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FERTILIZER INPUT SUBSIDY PROGRAM AND RESPECTIVELY FERTILIZER USE AND

CROP PRODUCTIVITY IN SUB-SAHARAN AFRICA. A COMPREHENSIVE

LITERATURE REVIEW AND ANALYSIS. A pathway to decide on smart subsidies









PATRICK MAZICK







ECONOMIC POLICY PAPER SERIES 1







DECEMBER, 2011









UNIVERSITY OF MALAWI, BUNDA COLLEGE, DEPARTMENT OF AGRICULTURAL AND

APPLIED ECONOMICS, LILONGWE, MALAWI

THE AUTHOR



Patrick Mazick is a Resource economist who is currently undertaking his research for the Collaborative Masters in

Agricultural and Applied Economics (CMAAE) and expected to graduate in September, 2012.



A part from school, Mr Mazick is business person; he produces potatoes, beans, supplies ground nuts, rice and runs salon

and cosmetics shop but enjoys writing papers. He may be contacted at:



University of Malawi



Bunda College



Department of Agricultural and Applied Economics



Box 219



Lilongwe



Malawi



Mobile: (00265) 999 365 952



pat_mazick@rocketmail.com or mazickpatrick@gmail.com

Contents

Introduction ................................................................................ 5

Fertilizer input subsidy ............................................................... 6

Literature analysis ...................................................................... 9

What is the way forward? ......................................................... 10

Bibliography ............................................................................. 12

ABSTRACT



In this paper, we critically review the comprehensive literature from studies that been undertaken

about the effects of fertilizer input subsidy program on respectively fertilizer use and crop

productivity. Through the literature review, we have found that indeed fertilizer helps to improve

crop yields but when using the econometric models to isolate the effects of fertilizer on crop

productivity, we do not assume largely on ceteris puribus (on some critical variables) which are

believed to contribute to the improved yields. These variables are; timeliness of fertilizer

application, fertilizer application rates, weather conditions related to rainfall (climatic issues),

recommended agronomic practices of crop production and technical changes due to improved

crop varieties. We have synthesized that it is true that increase in fertilizer may increase crop

productivity but issues of data and methodological challenges in analysis make it difficult to

have conclusive sentiments as such scholars have come up with potential or indicative effects.

Regarding fertilizer use, this synthesis has found that increase in fertilizer subsidy positively

correlates with increase in fertilizer use but according to some repercussions in some countries of

the Sub Saharan Africa (Cameroon, Senegal, Tanzania, Nigeria and Ghana) when subsidies

phased out and in other countries (Benin, Togo, Mali, and Madagascar) fertilizer use increased

even when the fertilizer subsidies phased out due to SAPs. Due to this phenomenon, this paper

has therefore suggested that price reductions in farm input in this case fertilizer may be taken as

one of the reasons for the increased fertilizer use not the only reason. Considering the complaints

scholars and civil society have expressed about the behavior of subsidies of undermining the

performance of private sector, this paper has suggested that when implementing this program,

ensure that input market development is promoted or implement the smart subsidies.



Key words; fertilizer input subsidy program, fertilizer use, crop productivity, Sub Saharan

Africa.

Introduction

The issue of subsidies of any kind faces all sorts of criticisms from different angles of arguments.

This controversy arises probably because of several reasons but the main one could be the

interest an individual or professional has in the issue at hand. For instance, a classical economist

by allowing its dominant thoughts to crowd the mind would at any point refuse to see the

government influencing the market mechanisms either on demand or supply side interventions,

proponents of input subsidies for example believe that the only way to jump start the African

agriculture and achieve food security and increase the incomes of the rural people is through

input subsidies of which fertilizer is central, agronomists view the fertilizer subsidies as a way of

reversing the depletion of soil nutrients, political leaders which are the decision makers when it

comes to agricultural policy and any other policy believe that the simplest way to help the rural

poor people is through subsidies and development agencies view subsidies as a way of realizing

Green Revolution in Africa.



I bet you, if you bring different professionals; lawyers, economists (remember there are also

different schools of thought in this discipline), engineers, architects, teachers and many others

into one room to debate about the benefits we get from subsidized fertilizer over the costs, many

responses will be generated and most likely the house could agree to disagree by believing that

though their ideas are different all of them are right in their own respect. What goes wrong for

these things to continue happening. The question is posed ‘’ if we, economists are smart, why

then Africa is still In shambles?’’ you move around, several projects are on the run and the

monitoring and evaluation reports show that most of these projects are on track but the poverty

levels are still embarrassing and thorough and critical analysis, may reveal that peoples’

conditions today may be worse than 1995. Why? Is it wrong to have an interest in undertaking

projects? At the same time is it right to tell people what they should have instead of them

themselves determine what they want and tell those in authority for provision of the same?



