Lecture 15: Investment and Technology: Should We Subsidize Fertilizer?

Transcription

1 Lecture 15: Investment and Technology: Should We Subsidize Fertilizer? Dave Donaldson and Esther Duflo Challenges of World Poverty

2 Fertilizer Previous lecture: by how much should anti-malarial bednets be subsidized? This lecture: by how much should an agricultural input (like fertilizer) be subsidized?

3 How Can We Feed a Growing/Crowded Planet? A quote from Johnson (Presidential Address, American Economic Association, 2004): Indeed it is certain...all places are full of business. The most charming farms obliterate empty places, ploughed fields vanquish forests, herds drive out wild beasts, sandy places are planted with crops, swamps are drained, and there are great cities where formerly hardly a hut...everywhere there is a dwelling, everywhere a multitude, everywhere a government, everywhere there is life. The greatest evidence of the large number of people: we are burdensome to the world, the resources are scarcely adequate to us; and our needs straiten us and complaints are everywhere while already nature does not sustain us. Truly, pestilence and hunger, and war and flood, must be considered as a remedy for nations, like a pruning back of the human race becoming excessive in numbers.

4 The Problem: Food Output per Person From Fertilizer Use in African Agriculture East and Southeast Asia Latin America South Asia Sub-Saharan Africa Index of Food Production Per Capita, (1961 = 100) Figure by MIT OpenCourseWare. Source: FAOSTAT.

5 The Problem: No Green Revolution From Fertilizer Use in African Agriculture East and Southeast Asia Latin America South Asia Sub-Saharan Africa Cereal Yields, Developing Regions, (Average cereal yields [MT/hal]) Figure by MIT OpenCourseWare. Source: FAOSTAT. MT = metric ton; ha = hectare.

6 The Solution? Fertilizer I From Fertilizer Use in African Agriculture 45 Fertilizer consumption (mill tons) East Asia Latin America South Asia Sub-Saharan Africa Southeast Asia Fertilizer Consumption, Developing Regions, Figure by MIT OpenCourseWare. Source: FAOSTAT.

7 The Solution? Fertilizer II From Mundlak (Journal of Economic Literature, 2004) 992 Journal of Economic Literature, Vol. XLIII (December 2005) cc~ ~18, 0 ~" Percent U.S. Agriculture Growth rates Output Labor Land Capital Fertilizers Figure by MIT OpenCourseWare.

8 The Solution? Fertilizer III What was the claim of the 2007 NYT article ( Ending Famine, Simply by Ignoring the Experts ) on the reading list? Do you agree with the claim?

9 Subsidize Fertilizer? Huge swings in subsidy policy in developing countries in last 3 decades Huge issue: Fertilizer subsidies: 0.75 % of GDP in India in Fertilizer subsidies: 2 % of government budget in Zambia in 2008 Should fertilizer be subsidized?

10 Answer from World Bank I Chapter 1 of Fertilizer Use in African Agriculture No. Whenever direct price subsidies have been used to promote fertilizer, the results have almost always been disappointing: the cost of the subsidies has been high, and the benefits generated by the incremental fertilizer use have been modest. What do they propose instead?

11 Answer from World Bank II Chapter 1 of Fertilizer Use in African Agriculture Improve the supply of fertilizer (shift S curve up): Reduce fertilizer sourcing costs (lower tariffs, adopt common quality standards, harmonize approval processes to create larger markets) Reduce fertilizer distribution costs (better road and rail infrastructure) Strengthen (fertilizer manufacturer and distributor) business finance and risk management instruments Improve supply chain coordination mechanisms (system of product quality grades, improved market information systems)

12 Answer from World Bank III Chapter 1 of Fertilizer Use in African Agriculture Improve the demand for fertilizer (shift D curve up): Strengthen ag research and extension (sponsoring research and demonstrations) Improve farmers ability to purchase fertilizer (better access to credit) Provide farmers with better tools to manage risk (weather insurance) Improve market information systems Protect farmers against low and volatile output prices (eg, irrigation) Empower farmers (by supporting producer organizations) Improve the ag resource base (soil and water conservation, irrigation)

13 Answer from World Bank IV Chapter 1 of Fertilizer Use in African Agriculture What do you think about all of this?

14 Answer from Economists I From discussion in Duflo, Kremer and Robinson (2009) Chicago tradition and others: farmers are rational profit maximizers So if there is no externality, subsidies/taxes will make farmers do something non-optimal Plus, subsidies are regressive : the rich (those with more land) benefit more Plus, public distribution programs are full of corruption, waste, and politically motivations for their distribution Plus, overuse of fertilizer can be environmentally damaging

15 Answer from Economists II From discussion in Duflo, Kremer and Robinson (2009) But if the Chicago tradition is right, and fertilizer use is obviously profitable, why aren t farmers using it? Possible answers (and replies from DKR09): Fertilizer use isn t profitable. (But demonstration farms show, time and time again, that it is profitable.) Fertilizer use requires a combination of conditions that may be true on demonstration farms, but isn t true on real farms. (But even on real farms, if you use fertilizer randomly, it can be profitable.) Farmers don t know about the benefits. (But fertilizer is used extensively and for decades in our study area. And when we showed every farmer the improved profitability on their own farm, most still don t use it.) Farmers are credit constrained. (But fertilizer is divisible. You can buy and use tiny amounts or large amounts.)

