Nudging and Subsidizing Farmers to Adopt: Some Puzzles DIME-AADAPT Workshop Xavier Gine DECRG
Background Fertilizer use is low and stagnant in Africa Low fertilizer adoption accounts for much of lower agricultural yields in Africa relative to Asia (Morris et al. 2007, Tomich et al. 1995) Yet only 10-40% of farmers in Western Africa use fertilizer in a given season Returns to fertilizer very high on agricultural test plots (Duflo, Kremer and Robinson, 2008) High returns for fertilizer (~50-85% on an annualized basis) if used in proper quantities, times Lower, even negative rates, if used in wrong quantities and times.
Why don t farmers use fertilizer? Knowledge? Returns to improved inputs may be uncertain, although they have been around for a while Credit constraints? Most farmers lack access to credit, but No technical non-convexities in fertilizer use Theoretically could gradually accumulate enough for a farm Risk aversion? Most government recommended dosages include fertilizer at planting and top dressing and hybrid seeds Most farmers lack proper insurance, but Can be used on small part of plot, and could focus on less risky inputs fertilizer
Why don t farmers use fertilizer? Farmers do not have access to complementary inputs such as labor, irrigation and roads. Farmers say they want to use fertilizer, but do not have cash to purchase. Farmers have money at harvest, but not when fertilizer needed. Part of problem may be that farmers have trouble saving harvest income for future fertilizer use
What is the solution? View from an Agricultural Expert The rest of the world is fed because of the use of good seed and inorganic fertilizer, full stop. This technology has not been used in most of Africa. The only way you can help farmers gain access to it is to give it away free or subsidize it heavily. (Stephen Carr, former WB specialist on agriculture in SSA, cited in Dugger, NY Times) Simplest solution is heavy subsidies or loans. India ~0.75% of GDP on fertilizer subsidies Malawi ~ 11% of government budget Tanzania, etc
How to Subsidize? Universal input price subsidies Can be highly distortionary and regressive Constrained farmers moved closer to efficient use, but unconstrained farmers use too much. Fiscal costs as it is poorly targeted But, transparent and easy to administer
How to Subsidize? Vouchers Quantity restriction limits overuse by efficient farmers, but government still pays for what they would have used If voucher is tradable, Wealthy/efficient farmers benefit as poor/inefficient farmers. Increased fertilizer use allocated to most productive farmers. Potential for demonstration effects If voucher is non-tradable, Farmers may (inefficiently) use rather than sell voucher. Poorest farmers may not benefit unless input is heavily subsidized Large-scale voucher schemes prone to corruption theft, counterfeiting non-transparent allocation
Nudges Duflo, Kremer, Robinson (2010) Small subsidies limited to the post-harvest period can improve welfare vs. large subsidies with no time-limit or vs. no subsidy at all. Increases in fertilizer use of 14-20% (on a base of 22-30%) Allows present-biased farmers to commit themselves to purchase fertilizer when they have cash, without greatly distorting fertilizer use of other farmers. Small subsidies mitigate corruption incentives. In Kenya, fertilizer adoption rates were still below 50% among those offered time-sensitive discount, so this policy is not the answer. Needs to be replicated.
Program Design Issues Targeting Community involvement? Fertilizer distribution Private or public? Exit strategy How long will the subsidy last?
Alternatives to subsidies May be cheaper to address the underlying market failures than the symptoms. Example: If uninsured production risk is the problem, introduce weather index insurance. Only inefficient (risk averse) farmers will chose to insure May be cheaper than subsidy which buys fertilizer for farmers (i.e., risk neutral ones) who would have used it anyway. Input companies (Monsanto, Syngenta) are bundling seeds with index insurance Depending on the context, irrigation schemes, credit programs, agricultural extension, and/or road construction may prove more cost-effective (targeted) solutions to the under-use of inputs than broad-based subsidies or vouchers. Conclusion: More research is needed!