Towards ‘ smart ’ subsidies in agriculture ? Lessons from recent experience in Malawi

an independent non-profit policy research institute, with financial support from the Swedish International Development Cooperation Agency, Sida. Opinions expressed do not necessarily reflect the views of either ODI or Sida. ODI is the UK's leading independent think tank on international development and humanitarian issues. The Malawi Government Agricultural Inputs Subsidy Programme as implemented in • 2006/7 was very costly, but is capable of generating benefit:cost ratios between 0.76 and 1.36 (a ratio of 1 represents a " break even " point), not allowing for " second-round " growth effects. Major determinants of programme impact include clear understanding of programme • objectives (increased wages, reduced food prices, growth and diversification) and trade-offs, extent and effectiveness of subsidy targeting, timeliness in implementation, programme scale and cost, extent of public/private sector partnership, and policy makers' access to and use of reliable and timely information. Programme impact is also vulnerable to factors either partially or completely outside • government control, including variations in international fertiliser and maize prices and weather. T he recent spike in international food and fertilizer prices has underlined the vulnerability of poor urban and rural households in many developing countries, especially in Africa. The combination of factors that resulted in this spike has renewed policymakers' focus on the need to increase staple food crop productivity. While the pros and cons of input subsidies have been hotly debated over the past decade, input subsidies are being introduced (or reintroduced) in several countries as a means to shore up food security in the short-term while also implementing longer-term investments to raise productivity. With fertilizer prices likely to remain high in the short to medium term, such subsidies will inevitably imply a high budgetary burden. The challenge is to design so-called " smart " input subsidy programmes that have a significant impact on the availability of food in the short run while stimulating growth and rural development and increasing (or at least not suppressing) effective demand for and commercial distribution of inputs in the long run. Beginning in 2005/6, after almost a decade of experience with smaller-scale subsidy programmes, Malawi introduced a large-scale input subsidy programme using vouchers. The purpose of this brief is to review Malawi's experience in order to identify the challenges facing " smart " subsidy programmes if they are to be sustainable and cost effective in delivering on their goals. Introduction Agricultural input subsidies were common in poor rural …