How Do Fertilizer Subsidy Programs Affect Total Fertilizer Use in Sub-Saharan PDF

AGRICULTURAL
ECONOMICS
Agricultural Economics 44 (2013) 687703
How do fertilizer subsidy programs affect total fertilizer use in sub-Saharan
Africa? Crowding out, diversion, and benet/cost assessments
T.S. Jayne
a,
, David Mather
a
, Nicole Mason
a
, Jacob Ricker-Gilbert
b
a
Department of Agricultural, Food and Resource Economics, Michigan State University
b
Department of Agricultural Economics, Purdue University
Received 1 April 2013; received in revised form 15 August 2013; accepted 15 August 2013
Abstract
Amajor determinant of input subsidy programs effects on the achievement of national policy goals is the extent to which they raise total fertilizer
use. This study synthesizes recent literature on how the new generation of targeted input subsidy programs has affected national fertilizer use
after accounting for crowding effects, and derives benetcost (BC) estimates of the fertilizer subsidy programs for Kenya, Malawi, and Zambia
after accounting for crowding out and diversion. We highlight two major ndings. First, accounting for the illicit diversion of program fertilizer
can profoundly inuence estimates of how fertilizer subsidy programs affect total fertilizer use and program impacts. Given recent evidence that
33% or more of total program fertilizer may be diverted before being received by intended beneciary farmers, the failure to account for program
diversion is shown to overestimate the contribution of the subsidy programs to national fertilizer use by 67.3% in the case of Malawi, by 61.6% for
Zambia, and by 138.0% for Kenya. The second major nding is that the incremental value of maize output produced from these subsidy programs
is considerably less than their costs in most years, except under unusually high maize price assumptions. Conventional BC analyses that do not
account for crowding out and diversion may seriously overestimate the benets of input subsidy programs. Greater attention to program design
and implementation details to reduce problems of crowding out and diversion can substantially raise the returns to such programs.
JEL classications: Q12, Q13, Q18
Keywords: Input subsidies; Fertilizer; Crowding out; sub-Saharan Africa
1. Introduction
Fertilizer subsidy programs typically have multiple objec-
tives, including the raising of crop productivity, food supplies,
rural incomes, and food security. The degree to which an in-
put subsidy program achieves these objectives depends on the
extent to which it raises total fertilizer use.
This takes us quickly to the issue of crowding in/out.
Concerns about crowding outthe displacement of commer-
cial activity in the presence of government programshave
been examined in many economic contexts (e.g., Cutler and
Gruber, 1996; Easterly, 2006; Kronick and Gilmer, 2002;
Spencer and Yohe, 1970) but only quite recently in the con-
text of input subsidy programs. Because sub-Saharan African
Corresponding author. Tel.: +1-517-432-9802. E-mail address:

