, 182, 199, 236 Olson, M. 65
JiKun, H. 34
Jorgensen, S.L. 49, 50, 51 Pan, L. 54, 247
Patel, S. 54
Kelly, V. 10, 46, 56, 169, 171, 175, 177, 180, Pohl, G. 217
182, 183, 184, 190, 191, 192 Poulton, C.D. 25, 34, 36, 65, 268
Kiger, B. 51, 52 Prowse, M. 79
Kodamaya, S. 48 Pursell, G. 34
Krausova, M. 47
Kydd, J.G. 27, 71, 78, 81 Ravallion, M. 2
Reardon, T. 2, 71
Leturque, H. 3 Reserve Bank of Malawi 148
Levy, S. 6, 81 Ricker-Gilbert, J. 6, 50, 126, 129, 136, 137,
Liverpool-Tasie, S. 51–2 138, 141, 142, 146, 155, 158, 161, 180, 182,
Logistics Unit 170, 172, 175–177, 183–185, 225, 231, 233, 236
191–193 Rodenstein-Rodan, P. 73, 251
Loudjeva, Z. 49, 50, 51 Rosenzweig, M. 32
Lunduka, R. 104, 106, 107, 112, 116, 129,
131, 133, 134, 135, 137, 138, 189, 206, 232, Sadoulet, E. 2, 203
233, 236, 237, 255 Sahley, C. 69, 70, 82
Sanchez, P. 27
Maize Productivity Task Force 255 Santos, P. 135
Makumba, W.I. 131 School of Oriental and African Studies 130,
Malawi National Vulnerability Assessment 131–2, 155, 177, 181–2, 183, 202, 235
Committee 9 Siamwalla, A. 17
Maliro, D. 268 Slater, R. 79, 80
Mason, N.M. 50, 182, 231 Snapp, S.S. 255
Mathiassen, A. 163 Stiglitz, J.E. 32
McIntire, J. 32
Mellor, J.W. 2 Tambulasi, R.I.C. 114
Meyer, R.L. 146 Taylor, J.E. 39, 147, 154, 159, 161, 216
Mihaljek, D. 217 Tengstam, S. 51
Minde, I. 5, 49, 50, 51, 258 Thirtle, C. 2
Ministry of Agriculture and Cooperatives 49 Timmer, C.P. 23, 200
Ministry of Agriculture and Food Security 5 Tschirley, D.L. 73, 199
Ministry of Agriculture Food Security and Tsoka, M. 79, 80
Cooperatives 55
Minot, N. 22, 30, 52, 53 United Nations Economic Commission for
Mogues, T. 51 Africa (UNECA) 1

290
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Author index

Valdes, A. 17 Wiggins, S. 3, 40
Van de Walle, N. 34 World Bank 2, 3, 4, 22, 24, 37, 50, 51, 52, 53,
Verpoorten, M. 2 65, 66, 68, 98, 129, 145, 163, 164, 245
Vogel, R.C. 32
Vondolia, G.K. 48 Xu, Z.Y. 50, 51