An interesting thing is that even the developed economies have most often different views and

ideas on different issues of public interest but they are still making huge progress. Is there

something invisible in our midst that affects our operations without seeing it? So, how do we

handle issues in which different groups have different interests including those that do not want

to hear that what they are implementing has negative implications or it is not just working. If you

hire them to do evaluation, what do you expect? The project has been successful and we

recommend same implementation process in the next phase becomes an obvious conclusion. Is it

helping us?



Considering all that has been said in the above paragraphs, for us to get the real results of the

projects it is recommended to use an independent party to do evaluation of a particular kind and

in this debatable topic, despite the findings of several research papers, let us approach these

papers, analyze them, check the conclusions and marry with what is really happening on the

ground with an open mind without any biasness or preconditions.

The hallmark of this paper is to review the research findings researchers have come up with

about fertilizer input subsidy and respectively; fertilizer use and crop productivity. This paper

proceeds as follows; we introduce the debate on the definition of fertilizer input subsidy to

remove all the chaos to bring order of understanding, then we will come to case studies as to how

the fertilizer inputs have worked by critiquing how conclusions reached upon and finally we will

harmonize everything to suggest what should be included in doing the analyses and what should

not and provide the suggestions on how should subsidies to be efficient and effective be

implemented considering complaints posed by experts and civil society that the way the subsidy

program is implemented undermines the performance of private sector.





Fertilizer input subsidy

Opinions about the role of fertilizer subsidies in spurring agricultural development in Sub-

Saharan Africa have fluctuated significantly over the past five decades. Many experts believe

that fertilizer subsidies represent an essential method for achieving long term food security in

Sub-Saharan Africa, while providing social support to Africa's poorest subsistence farmers. Yet

previous universal subsidy schemes enjoyed only moderate success, raising concerns about

whether the market distortions subsidies introduce can ever lead to a sustainable agricultural

system. New practices in creating more targeted subsidies may be the key to achieving durable

success.



Despite the potential benefits to crop yields, inorganic fertilizer application in Sub-Saharan

Africa lags behind other developing regions. Average application in Sub-Saharan Africa is less

than 10 kg per hectare, while the average application in Latin America and South Asia is nearly

140 kg per hectare. Sub-optimal or inefficient fertilizer use may result from farmers’ incomplete

knowledge of its benefits or proper application techniques, inadequate (liquid) funds, or aversion

to the risk associated with investing in a new input. Proponents of subsidies argue that they can

help to mitigate these circumstances and bring fertilizer use up to optimal levels. The

implementation of subsidy programs may also be argued for equity reasons. Like other forms of

social support (health, education spending) subsidies represent a redistribution of funds within a

society, and can be an effective way to target subsistence farmers (a disproportionately large

amount of Sub-Saharan Africa’s poor). Finally from theoretical point of view, subsidies may also

create positive externalities, such as decreased soil erosion from increased plant growth. These

external benefits may cause fertilizer to be undervalued in the market transaction, and thus

represent another argument for government intervention through subsidies



During the 1960s and 70s many countries in Africa provided subsidized fertilizer to their farmers

though state owned enterprises, or "parastatals," which generally enjoyed a monopoly on

fertilizer distribution and import within the country. The fertilizer distributed by these enterprises

sold at a universally reduced price, between 20 and 60 percent of the full market cost. Currency

over-valuation also created an additional "implicit" subsidy for imported fertilizer. These policies

were seen as a way to counteract the effects of soil erosion and depletion, and increase crop

yields by bringing fertilizer within the reach of subsistence farmers. This followed the dominant

‘modernization’ model of the period, which aimed to develop production systems in the sector

through the promotion of new technologies like fertilizer and improved hybrid seeds.



The subsidy programs often suffered from multiple problems. Inefficient bureaucracies

contributed to delays in fertilizer delivery. Overstaffing and lack of efficiency incentives

increased overall program costs. In cases of inadequate budgets, fertilizer was rationed, barring

farmers from accessing sufficient amounts to apply to their crops. Finally, below market-level

pricing disincentivized and displaced private distributors of fertilizer who no longer found it

economically feasible to compete with subsidized fertilizer. This seriously jeopardized the

financial sustainability of the programs.