Jayne@msu.edu (T.S. Jayne).
Data Appendix Available Online
A data appendix to replicate main results is available in the online version of
this article.
governments are spending at least US$1.0 billion each year on
fertilizer subsidy programs (Jayne and Rashid, 2013), even rel-
atively modest reductions in crowding out could massively pro-
mote the achievement of important national policy objectives.
There are offsetting a priori reasons why a ton of fertil-
izer distributed through a subsidy program may result in either
more or less than one ton being applied to farmers elds. In
areas where only a small proportion of farmers use fertilizer,
where market and agronomic conditions would justify appli-
cation rates higher than those observed, and/or where rural
incomes are so low as to depress effective demand for com-
mercial inputs, then a subsidy program might raise fertilizer
use by at least the quantity distributed through the program. In
this situation a subsidy program could potentially generate new
investment in input retailing or raise farmer incomes in ways
that crowd in additional purchases of commercial fertilizer,
such that total fertilizer use increases beyond the quantities
distributed through the subsidy program.
By contrast, if a ton of subsidized fertilizer is distributed
to farmers who already purchase commercial fertilizer at near
C 2013 International Association of Agricultural Economists DOI: 10.1111/agec.12082
688 T.S. Jayne et al./ Agricultural Economics 44 (2013) 687703
prot-maximizing application rates, then the program may
induce these farmers to reduce their purchases of commer-
cial fertilizer, thereby adding less than one ton to total fer-
tilizer use. Because the underlying market conditions in which
fertilizer subsidy programs are implemented in sub-Saharan
Africa (SSA) vary considerably, and because implementation
modalities also tend to vary, the degree of crowding in/out is
ultimately an empirical question that inuences the overall ben-
ets and costs of such programs. Understanding the degree to
which fertilizer subsidy programs in SSA have affected total
fertilizer use is crucial for achieving greater consensus on the
impacts of such programs. This study synthesizes the evidence
to date on the topic and derives program benetcost (BC)
estimates after accounting for crowding out.
Despite the longstanding post-independence history of in-
put subsidy programs in Africa, until recently there has been a
dearth of quantitative estimates of how they affect total fertil-
izer use. Using a cross-section of Malawian farm households,
Nyirongo (2005) compared commercial fertilizer purchases
between recipients of the governments Targeted Inputs Pro-
gramme (TIPS) and nonrecipients. Even though nonrecipients
were found to be 20% more likely to purchase commercially
distributed inputs than recipients, Nyirongo concludes that the
TIPS program had little effect on commercial fertilizer demand
behavior.
1
The rst estimates of crowding out using large-scale
household panel survey data capable of controlling for unob-
served heterogeneity was by Xu et al. (2009), who found that
fertilizer subsidies distributed to regions of Zambia where pri-
vate input distribution systems were weak or nonexistent had
no impact on commercial fertilizer purchases, whereas in ar-
eas where private input distribution systems were active, the
distribution of subsidized fertilizer almost totally crowded out
commercial purchases, resulting in no increase in total fertilizer
used by farmers. More recent studies using large-scale panel
survey data in Malawi, Zambia, and Kenya were conducted
by Ricker-Gilbert et al. (2011), Mason and Jayne (2013), and
Mather and Jayne (2013), which both controlled for unobserved
heterogeneity and treated the allocation of subsidized fertilizer
as endogenous to commercial fertilizer demand. These studies
were conducted in a coordinated way using relatively similar
methods and form the basis for the review in this article.
2
Other
recent studies drawn upon for this study include two fromNige-
ria (Liverpool-Tasie, 2012; Takashima et al., 2012).
To our knowledge, this is the rst study to synthesize the re-
search evidence on how the new generation of so-called smart
1
The TIPS program in the early 2000s was much smaller than Malawis
current subsidy program, the Farm Inputs Support Program (FISP). The TIPS
gave recipients 10 kg of fertilizer, compared to 50100 kg for most recipients
of FISP, so the smaller size of the TIPS may have minimized the magnitude of
crowding out.
2
Another important set of studies to consider are those conducted by Andrew
Dorward and associates on the Malawi fertilizer subsidy program(e.g., Dorward
et al., 2008; Dorward and Chirwa, 2011). Their estimates of crowding out draw
largely fromthe analysis of Ricker-Gilbert et al. (2011), who were also involved
in the initial reports produced by Dorward and associates, and hence we do not
explicitly review their reports in this analysis.
subsidy programs implemented in SSA since the early 2000s
has affected total fertilizer use. The study is also novel in that
it demonstrates how accounting for the diversion of program
fertilizer (following Mason and Jayne 2013) affects the BCesti-
mates of the programs, which are presented for Malawi, Kenya,
and Zambia. A major conclusion of the study is that failure
to account for diversion of program fertilizer into estimates of
crowding out may result in a substantial overestimation of the
increase in total fertilizer resulting from a subsidy program and
consequently overestimate the programs benets relative to its
costs. By providing a synthesis of the new literature on this
topic, this review aims to reconcile conicting understandings
of how and why targeted input subsidy programs may lead to
different crowding out/in outcomes and contributes to a general
understanding of the importance of addressing crowding out
problems in input subsidy program design and implementation.
2. Description of input subsidy programs in Malawi,
Zambia, and Kenya
The Abuja Declaration in 2006 was a watershed moment in
the agricultural policy environment in SSA. Many African gov-
ernments resolved at that time to revive input subsidy programs
as the vehicle for greatly raising fertilizer use and agricultural
productivity in the region. Subsequent surges in world food and
fertilizer prices in 2007 and 2008 created a heightened sense of
urgency in meeting these important goals.
In contrast to the government-led input subsidy programs
of the pre-structural adjustment era in SSA and Asia, which
typically took the form of monopolistic state control of input
distribution and a pan-territorial subsidized input price for all
buyers, the recent wave of input subsidy programs was designed
to work through, and support the development of, private sec-
tor input distribution systems. By utilizing the private sector in
program implementation, so-called smart subsidy programs
were conceived to overcome well-known inefciencies of the
earlier state-led approaches, including the problem of crowd-
ing out of commercial input delivery systems.
3
Although not
adopted by all programs, the feature of targeting vouchers to
smallholder farmers according to specic characteristics and al-
lowing themto redeemthe vouchers for fertilizer at the stores of
private retailers was one of the most important smart features
of the new programs.
Because the implementation modalities of the targeted fer-
tilizer subsidy programs are reviewed in detail in companion
country-specic articles in this issue, we do not review them
here.
4
For the cases of Malawi, Zambia, and Kenya, which are
the focus of this study, the subsidy programs included the distri-
bution of improved maize seed and were primarily focused on
increasing maize production. In Malawi, and in Zambia since
3
The criteria for smart subsidies were rst laid out in Morris et al. (2007)
and later in the World Bank (2007). These criteria are summarized in Jayne and
Rashid (2013).
4
See also Dorward and Chirwa (2011) for the case of Malawi and Mather
and Jayne (forthcoming) for Kenya.
T.S. Jayne et al./ Agricultural Economics 44 (2013) 687703 689
2010/2011, the programs also included inputs for other crops.
However, in all three case study countries, fertilizer constituted
the vast majority of the input costs of the programs. The re-
mainder of this section highlights some common features about
these targeted subsidy programs in relation to the problem of
crowding out of commercial fertilizer.
First, major differences have surfaced in the three countries
between smart subsidy concepts and actual subsidy programim-
plementation. Most important for the present study on crowding
in/out is that the private retailers, who were supposed to have
found their operations expanded through their involvement in
the distribution of fertilizer, were in most years excluded from
distributing fertilizer in Malawi, and were never involved in
Zambias program.
5
In these two countries, farmers could ob-
tain fertilizer only from government-arranged depots. Only in
Kenya have private retailers consistently been involved in its
fertilizer distribution program.
Second, it is important to distinguish between volumes sold
by private traders and volumes sold through commercial chan-
nels. Some private traders have experienced a marked decline
in the quantity of fertilizer sold to farmers on commercial terms
even while their overall sales have increased after being selected
to distribute subsidized fertilizer on behalf of government. This
can lead to an atrophy of commercial distribution operations as
private traders gear up their activities to meet the needs of the
subsidy program. The larger set of traders not selected to par-
ticipate in the governments subsidy program generally suffer
a loss in sales as they are competing against heavily subsidized
fertilizer being distributed by rms participating in the govern-
ment program(Dorward et al., 2008; Takeshima et al., 2012; Xu
et al., 2009), leading to rms exit from fertilizer distribution
and increased concentration of the sector. Anecdotal reports in-
dicate that some rms awarded government supply tenders have
taken extreme measures to ensure that they are able to continue
in this role.
A third general issue concerns targeting. The generalized
smart subsidy guidelines specied in Morris et al. (2007) and
Minde et al. (2008) were to target households who would not be
able to afford commercial fertilizer. This guideline has proven
difcult to implement in practice. In each of the three countries,
targeting guidelines were vague and sometimes contradictory
(Dorward et al., 2008; Mather and Jayne, 2013; World Bank
2010). Zambias program in particular subordinated the target-
ing of households with little effective demand for fertilizer to
the goal of raising food supplies, based on the assumption that
larger farmers were more efcient users of fertilizer (Mason
et al., 2013). As will be shown, this exacerbated crowding out
and adversely affected the extent to which the subsidy programs
were effective in raising total fertilizer use, a conclusion also
reached by Banful et al. (2010) and Takeshima et al. (2012)
5
In Malawi, certain input wholesalers were allowed to sell fertilizer directly
to farmers during the 2006/2007 and 2007/2008 seasons, while retail shops were
prohibited from doing so in all years of the program. Since 2007/2008, farmers
have been able to redeem their subsidy vouchers in exchange for fertilizer only
from government and/or national cooperative depots (Dorward and Chirwa
2011).
based on their study of Nigerias fertilizer subsidy programs
prior to 2010. By contrast, Liverpool-Tasie (2012) found ev-
idence of crowding-in of commercial fertilizer demand in a
pilot subsidy scheme in one district of Nigeria, the success of
which appears to be related to the fact that fertilizer vouchers
were mainly targeted to areas where private commercial mar-
kets were relatively weak and to households that were relatively
poor. These studies linking contrasting ndings to variations in
program design and implementation can provide useful guid-
ance about how to raise the benets of fertilizer voucher pro-
grams through modications to programdesign and/or targeting
criteria.