Ward, M. 135 Zakeyo, C. 146

Webb, P. 165 Zeller, M. 245

291
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Subject index

ADMARC 9, 77–8, 93, 98, 108, 112, 118–19, cereals

153, 168, 171–2, 174 yields by region and selected countries 4
affordability 25, 31–3, 35, 37, 53, 58, production by region and selected
203, 261–2 countries 3
African Union 1, 149 see also individual cereal crops
agricultural development 1–7 child headed households 105, 139, 227, 278,
Agricultural Development Division 281
(ADD) 130 see also vulnerable groups
Agricultural Input Subsidy Programme (AISP) children
see Farm Input Subsidy Programme nutritional status 64, 130, 134, 162, 163,
Agricultural Input Subsidy Survey 164, 165, 264
(AISS) 9–11, 125 stunting of growth 64, 163, 164, 165
Agricultural Input Suppliers Association of wasting 164, 165
Malawi (AISAM) 183 see also health
Agricultural Marketing and Development Civil Society and Civil Society Organisations
Corporation see ADMARC (CSOs) 167
Agricultural Sector Wide Programme 90 competition
agro-ecological sustainability 268–9 fertilizer market 174–6, 177–8
Asia 2, 3, 4, 23, 24, 25, 26, 32, 34, 217 seed market 183–4
assets 77, 80, 86, 124, 126, 135, 137–8, computable general equilibrium (CGE)
141–3, 226, 232–3, 236, 245, 249–50, models 144, 146–7, 154, 159, 161,
258, 263 165–6, 200, 201, 202, 216
Association of Smallholder Seed consumer gains 206–10, 212–13
Multiplication Group (ASSMAG) 171 consumer surplus 16, 17, 18, 203
cooperatives and cooperative societies 168,
Banda, Hastings Kamuzu 63, 65–6 169, 171, 177–9, 187
beans 183, 189 corruption 67, 68, 90, 94, 102, 107, 113,
beneﬁt-cost analysis 196–218, 265 114, 177–8
improvements in 205–15 cotton, cotton seed and inputs 56, 68, 90, 92,
price/quantity demand and incremental 93, 105, 122, 183, 228
production 210–12 coupons
prices and producer/consumer distribution 99–108, 229, 232, 236
gains 206–10, 212–13 ﬂows 115–8
methods 200–210 redemption 108–13, 230
regression models 144, 200, 201 performance 110–13
problems and challenges 202–5 systems 108–10
purposes and principles 196–9 redistribution and sharing 106, 133, 140–2,
Berg Report 24 231, 236, 241, 243, 246, 264
borrowing see credit security and fakes 37, 114, 116, 178,
buy back arrangements 90, 92, 122 190, 191
cow peas 183
carbon dioxide 27, 269 credit and credit services 3, 16, 32, 33, 39,
cash transfers 30, 39, 41 40, 51, 66, 72, 74, 77–9, 81, 154, 217,
cassava 49, 50, 130 253–4, 256, 258
casual labour see ganyu

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Subject index

Democratic People’s Party (DPP) 67 exits 21–2, 30, 34, 37–8, 58, 60, 267
dependency 248, 251 see also graduation from subsidy
discount rate 204–5 programmes
displacement 29, 36, 44,59, 264–6 Extension Planning Areas (EPAs) 100–1,
fertilizer sales 132, 173, 180–2, 211, 214–6 104, 177
seed sales 182, 187
Malawi 75, 81–2, 86, 167, 193–4, 206, 217, Farm Input Subsidy Programme (FISP) 6, 9,
221–3, 225–6, 230, 243, 247 33, 68, 77, 82–3, 144, 180, 262–6
Mali 56 activities and achievements 87–123
Tanzania 54 coupon allocation and distribution 99–108,
Zambia 50 229, 232, 236
District Agriculture Development Officers coupon flows 115–8
(DADOs) 88,101 coupon redemption 108–13, 230
District Development Committees design and evolution 89–93
(DDCs) 105 finance and costs 118–21
diversion (of subsidies) 19, 21, 24, 34, 36, 44, input procurement and distribution 93–9
113–18, 217 graduation 251–5
Nigeria 51 female headed households and input
diversification (crop and livelihood) 7, 71, 81, subsidies
252–8, 260, 269 subsidy impacts 137, 139–40, 236–42
Ghana 48 Tanzania 53–54
targeting 105, 118, 126, 128, 227–228, 232,
economic growth 236–40
Africa 1–3,25 See also vulnerable groups and input subsidies
Malawi 63, 64, 66–7, 73, 78, 145–6, Fertilizer Association of Malawi (FAM) 168
148–9, 166 fertilizers
input subsidy effects 7, 19, 22–4, 26–7, and cereal yields 4
30, 34, 39, 42, 44, 57, 59, 60, 260–5, commercial sales Malawi 172–3
267, 270 imports Malawi 173
Malawi 74, 137, 147–8, 165, 205, maize 90, 106, 107, 109
213–216, 243, 248, 252 market development169–70,174–83
economic rents 18–19 organic 255
education politics of 67–8
input subsidy impacts 43, 76, 126, 127, prices 31–2, 98–100
134–5, 204, 217 procurement and distribution 93–9
Malawi 62–4 competition 174–7
primary school enrolment 127,134, 141–3, purchase and use 172–3
162, 263–4 by poverty status 181
efficiency displacement 180–3, 215
input subsidy efficiency 18, 20–2, 24. retail competition 177–8
30, 33–6, 38–42, 44 57, 60–1, 264–5, sales trends 178–80
268–9, 270–1 value cost ratio 73
Malawi 81, 121, 167, 177, 189, 192–5, FEWSNET 150
217–8, 221–3, 230–1, 236, 240, fiscal deficit/GDP ratio 149
254–7,261 fiscal efficiency 202, 206, 212–216
Tanzania 53–4 fiscal sustainability 268
Zambia 49–50 flexi-seed vouchers 105, 185
fiscal efficiency 202, 206, 212–216 food
elasticity availability 133, 134, 160
produce demand elasticity 17–9, 28,35, 86, consumption 133, 141–3, 146, 160, 232,
208, 210–214, 216, 218 233, 263, 265
produce supply elasticity 17–9, 28,35, 86 crops 5, 19, 22–6, 31–2, 42, 53, 56, 58,
input supply elasticity 28, 86 70, 261
input demand elasticity 182 deficit producers/ buyers 26–7, 31, 40, 70,
elderly see vulnerable groups and input subsidies 146, 253
entitlement (to input subsidies) 36, 37, 38, for work 33, 80
41, 42, 44, 58, 60, 241, 257, 262, 270 markets 40–1, 43–4, 74, 261

