Fertiliser subsidies or cash transfers – renewing the debate

Fertiliser subsidies have received a lot of attention, and praise for success in combating food shortages in Africa. The most notable case is that of Malawi, which introduced a fertiliser subsidy in 2005. In late 2007, the New York Times, for example, published an article hailing Malawi’s success in fighting famine.

But in a new research paper, Professor Frank Ellis of the Regional Hunger and Vulnerability Programme (RHVP), argues that while fertiliser subsidies have a number of benefits, they also have limitations, and should not be seen as an alternative for other social protection measures for the poor — most notably, social cash transfers (pensions and child support grants, for example).

Ellis argues that while fertiliser subsidies have been successful in boosting food production overall, they do little directly to protect poor and vulnerable households from poverty and hunger. Practical experience has shown that such subsidies mainly benefit non-poor farmers – those who have access to cash, land and labour. Even if some attempt is made to allocate coupons to poorer farmers, they will in most cases sell their coupons, because they can’t afford fertiliser even at the subsidised price.

Fertiliser subsidies are supposed to be used as a bridging measure to deal with market failures, Ellis says. Once these outcomes have been achieved, the subsidies should be gradually phased out — otherwise they become a drain on public finances, preventing support being given to other worthwhile social and economic goals. The problem is that once such subsidies are in place, governments usually find that it’s politically very difficult to reduce or remove them. This means that subsidies can take a heavy toll on the national budget, long after they have ceased to deliver benefits.

Nevertheless, poor and vulnerable people can gain from fertiliser subsidies indirectly in three ways:

* Firstly, poor farmers who are allocated vouchers and then sell them in effect get a cash transfer (but this is a very expensive way of providing a cash transfer);

* Secondly, the poor benefit from lower food prices as a result of the higher supply thanks to better crop production;

* Thirdly, a vibrant agriculture increases demand for rural labour, creating additional jobs and potentially resulting in higher rural wages.

Ellis believes, though, that these benefits of subsidies can’t be used as arguments for neglecting social transfers that can combat poverty and vulnerability more directly, and less expensively.

Cash transfers such as social pensions provide for those who are not part of the active labour force.  They reach those who are unable to generate a livelihood due to lack of land or labour. They do this directly through providing purchasing power. They are equally effective in urban and rural areas. Cash transfers can be delivered securely and cheaply using electronic methods, and their overall cost within the national budget is stable and predictable.

To some extent, fertiliser subsidies and social cash transfers can complement each other. But they also compete – money that a government spends on subsidies is not available to use for pensions and grants, and vice-versa. So it is important that policymakers look at the tradeoffs involved, before making decisions.

The case of Malawi

Malawi has had a fertiliser subsidy for the past four years, and has run a number of pilot cash transfer programmes. According to Ellis, most field studies of the fertiliser subsidy show there’s a vibrant parallel market in coupons, and that members of poorer rural households who are allocated subsidy vouchers, do indeed tend to sell them for cash.

Then too, the budget cost of the Malawi fertiliser subsidy has quadrupled over four years, because the cost of fertiliser shot up in 2008.  The cost of the subsidy has grown from 1.4 to 4.7 per cent of GDP and from 5.1 to 13.9 per cent of total government revenue.

As for the benefits of the subsidy, these were initially large, but have declined over the years. Maize production rose significantly at first, and this led to a drop in maize prices by mid-2007. But by late 2008, prices had risen steeply again, for a range of reasons – and despite the government’s attempts to put a ceiling on the maize price.

This can be contrasted to social transfers: A universal pension for the over-60s, for example, would cost just 2 per cent of GDP and 6 per cent of the budget (as opposed to nearly 15 per cent of the budget that has been allocated to the fertiliser subsidy). The same would apply if instead the government opted for a combination of a pension for those over 65, and a transfer to vulnerable households without pensioners.

Recommendations

Ellis recommends that rather than focusing on only one transfer option (either cash transfers or fertiliser subsidy), governments should adopt a portfolio of instruments. Each has different strengths and weaknesses.

One of the things that Ellis’s paper makes clear is that the debate can no longer be about affordability — clearly, effective social protection measures are affordable — but rather about what measures are most appropriate for meeting the twin goals of boosting food production, and protecting the poor and vulnerable.

View the full research paper here.

A video documentary produced by RHVP on Malawi’s fertiliser subsidy, can be viewed on YouTube:

Meanwhile, IPS reports that Malawi has put measures in place to end subsidy fraud. This emerged at the meeting of the Food Agriculture and Natural Resources Policy Analysis Network (FANRPAN) in Maputo, Mozambique from 1-4 September.

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2 Comments

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2 responses to “Fertiliser subsidies or cash transfers – renewing the debate

  1. where can we find ellis’ full research paper, it is not avaliable on the link provided with

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