A fourth issueand one of the main contributions of this
studyconcerns the measurement of crowding out under con-
ditions where some program fertilizer is diverted by program
authorities before being distributed to intended farmer recipi-
ents. Mason and Jayne (2013) rst explored this issue for the
case of Zambia. Illegal diversion of program fertilizer is com-
monly identied as a ubiquitous feature of subsidy programs
in developing countries. By diversion, we are referring to fer-
tilizer procured by the government for its subsidy program,
illegally diverted at the wholesale level, and thus not forwarded
through the normal government subsidy (GS) program distri-
bution channels. That is, by diversion we are not referring to
the leakage of vouchers at the village levelthat is, where
a targeted voucher recipient decides to sell his/her voucher or
subsidized fertilizer to another farmer (or a trader) rather than
apply it on his/her elds. However, the magnitude of diversion
is difcult to measure, hence it has typically not been con-
sidered in analyses of subsidy program impacts. While most
of the diverted program fertilizer may ultimately be resold to
and used by farmers (except for quantities that are smuggled
across borders or spoiled), farmers may believe that they are
purchasing commercial fertilizer and refer to it as such when
responding to surveys when in fact they purchased government
fertilizer intended for distribution under the subsidy program.
This means that the quantity of fertilizer procured by fertilizer
wholesalers and retailers for commercial distribution is actually
less than the total amount of fertilizer purchased by farmers
through commercial channels according to farm survey data.
Mason and Jayne (2013) compute the magnitude of diversion
fromZambias Fertilizer Support Programme by comparing the
quantities of program fertilizer specied in ofcial government
documents against the receipts of subsidized fertilizer by farm-
ers in nationally representative Crop Forecast Surveys.
6
For the
annual surveys conducted between 2002/2003 and 2011/2012,
the weighted quantity of Farmer Support Programme fertilizer
received by farmers averaged only 62% of the quantities dis-
tributed under the program according to the Ministry of Agri-
culture and Livestock, implying that 38% was diverted. The
share of program fertilizer that was diverted ranged from a low
of 13% in 2007/2008 to a high of 63% in 2004/2005. Following
6
The Government of Zambias Crop Forecast Survey is considered statisti-
cally representative at the district level in Zambia and is used to produce the
countrys ofcial annual crop production estimates.
the same approach in Malawi, Lunduka et al. (2013) used the
nationally representative Integrated Household Survey III to es-
timate the total quantity of subsidized fertilizer that households
received through the subsidy program in 2009/2010, and con-
clude that between 25% and 42% of the fertilizer imported for
distribution through the subsidy program was illicitly diverted
to middlemen who subsequently resold the fertilizer to farmers.
Liverpool and Takeshima (2013) conclude that more than 50%
of the quantity of fertilizer distributed through Nigerias sub-
sidy program in the late 2000s was likely to have been diverted
by authorities. As will be shown later, the consideration of pro-
gram diversion can make an enormous difference in estimating
the contribution of fertilizer subsidy programs to total fertilizer
use and program benets relative to their costs.
3. Conceptual modeling of crowding out after accounting
for program diversion
7
The main studies on this topic starting with Xu et al. (2009)
dene crowding in/out as the change in commercial fertilizer
purchases (comm) given a one-unit increase in government-
subsidized fertilizer received by a household (govt). Because
total fertilizer use (total) is the sum of fertilizer from the two
sources, then the change in total fertilizer use is one plus the
crowding in/out estimate, that is:
t ot al = govt +comm, (1)
t ot al
govt
=
govt
govt
+
comm
govt
= 1 +
comm
govt
. (2)
If there is diversion of fertilizer intended for the GS program
and it is resold through commercial retailers at prices at or
near market levels (making it indistinguishable for farmers and
researchers from other fertilizer sold by commercial retailers),
then some of the commercial fertilizer is actually diverted
government fertilizer (leaked). In equation form, this is:
govt = nonleaked +leaked, (3)
and
comm = allcommleaked, (4)
where nonleaked is government fertilizer that stays in the gov-
ernment channel and allcomm is all fertilizer acquired by end
users through commercial channels. Plugging Eqs. (3) and (4)
into (1) and taking the derivative with respect to govt gives:
t ot al
govt
=
(govt +allcommleaked)
govt
=1 +
allcomm
govt
leaked
govt
. (5)
7
This section draws on Mason and Jayne (2013).
In Eq. (5), allcomm and govt are observable in survey data
and hence
allcomm
govt
(the household-level change in commercial
purchases given a change in subsidized fertilizer receipts, i.e.,
household-level crowding in/out) can be econometrically es-
timated via a factor demand equation for allcomm. However,
to go from this estimate of crowding in/out to the change in
national total fertilizer use given a change in subsidized fer-
tilizer (
t ot al
govt
), the diversion effect (
leaked
govt
) also needs to be
accounted for, reecting the fact that some of farmers com-
mercial fertilizer purchases were not supplied through com-
mercial input distribution systems but were rather fertilizer di-
verted from the GS program and then resold to traders and
ultimately to farmers.
8
Failure to account for diversion of pro-
gram fertilizer results in upwardly biased estimates of the con-
tribution of subsidized fertilizer to total national fertilizer use.
Farmers purchases of diverted program fertilizer are gener-
ally not specied as such in survey data, but as discussed in
Section 2, the magnitude of diversion,
leaked
govt
, can be estimated
as 1 y/z, where y is the national quantity of fertilizer received
by farmers through the subsidy programaccording to nationally
representative survey data with appropriate weighting factors,
and z is the national quantity of fertilizer distributed through
the subsidy program according to ofcial government gures.
Based on the magnitude of this term from the several stud-
ies reviewed in Section 2, we use a conservative estimate of
33%. We report the results of sensitivity analysis to provide an
impression of how sensitive program benet/cost ratios are to
alternative assumptions about the magnitude of diversion.
4. Estimation approach
The basic approach taken in the Malawi (Ricker-Gilbert
et al., 2011), Kenya (Mather and Jayne, 2013), and Zam-
bia (Mason and Jayne, 2013; Xu et al., 2009) studies was
to estimate a household-level factor demand model to ob-
tain estimates of
allcomm
govt
. See the individual studies for
details. The dependent variable in these factor demand mod-
els is allcomm (the kilograms of fertilizer purchased by the
farmer from commercial retailers in a given year). The main
explanatory variable of interest is govt (the kilograms of subsi-
dized fertilizer acquired by the household). The models control
for other exogenous factors including the expected prices of
maize and other crops (typically nave expectations); the market
prices of fertilizer and other inputs, including agricultural labor;
agro-ecological conditions; and household characteristics and
quasi-xed factors of production such as landholding size,
farm equipment, household size, age, gender and education
of the household head, distances to roads, towns, and /or
markets, etc.
8
Anecdotal reports from Zambia and Malawi indicate that those doing the
diverting may include government and nongovernment local authorities, and
that diverted fertilizer tends to be recycled through local retail markets, private
agro-dealer stores, and even directly by government extension agents.
Our a priori hypothesis is that the degree of crowding in/out
may vary in magnitude and potentially in sign between areas
where commercial fertilizer demand has already been estab-
lished and where it has not. To allow for these differential
effects, separate demand models are estimated for areas of rel-
atively high versus low commercial demand. Doing so was
supported by Chow Test results in all three countries. The es-
timates from the high and low commercial demand areas are
then weighted (by the number of households in each area) and
combined to obtain a national estimate of crowding in/out.
Corner-solution dependent variable and choice of the double
hurdle (DH) model
The demand models are estimated using panel data from
each country. Because a large proportion of households buy
no commercial fertilizer (i.e., allcomm is zero for many house-
holds), the equations are estimated via a truncated normal hur-
dle model, also known as a DH model (Cragg 1971). Pooling
the data across all survey years in each country, only 16% of
Zambian smallholders purchased commercial fertilizer versus
35% for Malawi, and 79% for Kenya. A DH model is more
appropriate for corner-solution variables like allcomm than is a
selection model because inorganic fertilizer has been available
for decades in Kenya, Malawi, and Zambia, so it is reasonable to
assume that the vast majority of farmers are aware of it. However
due to market and agronomic conditions many farmers choose
not to use fertilizer. Therefore the zeros in the data reect the
farmers decision not to buy commercial fertilizer rather than
representing a missing value. All three studies conducted a like-
lihood ratio test to test the DHmodel against a Tobit alternative,
which is also appropriate for modeling corner-solution depen-
dent variables but is more restrictive than the DH. Test results
suggest that the DH model is favored in all cases.
Controlling for unobserved heterogeneity
In models estimated with panel data, a key concern is time-
invariant household-level unobserved heterogeneity that may be
correlated with the observed covariates. Failure to control for
it leads to biased and inconsistent estimates of crowding in/out
and other factors affecting commercial fertilizer demand. Fixed-
effects approaches to dealing with unobserved heterogeneity
lead to the so-called incidental parameters problem in nonlin-
ear models like the DH so should not be used (Wooldridge
2002). Fortunately, another approach, known as the correlated
random effects (CRE) approach or the MundlakChamberlain
device following Mundlak (1978) and Chamberlain (1984)
works well with nonlinear models. The CRE approach is imple-
mented by including as additional covariates in the DH model
the household-level time averages of the observed explanatory
variables (for more on the CRE framework, see Wooldridge
2002).
Controlling for the potential endogeneity of subsidized
fertilizer to commercial fertilizer demand
Even after controlling for time-invariant unobserved hetero-
geneity, we still might be concerned that subsidized fertilizer
(govt) is correlated with time-varying shocks affecting commer-
cial fertilizer demand (allcomm). Such endogeneity would also
lead to biased and inconsistent estimates of crowding in/out
and the other parameters in our DH model. Endogeneity is of
particular concern in our studies because the quantity of subsi-
dized fertilizer allocated to a given household is not random but
rather is affected by targeting criteria as well as government and
local leaders interpretation and implementation thereof. Our
Malawi, Zambia, and Kenya studies all use the control function
(CF) method to test and control for the potential endogeneity of
subsidized fertilizer.
9
The CF approach as implemented in the
Kenya, Malawi, and Zambia case studies entails rst estimating
a reduced form CRE Tobit model of govt on all the exogenous
explanatory variables fromthe demand model. The results from
these reduced form CRE Tobits also shed light on the factors
affecting targeting of subsidized fertilizer. The residuals from
the reduced form Tobits are then included as additional regres-
sors in the main DH demand model. A t-test of those residuals
tests the null hypothesis that subsidized fertilizer is exogenous
against the alternative that it is endogenous.
