Economywide effects of FISP

Karl PauwMalawi Strategy Support ProgramIFPRI

Prepared for the National FISP Symposium14-15 JulyLilongwe, Malawi

Background

• Several evaluations of “direct” farm-level effects against set objectives: maize production, food security & rural incomes (Lunduka et al. 2013)

• Growing interest also in the “indirect”, “spillover” or “economywide” effects– “The ability of fertilizer subsidy programs to lower maize

prices and increase agricultural wage rates could have a more pronounced effect on the welfare of the poor than does receiving the subsidy directly” (Dorward et al. 2008)

• Two narratives have emerged…

The “not-so-positive” story

• Farm-level surveys show modest yield increases (in contrast to official crop estimates) and small income gains for FISP beneficiaries (see Lunduka et al. 2013)

• Maize price behavior “not as expected” (Dorward & Chirwa 2013): increased volatility and higher real prices during FISP period (esp. 2007/08 & 2008/09)– But price spikes linked to other factors; FISP still exerted some

downward pressure when these factors were absent (e.g. 2006/07)

• Ricker-Gilbert et al. (2013) econometrically estimate that removal of FISP would cause maize prices to increase 1.22.5%

The “not-so-positive” story [continued]

• Ricker-Gilbert (2014) also find very limited ganyu supply/demand effects; virtually no wage effect: – Additional 10kg fertilizer per household raises ganyu

wage by 1.4%– Translates to $1.86 increase in annual income for ganyu-

supplying households• NSO (2012) poverty estimates further endorses this

narrative of FISP’s inability to have a meaningful impact (2004/052010/11) – National poverty declined 52.4 to 50.7%– Rural poverty increased from 55.9 to 56.6%

The more optimistic version• Fertilizer use efficiency is reasonably high and has led to significant

production gains at farm-level (Dorward et al. 2013)• Strong GDP growth (7.1% during 2005-2011); over one-third

accounted for by agricultural growth (Pauw and Thurlow 2014)

Mar/03

Dec/0

3

Sep/0

4

Jun/05

Mar/06

Dec/0

6

Sep/0

7

Jun/08

Mar/09

Dec/0

9

Sep/1

0

Jun/11

Mar/12

Dec/1

20

20

40

60

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100AMIS nominal maize prices

Nati

onal

avg

. pric

e (M

K/kg

)

IHS2

IHS3

• Real maize prices declined: nominal maize prices doubled during 2004/052010/11 (AMIS and IHS2/3)

• “Official” inflation 77.3% vs. “revised” inflation 128.9% (NSO 2012); consistent with 125.8% Beck at al. (2014)

The more optimistic version [continued]

• Wages have increased: increased bargaining power for ganyu suppliers; ganyu wages measured in terms of maize purchasing power have increased (Dorward & Chirwa 2013)

• Other evidence: multidimensional poverty declined, also in rural areas (Mazunda et al. 2012); subjective measures of well-being (IHS2/3) improved dramatically (fig.)

• Ultimately, the rise in NSO’s rural poverty “…is very difficult to reconcile with estimates of wider changes … in wages, crop incomes,… subjective well-being, asset ownership…” (Dorward & Chirwa 2013)

Food Housing Clothing Health

-30-25-20-15-10

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Change in perception of well-being 2004/05 to 2010/11

Urban Rural%-p

oint

redu

ction

in

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te"

An alternative view of poverty

• review consumption conversion factors (Ecker & Qaim 2011);

• reintroduce regional poverty lines of IHS1 tradition (Mukherjee & Benson 2003);

Beck et al. (2014) NSO (2012)2004/05 2010/11 Change Change

PovertyNational 55.5 48.7 -6.7± 2.7 -1.8± 2.6Urban 36.2 31.6 -4.6± 9.3 -8.1± 7.5Rural 57.9 51.8 -6.1± 2.8 0.8± 2.8

Ultra-povertyNational 25.5 26.8 1.2± 2.3 2.1± 2.2Urban 7.7 7.8 0.1± 3.9 -3.2± 3.4Rural 27.8 30.2 2.4± 2.6 3.9± 2.4

• cost of basic needs in both periods; new consumption bundles with flexible food/non-food shares;

• entropy method ensures utility-consistency (Arndt & Simler 2010).

Beck et al. (2014): several refinements over NSO method

Inflation experience and consumption

• Dietary shifts towards more expensive sources of calories; e.g.– Apart from more maize (14%), also more rice (23%), poultry (59%),

cooking oil (46%); but – Less tomatoes (-26%), green leafy vegetables (-55%), and dairy (-12%)

(Verduzco et al. 2014)• Calorie deficiency rate declines, but increases in micronutrient

deficiencies (iron, zinc, vitamin A, folate); mixed results from child nutrition indicators (Verduzco et al. 2014)

• Rural inflation lower than urban inflation

• Rural food inflation high: relative price changes but also compositional shift in consumption

Inflation rates faced by the poorBeck et al. (2014) NSO

(2012)Food Nonfood TotalNational 137.8 106.5 125.8 128.9Urban 152.3 151.4 151.9Rural 136.0 90.3 119.0

How do we attribute changes to FISP?

• Ex post econometric analysis – Difficult to control for all exogenous and endogenous factors,

especially for large-scale programs with spillover effects• An alternative is ex ante “simulation” analysis

– Could be partial or general equilibrium– Sensitive to various elasticities and model assumptions

• Arndt et al. (2014) develop CGE model with 2003/04 baseline (pre-FISP)– New and negligibly small “FISP” maize and fertilizer sectors– Loosely replicate 2006/07 program in terms of volume of

fertilizer imports and application– Varying assumptions about fertilizer use efficiency

General equilibrium analysis

Imports, exports

Rest of World

Foreign aid

Taxes

Government

Spending

Taxes

Taxes

Product marketsProduction

Payments

Industry

Agriculture

Services

Rural

Urban

Incomes

Consumption

Factor markets

Producers Households

Subsidies

Transfers

Significant indirect benefits

Base value (2003)

Deviation from baseFertilizer use efficiency

(kg grain per kg N)

11.8 13.4 16.8 18.5

Maize production (1000mt) 1,982.8 84.6 152.6 289.2 357.7Maize land (1000ha) 1,501.9 -119.5 -161.9 -248.9 -293.3Real maize price index (%) -0.2 -1.2 -3.2 -4.1Average farm wage (%) -0.2 1.4 4.6 5.9

Real exchange rate index (%) 1.4 1.1 0.6 0.3

GDP market prices 199.9 -1.7 -0.5 1.9 3.1 Exports 51.2 3.2 3.7 4.6 5.1

Rural poverty 55.9 -0.3 -0.7 -1.8 -2.4Urban poverty 25.4 0.3 -0.3 -1.4 -2.4

Production-based benefit-cost ratio ~ 0.5 0.6 0.9 1.1Economywide benefit-cost ratio ~ 0.8 1.1 1.6 1.9

Conclusions• Both narratives on FISP impact are compelling; illustrates the

complex nature of large-scale interventions with economywide implications

• Recent IFPRI research shows rural poverty did fall sharply; FISP’s role in this may have been significant; and FISP has the potential to generate substantial indirect benefits– Indirect benefits are around two-fifths of FISP’s total benefits– Prices, wages are important sources of indirect benefits, but so too

opportunity for land reallocation towards higher-value crops (e.g. exports or legumes)

– Economywide approach complements survey-based methods

• BCRs depend strongly on marginal return to fertilizer use– Drops below one with response rates from some survey studies– Crucial area of intervention