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In 2005/06 Malawi bucked the advice of the World Bank, and launched a massive nationwide program to subsidize fertilizer and maize seeds for small farmers.    Over the next two years, maize output doubled and real GDP growth jumped from 0 to 5% per annum.  Malawi was crowned an economic miracle, and copycat programs sprang up in Tanzania, Zambia, Ethiopia, Nigeria and Senegal.

I spent most of 2008 and 2009 working for the Tanzanian government to measure, among other things, small farm yields -- just as Tanzania's Ministry of Agriculture was launching its own replica of the Malawian program.  There was a lot of enthusiasm on the government side, lots of skeptical hand-wringing on the donor side, and precious little evidence about whether or not this would work on either side.

Unraveling the hype

Can the reality possibly live up to the hype surrounding the Malawian experience?  That's an extremely high bar.  But recent research reveals tantalizing evidence that small farmers systematically under-invest in fertilizer -- implying, in theory at least, big economic returns from exactly this kind of subsidy.

Matt Collin over at Aid Thoughts hosted a series of guest posts about recent claims, publicized by Oxfam and others, that Malawi's program raised real wages or contributed to economic growth.   There are many reasons to be skeptical.

  • First, claims of huge program impacts are based primarily on nationwide trends, with no credible comparison group or counterfactual.
  • Second, 2004/05 was a dry year, and rainfall improved dramatically in the two subsequent seasons that are used to evaluate the program. At least some of the increased productivity is clearly the result of better weather.
  • Third, even these crude estimates of the program impact are actually inconclusive, with a mostly positive program evaluation citing estimated benefit-cost ratios from 0.76 to 1.36.  That is, the program either led to 36% gains or 24% losses.   A fairly important difference.

More detailed research (here and here) examining maize yields in household panel data spanning the onset of the input voucher program has a better shot at establishing credible impacts.  Unfortunately, estimates to date are fairly noisy -- jumping from positive to negative effects on output depending on the sub-sample and estimation method.

If fertilizer is so great, why do we need to subsidize it?

The best rationale for Malawi-style input subsidies is that small-scale farmers have profitable investment opportunities that they fail to exploit.  This logic is hard for economists to swallow.   Economists really only ever tell one joke, but it fits here:

An economist and his friend are walking down the street when the friend sees a ten dollar bill on the sidewalk.

“Look,” he says, “it’s a ten dollar bill”.

“Nonsense,” says the economist. “If that was a ten dollar bill, someone would have picked it up by now.”

By this logic, if fertilizer were profitable, farmers would be using it already.  Unless you can point to a clear market failure or some widespread failure of economic rationality, subsidies are just money down the drain.

Enter the behavioral economics revolution, which claims such failures of economic 'rationality' are in fact quite widespread.  Recent experimental work by Esther Duflo, Michael Kremer and Jonathan Robinson has been undermining economists' traditional skepticism, and showing that impatience and poor planning may lead farmers to underinvest in farm inputs.  By randomly assigning farmers in Western Kenya to have fertilizer applied freely (and almost forcibly, it seems) on their plots, they reach startling conclusions.  On average, fertilizer is extremely profitable for their sample of small farmers in Kenya.  Yet even after seeing this fact demonstrated on their own plots, farmers still don't use fertilizer once the free provision stops.

Interestingly,  however, a simple "nudge" is all it takes to tilt the scales: when offered the opportunity to invest in fertilizer at harvest time when they have cash on hand, farmers jump at the chance and reap profits in the following season.

If these results are right -- and replicable in Malawi and elsewhere -- the economics underlying input vouchers is much more promising.  The implication is that small farmers are leaving money on the table, so to speak, and vouchers could spur them to make profitable investments.

A word of caution

The counter-revolution to Duflo et al's behavioral approach arrived almost simultaneously from another researcher, Tavneet Suri, also at MIT, also working on technology adoption among maize farmers, also in Kenya.  The abstract of her new paper in the journal Econometrica, states quite bluntly:

This paper investigates an empirical puzzle in technology adoption for developing countries: the low adoption rates of technologies like hybrid maize that increase average farm profits dramatically. I offer a simple explanation for this: benefits and costs of technologies are heterogeneous, so that farmers with low net returns do not adopt the technology.

Despite the fact that Suri focuses on seeds and Duflo et al on fertilizer, the results from these two studies sit awkwardly together.   Suri's results imply that farmers not using hybrid seeds right now simply shouldn’t be: it's not profitable for them.  And input subsidies would be a very inefficient way of helping such farmers.  Instead we should think of other forms of social protection or targeted transfers for such households (conditional cash transfers?)

Stay tuned

I'm anxiously awaiting new data from Tanzania's first maize harvest under the input voucher scheme, which is now slowly trickling in.  Will the numbers validate the Malawian miracle?  If yields are strongly up, it would seem the burden of proof in the subsidy debate might begin to shift.

The holy grail will still be an evaluation -- in Malawi, Tanzania or elsewhere -- showing that input vouchers not only stimulate yields, but stimulate them up to a level of profitability that justifies input subsidies vis-a-vis some other form of transfer or social protection.   But if Tanzania is successful even in meeting its operational targets of delivering valuable commodities to the rural poor in over 50 districts (never mind its ambitious impact goals), the voucher fad would seem  to merit more serious attention from aid donors and policymakers concerned not only with agriculture, but social protection more broadly.    Stay tuned.

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CGD blog posts reflect the views of the authors, drawing on prior research and experience in their areas of expertise. CGD is a nonpartisan, independent organization and does not take institutional positions.