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Subject index

prices 1, 2, 5, 23–6, 30–1, 40–3, 55–59, Indonesia, input subsidies 23–4, 200
Ghana 47 Informal Rural Economy (IRE) model 10, 127,
Mali 56 137, 147, 154, 159, 165
Malawi 66, 73, 77–8, 82, 138, 151–6, 199, input subsidies
200, 202–3 African experience 46–61
Rwanda 55 conceptual framework 41–5, 75, 86
Senegal 56 conditions for success 38–41, 261
Tanzania 53 complementary investments/policies 20,
production 2, 34, 139, 140 25, 31, 36, 41–2, 44, 58, 60–1, 261
security 1, 3, 5, 7, 22–7, 35, 43–4, 57–8, 61, Tanzania 53
260–2, 266, 268 Zambia 50
Mali 56 crops 18–9, 22–3, 25, 31–2, 34–6, 44,
Malawi 66–70, 78–82, 121, 127–8, 130–1, 46, 261
133–4, 160, 222–3, 230, 232, 240, 256, design and implementation 35–8, 44, 58
Nigeria 51–2 dynamic effects 26–35
Rwanda 55 exits 21–2, 30, 34, 37–8, 58, 60, 267
Senegal 56 see also graduation from subsidy
Zambia 49–50 programmes
FAOStat 150 leakages 19–20, 38–40, 44, 59, 60
fraud 89, 106, 113–18, 177–8 Mali 56
Nigeria 52
ganyu 75–6, 136, 140, 143, 146, 161, 166, Tanzania 52
223, 233–5 Zambia 50
wage rates 155–9 objectives 22, 23, 26–34, 36, 41–2, 44–5, 57,
gender issues in subsidy use 236–41 60, 270
Ghana, input subsidies 47–8 outcomes 23, 44–5, 58–9
‘ghost’ beneficiaries 102, 114 political economy 5, 16, 21–2, 33–6, 43–4,
graduation from subsidy programmes 12, 33, 57, 59, 61, 261, 268, 270
37–38, 42, 44, 58, 60–1, 243–4, 248–59, Ghana 48
261, 266–7 and private sector development 21–2, 24,
actual 249 29–30, 32, 43–4, 60–1, 261
conceptual framework 248–51 Ghana 47–8
conditions of 252–3, 254 Mali 56
FISP 251–5 Nigeria 51–2
pathway design/implementation 256–8 Senegal 56
political issues 257 Tanzania 52–53
potential 249 Zambia 49–50
termination 249, 250 rationing 36, 42–4
Green Revolution 2, 23, 24, 25, 32, 217 sustainability 2, 22, 24, 42, 44, 267–9
greenhouse gases 269 timeliness 31, 59–61 261, 266
gross domestic product (GDP) 148 Ghana 47–8
fiscal deficit/GDP ratio 149 Mali 56
groundnuts 183, 189 Nigeria 51–2
growth multipliers and linkages 20–26, 76, Rwanda 55
78, 79, 80, 145, 200, 202, 204, 212–14 Tanzania 52–55
Zambia 49–50
health 5, 43, 56, 63, 64, 76, 124, 127, 134–5, targeting 21–2, 35–6, 42–4, 58, 60, 261–2,
141–3, 162, 261, 264 266–7
HIV/AIDS 43, 63–4, 79, 105, 228, 240 Nigeria 52
see also vulnerable groups and input subsidies Tanzania 52–54
household real incomes 136–7 Zambia 49–50
human capital 76, 125, 137, 265 termination 21, 249–51, 256–8
theory and practice 15–43, 260–2
incomes, subsidy impacts 136–137 input supply systems 28–30, 73
incremental production 60, 128, 130, 132, transportation 167, 170, 242
203–4, 210–12, 225, 230, 260–261 see also private sector
India, input subsidies 24, 28, 217 inputs for work 80