16 Answer from Economists III Duflo, Kremer and Robinson (2009) propose an alternative answer to the question: If fertilizer use is obviously profitable, why aren t farmers using it? Their alternative answer: Some farmers are irrational : Farmers are present-biased (they procrastinate; they are impatient now) Farmers don t realize that they procrastinate (they underestimate the chance that they will again be impatient in the future) So if faced with a cost of buying fertilizer, even a small cost, even farmers who plan to use fertilizer will procrastinate on incurring this cost Examples of this cost: going to the store, deciding which type to buy, figuring out how to use it Strong evidence of this type of behavior among US workers deciding about which pension plan to use. (Nudge)

17 Duflo, Kremer and Robinson (2009) Build on over five years of randomized experiments in Western Kenya Examine fertilizer use and effects among maize farmers Randomly offer free fertilizer delivery, in four different ways, designed to examine whether procrastination could explain low fertilizer usage.

18 What Do Kenyan Farmers Say? Why don t you use fertilizer? Not that it s unprofitable (9 %), unsuitable for my soil, or too risky. I want to use fertilizer but I don t have the money to purchase it. (79 %) Do you plan to use fertilizer next season? 97.7 % say yes % follow through

19 First Randomized Intervention Basic SAFI : Field officer visits farmer s home at harvest time Offers free delivery of any amount of fertilizer Delivery date can be any date the farmer wants Farmer must decide now What does this intervention do? Saves trip into town to buy fertilizer Forces quick decision (lower decision cost?) Allows farmer the chance to pre-commit What effect do you think this will have on fertilizer use in T vs C?

20 First Intervention: Results Table 2. Adoption for Parents Sampled for SAFI & Subsidy Programs Used Fertilizer Used Fertilizer Used Fertilizer Season 1 Season 2 Season 3 (1) (2) (3) (4) (5) (6) SAFI Season (0.035)*** (0.038)*** (0.041) (0.044) (0.037) (0.041) Starter Kit Farmer (0.042) (0.046)* (0.047) (0.051) (0.043) (0.048) Starter Kit Farmer * Demonstration Plot School (0.060) (0.066) (0.068) (0.075) (0.063) (0.070) Demonstration Plot School (0.314) (0.435) (0.460) (0.463) (0.335) (0.465) Household had Used Fertilizer Prior to Season 1 (0.031)*** (0.035)*** (0.035)*** (0.040)*** (0.033)*** (0.037)*** Male (0.033) (0.037) (0.034) Home has mud walls (0.081)** (0.091)** (0.085) Education primary respondent (0.004) (0.005) (0.005)*** Income in past month (in 1,000 Kenyan shillings) (0.003) (0.003)** (0.003) Observations Used Fertilizer Season 1 Used Fertilizer Season 2 Used Fertilizer Season 3 Panel B Season 2 Treatments (1) (2) (3) (4) (5) (6) SAFI Season

21 Second Randomized Intervention Basic SAFI with ex ante timing choice : Field officer visits farmer s home before harvest time Offers farmer the choice of when he would like to be offered Basic SAFI What does this intervention do? Saves trip into town to buy fertilizer Forces quick decision (lower decision cost?) Allows farmer the chance to pre-commit When do you think farmers wanted to be offered SAFI? What effect do you think this will have on fertilizer use in T vs C?

22 Second Intervention: Results When did farmers want to be offered SAFI?: 44 %: asked officer to come back immediately after harvest (and among this 44 %, almost half bought Basic SAFI ) 52 %: asked officer to come back at time when fertilizer is to be applied (and among this 52 %, 39 % bought the fertilizer) 4 %: declined offer for officer to come back

23 (0.033) (0.037) (0.034) Home has mud walls (0.081)** (0.091)** (0.085) Education primary respondent (0.004) (0.005) (0.005)*** Income in past month (in 1,000 Kenyan shillings) (0.003) (0.003)** (0.003) Observations Second Intervention: Results Used Fertilizer Used Fertilizer Used Fertilizer Season 1 Season 2 Season 3 Panel B Season 2 Treatments (1) (2) (3) (4) (5) (6) SAFI Season (0.053) (0.057) (0.061)*** (0.066)*** (0.056) (0.061) SAFI Season 2 with Choice on Date of Return (0.048) (0.053) (0.055)*** (0.060)*** (0.050) (0.056) Half Price Subsidy Visit at Top Dressing (0.052) (0.057) (0.059)** (0.065)* (0.054) (0.061) Full Price Visit at Top Dressing (0.052) (0.058) (0.059) (0.066) (0.054) (0.061) Bought Maize (0.043) (0.048) (0.049) (0.054) (0.046) (0.050) Bought Maize * SAFI Season (0.075) (0.082) (0.087) (0.096) (0.080) (0.087) Household had Used Fertilizer Prior to Season 1 (0.031)*** (0.035)*** (0.035)*** (0.040)*** (0.033)*** (0.037)*** Male (0.033) (0.037) (0.035) Home has mud walls (0.081)** (0.091)** Education primary respondent (0.004) (0.005) (0.005)*** Income in past month (in 1,000 Kenyan shillings) (0.003) (0.003)** (0.003) Mean Usage in Comparison Group Observations Note: Dependent variable is an indicator equal to 1 if the farmer adopted planting or top dressing fertilizer in the given season. All regressions control for school, and whether the farmer was a parent of a Standard 5 or 6