These reduced form CRE Tobits also need to include an
instrumental variable (IV) that is correlated with household re-
ceipt of subsidized fertilizer but that is uncorrelated with the
time-varying, household-level shocks affecting allcomm. The
studies used several sets of instruments. Following previous
studies (Banful 2011), we hypothesize that the distribution of
government-funded input subsidies may be driven in part by
political economy factors. We therefore use constituency-level
data on electoral results (fromthe most recent presidential elec-
tion) to construct various IVs.
For the Kenya models, the constituency-level electoral IVs
are electoral threat and the proportion of votes earned by
the runner-up in the most recent presidential election. Elec-
toral threat is dened as the ratio of the proportion of votes
for the runner-up over the proportion of votes for the presi-
dential winner (Chang 2005). The Kenya model also uses as
IVs the percentage of the population in each district belong-
ing to particular ethnic groups. The Zambia studies considered
three candidate IVs for subsidized fertilizer: (i) a dummy vari-
able equal to one if the households constituency was won by
the ruling party in the last presidential election; (ii) the ab-
solute value of the percentage point spread between the rul-
ing party and the lead opposition party in the constituency in
the last presidential election (to measure the closeness of the
race); and (iii) the interaction of (i) and (ii). The IV used in the
Malawi analysis was the number of years that the household has
lived in the village, a social capital indicator hypothesized to be
9
For further details on the CF approach, see Rivers and Vuong (1988), Smith
and Blundell (1986), Vella (1993), and Lewbel (2004).
correlated with receipt of subsidized fertilizer but not correlated
in any obvious way with commercial fertilizer demand.
5. Data
The household panel surveys used in each country recorded
information on household demographics, farm/household land-
holding and assets, and recall information on a range of eco-
nomic activities during that agricultural year, including land
use, input use and access to farm services, agricultural and live-
stock production, and nonfarm income activities. Regarding
fertilizer use in particular, the survey instruments asked house-
holds about the quantity and source of commercial purchases,
fertilizer acquired from barter, gifts, and other sources, and the
prices paid. The surveys also asked farmers about the quanti-
ties of fertilizer and other inputs acquired through government
programs, where they acquired these inputs, and prices paid.
The following briey describes other salient features of the
three country data sets. The studies use either balanced (Kenya)
or unbalanced (Malawi and Zambia) panels. Given attrition
between survey rounds, attrition bias is a potential problem.
However, regression-based tests for attrition bias as described
in Wooldridge (2002) nd little evidence of attrition bias or
show that attrition has little impact on coefcient estimates in
all cases.
Kenya
The data used by Mather and Jayne (2013) are primarily
drawn from a nationwide rural household survey rst imple-
mented in 1997 by The Tegemeo Institute of Egerton Univer-
sity. This survey covered the main and short harvest periods of
the agricultural years of 1995/1996 and 1996/1997. Subsequent
panel waves were conducted in 2000, 2004, 2007, and 2010.
The sampling frame for the 1997 survey was prepared in con-
sultation with the Central Bureau of Statistics. Households and
divisions were selected randomly within purposively chosen
districts within the countrys eight agriculturally oriented zones;
further sampling details are provided in Argwings-Kodhek
et al. (1998). Atotal of 1,514 sedentary farming households cul-
tivating less than 20 hectares were surveyed in 1997, drawn from
106 villages in 24 districts. The 2009/2010 sample contains
1,257 households of the 1,514 sedentary households sampled, a
re-interviewrate of 83%. For this study, we also drop 111 house-
holds from two regions with marginal potential for maize pro-
duction and inorganic fertilizer use in which the government-led
input subsidy programs were not active. We also drop house-
holds which were not observed in each of the ve panel years,
leaving a sample of n = 1,065 households each year.
Malawi
Data used in this analysis update the data used in Ricker-
Gilbert et al. (2011). Data used in the earlier study come from
two nationally representative, stratied random samples col-
lected by the Government of Malawis National Statistical
Ofce. The rst wave of panel data comes from the nation-
ally representative Integrated Household Survey-II (IHHS2),
covering two cropping seasons; 2002/2003 and 2003/2004. A
stratied random sample of 11,280 households was collected
from IHHS2. The second panel wave comes from the 2007
Agricultural Inputs Support Survey (AISS), conducted after the
2006/2007 growing season. The budget for AISS1 was much
lower than for IHHS2, so only certain districts of the coun-
try were selected for resampling, however the sample is still
considered nationally representative. In total 3,287 households
were surveyed in AISS1. The third wave of data that is new
for this analysis, called the AISS2 survey, was collected in the
2008/2009 growing season, and built on earlier survey rounds
in Malawi. In total we use an unbalanced panel of 7,311 house-
holds where 1,593 were surveyed in the rst two rounds and
1,375 households were surveyed in all three rounds.
Zambia
The Zambia study (Mason and Jayne, 2013) used data
from a three-wave, nationally representative panel survey of
smallholder households (the Supplemental Survey to the Post-
Harvest Survey). These surveys were conducted by the Min-
istry of Agriculture and Cooperatives in mid 2001, 2004, and
2008 to capture information on the 1999/2000, 2002/2003, and
2006/2007 agricultural years and subsequent crop marketing
years. A total of 6,922 households were interviewed in 2001,
5,358 (77.4%) of which were re-interviewed for in 2004. Of
the households interviewed in 2004, 4,286 (80.0%) were re-
interviewed for the 2008 Supplemental Surveys. The analysis
used the unbalanced panel of households fromthese three years.
Household characteristics based on the Kenya, Malawi, and
Zambia survey data
The averages of the variables used in the analysis are pre-
sented in Table 1, by survey wave. Income denitions are con-
sistently dened for each country across years, but differ across
countries. During the rst survey round in Malawi, there was
a relatively small fertilizer subsidy program in operation, and
commercial purchases accounted for about 94% of farmers to-
tal fertilizer use. In the rst survey wave of 2002/2003/2004,
35% of small-scale farmers purchased fertilizer from private
retailers. This proportion fell to 12% in 2006/2007, the rst
survey period after the initiation of the Agricultural Inputs Sup-
port Programme. The proportion of farmers receiving subsi-
dized fertilizer rose from 35% in the rst wave to 59% in the
second wave, to 71% in 2008/2009. The proportion of house-
holds purchasing commercial fertilizer recovered to 34% in
2008/2009, but the median quantity purchased commercially
fell to 50 kg per household in that year, down from 100 kg
in the two previous survey rounds. The proportion of total
Table 1
Household characteristics from the farm surveys
Malawi Zambia Kenya
Smallholder household characteristic 2002/2003
*****
2006/ 2008/ 1999/ 2002/ 2006/ 2006/ 2009/
2007 2009 2000 2003 2007 2007 2010
General
Total gross HH income per adult equivalent ($US real), mean
*
104 58 121 244 177 199 1016 984
Total gross HH income per Adult Equivalent ($US real), median 56 27 46 131 92 107 635 612
HH total landholding (ha) 1.08 1.04 1.07 2.82 2.30 2.71 2.15 1.89
% of total crop production value marketed (%), mean 13.7 8.0 7.5 13.4 26.2 24.8 46.1 41.9
% of total crop production value marketed (%), median 0 0 0 5.9 14.3 16.5 47.1 42.8
Market access
**
Distance to nearest paved road (km) 16.9 16.8 17.1 26.3 7.4 6.6
Distance to nearest feeder/motorable road (km) 3.3 0.5 0.4
Distance from village to nearest fertilizer retailer (km) 19.6 9.9 11.4 2.9 3.5
Input use
% HHs that purchased/acquired hybrid
***
maize seed (%) 52 71 11 28 24 72 82
% HHs acquiring no fertilizer (%)
****
38 34 18 79 71 71 21 13
% HHs purchasing commercial fertilizer (%)
****
35 12 34 16 17 20 79 79
% HHs receiving subsidized fertilizer (%)
****
35 59 71 7 14 14 0 9
Quantity of commercial fertilizer purchased, among users (kg), median 100 100 50 150 150 200 154 139
Quantity of subsidized received, among recipients (kg), median 10 100 50 200 100 200 0 100
% households that received credit for farm inputs (%) 5 7 11 13 13 12 52 58
Notes:
*
Income values are in $US in the year of the most recent survey from each country.
**
Distance to nearest road measures in Zambia are from 2000.
***
Includes both hybrids and improved OPVs for Malawi.
****
% acquiring commercial fertilizer, subsidized fertilizer, and no fertilizer do not add up to 100% because commercial category includes some who received
subsidized fertilizer, and vice versa.
*****
The Integrated Household Survey II for Malawi covered both the 2002/2003 and 2003/2004 crop seasons.
fertilizer use accounted for by commercial purchases fell from
94% in 2002/2003/2004 to 26% by 2006/2007. Total fertilizer
use rose by 11% for households in the balanced panel between
the rst and second survey years.
A small proportion of Zambias smallholder farmers pur-
chased commercial fertilizer in the early 2000s, and this has
risen slowly over the course of the 2000s. The scale of Zam-
bias input subsidy programhas been smaller than Malawis and
the proportion of farmers receiving subsidized fertilizer through
the program rose from 7% in 1999/2000 to 14% in 2002/2003
and 2006/2007.
A much higher proportion of smallholder farmers purchase
commercial fertilizer in Kenya than in Malawi or Zambia. This
proportion stood at 79% in 2006/2007 before the National Ac-
celerated Agricultural Input Access Programme (NAAIAP) be-
gan and remained at 79% in 2009/2010 even after several years
of NAAIAP implementation and the scaling up of a concurrent
government fertilizer subsidy program implemented through
the governments grain parastatal, the National Cereals and
Produce Board (NCPB). However, the scale of the combined
NAAIAP and NCPB programs has been relatively small, with
only 9% of sampled farmers having received subsidized fertil-
izer through either of these programs in 2009/2010.
One observation that does not come out in the full sample
data reported in Table 1 is the considerable spatial variation
in commercial demand for fertilizer. In each country, there are
areas where a relatively high proportion of households had
purchased commercial fertilizer prior to the subsidy program,
whereas many other areas exhibit very low commercial fertil-
izer purchases throughout the panel periods, owing mainly to
differences in soil, rainfall, and market conditions.
6. Main ndings
As a prelude to the econometric results, we rst present the
bivariate relationship between changes over time in commer-
cial fertilizer purchases and receipt of subsidized fertilizer by
recipient households for one of the case studies, Malawi. Each
point in Fig. 1 represents a farmhousehold surveyed in two suc-
cessive survey years. The slope of the line measures the change
in a households commercial purchases of fertilizer per addi-
tional unit of fertilizer acquired from the government.
10
Dots
and the solid regression line represent the relationship in areas
of low initial commercial fertilizer demand before the subsidy
programs were scaled up, while Xs and the dotted regres-
sion line represent the relationship in areas of relatively high
initial demand. While recipient farmers were supposed to have
received only 100 kg of subsidized fertilizer, the data in Fig. 1
indicate that many households received more than 100 kg.
The data in Fig. 1 reveal that, at least in Malawis case,
the relationship between changes in acquisition of subsidized
10
The slope is a locally weighted bivariate regression line (Lowess).
-
2
0
0
0
-
1
5
0
0
-
1
0
0
0
-
5
0
0
0
5
0
0
1
0
0
0
c
h
a
n
g
e