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Subject index

insurance 250 United Democratic Front (UDF) 67

market integration 17, 200 Malawi Congress Party (MCP) 67, 68, 82
Integrated Household Surveys (IHS) 9–10, 12, Malawi Farm Input Subsidy Programme see
134, 159, 162–5 Farm Input Subsidy Programme
Internal Rate of Return (IRR) 205, 214, Malawi Vulnerability Assessment Committee
215, 216 (MVAC) 9
Mali
Kasungu–Lilongwe Plain 127, 161 input subsidies 56
Kenya markets thickening 27, 260
cereal yields and fertilizer use 4 thin 71–3
National Accelerated Agricultural Input market failure 3, 16–7, 19–22, 25, 33, 36–42,
Programme 46 70–1, 201–4, 261
Mauritius
Latin America/Caribbean, 3 cereal yields and fertilizer use 4
legumes Millennium Villages Project 56, 83
and graduation 254–5 Ministry of Agriculture and Food Security
Malawi seed subsidy 89–95, 105, 110–13, (MoAFS) 9, 90, 100–1, 102–3, 105,
122, 171, 174, 183–6, 189 109, 114
Malawi Targeting Input Programme 81 Muluzi, Bakili 63, 67, 69
Zambia seed subsidy 49 Mutharika, Bingu wa 65, 67, 69, 82, 130, 262
liberalization 2, 21, 24
in Malawi 66–8, 74, 79–80 National Association of Smallholder Farmers
livelihoods of Malawi (NASFAM) 168, 175, 183
Malawi 70–7 neo-patrimonialism 34, 65
Zones, Malawi 9–11 net deﬁcit producers 26–7, 31, 40–1, 70,
low maize productivity trap 71–4, 78, 83, 147, 146, 253
154, 255, 262, 266 Nigeria
fertilizer use 51–2
macro-economy input subsidies 51–2
Malawi 63, 67–68 nitrous oxide 269
Malawi subsidy impacts 43–44, North America
147–50, 165 cereal yields and fertilizer use 4
maize Northern Africa
Malawi export bans 73 cereal yields and fertilizer use 4
Malawi policies 66–7, 77–82 nutrition 63–4, 76, 134–5, 162–5, 217, 264
Malawi exports/imports 150–1 anthropometric measures 64, 135, 162–164
seed subsidies 90–92, 109–113, 174,
183–9, 192 open pollinated maize varieties 90, 130–1,
prices 11–12, 66, 69, 72–78, 81–82,150–9, 171, 183, 184, 189
166, 186 orphan headed households see chid headed
price/quantity demand relations 204, 210–12 households
storage chemicals 90, 92
yields and production 71–2, 81, 128–133, 211 Paciﬁc region, cereal production 3
varieties see seed subsidies, above panel data 9, 10, 124–6, 136, 144, 146
see also low maize productivity trap parastatals 66, 78, 91, 171
Malawi 62–83 ADMARC 9, 77–8, 93, 98, 108, 112, 118–19,
agricultural policies 77–82 153, 168, 171–2, 174
input provision programmes 80–2 fertilizer procurement 174
liberalization 79–80 fertilizer sales 179
post-independence 77–9 fraud 177–8, 190
cereal yields and fertilizer use 4 SFFRFM 9, 93, 98, 108, 112, 118–19, 168,
Democratic People’s Party (DPP) 67–8 171–2, 174, 193
livelihoods 70–7 partial equilibrium models 10, 124, 127, 141,
politics and policies 63–70 144, 147, 154, 165, 200, 201, 204, 205,
socioeconomic indicators 64–5 213, 216, 218, 265
Special Crops Act 67 patronage 34, 65–70, 74, 78, 82, 261, 268
Targeted Input Programme 6, 67, 80, 135 pigeon peas 183
Malawi Congress Party 66 policy reversals, Malawi 66, 263

