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December 21, 2010

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December 21, 2010

How fertiliser subsidies have transformed Malawi

December 21, 2010
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Max Lawson is Head of Development Finance and Public Services for Oxfam GB

When I lived in Malawi in 2002, the outlook was bleak. The received wisdom was that Malawi had a structural food deficit and for the foreseeable future would face periodic famines and chronic food insecurity. Our humanitarian department was thinking of setting up a permanent office.

But in the last few years this situation has turned around completely, due in large part to an extensive programme of subsidy for fertilisers. The subsidy has attracted many strong views. Malawian civil society is very supportive, although always pressing for improvements to the subsidy and drawing attention to continued areas of food insecurity.

In a forthcoming paper for the International Journal of Agricultural Sustainability, Andrew Dorward and Ephraim Chirwa, two long-time Malawi watchers, assess four years of the subsidy programme. The Dorward and Chirwa study is based on extensive research, is carefully expressed and balanced, and will hopefully lay to rest a number of the most common arguments.

Overall finding? Thanks largely to the subsidy Malawi has had seven years of economic growth, based on agriculture, malawi graphwhich has had a major impact on reducing poverty, helping to halve child mortality rates. For me the key point is the huge role a government subsidy like this can play in getting an economy back on its feet and in stimulating (rather than stifling) growth and poverty-reducing private sector development. For many who see government subsidies as anti-private sector this will be counterintuitive. But it is exactly the kind of heterodox approach that will be needed to deliver success in Africa and in other poor countries, where we should leave our economic theory at the door and instead focus on what works empirically.

Has the subsidy been a success?

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

On a more personal level, on a recent visit to the country, I could literally feel the difference from 2002. It is hard to exaggerate the impact of relatively cheap and plentiful food on a country where it is often over 50% of a family’s expenditure.

Are the benefits captured by the rich?

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

As important are the many indirect impacts on the poorest of a subsidy of this size.

· In Malawi, only 10% of Malawians are net sellers of maize, whereas 60% are net buyers and benefit from greater overall maize availability.

· The majority of smallholder farmers exhaust their own food supplies with between 3 and 6 months left to the next harvest, and then have to work on the farms of others in order to purchase maize. Real wages have also risen, in part as more maize being grown has meant more demand for farm labour.

malawi kids· In addition, the paper also finds that with plenty of the main food crop available, farmers are more and not less likely to diversify into other crops and/or non-farm activities. Conversely before the subsidy farmers were trapped in a cycle of low yields which ‘in turn depresses wider labour and agricultural productivity and inhibits the growth of the non-farm economy’

· The impact on the macro-economy is also critical, a fact recognised by the IMF. The subsidy has contributed to single digit inflation for the last four years, previously virtually unheard of in Malawi.

But is the subsidy unaffordable and unsustainable?

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

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

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

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

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

Is this applicable to other poor countries?

The paper is cautious about the applicability of the subsidy in other developing countries, but does not rule it out, rather describing a set of circumstances that make it viable and a sensible policy choice. Certainly many other countries should be seriously looking at similar programmes. Oxfam challenged the World Bank on this point at a recent meeting, and it is now saying it is supportive, where appropriate, of ‘smart subsidies’. The Bank has have pursued a temporary subsidy in Ethiopia but generally remain distinctly tepid in its support. I am not aware of any donor actively helping any other country explore the Malawi option. I fear that the reason for this lies more in ideological intransigence than in a balanced appraisal of what is clearly a serious option for generating poverty-reducing growth for many nations in the face of growing global food and climate insecurity.

13 comments

  1. A major concern must be that the resource cost of fertilizer (with the subsidy) does not reflect the actual cost. Should the subsidy fall away, for what ever reason, would the Malawian farmers be able to continue to produce the maize or whatever other products competitively. If input cost to produce is subsidized one can expect that inefficient production processes will be entrenched in the economy which will have a very negative effect both economically and politically should the subsidy be removed. I would like to see what the effect would be if the farmers are trained to be efficient with the true cost of production inputs. I would imagine that that would have a far better and more sustainable effect in the long run.

