A Nudge or a Battering Ram?

(c) Panos / Jan Banning

Malawi is going through another round of massive fertilizer subsidies, with MK10,000 bags of fertilizer going for MK500 — taking a battering ram to the problem of low fertilizer usage in the country.  The subsidies have been hailed  in the media and some other reports as a success, having boosted maize production to a record 3.4m metric tons this past year.

Taking a quick look at Malawi’s budget speech, we see fertilizer subsidies are going to cost MK19bn (about $135m).  Compare that to spending on health (MK31.4bn), education (MK26.1bn), roads (MK15bn), and irrigation and water development (MK7.7bn).

An assessment of the input subsidy program put the direct benefit-cost ratio at between 0.76 and 1.36, meaning that an investment of $1 got about $1 back.  Think it’s worth it?  What’s important to consider?  What would you do with $135 million?

Freakonomics notes that Esther Duflo and crew have published a new piece, which suggests that gentler nudges can induce farmers to use fertilizer without such a massive subsidy.

The paper describes a more clever way of getting farmers to take up fertilizer use.  Farmers are used to getting a big lump sum right after the harvest.  Just like that rebate in Alberta that led to a massive spike in ipod sales, one-time injections of cash typically get spent quickly.  Farmers use the money from the harvest to pay school fees, maybe put some iron sheets on the house, kick back with the buddies with some drinks to celebrate a good season.  When the time to buy fertilizer rolls around, most of the money is goen.

Duflo et al suggest that selling farmers discount vouchers at the small price right after the harvest is a far more cost-effective and far less distortionary way of getting farmers to take up using fertilizer.   The farmer buys a coupon for a few dollars right after harvest, to get a bit more off the full fertilizer purchase later.  The farmer saves money to buy fertilizer because he’s already committed a small amount of money early.  It turns out that farmers who buy the cheap discount voucher and get a small subsidy take up fertilizers as much as farmers who don’t get access to the early voucher but get a much larger subsidy at time of sale.

Appears to be cheap and effective; too bad it’s a lot harder to sell the idea of a nudge than handing out freebies.

If the country could cut it’s fertilizer subsidy costs, it would free up a lot of money for schools, clinics, roads, and irrigation dams.

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Working to include smallholder farmers in agricultural markets, we know there are no easy answers. This blog is a place to ask "What does it take to make it work?" and to share what we're seeing and learning.
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