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Subject index

political issues 63–70 soil fertility and input subsidies 22–3,27, 44,
economics 33–5 55, 59–61, 269
fertilizers 67–8 and graduation 254–5
graduation from subsidy programmes 257 Malawi 90, 121,141
sustainability of subsidies 268 and targeting 224
poverty 72–3, 127, 161–2, 251 Tanzania 53–55
and fertilizer use 181 Zambia 50
traps 3, 251 South Africa
Malawi trends 163 cereal yields and fertilizer use 4
prices see fertilizer, maize, tobacco South/Central America
private sector 167–95 cereal yields and fertilizer use 4
challenges and opportunities 189–93 soya beans 183, 189
mistrust of 190–1 Starter Pack programmes 80–1, 82, 243
see also input supply systems ‘stepping up’ and ‘stepping out’ 26, 249–253
producer gains 206–10, 212–13 see also diversification (crop and livelihood)
producer surplus 16, 17, 18, 203 stock-outs 112
profitability constraints 30–2 storage chemicals 90
stunting 64, 135, 162–164
rationing of input subsidies 35–6, 42 Sub-Saharan Africa
Rwanda, input subsidies 55 cereal production,yields and fertilizer use 4
subsidies see also input subsidies
Sachs, Jeffrey 83 supply inelasticity 18
sampling (in AISS) 9–10 supply shifts 20
scale (of input subsidies) 18, 22, 25, 28, 33–4, sustainability 267–9
42, 44, 81 agro-ecological 268–9
seasonal fiscal 268
constraints 11, 33, 39, 72, 78
finance 25, 29, 32 Tanzania
poverty adjustment 161, 163 input subsidies 52–5
income 254 National Agricultural Input Voucher
seasonality 72, 245, 254 Scheme (NAIVS) 53
Seed Traders Association of Malawi National Microfinance Bank 53
(STAM) 109, 168, 171 Targeted Input Programme (TIP) 6, 67,
seeds 170–2 80, 135
market development 183–9 targeting of subsidies 21, 35–6, 42–4, 58, 82,
competition 183–4 221–47, 266–7
subsidies 90–92, 109–113, 174, 183–9, 192 criteria and processes 226–9
purchase and use 174, 265 and displacement 180
preferences 185–9 gender issues 236–41
suppliers 183 and graduation 248–9, 257
Senegal Malawi 95, 105–6,
input subsidies 56 Nigeria 52
SFFRFM 9, 93, 98, 108, 112, 118–19, 168, objectives and impacts 222–6
171–2, 174, 193 options for 242–6
Shire Highland Livelihood Zone outcomes 229–32
(SHI) 127, 161 and subsidy returns 217
shocks/stresses 127, 138–9 Tanzania 54
Smallholder Farmer Fertilizer Revolving Fund Zambia 49–50
of Malawi see SFFRFM tax 16, 21
smart subsidies 22, 33, 37, 46, 53, 61, 258, tax payers 17–19, 30, 35
267, 269–70 taxation 78
Social Accounting Matrix (SAM) 147 Tembo, John 82
social protection tenders, tendering 93–98, 169, 190, 264
and agriculture 30 termination of subsidy programmes 21,
and input subsidies 21–3, 36, 38 249–51, 256–7
and graduation 248–50, 254 Tanzania 53
Malawi policies and programmes 67–69, theft 37, 89, 113–4, 242
78–81 see fraud

297
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Subject index

tobacco 66–7, 78–9, 173 wages 161–2

cultivation 129, 140, 233–4, 237–40 and input subsidies 23, 26, 30, 35, 44, 75–6,
fertilizers 90–2, 110, 132, 173, 181 81–2, 86, 135
prices 144–6, 149, 156–8, 161, 173 and Farm Input Subsidy 140, 146, 154–9,
sales values 145 161, 166
traditional authorities see Traditional leaders Washington Consensus 2, 68
traditional leaders 101–106, 114 welfare, input subsidy impacts 135–9
and targeting 235, 240, 245 assets 137–8
household real incomes 136–7
UK, Income Support Allowance 117 shocks/stresses 127, 138–9
United Nations Economic Commission for subjective wellbeing assessment 135–6
Africa (UNECA) 1 theory 16–17
United Democratic Front (UDF) 67, 68, 82 women 73
subsidy impacts 27, 32
value cost ratio (VCR) 73 subsidy use by 236–41
Village Development Committees see also female headed households and
(VDCs) 101, 104 input subsidies
vouchers see coupons World Bank
vulnerability 43, 48, 63, 66, 69, 71, 73–4, 79, policy in Malawi 66, 68
121, 138, 233, 245, 250 Tanzania input subsidy support 53
vulnerable groups and input subsidies 30 World Development Reports 2, 22
and subsidy access and impact 139–40,
240–2 Zambia
targeting 89, 91, 105, 222–3, 226–8, 234–6 cereal yields and fertilizer use 4
Zambia 48–49 Fertilizer Support Programme 48–51, 57
see also children, child headed households; Food Security Pack 48–51
female headed households and input Zimbabwe
subsidies; HIV/AIDS cereal yields and fertilizer use 4

298
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