The 1980s saw the rise of neoclassical liberalism, the Washington Consensus and Structural

Adjustment Programs. The dominant philosophy of this period saw underdevelopment as a

symptom of allocative inefficiency, placed emphasis on the power of free markets to effect

lasting development change and encouraged the minimization of the state’s role in the economy.

During this period, multilateral lending agencies and financial institutions such as the

International Monetary Fund and the World Bank placed conditionalities upon the disbursement

of development aid. Countries were required to agree to make a series of "structural adjustments"

to their economies, in order to gain financial assistance or engage in refinancing. The common

package of policies prescriptions included currency devaluation, privatization or divestiture of

state-owned industries (parastatals) in the health and agricultural sectors, trade liberalization

(lowering or elimination of tariffs on imports), cuts in social spending (agriculture, health,

education sectors) and strict deficit reductions. Structural Adjustment Programs also led to the

phasing out of most fertilizer subsidy programs. Some of the African countries following these

guidelines included Benin, Ghana, Madagascar, Senegal, Togo, Tanzania, Zambia, Cameroon,

Malawi, and Nigeria.



Results of liberalization and subsidy phase-out were mixed. In a five year study comparing

before and after cases, fertilizer use in Cameroon, Senegal, Tanzania, Nigeria and Ghana

declined 25-40 percent, while it increased 14-500 percent in Benin, Togo, Mali, and Madagascar.

Subsidies may have been only one factor affecting the price and use of fertilizer.



In economics we define subsidy as any grant most often monetary that keep down the market

price so that the farmer would look at the commodity as cheap or affordable. Generally, this

happens mostly in agricultural sector where governments with an intention of increasing

production, may contribute to the farmers’ payment of the inputs particularly to those farmers

that are deemed resource constrained at that time.



So, when we look at fertilizer input subsidy, there are several kinds and implemented in different

ways and have diverse effects. For the case of Malawi of example aborted this idea of input

subsidy because of the structural adjustments programs of IMF and World Bank but after looking

at some rigidities in the economies even in the face of SAPs, Malawi reconsidered its position on

subsidies. Agricultural input subsidies have mainly been intended to promote the realization of

household food security as a primary and principal reason, and other reasons like increase wages,

reduce food prices, and promote economic growth as reported by Crawford et al.( 2003) may

come through multiplier effects. An interesting work done by Kydd and Dorward (2003)

reported that most often, the hidden justification for implementing agricultural subsidies has

been the concern that market failures that do not involve private sector development through

market development inputs my undermine the overall performance of the economy which affects

the public at large. This regard, implementing agricultural input subsidies to promote the growth

of agricultural sector taking no regard for other sectors of the economy is purely suicidal because

the in true sense, there is no sector that is stand alone sector (this is very critical in implementing

smart subsidies) In Malawi in trying to promote food crop production, used general price

subsidies coupled with subsidized credit in the 1970s and 80s. During that period, it is reported

with evidence that Malawi achieved significant degree of enough maize (the main staple food)

(Shively et al., 2010, Dorward and Chirwa, 2011, Holden and Lunduka, 2010). It is reported that

after the force from international financial agencies, mainly the so called the Breton woods’

institutions (IMF and World Bank) to deregulate through the popular SAPs, the Malawi

Government terminated the use of subsidies in the early 1990s. Following this termination of

subsidies, Malawi suffered from lineup of severe and persistent food crises in the years leading

up to 1998. Agricultural subsidies were reintroduced in 1998, following years of perpetual food

shortages, through what the government termed the Starter Pack Scheme (SPS). Under the SPS,

which evolved into a Targeted Inputs Program (TIP), all smallholders in Malawi were entitled to

a package containing sufficient fertilizer and seed to plant about 0.1 hectare of maize. The

purpose of the SPS was to promote food security, increase agricultural productivity and improve

soil fertility. Evaluation studies suggest that the SPS succeeded in increasing food production,

thereby helping to promote national food security in the short-term. However, critics have argued

that the SPS and TIP led to the crowding out of commercial supply of chemical fertilizers and

seed (though this is obvious if smart subsidies are no factored). Despite the actual benefits of the

SPS, most of Malawi’s donors opposed the program. The program was criticized for

undermining the development of private sector input delivery.