  2. This is a well written article and I have been delighted to see the improvement in food production in Malawi in recent years. However I advise to not ‘leave our economics theory at the door’. Economics theory does not equate to an automatic reliance on private markets. Indeed it calls for government intervention in order to address market failures. Market failures arise when markets fail to result in an optimal (or in this case, pro-development) outcome. Market failures justify government intervention. However the intervention must be such to sustain an optimal (or quasi-optimal) outcome in the long-run. In the case of fertilizers, the market failures at play are asymmetric information in the financial sector and the applicability of property rights. If the financial system worked well, if banks knew of the success of fertilizers and were confident that farmers would not default, then they would lend money to farmers to buy the fertilizer. In such a case banks would devise a favourable pay-back plan and provide affordable rates of interest. While it is important to recognise the success of subsidies in raising food production by tackling the issue of fertilizer affordability, it will be difficult for this approach to be sustained in the long-run. With time, pressures will mount for the expenditure on subsidies to be spent addressing other market failures (such as on sectors that have positive externalities like education, housing and health) and the subsidy’s negative contribution to farmer incentives may also become engrained. In the long-term, the financing of the subsidy will likely become a strain on government finances unless the taxation system works highly effectively and not many other markets require government intervention. My suggestion is to recognise the benefit and success of the subsidy program in unlocking the food sector, but to treat this as a temporary kick-start rather than a long-term solution. In this regard, I would seek to address the core issue, which is the market failure of the financial sector. I would suggest introduced a mechanism to taper off the fertilizer subsidy while simultaneously ensuring a fully functioning financial market and a strong property rights system. The funding of a government mutual guarantee fund that targets farmers and a programme to raise financial sector knowledge about the contribution of fertilizers might be two approaches to take. The role of Malawi’s development partners should be to use economics theory to present the case to the Malawian Government to tackle the root cause of the market failure in the food sector and to devise appropriate policies to address the cause of the market failure.

  3. Well done to the Farmers who have been able to increase production so dramatically over the last few years. I’d be very interested in the answers to a few simple questions.
    1/. Has there been good rainfal over this period ?
    2/. What seed is used & how sustainable is the supply ?
    3/. What other food crops are grown & are planting times staggered to spread risk ?
    4/. What is the proportion of small-scale farmers to large-scale farmers that have cotributed to these statistics ?
    5/. Have the Extention Workers been able to be with the farmers to a greater extent than previously ?

  4. “The majority of smallholder farmers exhaust their own food supplies with between 3 and 6 months left to the next harvest, and then have to work on the farms of others in …..”

    The Malawi model analysis by Dorward and Chirwa is timely and suggests a convincing alternative to where rising public and private flows in African agriculture may be heading.

    Interesting to know if co-operatives and similar smallholder organisations have increasingly formed in the past eight years and if so how they have fared.

  5. There are several good reasons why agricultural credit is not the answer to Malawian smallholders’ need for access to good quality seed and fertiliser.
    The first is that 75% of the country’s 2.4 million smallholders grow no cash crops and sell no significant amount of produce. They are subsistence farmers with an average of less than one hectare of land and for many years have suffered serious food deficits as they farm on the same plot of land year after year with no restoration of nutrients. As a result the country, until recently ,had a child death rate of 22% with over 50% of children stunted. These 1.8 million farmers have virtually no resources with which to purchase fertiliser at commercial prices and the incremental maize which they produce from the current subsidy programme is all used to supplement home consumption so that there is no surplus with which credit could be repayed. Banks do not lend money to subsistence farmers for inputs which are intended to improve on the family diet and chance of survival but which produce no cash surplus.
    The second reason for the banks reluctance to lend is that the high cost of fertiliser in Malawi (the result of long and expensive import and distribution links) means that at current prices of inputs and outputs commercial maize production is not an attrative proposition. Twenty years ago Malawi had a highly successful credit programme which benefitted about 15% of farming families. The government had a monopoly on maize marketing and set the maize price at a level which enabled the privleged few to repay their loans and make a profit from the use of hybrid seed and fertiliser. This resulted in a cost of maize which was beyond the reach of the majority of the poor and led to widespread hunger and the death of large numbers of children. There are few who would want to return to that situation.
    The subsidy produces maize which replaces expensive imports from South Africa so that the estimate of its economic benefit does not hinge on the local low price of maize but on the cost of imports and at that cost fertiliser use makes economic sense.
    Malawi faces two options: either help the majority of farmers who are poor subsitence producers to gain access to yield enhancing inputs and feed their families adequately or import a million tons of maize a year and heavily subsidise its price to avoid widespread hunger.
    The obvious route out of this situation is to identify a high value cash crop which could be grown by a couple of million smallholders.Unfortunately 25 years of studies and searches by some of the top entepreneurs and agronomists on the continent have failed to come up with any single such crop.
    Much of the rest of the world has subsidised its farmers for the past 50 years and it seems odd that when the richest countriee have failed to find an exit strategy from subsidising intensified agriculture that one of the poorest should be expected to find such a strategy.
    Acouple of quick responses to John Fowler Malawi has had two droughts in the past 60 years so rainfall has not played any significant role in the increases of the past five years. Farmers obtain subsidised hybrid maize seed produced by three international companies in competition with one another.
    Smallholders dominate the farming scene with some 2.4 million and maize dominates the farming pattern with only small areas of other crops.
    The writer lives in a village in Malawi and has been working with Malawian smallholders for the past 23 years

