# _Smart Subsidies_

The urgency of arresting soil nutrient mining combined with rising fertilizer prices in recent years have stimulated interest in ways to raise fertilizer use through a new generation of socalled smart input subsidies (Morris et al., 2007; World Bank, 2007; Minde et al. 2008; Dorward et al. 2008). Input subsidies are ―smart‖ if;

- the crop productivity and food security benefits outweigh what might have been achieved through alternative investments (not only direct but also considering the opportunity costs of resources used)

- they stimulate investment in input distribution by private suppliers and agro-dealers and the development of a robust input distribution system

- they target farmers who would not otherwise use purchased inputs in areas were economic yield response to fertilizer can be achieved, and

- they have a clear exit strategy.

Input vouchers redeemable at private input dealers and targeted to farmers who use little fertilizer have been the main vehicle for implementing smart subsidies. Malawi‘s is one of the most studied cases of subsidy and voucher programs. During the 1980s, the provision of subsidized seed, fertilizer and credit was tied to purchases by a parastatal marketing board. However, in 1995, prices of all inputs and crops except maize were fully liberalized and the extension service began promoting other crops and activities.

In 1996-97, in response to a crisis situation, the Starter Pack Initiative was introduced to ―jump-start‖ maize production by providing enough seed and fertilizer for 0.1 ha of maize, and seed of other crops, for all smallholders. After several seasons of exceptionally good harvests, donors began to complain about the welfare nature of the scheme, urging its replacement with the Targeted Inputs Program (TIP). The TIP scaled down the number of beneficiaries and replaced hybrids with improved OPVs, which were viewed as more suitable for smallholders. Delayed deliveries, poor weather, and late maize imports led to high prices and increasing food scarcity during the 2001-2 season. A similar scenario occurred in 2005-6.

In response to the 2005/06 crisis, the government initiated the Agricultural Input Subsidy Programme (AISP). AISP provides about 50 percent of farm households with vouchers for 100kg of fertilizer and small quantities of maize (and lately legume) seed, with mainly privately imported fertilizers delivered principally, and in some years exclusively, by two parastatal input suppliers. During the 2005/06 season over one million input coupons were distributed for a fiscal cost of US$32 million. Since then the program has been scaled up each year to reach US$242 million in 2008/09, largely paid by the Government of Malawi. Corresponding to rising fertilizer prices, the subsidy paid 91 percent of fertilizer costs in 2008/09. The program has been perceived as a test case for potential implementation elsewhere in Africa.

Since the policy motivation for governments to subsidize fertilizer is to enable smallholders to attain higher maize yields, establishing positive impacts on productivity is fundamental. In an analysis of three years of plot-level data collected from 450 households in Central and Southern Malawi, Holden and Lunduka (2010a) found that access to subsidized fertilizer had a significant positive effect on maize yields. However, Dorward et al. (2010) concluded that the benefits of the program are difficult to assess due to controversies about national statistics on maize production, which are likely to be overestimated. With reasonable 16