i
n

q
u
a
n
t
i
t
y

d
e
m
a
n
d
e
d

o
f

c
o
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m
e
r
c
i
a
l

f
e
r
t
i
l
i
z
e
r

(
k
g
)
-500 -300 -100 100 300 500 700 900
change in quantity of subsidized fertilizer received (kg)
Notes: Lines computed by Statas lowess nonparametric command with
bandwidth 0.8. Dots and solid lowess regression line represent the change
in household commercial fertilizer use in communities of relatively low
private sector fertilizer retailing activity; Xs and dotted lowess regression
line represent the change in household commercial fertilizer use in areas of
relatively high private sector activity.
Fig. 1. Change in household commercial fertilizer quantity demanded given
the change in household subsidized fertilizer quantity received, 2002/2003,
2003/2004, and 2006/2007, by low and high private sector activity (PSA)
zones, Malawi.
fertilizer and changes in commercial fertilizer purchases in ar-
eas of high initial commercial demand is clearly negative, while
in areas of low initial demand, the relationship is basically at.
This conforms to our a priori expectation that some crowd-
ing out of commercial fertilizer purchases would be expected
in areas where private retailers are active and where a rela-
tively high proportion of farmers are purchasing fertilizer on
commercial terms. The slope of the line for the areas of high
initial demand is around 0.85, indicating that an increase in 1
kg of subsidized fertilizer received by a household results in a
0.85 kg reduction in commercial fertilizer purchases, and a 0.15
increase in total fertilizer use. However, these bivariate results
do not account for other factors or the many estimation chal-
lenges mentioned in Section 4.
Government targeting behavior
As indicated in Section 4, Tobit models were estimated to
identify factors associated with the quantity of subsidized fertil-
izer received by households. This section reports the main statis-
tically signicant ndings of these models for Kenya, Malawi,
and Zambia as summarized in Table 2.
In Malawi, villages with a farmer credit organization re-
ceive signicantly less subsidized fertilizer than other villages.
Households further from a road receive signicantly more sub-
sidized fertilizer. These results indicate that the government is
distributing subsidized fertilizer to farmers in areas with weak
access to credit and infrastructure. Household assets and land-
holding size are both positively correlated with the quantity of
subsidized fertilizer received. These coefcients are signicant
at the 4% and 1% levels, respectively.
In all three countries, households with larger landholdings
were more likely to acquire subsidized fertilizer. In Malawi, the
targeting of households with larger farms and asset holdings has
lessened between the last two surveys, indicating movement to
somewhat more progressive distributional effects. In Malawi,
female-headed households were likely to receive 12 kg less
subsidized fertilizer than male-headed households in the rst or
second wave, however there is some evidence that targeting of
female-headed households may have improved in recent years
(Lunduka et al., 2013). No such nding of targeting in favor of
male-headed households was found in Kenya or Zambia.
It is interesting to understand how input subsidies are tar-
geted in relation to market access conditions, since one of the
motivations for subsidy programs is the perceived underdevel-
opment of private sector input retail networks in remote areas.
In Kenya and Malawi, households further fromthe main district
markets and motorable roads did tend to acquire more subsi-
dized fertilizer than households with better access to markets.
By contrast, in Zambia, farmers further from the main towns
and roads tended to get less than households closer to markets
and roads.
Political factors loomed large in subsidy targeting in all three
countries. In Malawi and Zambia, local administrative units
where the ruling party won the prior presidential election re-
ceived more fertilizer. In Zambias case, the greater the ruling
partys margin of victory, the more was distributed to recipient
households. In Kenya, prior election results also inuenced the
quantity of subsidized fertilizer distributed to the constituency,
but in this case, more was given in 2009/2010 to households in
constituencies with a larger proportional turnout for the chal-
lenger in the 2007 presidential election. The statistical signi-
cance and importance of these political variables, and their lack
of correlation with commercial fertilizer demand, demonstrate
the appropriateness of the variables as IVs to control for the
endogeneity of subsidized fertilizer in the commercial fertilizer
demand models.
Evidence on crowding in/out without accounting for diversion
The main econometric results on crowding out are summa-
rized in Table 3. Unconditional average partial effects (APEs)
show the estimated kilogram change in a households demand
for commercial fertilizer based on a 1 kg increase in the quantity
of subsidized fertilizer received by that household.
11
These re-
sults assume that there is no diversion of program fertilizer into
11
Unconditional refers to the effect on the average household in the sample,
regardless of whether or not they received subsidized fertilizer. This is in con-
trast to estimates that are conditional on receipt of subsidized fertilizer from
the probit stage of the truncated normal hurdle model. The conditional estimates
of crowding out are much higher (more crowding out) than the unconditional
estimates.
Table 2
Household (HH) and village characteristics of recipients of subsidized fertilizer
HH or village characteristic Malawi Zambia Kenya
HH total landholding HHs with larger landholding and
asset wealth get more; less of an
issue in recent years
HHs with larger landholding get
more
HHs with larger landholding get
more
Gender of HH head Female-headed HHs less likely to
receive subsidized fertilizer
Female-headed HHs equally likely to
Female-headed HHs equally likely to
Market access HHs farther from main district
market get more
HHs farther from main district
market and/or feeder road get less
HHs farther from motorable road get
more
Political economy factors
(electoral results)
Districts where ruling party won last
presidential election get more
Constituencies where ruling party
won last presidential election get
more (and more so the larger the
ruling partys margin of victory)
Constituencies with more electoral
support for challenger in the last
presidential election get more
Table 3
Unconditional average partial effects (APEs) of a 1 kg increase in the quantity of subsidized fertilizer received by a household on the kilograms of commercial
fertilizer purchased, not accounting for program diversion
APE P-value signicance 95% CI
National (full sample)
Malawi 0.180 0.000 *** [0.26 to 0.11]
Zambia 0.134 0.000 *** [0.29 to 0.16]
Kenya 0.431 0.005 *** [0.74 to 0.11]
HHs in low PSA zones
Malawi 0.103 0.000 *** [0.15 to 0.06]
Zambia 0.070 0.000 *** [0.10 to 0.04]
Kenya 0.125 0.079 * [0.26 to 0.02]
HHs in high PSA zones
Malawi 0.265 0.000 *** [0.37 to 0.16]
Zambia 0.228 0.000 *** [0.16 to 0.11]
Kenya 0.534 0.029 ** [1.02 to 0.03]
HHs in bottom 50% of total HH landholding (Kenya, Malawi); HHs with <2 ha cultivated (Zambia)
Malawi 0.127 0.000 *** [0.18 to 0.07]
Zambia 0.110 0.000 *** [0.13 to 0.09]
Kenya 0.235 0.046 * [0.47 to 0.01]
HHs in top 50% of total HH landholding (Kenya, Malawi); HHs with 2 ha cultivated (Zambia)
Malawi 0.251 0.000 *** [0.35 to 0.15]
Zambia 0.210 0.000 *** [0.25 to 0.16]
Kenya 0.647 0.004 *** [1.08 to 0.19]
Notes: PSA = private sector fertilizer retailing activities. In Zambia, high PSA refers to HHs in districts in the top tercile of mean HH commercial fertilizer quantity
used in 1999/2000. In Kenya, high PSA refers to the medium and high potential zones. In Malawi, high PSA refers to the top half of mean community commercial
fertilizer quantity used in 2002/2003 and 2003/2004.
*
Indicates statistical signicance at 1% level.
**
***
Sources: Ricker-Gilbert & Jayne (forthcoming), Mason & Jayne (2013), Mather and Jayne (2013), and authors calculations
commercial distribution channels and hence that households
reporting of commercial purchases in survey data is fully
representing fertilizer distributed through private rms nor-
mal commercial operations. The APEs are negative and highly
signicant in all three countries, indicative of crowding out.
Across the full samples, an additional ton of subsidized fertil-
izer distributed in Malawi, Zambia, and Kenya would crowd out
180 kg, 134 kg, and 431 kg, respectively, of commercial fertil-
izer purchased by farmers. This means that an additional ton of
subsidized fertilizer would add 820 kg, 866 kg, and 569 kg to
total fertilizer use if diversion is not accounted for.
Table 3 results also show that crowding out is higher for
subsidized fertilizer distributed to relatively large farms. In all
three countries, an additional ton of subsidy fertilizer allocated
to farmers in the top half of the farm size distribution leads to
a doubling or more in the magnitude of crowding out (e.g., for
Malawi, 251 kg of commercial sales are displaced as opposed
to 127 kg if the subsidized fertilizer were allocated to farms in
the bottom half of the landholding size distribution).
Estimates of crowding out are also, as expected, highly sen-
sitive to where the fertilizer was distributed. In areas of low
demand for commercial fertilizer, there is virtually no crowd-
ing out. In such areas, there is very little commercial fertilizer
demand that could be crowded out, thus fertilizer subsidies dis-
tributed to such areas clearly make the greatest contribution to
total fertilizer use. For example, one ton (1,000 kg) of additional
subsidized fertilizer crowds out only 103 kg of commercial fer-
tilizer in areas of Malawi where commercial demand was rela-
tively low. By contrast, an additional ton of subsidized fertilizer
distributed in areas of Malawi where commercial demand was
relatively high would crowd out 265 kg of commercial pur-
chases. The most extreme case of crowding out has been in
the high-potential areas of western Kenya, where commercial
fertilizer channels are relatively well developed and where over
90% of sampled households purchased fertilizer in the survey
prior to the subsidy program. In these areas, one additional ton
of subsidized fertilizer was found to crowd out 534 kg of com-
mercial fertilizer and contribute 466 kg to total fertilizer use.
This is quite substantial, especially considering that some of the
commercial purchases made by farmers are actually recycled
subsidy program fertilizer after it was diverted to commercial
channels.
However, this does not necessarily mean than targeting sub-
sidized fertilizer to areas of low commercial fertilizer demand
constitutes best practice. In areas where fertilizer use is
protable on one or more crops, there is likely to be effec-
tive demand that attracts input suppliers to meet this demand.
Conversely, areas of low private sector activity may reect
poor underlying economics of using fertilizer and low crop
response rates (average/marginal products) of fertilizer appli-
cation. Hence, whether or not subsidized fertilizer contributes
more or less crop output if distributed in high- or low-demand
areas depends on two potentially offsetting effects: howthe dis-
tribution of subsidized fertilizer affects total fertilizer use, and
the average/marginal products of fertilizer application in crop
output.
Estimates of crowding out after accounting for diversion
We now estimate the issue of main interest in this article:
how a ton of subsidized fertilizer affects total fertilizer use after
accounting for diversion of program fertilizer. Table 4 presents
these estimates based on three alternative estimates of program