Based on these arguments, as well as general suspicion of markets, most African governments

tightly controlled their fertilizer markets in the 1970s and 1980s. Typically, one or more state-

owned entities had a legal monopoly on importing and distributing fertilizer. Fertilizer prices

were subsidized at below-market levels and fixed at one rate throughout the country. The

fertilizer was often distributed as part of government-run agricultural credit schemes, and a large

percentage of the fertilizer was provided by donor agencies as in-kind aid. These policies,

however, resulted in high financial costs and inefficient distribution. Fertilizer was often

delivered to farmers late and in limited quantities. Although fertilizer subsidies were politically

popular, economists and policymakers began to believe that the fiscal cost was not worth the

benefits to farmers. In addition, growing evidence showed that the bulk of the benefits of these

subsidies went to larger and richer farmers, thus undercutting the equity argument for subsidies.

Under the structural adjustment programs of the International Monetary Fund (IMF) and the

World Bank, most African countries phased out fertilizer subsidies and opened up fertilizer

markets to competition from the private sector as part of wider market reforms in the economy.

The link between fertilizer policy and fertilizer use in Africa is not very direct.

Literature analysis

Studying Crawford et al. (2003), Kydd and Dorward (2003), Shively et al. (2010), Dorward and

Chirwa (2011), Holden and Lunduka (2010) one would come to conclude that subsidies

particularly fertilizer promote agricultural productivity which help in solving challenges of

malnutrition, food insecurity, poor incomes and macroeconomic instability. However, it is very

critical to analyze the methodology that a researcher has followed before coming to a conclusion

because in the real analysis of maize productivity for the case of Malawi, to isolate the effect of

fertilizer subsidy on the maize productivity is very complex and has a lot of methodological

challenges due to data availability and also its econometric modeling. Dorward and Chirwa

(2011) demonstrated their competence and reliability by admitting to this fact and they included

the political profile of the program, scope of the objectives and focus of evaluation, household

and market impact pathways, scale effects, measures/indicators of impact, data and analytical

methods. In trying to estimate the impact of the subsidy program on fertilizer use, Chirwa (2010)

used the propensity score matching and found out that there were mixed effects with positive

outcomes in 2006 and negative impact in 2009. Shively et al. (2010), used the two stage

Instrumental variable regressions of which in the first stage selection into the program was taken

to be endogenous and the fertilizer application rate was used as dependent variable in the second

stage. They also used the Multinomial Logit model to predict the probability of participating in

mutually exclusive categories of the program. In their conclusion on maize productivity, their

results were found to be indicative rather than conclusive in the sense that households that were

sampled as those who accessed subsidized fertilizer had two categories; farmers that used

improved varieties and that used local varieties (the report does not say anything to do with

farmers who planted both varieties in different fields) and found out that those farmers with

fertilizer and improved maize had higher yields than the ones that did use the local varieties.



We know that in conducting controlled experiments, the agronomists if they want to capture the

effect of the particular nutrient for example, allow other factors affecting the outcome remain

constant in different plots but keep what you want to analyze variable. In economics, we usually

say ceteris puribus demand decreases if price goes up for instance. Now, if we can use the same

line of thinking of the findings of Shively et al. (2010) and the conclusion reached upon that

those farmers using improved maize had higher yields than their counterparts which in any kind

of argument, the logical conclusion would be that therefore, improved maize increased the maize

productivity not fertilizer because its use in the analysis between the two counterfactuals was

kept constant across.



According to the Food and Agriculture Organization of the United Nations (FAO), annual

growth in fertilizer use in Sub-Saharan Africa was 9 percent over the 1960s and 1970s, but since

1981 fertilizer use has stagnated at around 1.9–2.2 million metric tons, with some possible signs

of growth since 2000. Given that few countries had begun to liberalize their fertilizer markets by

1981, it is difficult to attribute this stagnation to the reforms. In some countries, subsidy removal

and devaluation resulted in sharp reductions in fertilizer use (Cameroon, Ghana, Nigeria,

Senegal, and Tanzania), whilst in other countries fertilizer use increased (Benin, Madagascar,

Mali and Togo). This has a serious implication on the scientific research on the effect of fertilizer

subsidy policy of fertilizer and crop productivity because subjected to the same conditions of

withdrawing subsidies some reduced fertilizer use others increased portrays the fact that fertilizer

policy is not the only factr that affects fertilizer prices and that in a series of factors, price is one

of the factors determining fertilizer use. This conclusive statement goes in tandem with the

conclusions reached upon by many researchers (Green and Ng’ong’ola ,1993; Nkonya et al.,

1997; Isham, 2002; Abdoulaye and Sanders, 2005; Chirwa, 2005).



In agreeing with Dorward and Chirwa (2011), who honestly admitted the challenges in an

attempt to isolate the effect of fertilizer on maize productivity because of the highlighted above.