  6. The opposition to Malawian fertilizer subsidies has always been deeply hypocritical.
    I agree that in a perfect world fertilizer subsidies do not make sense. But so long as one country is willing to subsidize its farmers every other country will also do so. Furthermore developed countries that might be able to afford giving less farm subsidies without the immediate specter of famine looming on their doorstep really need to take the lead on this issue if they are going to have any credibility when they ask developing countries to end their own subsidy programs.
    Finally the goal of agricultural development projects probably should not be to ensure that smallholders are able to make more money and be more productive. There is no nation on the planet which has a large middle class of smallhold farmers who are able to send their kids to college and retire at 65. Rather the priority should be food security AND economic development projects that get people off their small plots and into more productive work either through education or industry.

  7. En France et en Europe nous aussi nous utilisons depuis longtemps des engrais chimiques et le résultat est inquiétant pour les sols puisque l’humus est entrain de disparaître. Ne serait il pas plus sage de faire connaitre aux villageois la possibilité de produire de l’humus excellent fertilisant à partir des latrines privés ou publiques . J’accepterais selon mes disponibilités être invité pour faire un diagnostic sur ce problème extrêmement préoccupant merci Consultez le site merci lombrics .com

  8. ‘Farmers obtain subsidised hybrid maize seed produced by three international companies in competition with one another.’

    Is there any will to produce non-hybrid maize-seed adapted to the regional climate? Nothing more important than to have your own seeds.

  9. There have been many years of research to produce open-pollenated (non-hybrid) seed adapted to local conditions and seed of these varieties is readily available. Under the subsidy scheme farmers have a choice of x kg. of open-pollenated maize seed, of which farmers can save their own seed, or half of the quantity of hybrid seed. 85% consistently chose hybrid because the plant vigour and yield is just so much greater. Farmers across the world decide for themselves which varieties they want to grow and there appears no reason why Malawian farmers should be pressurised into using inferior planting material for their main food crop.

  10. I’m wondering if I’m reading the same report (The Malawi Agricultural Input Subsidy Programme: 2005-6 to 2008-9)because on page 13, it states that reports on household food security “do not show any clear trends in improvement” and that while there is evidence that poverty has generaly declined “it
    is not possible to directly attribute this to the subsidy programme” citing a number of other factors, such as good weather and high tobacco prices. Later in the report, serious concerns on both economic and ecological sustainability are raised. The fact that the AISP absorbs about 74% (2008/9) of the agriculture budget clearly has implications on resourcing for training and extension, soil management, research, etc, for Malawi’s smallscale farmers.

  11. The site thank you earthworm (multi languages) provides perfectly hygienic toilet solutions, without storage, odorless and flies and they provide users with the most fertilizer nutrients of the planet, humus and nitrates

  12. Nous avons finaliser des latrines HUMUS pour ceux qui n’ont jamais été équipé par les toilettes à eau… en Afrique , à Madagascar , en Amérique du sud , en Asie etc..
    Mais ces nouvelles toilettes en liaison avec la nature recyclent en permanence nos déjections dans le plus parfait hygiène ce qui fait qu’il n’y a plus de stockage . Cela remet en question les promoteurs de toilettes à eau qui gaspillent de l’eau , qui stockent dans des fosses toutes eaux et ensuite dépensent des sommes faramineuses pour traiter ces effluents . Nos latrines humus ou toilettes humus apporteront aux utilisateurs , ceux qui s’attacherons à produire de l’humus , non seulement le plus parfait hygiène et aussi les meilleurs engrais de la planète .

    Nous sommes devant une alternatives aussi bien en matière d’assainissement qu’en matière de fertilisation .

    C’est votre engagement dans cette voie nature qui nous donneras raison .

    L’Humanité a besoin d’augmenter l’hygiène et la production agricole n’hésitez plus ;, METTEZ VOUS AU TRAVAIL .

    LE BONHEUR D’EXISTER EST A CE PRIX

    (consultez le site merci lombric si vous hésitez )

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