diversion (16.5%, 33%, and 40%). Recall from Section 2 that
analysis to date indicates that between 25%and 40%of program
fertilizer (or more in the case of Nigeria) appears to be diverted
by program authorities prior to reaching farmer beneciaries
(Holden and Lunduka, 2013; Liverpool and Takeshima, 2013;
Lunduka et al., 2013; Mason and Jayne, 2013). Using Eq. (5),
and based on the national (full sample) estimates of crowding
out presented earlier in Table 3 and an estimated diversion rate
of 33%, we nd that an additional ton of fertilizer distributed
through the subsidy program is found to displace 490 kg, 464
kg, and 761 kg of commercial fertilizer purchases in Malawi,
Zambia, and Kenya, and contribute 510 kg, 536 kg, and 239
kg to total fertilizer use (Table 4). Note that if the computation
of crowding out does not account for program diversion, the
estimated contribution of the subsidy programs to total fertilizer
use is overestimated by 67.3% in the case of Malawi, by 61.6%
in the case of Zambia, and by 138.0% in the case of Kenya.
If we reduce our estimate of subsidy program diversion by
half (from 0.33 to 0.165), then the estimated contribution to
total fertilizer use from a one ton increase in the quantity of
subsidized fertilizer is 655 kg in Malawi, 701 kg in Zambia, and
404 kg in Kenya. Afailure to account for even this more modest
level of program diversion would overestimate the contribution
of the subsidy programs to total fertilizer use by 25.2% in the
case of Malawi, by 23.5% in the case of Zambia, and by 40.8%
in the case of Kenya.
Table 4 shows how total additional fertilizer use from a one
unit increase in the quantity of subsidized fertilizer use is af-
fected by alternative assumptions about the magnitude of pro-
gram fertilizer diversion. Analyses of input subsidy programs
that do not account for crowding out of commercial demand
and particularly the diversion componentare likely to seri-
ously overestimate the national food production response to
such programs.
Benet/cost analysis
BC analysis provides a means of assessing the incremental
benets of GS programs (the value of the incremental maize
production and associated welfare effects of price changes) rel-
ative to their costs (the incremental change in government and
farmer expenditures on fertilizer used on maize). The term in-
cremental refers to the difference between total benets and
costs in a with program scenario as compared with those in
a without program scenario.
12
Tables 57 show BC cal-
culations for ve years each for Malawi, Zambia, and Kenya,
respectively. We have put as much description as possible in
each row of the tables to make them relatively self-explanatory.
The sources of all information used in the tables are provided
in the table notes. More detailed information on our methods
and data sources are contained in the Data Appendix.
Our analysis includes the associated welfare effects of
changes in maize prices resulting from the subsidy programs,
but not potential effects of these programs on wage rates. That
said, analysis to date has indicated that the effects of these pro-
grams on food prices and wages are quite small and/or statisti-
cally insignicant from zero, even in countries with relatively
large subsidy programs (Ricker-Gilbert et al., 2013, Ricker-
Gilbert, 2013; Takeshima and Liverpool-Tasie, 2013).
We report both nancial and economic (or social) BC ra-
tios. Differences between the nancial and economic BC ratios
are due to two main differences in the methods used in each
type of analysis. The rst and most signicant difference is that
12
For example, the incremental benet of the GS program in a given year
is the difference between the value of aggregate national maize produced that
year with the GS program (i.e., the with program scenario) and value of
aggregate national maize production that we assume would have obtained in
the absence of the GS program (the without program scenario). Similarly,
the incremental cost of the GS program is the difference between the total
government and farmer expenditure on fertilizer applied to maize in the with
and without program scenarios.
Table 4
Estimated kilogram change in total smallholder fertilizer acquisition given a 1 kg increase in the quantity of subsidy program fertilizer
Contribution of 1 kg additional
subsidized fertilizer distribution to
total fertilizer use (kg)
Adjusted by alternative % overestimation of total fertilizer use
estimates of the % of program if program diversion is not accounted
APE of 1 kg subsidized fertilizer Not accounting fertilizer that is diverted
**
for, based on diversion rate of
on household commercial fertilizer for program
Country use unadjusted for diversion (kg)
*
diversion 16.5% 33% 40% 16.5% 33% 40%
Malawi 0.180 0.820 0.655 0.490 0.420 25.2% 67.3% 95.2%
Zambia 0.134 0.866 0.701 0.536 0.466 23.5% 61.6% 85.9%
Kenya 0.431 0.569 0.404 0.239 0.169 40.8% 138.0% 236.4%
Notes:
*
APEs from Table 3.
**
Mason & Jayne (2013) found a diversion range between 13% and 71% in Zambia between 1999 and 2012, depending on the year, but a multi-year average of
33% for their SS household survey wave years. Holden & Lunduka (2010) estimate a diversion rate of 33% in Malawi and Lunduka et al. (2013) estimate 42% for
2009/2010.
total incremental costs in the nancial analysis includes the to-
tal government expenditure on the GS program plus farmers
expenditure on their incremental fertilizer used on maize. By
contrast, the total incremental costs in the economic analysis do
not include the governments expenditure on subsidized fertil-
izer that displaces commercial fertilizer (that the farmer would
have purchased at the full market rate in the without program
scenario). This is because economic analysis considers this ex-
penditure to be a transfer from the government to farmers and
not an incremental cost. Thus, the incremental cost of govern-
ment expenditure is lower in the economic analyses. Second,
in the nancial analysis, incremental maize output produced on
account of the GS program is valued at its observed retail mar-
ket price, while in the case of the economic analysis, additional
maize output is valued at the import parity retail price of maize,
which is often higher than observed market prices in these coun-
tries, depending on the year. As these countries import all of
their fertilizer, we value fertilizer prices at observed retail prices.
RowJ in Tables 57 shows the contributions to total fertilizer
use resulting from a one ton increase in the quantity distributed
through the subsidy programs, based on the unconditional APEs
for the national (full sample) in Tables 3 and 4, and based on the
assumption that 33% of GS fertilizer is diverted to private sec-
tor channels. Row L shows the tonnage of additional fertilizer
utilized on farmers elds; because of crowding out, this is con-
siderably less than the total quantity of government-subsidized
fertilizer intended for distribution in Row A. Row K reports the
average product of fertilizer on maize output, the main crop on
which the programs in each country were focused. These av-
erage product estimates come from farm survey crop response
functions reported in Ricker-Gilbert and Jayne (forthcoming),
Burke (2012), and Sheahan et al. (2013), which are derived
from the same national panel household survey data we use
to estimate crowding in/out effects of subsidized fertilizer on
household total fertilizer use.
One of the most widely varying parameters affecting the es-
timated benets of subsidy programs is the price of the output.
Maize prices vary widely across years, and hence we report
program benets for a wide range of maize output prices, in-
cluding the annual average retail price in the capital city (Row
N.i), the import parity price in the capital city during the lean
season period (Row N.ii), and nally, the maize price at which
the benets of the subsidy program equal program costs (ac-
cording to both the nancial and economic analyses [Rows N.iii
and N.iv]). The corresponding gross revenue of the additional
maize output valued at these prices is shown in Rows O.i and
ii. Based on these output values and program costs as shown
in Row I, we compute the nancial and economic BC ratios in
rows P and Q.
The salient conclusion from these computations in Table 5 is
that under no scenario in any of the three countries (except in one
year in Malawi, 2008/2009) do the nancial program benets
outweigh the program costs. The mean BC ratios across all
years for Malawi, Zambia, and Kenya are 0.55, 0.52, and 0.52.
A BC ratio of 1.0 would mean that the program benets equal
their costs. The maize price levels required for the program
to break even in nancial analysis (Row N.iii) are in all cases
upward of US$300 per mt in Malawi, US$350 in Zambia, and
US$381 in Kenya, and often far higher than that. These break-
even price levels are generally higher than import costs to the
capital city in each country experienced over the past decade.
The economic BC analysis produces more varied results. BC
ratios are belowone in four of the ve years of subsidy program
implementation in Malawi, with a mean BC ratio of 0.77. In
Zambia, BCratios are belowone in three of the ve years, with a
mean BC ratio of 0.79. In Kenya, BC ratios are greater than one
in three of the ve years, although the mean BC ratio across the
ve years of program implementation is 0.89.
13
The relatively
high maize response rates to fertilizer application in Kenya
13
The ve-year BC ratio reported in Tables 57 are not the average of the
ratios across ve years, but rather the ratio of the aggregate incremental program
benets over ve years to the aggregate incremental costs over ve years. Thus,
the ve-year BC ratio is weighted by relative differences in program size, costs,
and maize prices over time.
Table 5
Benetcost estimates for government fertilizer subsidy programs in Malawi, 2005/2006 to 2009/2010 crop years
2005/2006 2006/2007 2007/2008 2008/2009 2009/2010 Five-year total
Estimated program costs to government and farmers
*
(A) Total quantity of GS fertilizer intended for distribution to
farmers (MT)
**
131,388 179,000 216,553 202,278 160,000 889,219
(B) Total ofcial government costs of GS fertilizer program ($US)
**
$55,710,000 $88,690,000 $114,620,000 $274,920,000 $114,600,000 $648,540,000
(C) Pan-territorial farmer price for GS fertilizer ($US/MT)
**
$147 $132 $126 $110 $67
(D) Total farmer spending on incremental fertilizer use as result of GS
program, accounting for crowding out and diversion (A C J)
$9,463,878 $11,577,720 $13,369,982 $10,902,784 $5,252,800 $50,567,164
Incremental government program costs for economic analysis
(E) Total government costs of GS fertilizer less administration costs $52,924,500 $84,255,500 $108,889,000 $261,174,000 $108,870,000
(F) GS program administration costs of GS fertilizer program (B 5%) $2,785,500 $4,434,500 $5,731,000 $13,746,000 $5,730,000
(G) Total government spending on the portion of GS fertilizer received
by farmers that results in incremental aggregate fertilizer use,
accounting for crowding out and diversion (E J)
$25,933,005 $41,285,195 $53,355,610 $127,975,260 $53,346,300
(H) Total government spending on GS fertilizer that is diverted at
wholesale level to commercial channels (E 33% diversion 90%
wholesale share of retail price)
***
$15,718,577 $25,023,884 $32,340,033 $77,568,678 $32,334,390
(I) Total incremental government costs of GS fertilizer program,
accounting for crowding out and diversion (F + G + H)
$44,437,082 $70,743,579 $91,426,643 $219,289,938 $91,410,690 $517,307,931
Estimated incremental benets
(J) Estimated average partial effect of a 1 kg increase in GS fertilizer
on total household fertilizer use, accounting for crowding out and
diversion (kg)
+
0.490 0.490 0.490 0.490 0.490
(K) Estimated average product of maize (MT) per additional MT
of fertilizer
3.32 3.32 3.32 3.32 3.32

