The Economywide Impacts and Risks of Malawi's Farm Input Subsidy Program
- 1. The Economywide Impacts and Risks of Malawi’s Farm Input Subsidy Program James Thurlow (IFPRI) Coauthors: Channing Arndt (UNU-WIDER) Karl Pauw (IFPRI)
- 2. Farm Input Subsidy Program • Characteristics: – Widely targeted: 50% of smallholders – Generous: Fertilizer and seeds provided more than satisfies a typical households’ annual maize needs – Costly: 3% of GDP, and 70% of agricultural budget • Initially strong support, but growing skepticism – Implementation issues; marginal returns to fertilizer use; fiscal sustainability; policy alternatives; risk factors • Evidence: – Marginally positive to relatively high returns to the program in terms of national grain output and household income of beneficiaries – Implications for rest of the economy and for poverty less clear
- 3. Economywide Impacts Imports, exports Rest of World Foreign aid Taxes Government Spending TaxesTaxes Product markets Production Payments Industry Agriculture Services Rural Urban Incomes Consumption Factor markets Producers Households
- 4. Simulation Design • CGE model with 2003/04 baseline (pre-FISP) – New and negligibly small “FISP” maize, fertilizer, and seed sectors • Replicate 2006/07 program – Exogenously transfer 500,000ha to “FISP maize” – Once at full scale, sector-specific technologies and program design elements exactly reflected • Various simulations consider different… – Marginal returns to fertilizer use – Program scales – Fertilizer price shocks – Weather conditions
- 5. Maize Technologies (per hectare) Existing maize New FISP maize Composites Hybrids Fertilizer (50kg bags) 1.8 6.0 6.0 Local seeds (kg) 12.1 0 0 Improved seeds (kg) 8.3 20.0 15.0 Hired labor (days) 44.3 56.8 60.8 Maize yield (tons/hectare) 1.32 2.23 2.76 Base yield for seed variety 0.79 0.75 0.97 From fertilizer use 0.44 1.49 1.78 Marginal return to fertilizer use (kg grain/kg N) 15.0 18.0 60% of FISP seed was hybrid in 2006/07 average 16.8kg grain per kg of nitrogen
- 6. Macroeconomic Impacts Base value, 2003 Deviation from baseline Donor funded Tax funded Maize production (1000mt) 1,982.8 307.3 289.2 Maize land (1000ha) 1,501.9 -236.8 -248.9 Maize yield (average mt/ha) 1.32 0.49 0.49 Real maize price index (%) 100 -4.26 -3.15 Real exchange rate index (%) 100 -2.74 0.72 GDP market prices (%) 199.9 1.93 1.89 Absorption 226.0 3.89 2.07 Exports 51.2 -0.87 4.64 Imports 77.3 5.82 3.81 FISP benefit-cost ratio (BCR) - 1.62 1.62 Production-based BCR - 0.99 0.92 Total cost (mil. USD) - 65.9 67.2 Financed by foreign aid (%) - 100.0 16.4
- 7. Impacts on Factor Returns and Poverty Base value, 2003 Deviation from baseline Donor funded Tax funded Average land return (%) 84.4 8.47 7.39 Average farm wage (%) 86.1 7.02 4.42 Poverty headcount rate (%) 52.4 -2.72 -1.78 Rural 55.9 -2.69 -1.82 Urban 25.4 -2.90 -1.45
- 8. Economywide BCR (production-based BCR) Marginal return to fertilizer use (kg grain/ kg N) 11.8 13.4 16.8 18.5 FISP benefit-cost ratio 0.78 1.06 1.62 1.90 Production-based BCR (0.49) (0.63) (0.92) (1.06) Returns to Fertilizer Use
- 9. Fertilizer Price Risks % change from baseline Real world fertilizer prices +0% +20% +50% FISP benefit-cost ratio 1.62 1.41 1.22 Production-based approach 0.92 0.49 0.07 Total costs (mil. USD) 67.2 82.3 105.3 Real exchange rate index 0.72 1.12 1.67 Tobacco production (1000t) 12.8 27.9 50.2 Poverty headcount -1.78 -1.37 -0.90 Rural -1.82 -1.42 -1.02 Urban -1.45 -0.98 -0.01
- 10. Weather Risk -40 -35 -30 -25 -20 -15 -10 -5 0 1 4 7 10 13 16 19 22 25 Productionloss(%) Drought return period (RP) Local varieties Composites Hybrids Loss Exceedance Curves 0.0 0.5 1.0 1.5 2.0 2.5 1 4 7 10 13 16 19 22 25E-BCR Drought return period (RP) Unadjusted Baseline-adjusted Economywide BCRs
- 11. Conclusions • FISP is reasonably pro-poor with potential to generate substantial indirect benefits – Indirect benefits are two-fifths of FISP’s total benefits – Economywide approach complements survey-based methods • BCRs depend strongly on marginal return to fertilizer use – Drops below one with response rates from some survey studies – Crucial area of intervention • BCRs fall when real fertilizer prices rise (or exchange rate depreciates); macroeconomic constraints come into play • BCRs fall during drought years; but FISP generates “double- dividends” of higher and more drought-resilient yields
- 12. What Next? • What this approach doesn’t deal with adequately: – Household targeting – “Irrational” farmers growing maize when export opportunities improve • What we can still address: – Dynamic gains at farm-level (nutrient build-up; learning-by-doing; OPV recycling) or economywide-level (savings investment) – Opportunity costs of public (agricultural) spending: short term gains versus long term sustainability – Policy alternatives (e.g., cash transfers, public works)