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Abstract:
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Our objective in this paper is to move past the dialogue of the deaf. To bring more clarity to the policy debate, we develop a dynamic general equilibrium model in which agricultural input subsidies can be directly compared with alternative anti-poverty strategies. The model features a full array of imports (intermediates, consumer goods, and capital goods), transport and distribution costs, sector-specific capital, public investment in physical infrastructure, production for own-consumption, and separate small and large-scale agricultural sectors. It is also firmly grounded in optimizing behavior. The general equilibrium dynamics for the economy emerge from the intersection of market-clearing conditions with the government budget constraint and the perfect foresight solutions to private agents’ optimization problems. We investigate the impact of a large AISP-type increase in input subsidies on GDP, food security, and real income of the poor. Not surprisingly, the grades on the report card depend on how the subsidies are financed, on the return on public investments that compete for scarce government funds, and on the size of the productivity gains smallholders reap from increased application of fertilizer + seed packs. In the case where lump-sum taxes increase to pay for the subsidies, all poor groups gain but private investment contracts and the long-run increase in GDP is not positive and significant unless the shadow price of fertilizer is five times as large as the market price. The results are distinctly less favorable when input subsidies crowd out infrastructure investment. Smallholders who derive most of their income from farming enjoy permanent, large gains, but positive effects on real output and income of unskilled labor are limited to the short/medium run; across steady states, GDP decreases 2-12% and the real unskilled wage falls 1-11%. An argument can still be made for input subsidies on the grounds that the gains for the poor may be large for 15+ years on the transition path. This requires, however, extremely large productivity gains from additional fertilizer use (a shadow price five times the market price) and relatively low returns (10% or less) on investment in infrastructure. The rest of the paper is organized into six sections. In Sections 2-4 we discuss the model and how it was calibrated to the data for Malawi. Following this, Sections 5 and 6 examine the effects of input subsidies financed either by lump-sum taxes or by cuts in infrastructure investment. The final section revisits the policy debate, drawing on the results to evaluate the conflicting views of donors and the GOM. |