(L) Incremental national fertilizer use as a result of GS fertilizer
program, accounting for crowding out and diversion (A J) (MT)
64,380 87,710 106,111 99,116 78,400
(M) Incremental maize output produced as a result of GS fertilizer
program, accounting for crowding out and diversion (K L) (MT)
213,742 291,197 352,288 329,066 260,288
(N) Maize grain prices ($US/MT)
&
(i) Annual average retail price in Lilongwe (nancial analysis)
#
$158 $212 $399 $292 $198
(ii) Annual average retail IPP in Lilongwe (economic
analysis)
$156 $259 $463 $294 $236

(iii) Price at which GS program breaks even (nancial analysis) $305 $344 $363 $869 $460
(v) Price at which GS program breaks even (economic analysis) $252 $283 $297 $700 $371
(O) Value of incremental maize output (M) at prices in N ($US)
(i) Annual average retail price in Lilongwe (nancial analysis) $34,125,834 $62,382,011 $142,038,992 $97,096,144 $52,078,163 $387,721,144
(ii) Annual average retail IPP in Lilongwe SA/Moz (economic
analysis)
$33,730,579 $76,209,043 $164,699,683 $97,648,716 $61,983,181 $434,271,202
Benetcost ratios of GS fertilizer program
(P) Financial BC ratio of incremental benets (value of incremental
maize output in (O.i)) to total government program costs (B) and
incremental farmer costs (D)
0.524 0.622 1.110 0.340 0.435 0.555
(Q) Economic BC ratio of incremental benets (value of incremental
maize output in (O.ii)) to incremental costs to government (I) and
0.626 0.926 1.572 0.424 0.641 0.765
Notes: All gures are in nominal $US. GS = government-subsidized.
*
The term incremental refers to the difference between benets and costs in a with program and a without program scenario.
**
Dorward and Chirwa (2011) and Logistics Unit.
***
33% of GS fertilizer assumed to be diverted.
+
APE adjusted for crowding out and diversion as per Table 4.
Ricker-Gilbert and Jayne (forthcoming) reports an average product of fertilizer of 3.32.

&
Average retail prices for May/April marketing year following harvest.
#
Ministry of Agriculture and Fisheries.
IPP computed as average of Angonia and Lichinga (Mozambique) market price (SIMA) during marketing year + $30 transport to Lilongwe + 10% retail markup.
Value of additional maize output in terms of net social surplus computed as [M (observed retail price + without-subsidy price)/2] where without-subsidy price is
1.012 observed price as per Ricker-Gilbert et al. (2013).
Table 6
Benetcost estimates for government fertilizer subsidy programs in Zambia, 2006/2007 to 2010/2011 crop years
2006/2007 2007/2008 2008/2009 2009/2010 2010/2011 Five-year total
*
(A) Total quantity of GS fertilizer intended for distribution to farmers
(MT)
**
84,000 50,000 80,000 100,000 178,000 492,000
(B) Total ofcial government costs of GS fertilizer program ($US)
***
$45,673,367 $45,965,458 $118,862,163 $100,631,894 $108,616,555 $419,749,437
(C) Pan-territorial farmer price for GS fertilizer ($US/MT)
+
$229 $286 $289 $204 $204
program, accounting for crowding out and diversion (A C J)
$10,387,440 $7,722,000 $12,484,800 $11,016,000 $19,608,480 $61,218,720
(F) GS program administration costs of GS fertilizer program (B 5%) $2,283,668 $2,298,273 $5,943,108 $5,031,595 $5,430,828
$23,430,437 $23,580,280 $60,976,290 $51,624,161 $55,720,293
$12,886,741 $12,969,154 $33,536,959 $28,393,289 $30,646,161

(I) Total incremental government costs of GS fertilizer program ,
$38,600,846 $38,847,707 $100,456,357 $85,049,045 $91,797,281 $354,751,237
diversion (kg)
&
0.540 0.540 0.540 0.540 0.540
(K) Estimated average product of maize (MT) per additional MT of
fertilizer
#
3.56 3.56 3.56 3.56 3.56
45,360 27,000 43,200 54,000 96,120
161,482 96,120 153,792 192,240 342,187
(i) Annual average retail price in Lusaka (nancial analysis)
$260 $327 $312 $242 $236

(ii) Annual average retail IPP in Lusaka (economic
analysis)
$
$408 $356 $331 $335 $454
(O) Value of incremental maize output (M)at prices in N ($US)
(i) Annual average retail price in Lusaka (nancial analysis) $42,489,039 $31,808,415 $48,558,901 $47,080,345 $81,725,253 $251,661,953
(ii) Annual average retail IPP in Lusaka (economic analysis) $66,615,949 $34,672,145 $51,543,562 $65,236,238 $157,225,882 $375,293,776
0.758 0.592 0.370 0.422 0.637 0.523
maize output in (O.ii)) to incremental costs to government [I] and
1.360 0.745 0.456 0.679 1.411 0.902
Notes: All gures are in nominal $US. GS = government subsidized.
*
The term incremental refers to the difference between benets and costs in a with program and a without program scenario.
**
MAL (2012).
***
MFNP (20052012). FSP/FISP government spending 90% to obtain estimated government cost of fertilizer portion of the program (program includes both
fertilizer and hybrid maize seed).
+
MACO (20052012) and MAL (20052012). Farmer contribution varied by district in 2006/2007 and 2007/2008. Value in (C) for these years is weighted average
farmer contribution, where weights are share of total GS fertilizer allocated to a given district.
33% of GS fertilizer assumed to be diverted as per Table 4.

&
#
Burke et al. (2012).
average retail prices for May/April marketing year following harvest.
CSO (2012).
$
IPP computed as SAFEX price + $100 transport + $20 non-GMO price premium + 10% retail markup.
Value of additional maize output in terms of net social surplus computed as [M (observed retail price + without-subsidy price)/2] where without-subsidy price is
1.024 observed price per Ricker-Gilbert et al. (2013).
Table 7
Benetcost estimates for government fertilizer subsidy programs in Kenya, 2006/2007 to 2010/2011 crop years
2006/2007 2007/2008 2008/2009 2009/2010 2010/2011 Five-year total
*
(A.1) Total quantity of NAAIAP fertilizer intended for distribution (MT)
**
0 3,550 9,200 17,725 31,066 61,541
(A.2) Total quantity of NCPB fertilizer intended for distribution (MT)
**
16,137 9,506 52,608 8,388 45,264 131,903
(B) Total estimated government costs of GS fertilizer programs ($US)
***
$8,512,290 $10,175,234 $80,864,354 $21,638,203 $61,571,039 $182,761,120
(C) Farmer price for NCPB fertilizer ($US/MT)
+
$352 $520 $872 $552 $538
program, accounting for crowding out & diversion (A.2 C J)
$1,356,291 $1,180,426 $10,966,571 $1,107,464 $5,817,559 $20,428,311
(F) GS program administration costs of GS fertilizer program (B 5%) $425,614 $508,762 $4,043,218 $1,081,910 $3,078,552
$1,932,715 $2,310,287 $18,360,252 $4,912,954 $13,979,705
$2,401,742 $2,870,942 $22,815,877 $6,105,219 $17,372,269

