Smart subsidy? welfare and distributional implications of Malawi’s FISP

It is often argued that subsidizing fertilizer and other inputs is desirable both to boost agricultural production and to help poor farmers. This analysis of Malawi’s huge Farmer Input Subsidy Program highlights a tension between these two objectives: The more FISP increases fertilizer use and thereby raises output, the greater the distortion and hence the lower the welfare gains from the program. Indeed, the empirical results indicate that up to 59% of every Kwacha spent on the FISP is wasted, in the sense that the fertilizer is not sufficiently valued by the beneficiaries. Cashing out the program is shown to have desirable distributional implications. 1 DECAR, World Bank. This note was prepared as background for the AFR regional study entitled Options for Improving Agriculture Public Expenditures in Africa (funded by the Africa Chief Economists Office and the Gates Foundation) led by Aparajita Goyal and John Nash. I am grateful to them for helpful suggestions as well as to Sinafikeh Gemessa for able research assistance. P ub lic D is cl os ur e A ut ho riz ed P ub lic D is cl os ur e A ut ho riz ed P ub lic D is cl os ur e A ut ho riz ed P ub lic D is cl os ur e A ut ho riz ed