Should Farm Input Subsidy Programs Target Poor or Non-Poor Farmers? Evidence from Malawi’s Farm Input Subsidy Program

This paper addresses the question of whether farm input subsidy programs should be targeted at non-poor farmers instead of poor farmers, using a two-wave, nationally representative panel data from Malawi. The question is addressed by estimating the net gain in maize yield for targeting non-poor farmers instead of poor farmers after accounting for the difference in inorganic fertilizer use efficiency and the difference in crowding-out of commercial fertilizer by subsidized fertilizer between the poor and non-poor farmers. Consumption expenditure is used to classify households into consumption poor and non-poor households, and an asset-based wealth index is used to classify households into asset poor and non-poor households. The difference in inorganic fertilizer use efficiency is estimated with a multilevel model of maize yield, and the difference in crowding out is estimated with a double hurdle model of demand for commercial, inorganic fertilizer. The results indicate that non-poor farmers are significantly more efficient in the use of inorganic fertilizer but have significantly higher levels of crowding out, compared to poor farmers. This suggests that there is a trade-off between targeting non-poor farmers and targeting poor farmers. However, further analysis of the trade-off indicates that targeting non-poor farmers instead of poor farmers, even after accounting for the difference in crowding out, would result in an overall gain in yield of 3.14 to 4.33 kilograms of maize per kilogram of nitrogen distributed by the subsidy program. Therefore, the productivity enhancing objective of Malawi’s farm input subsidy program would be better served by targeting non-poor farmers instead of poor farmers.