Malawi: Agriculture Subsidy Working in Malawi

Abuja — The farmers' success is not a coincidence: After facing a famine four years ago that threatened one-third of the country's 13 million people, around half of whom live in poverty, tiny Malawi has utilized a $60 million policy of state subsidies for agriculture to become a net grain exporter. Malawi has transformed itself from a ward of the international community into one of the most successful agricultural economies in southern Africa: The landlocked, geographically diverse country, covered in green rolling hills and dotted with freshwater lakes, now exports thousands of pounds of corn to neighboring, starving Zimbabwe, a nation once known as the breadbasket of the region.

State agriculture subsidies are hardly what the doctor - or, in this case, the international aid community and the World Food Program - ordered. But Malawi triumphed precisely by ignoring the world's leading pro-privatization agricultural experts. In fact, the "Malawi model" could turn out to be one of the only African success stories in recent years.

[...] Starting in 2004, it launched the nationwide Agricultural Inputs Subsidy Program, in which roughly half of Malawi's small farmers were given coupons to buy fertilizer and seed at a rate far below the market price. Critically, the government focused the program not on the most destitute, but on the poor farmers who at least had some land and the ability to work the plots, thus guaranteeing a return on their investment in the form of more efficient grain output. At the same time, the government invested in training programs, helping farmers learn about new types of irrigation and management to improve their yields. And once the farmers produced, the Malawian government created funds designed to buy a percentage of the maize crop and store it for future emergencies. In this way, the state hoped to ensure that it would never be caught in a famine having to rely upon private traders to supply staple crops.

And, the danger of getting overly obsessed with 'invisible hand' (liberalization and privatization) in vulnerable sectors, i.e. sectors whose performance would have a direct bearing on the very survival of poor people!

In many poor countries, when governments stopped handing out seeds and fertilizer, or providing warehouses to store farmers' grain, the meager private sector was not equipped to fill the void. Unlike in the developed world, home to giant agribusinesses, in Africa the small private grain sellers and buyers have little capital or ability to raise money. And with little financing, it is nearly impossible for the private sector to develop large stocks of seed and fertilizer, or to build large warehouses necessary to store significant quantities of staple foods. Forced to rely upon the private sector, farmers in turn could not buy large quantities of seed, or store grain between harvests; and even if the resources were available, farmers often could not afford to buy fertilizer and seed. In many nations that had liberalized agriculture, crops simply rotted.

With private traders unable to store crops, governments selling off their warehouses to the private sector, and no one investing in agricultural research, developing nations have been left dangerously short of any food reserves. Yet for years, donor nations ignored the downside to privatization, even as country after country suffered through famines made worse by a lack of food stockpiles'and as rich countries, in a great irony, subsidized their own farmers. As former President Bill Clinton told a United Nations conference on food security last year, referring to wealthy nations' push for agriculture privatization: "We all blew it."

A simulation of potential trade policy scenarios under the WTO showed that small country like Malawi would emerge as losers of agricultural trade liberalization. So, it does not make sense to argue for complete agriculture trade liberalization. Also, it does not make sense to blindly follow the market principles, though the best system if certain conditions are predetermined, and argue for full privatization, deregulation and liberalization of the agriculture market. Another relevant question here is: Would the developing countries lose or gain from agriculture trade liberalization (includes scrapping agriculture subsidies in the US, the EU, and Japan? Some say the developing countries would be worse off if agriculture subsidy in the West is eliminated. It really depends on if (households) a country is a net exporter or importer, its production and distribution cost structure, and demand of such goods in the global market, among other factors.