(I) Total incremental government costs of GS fertilizer program,
$4,760,072 $5,689,991 $45,219,347 $12,100,083 $34,430,525 $102,200,018
diversion (kg)
&
0.239 0.239 0.239 0.239 0.239
(K) Estimated average product of maize (MT) per additional MT
of fertilizer
#
6.72 6.72 6.72 6.72 6.72
3,857 3,120 14,772 6,241 18,243
25,917 20,969 99,269 41,940 122,592
(i) Annual average retail price in Nairobi (nancial analysis)
$305 $429 $350 $342 $331

(ii) Annual average retail IPP in Nairobi (economic
analysis)
$
$361 $315 $275 $345 $415
(O) Value of incremental maize output (M) at prices in N ($US)
(i) Annual average retail price in Nairobi (nancial analysis) $7,897,079 $8,995,658 $34,746,216 $14,352,652 $40,576,591 $106,568,197
(ii) Annual average retail IPP in Nairobi (economic analysis) $9,365,071 $6,605,372 $27,290,664 $14,487,464 $50,881,001 $108,629,572
0.800 0.792 0.378 0.631 0.602 0.524
maize output in (O.ii)) to incremental costs to government (I) and
1.531 0.961 0.486 1.097 1.264 0.886
Notes: All gures are in nominal $US. GS = government subsidized.
*
The term incremental refers to the difference between benets (costs) in a with program and a without program scenario.
**
NAAIAP (2010), LOG Associates (2011), and NCPB (2013).
***
Program cost for fertilizer derived from IPP of DAP (U.S. gulf port) and Urea (Black sea) + shipping to Mombassa-Nakuru + 10% retail markup, plus assumed
5% program administration costs.
+
Tegemeo survey households that received NCPB-subsidized fertilizer paid an average of 70% of the commercial fertilizer price in 2009/2010 for NCPB-subsidized
fertilizer, thus we multiply 0.7 by the average of our rural retail IPP of DAP and Urea fertilizer.
33% of GS fertilizer assumed to be diverted as per Table 4.

&
#
Sheahan et al. (2013).
Average retail prices for October/September marketing year following harvest.
Ministry of Agriculture (20052012).

$
Maize retail IPP computed as SAFEX price + shipping to Mombassa-Nairobi + 10% retail markup.
(6.7 kg of maize per kg of fertilizer product applied, Row K) is
the main reason why Kenya BC ratios are relatively favorable.
National maize response rates to fertilizer (the average prod-
uct of fertilizer) are considerably lower in Malawi and Zam-
bia according to national household survey data (Burke 2012;
Ricker-Gilbert and Jayne, forthcoming).
Therefore, the main conclusion from the computations in Ta-
bles 57 is that, after accounting for diversion of programfertil-
izer in the derivation of howprogramfertilizer crowds out com-
mercial fertilizer, the standard economic BCratios are generally
unfavorable in the three countries considered here. The Kenya
subsidy program does produce economic BC ratios exceeding
one in three of the ve years even though the ve-year average
of this ratio is also below one. While various actions could be
taken to raise programbenetsfor example, reduce diversion,
improve targeting to farms with little effective demand for com-
mercial inputs, extension programs to raise the efciency with
which farmers use fertilizerthe social and political circum-
stances of the countries involved require a sober assessment as
to the scope and time frame for achieving such benets.
7. Conclusions and implications for policy
This study is motivated by the need to better understand the
benets and costs of fertilizer subsidy programs in SSA. Cru-
cial for addressing this question is accurate information on the
degree to which fertilizer subsidy programs in SSA raise total
fertilizer use. Questions of crowding out and illicit diversion of
program fertilizer, while long understood to be potential prob-
lems, have until recently neither been rigorously measured, nor
have their impacts on total fertilizer use and program bene-
ts and costs been quantied. This study contributes to our
understanding of input subsidy program impacts in two ways.
First, we review and update the recent evidence on crowding
out based on large-scale farm panel survey data in eastern and
southern Africa after accounting for the likely range of diver-
sion of programfertilizer onto commercial markets. The second
contribution of the study is to examine howalternative targeting
criteria and estimates of diversion affect the extent of crowding
out, and hence the benets of the programs relative to their costs.
The rst major nding of this study is that the magnitude of
diversion can profoundly inuence estimates of how fertilizer
subsidy programs affect total fertilizer use and program im-
pacts. Based on estimates of programdiversion, every additional
ton of fertilizer distributed through the subsidy programs raise
total fertilizer use by 490 kg in Malawi, by 536 kg in Zambia,
and by 239 kg in Kenya. Not accounting for potential diversion
has led prior studies to seriously overestimate the extent to
which subsidy programs contribute to total fertilizer use. Given
recent evidence that 33% or more of total program fertilizer
may be diverted before being received by intended beneciary
farmers, the failure to account for program diversion is shown
to overestimate the contribution of the subsidy programs to
national fertilizer use by 67.3%in the case of Malawi, by 61.6%
in the case of Zambia, and by 138.0% in the case of Kenya.
This has important implications for the benets of the subsidy
programs relative to their costs. The second major nding of
this study is that after taking account of both crowding out and
diversion problems, under no scenario in any of the three coun-
tries (except for Malawi in 2008/2009) do the program benets
outweigh program costs according to nancial BC analysis.
The maize price levels required for the programs to break even
are generally well over US$350 per MT. These price levels are
generally higher than import costs to the capital city experi-
enced over the past decade. If world food prices continue to rise,
as they have in the recent past, the BC ratios may become more
favorable, but these considerations would also need to account
for the offsetting probable increases in world fertilizer prices as
well. Economic BC ratios are more favorable, particularly for
Kenya, but in all three cases, mean ve-year BCratios are below
one. The main conclusion that emerges from this analysis is
that, after account for crowding out and diversion, the standard
economic BC ratios are generally unfavorable in the three
countries considered here, especially for Malawi and Zambia.
These estimates of the contribution of subsidy programs to
total fertilizer use all pertain to the recent set of smart sub-
sidy programs, which were intended to overcome the major
targeting and diversion problems of universal input subsidy
programs commonly implemented in the 1970s and 1980s in
Africa. Empirical evidence from Asia and high-income coun-
tries showthat the costs of universal subsidies often outweighed
the benets as input suppliers usually captured a large part of
the subsidy, because the price discount was not fully passed
on to farmers (Brooks et al., 2008). The three targeted input
subsidy programs examined in this article produce BC ratios
that are similarly negative on average. Many factors contribute
to low BC ratios, including low crop response rates to fertilizer
application, the diversion of signicant quantities of program
fertilizer at least in some countries, and de facto targeting crite-
ria. Crowding out tends to increase when the main driver of the
subsidy programs is increasing food supplies and where by de-
sign or in practice the subsidies are allocated disproportionately
to households with relatively larger farms, higher incomes, and
the ability to purchase fertilizer. By contrast, when input sub-
sidies are targeted to poorer households, crowding out is often
considerably lower.
If the political process determines that fertilizer subsidy pro-
grams are to continue regardless of their questionable economic
merits to date, then the fundamental challenge is to raise their
benets by seriously addressing the program targeting and im-
plementation modalities that result in high levels of crowd-
ing out and diversion of program fertilizer. Raising the re-
turns to input subsidy programs would also require assisting
farmers to raise the efciency with which they use fertilizer,
through more effective farmer extension programs guided by
evidence from agronomic, agricultural engineering, and crop
science research. All of these measures would raise the output
response from a given quantity of fertilizer distributed through
the subsidy programs. In principal, overcoming these challenges
seems within reach. In practice, however, there has been limited
progress in effectively addressing these challenges despite their
longstanding recognition and despite explicit attempts of the
new generation of smart subsidy programs to do so. More at-
tention to these design and implementation detailsand their
underlying governance dimensionsis clearly necessary in or-
der to translate the theoretical benets of smart subsidy concepts
into reality.
Acknowledgments
This study has beneted from the useful comments of Hans
Binswanger, Eric Crawford, Mulat Demeke, Gershon Feder,
Milu Muyanga, and Elaine Ronchi. The authors gratefully ac-
knowledge funding for this study from the Bill and Melinda
Gates Foundation, USAID/Bureau for Food Security, and
USAID missions in Zambia, Kenya, and Malawi.
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3.32 3.32 3.32 3.32 3.32

$156 $259 $463 $294 $236

Ricker-Gilbert and Jayne (forthcoming) reports an average product of fertilizer of 3.32.

$12,886,741 $12,969,154 $33,536,959 $28,393,289 $30,646,161

(i) Annual average retail price in Lusaka (nancial analysis)

$260 $327 $312 $242 $236

33% of GS fertilizer assumed to be diverted as per Table 4.

average retail prices for May/April marketing year following harvest.

$2,401,742 $2,870,942 $22,815,877 $6,105,219 $17,372,269

(i) Annual average retail price in Nairobi (nancial analysis)

$305 $429 $350 $342 $331

33% of GS fertilizer assumed to be diverted as per Table 4.

Average retail prices for October/September marketing year following harvest.

Ministry of Agriculture (20052012).

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