How fertiliser subsidies have transformed Malawi

December 21, 2010

     By Duncan Green     

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

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.

· 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.