At the same time, most studies if not all usually run to reach to the conclusion of the fertilizer

input on maize subsidy not considering the data availability and the econometric model used.

Largely, issues of climate (weather issues), timeliness of fertilizer application, residual soil

fertility, manure application, weeding practice, other recommended husbandry practices, the

recommended fertilizer application, the amount of fertilizer from subsidy applied (to avoid

assuming that farmers would not have harvesting if had not been for subsidy). All these issues

are very crucial and critical in analyzing the impact of fertilizer subsidy though mostly neglected

but have made most reports on impact of fertilizer subsidy program dubious.







What is the way forward?

Now, how we handle challenges of crowding out effect of fertilizer subsidy of the private sector

as mostly is the case in Malawi particularly of the supply side regarding the agro-dealers unlike

in transport sector where most transport companies are contracted to do the distribution. The

Government does the import of the fertilizer without the involvement of the private investors.

The same also happened in Sri Lanka where the government was the sole importer of fertilizer

without the private sector involvement but later it was revisited such that the private sector

involvement in fertilizer importation was initiated and was successful (Ariyawardana et al.

2010).



Fertilizer market development is an alternative approach to improving farmers’ access to

fertilizer that has become more common over the past 10–15 years. This strategy involves

improving the policy environment, strengthening and expanding the network of private agro-

input dealers with training and credit, and providing farmers with information about fertilizer use

through advisory services and demonstration plots. A key policy issue, therefore, is whether

direct subsidies on fertilizer to small farmers are as effective in building sustained improved

access to fertilizer as, for example, support to intermediate actors in the fertilizer supply chain or

better information for farmers on how to make productive use of fertilizer. The answer seems to

be, it depends. If farmers have reasonable access to cash or credit, then it is more effective to

support the fertilizer supply chain than farmers directly. Evidence of this finding comes from

Kenya, which has relatively effective smallholder credit provision and higher household cash

incomes than do, many other countries in Sub-Saharan Africa. A stable fertilizer policy

environment in Kenya supported increasing investment in fertilizer marketing at all levels from

importers to retailers. The number of rural stockists of fertilizer increased sharply, and the

increasingly competitive fertilizer sector worked to reduce its transaction costs, giving farmers

more incentives to use fertilizer. Moreover, fertilizer dealers tailored their

products to farmers’ needs. For example, they offered small, experimental packets of improved

seed and fertilizer for farmers with only a little cash. A sustainable fertilizer supply system

within the private sector is emerging with minimal direct delivery of subsidies to farmers. Even

with the success achieved in Kenya, however, the economics of profitable fertilizer use still

apply—fertilizer use remains limited in remote agricultural areas of the country where high

transport costs render farm gate crop prices too low and costs of fertilizer are too high to allow

its profitable use. The economically optimal fertilizer application rate in such areas is zero. As in

many other remote areas of Sub-Saharan Africa, other investments than fertilizer subsidies, such

as agricultural technologies appropriate for local economic conditions or improved roads and

communication services to foster market development, would make greater contributions to the

welfare of farm households in such areas (Benson and Minot, 2009).



Smart subsidies can also be one of the ways of promoting both the rural welfare and private

sector development and this will help in overall economic development which has public good

characteristics. Smart subsidies are mechanisms to provide subsidized goods and services

designed both to promote market development and to enhance the welfare of the poor. Below-

market-cost provision of goods and services, generally by private-sector suppliers, from which

the poor in particular are likely to benefit, can be considered smart subsidies. For example,

provision of foot-driven irrigation pumps or small seed and fertilizer packages and the creation

of local schemes to exchange breeding animals among farmers with small herds could all qualify

as smart subsidy interventions. The subsidies can be phased out once the market infrastructure

has been developed and markets are functioning.



It does not make any sense when we have full knowledge that our economy is intersectoral and

yet we want to development one sector by undermining the other sector. S such, the smart

subsidies are the way to go so much provided there is a political will and mutual understanding

between the private and public sectors.



By suspending our preoccupied minds and also selfish interests about any project and remain

vigilant to want we want to realize, then every project investment will be beneficial to all

intended people. At the same time, politicians should not look for what they should hear what

they need to hear. As researchers and scientists, let us not stop seeing things the way they are

because an econometric model is telling me a different story. Do not forget that one of the rules

of thumb when interpreting results after an analysis is use of common sense.





To ensure that we can isolate the effect of fertilizer subsidy input on crop productivity, we need

to take into consideration other relevant variables that have significant contribution to the same.

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