Agricultural Subsidies

Po L i C ies A n D i nstitutions th A t Distor t r esour C e A LL o CA tion in s ub- sA h A r A n Afri CA 59

The greater use of inputs, especially land, in response to negative supply shocks is interpreted as a risk management strategy of farmers in the context of imperfect markets. That is, absent insurance or access to credit, subsistence farmers may need to increase input use to offset the loss of agricultural output and avoid an undesirable reduction in consumption (Aragón, Oteiza, and Rud 2018; Aragón and Rud 2018). In other words, negative climate shocks can exacerbate allocative inefficiency in environments with imperfect input markets. Reallocating resources from agriculture to other productive uses may attenuate the negative productivity effects of climate change, but imperfect markets might hinder this reallocation.

Climate mitigation and adaptation policies may help reduce the frequency of extreme temperature events and hence their potential impact on agricultural productivity. The introduction of digital technologies to implement early warning systems (EWS) and provide timely information on flood alerts, drought warnings, wildfires, and pest outbreaks can also help farmers manage climate shocks.7 Additionally, property rights appear to matter for adaptive behavior by farmers exposed to weather shocks. Policies that foster property rights and increase the competitiveness in the allocation of land markets may allow farmers to better cope with climatic shocks.

Targeted input subsidy programs (ISPs) are one of the main tools for many African governments to boost fertilizer use. ISPs have yielded short-term benefits for national production and food security. However, their impacts have been weakened by poor crop response to fertilizer implementation features that weaken the programs’ contribution to broader fertilizer use.8 Low crop response to fertilizer has also impeded the growth of commercial demand for fertilizer in Africa, and the ISPs have further crowded out the development of commercial distribution channels (Goyal and Nash 2017).

History and Effects of ISPs

Sub-Saharan Africa phased out most ISPs throughout the 1990s except in Malawi and Zambia, where modest ISPs have been implemented sporadically during the 2010s. Fertilizer subsidy programs were largely ineffective in contributing to agricultural productivity growth, food security, or poverty reduction in the 1980s and 1990s. Instead, they placed a major fiscal burden on African governments (Kherallah et al. 2002; Morris et al. 2007; World Bank 2008).

Fertilizer subsidy programs in the region also led to corruption and state paternalism, often hindering the development of commercial input distribution systems and contributing to local supply gluts that put political pressure on governments to implement costly grain purchases and price-support policies for farmers. For these reasons, international lenders and bilateral donors tended to discourage African governments from relying on ISPs during this period of aid conditionality.

The landscape, however, changed quickly and profoundly since 2005. After African governments committed to increase their agriculture expenditures under the 2003 Maputo declaration,9 at least 10 countries introduced or reintroduced fertilizer subsidy programs, at a collective cost of roughly US$1 billion annually (figure 4.1).10 Large-scale input subsidy programs often became the centerpiece of governments’ agricultural development programs. Skepticism based on the past performance of these programs was swept aside by arguments that a new vintage of “smart” subsidy programs (further discussed in the next section) could take account of past lessons to maximize the benefits and minimize the problems of prior programs.

What has been the experience of Sub-Saharan African countries with ISPs? Large-scale ISPs have tended to raise beneficiary households’ crop yields and production levels, at least in the year that they receive the subsidy. However, the production effects of ISPs are smaller than expected because of low crop-yield responses to fertilizer by most