An alternative approach to measuring the welfare implications of input subsidies: Evidence from Malawi

Abstract Most studies that have evaluated the welfare impacts of agricultural input subsidy programmes (ISPs) in developing countries have focused on measuring their effects on various outcomes of interest such as agricultural productivity. I estimate the consumer surplus accrued by direct and indirect beneficiaries of ISPs in Malawi. Malawi's Farm Input Subsidy Programme (FISP), introduced in 2005, is the largest such scheme in sub‐Saharan Africa. I find that the programme provides low direct benefits compared to the public costs of the programme. At the national level, the benefit‐cost ratio (BCR) is up to 0.37 for FISP households with no option to resell the fertiliser accessed through the programme. When reselling of the fertiliser is allowed for, the BCR increases to 0.64 including spillover benefits to direct non‐beneficiaries of FISP. I also found 60% of all fertiliser vouchers and benefits accrued to farm households with above the median wealth level. Many farmers demand 25 kg of fertiliser or less at the subsidised price. Thus, when resource poor direct beneficiaries have the option to buy 25 kg bags of fertiliser in addition to the 50 kg bags currently being offered under FISP, their benefits increase by about 53% compared to the status quo. Overall, my results suggest that a more flexible redemption of the fertiliser vouchers as well as complementary investments such as improved access to credit could increase the programme's contribution to farmers’ welfare.