24 Third Randomized Intervention Free delivery at fertilizer application time : Field officer visits farmer s home right at the time when fertilizer needs to be applied Offers farmer fertilizer with free delivery What does this intervention do? Saves trip into town to buy fertilizer Should be same as Basic SAFI, but without pre-commitment What effect do you think this will have on fertilizer use in T vs C?

25 (0.033) (0.037) (0.034) Home has mud walls (0.081)** (0.091)** (0.085) Education primary respondent (0.004) (0.005) (0.005)*** Income in past month (in 1,000 Kenyan shillings) (0.003) (0.003)** (0.003) Observations Third Intervention: Results Used Fertilizer Used Fertilizer Used Fertilizer Season 1 Season 2 Season 3 Panel B Season 2 Treatments (1) (2) (3) (4) (5) (6) SAFI Season (0.053) (0.057) (0.061)*** (0.066)*** (0.056) (0.061) SAFI Season 2 with Choice on Date of Return (0.048) (0.053) (0.055)*** (0.060)*** (0.050) (0.056) Half Price Subsidy Visit at Top Dressing (0.052) (0.057) (0.059)** (0.065)* (0.054) (0.061) Full Price Visit at Top Dressing (0.052) (0.058) (0.059) (0.066) (0.054) (0.061) Bought Maize (0.043) (0.048) (0.049) (0.054) (0.046) (0.050) Bought Maize * SAFI Season (0.075) (0.082) (0.087) (0.096) (0.080) (0.087) Household had Used Fertilizer Prior to Season 1 (0.031)*** (0.035)*** (0.035)*** (0.040)*** (0.033)*** (0.037)*** Male (0.033) (0.037) (0.035) Home has mud walls (0.081)** (0.091)** Education primary respondent (0.004) (0.005) (0.005)*** Income in past month (in 1,000 Kenyan shillings) (0.003) (0.003)** (0.003) Mean Usage in Comparison Group Observations Note: Dependent variable is an indicator equal to 1 if the farmer adopted planting or top dressing fertilizer in the given season. All regressions control for school, and whether the farmer was a parent of a Standard 5 or 6

26 Fourth Randomized Intervention Free delivery of subsidized fertilizer at application time : Same as third intervention but fertilizer is offered at a 50 % subsidy What does this intervention do? Saves trip into town to buy fertilizer Allows us to compare pre-commitment effect (of Basic SAFI ) with a pure subsidy What effect do you think this will have on fertilizer use in T vs C?

27 (0.033) (0.037) (0.034) Home has mud walls (0.081)** (0.091)** (0.085) Education primary respondent (0.004) (0.005) (0.005)*** Income in past month (in 1,000 Kenyan shillings) (0.003) (0.003)** (0.003) Observations Fourth Intervention: Results Used Fertilizer Used Fertilizer Used Fertilizer Season 1 Season 2 Season 3 Panel B Season 2 Treatments (1) (2) (3) (4) (5) (6) SAFI Season (0.053) (0.057) (0.061)*** (0.066)*** (0.056) (0.061) SAFI Season 2 with Choice on Date of Return (0.048) (0.053) (0.055)*** (0.060)*** (0.050) (0.056) Half Price Subsidy Visit at Top Dressing (0.052) (0.057) (0.059)** (0.065)* (0.054) (0.061) Full Price Visit at Top Dressing (0.052) (0.058) (0.059) (0.066) (0.054) (0.061) Bought Maize (0.043) (0.048) (0.049) (0.054) (0.046) (0.050) Bought Maize * SAFI Season (0.075) (0.082) (0.087) (0.096) (0.080) (0.087) Household had Used Fertilizer Prior to Season 1 (0.031)*** (0.035)*** (0.035)*** (0.040)*** (0.033)*** (0.037)*** Male (0.033) (0.037) (0.035) Home has mud walls (0.081)** (0.091)** Education primary respondent (0.004) (0.005) (0.005)*** Income in past month (in 1,000 Kenyan shillings) (0.003) (0.003)** (0.003) Mean Usage in Comparison Group Observations Note: Dependent variable is an indicator equal to 1 if the farmer adopted planting or top dressing fertilizer in the given season. All regressions control for school, and whether the farmer was a parent of a Standard 5 or 6

28 Should Fertilizer be Subsidized?

29 MIT OpenCourseWare The Challenge of World Poverty Fall 2009 For information about citing these materials or our Terms of Use, visit: