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December 05, 2007

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Bruce Wilder

The twists and turns of this narrative account leave me a bit dizzy, but, somehow, I doubt that the technical efficacy of fertilizer is a real issue.

The desired "underlying change" (could there be a more opaque phrase?), I would guess (and this essay leaves me to do a lot of guessing) is organizing agriculture's emergent institutional order into an engine of progress.

The critical question, from a World Bank or other development agency perspective, should not be primarily one of technical efficacy, but whether a fertilizer subsidy from external agencies can be an effective catalyst for building institutions and jump-starting the long process of better organizing the agricultural economy.

The problem should not conceived of as a debate by argonomists in Washington about the constraints on Malawi farming. The question should be focused on what would permit Malawi farmers and related interests to organize themselves, to recognize and address the constraints on their progess. If the village council on fertilizer distribution subsequently meets to discuss repairing a key bridge or digging a well, the important thing is that there is a committee and a sense of social efficacy, not whether fertilizer is priced "efficiently" in some University of Chicago nutball sense.

Random African

1. According to this paper http://72.14.253.104/search?q=cache:EUlaWvKMQcUJ:www.future-agricultures.org/pdf%2520files/fertilizer_subsidy_case.pdf the world bank has never been totally opposed to fertilizer subisides, the imf and usaid were. The World Bank was going for a more narrowly targeted subsidies program. (the paper also clearly explains the particularities of Malawi's political economy)

2. According to this paper: http://72.14.253.104/search?q=cache:MDu7ULWU2-cJ:www.csae.ox.ac.uk/conferences/2000-OiA/pdfpapers/minot.PDF cash crop farming increases use of fertilizers even on non-cash crops. Malawi is very particular in the sense that maize, the staple food is produced by a subsitence sector that is geographically and economically totally separated from the commercial sector.

3. The NYT times article is particularly bad at discussing the financial aspect. and furthermore, the article itself and the way it was received (in the american economic blogosphere) disqualifies it from really being about Africa. It's really a left-right debate thing.

terence

Your point, it seems, is that increased fertiliser use is not a long term pathway to development. Maybe, but on the other hand, for the time being, it has contributed to reduced suffering in Malawi. This - unless you can provide a convincing argument that it is retarding longterm development - still seems like a perfectly laudable outcome.

Random African

"unless you can provide a convincing argument that it is retarding longterm development "

1. government (especially Malawi government) ressources are not infinite. Money spent on one thing is money not spent on another (infrastructure for instance).

2. the subsidy or rather the way it was implimented crowded out the private sector. in effect, those private companies didn't leave the country, they just closed the rural branches they slowly started to open and distribution issues is one of the reason fertilizer is so rarely used (increases the price and decreases the possibility of credit).

3. other measures could be simply ignored by a government that just found a measure that is both popular and easy to control for political purposes.

all in all, nothing in the principle of the subsidy prevents Malawi from working on its other rural productivity issues. However, it's unclear if that work will be done. And articles like the NYT's doesnt help.

Sachs Appeal

I think Maggie makes a great point in that such short-term fixes often reduce incentive to invest in long-term projects such as infrastructure that would require more extensive coordination and higher initial costs.

Justin Rietz

This discussion begs the question: why can't Malawi farmers get loans to invest in fertilizer and / or better seed?

It has been proven that with the right raw materials, Malawi can be a net exporter of agricultural products. This would suggest that there is an incentive for funding smaller farmers or starting larger farming projects with either domestic or foreign investment.

The answer is that government corruption and bureaucracy scare off potential sources of funds and reduce incentives for farmers to grow food in excess of their subsistence needs, as they don't reap the full benefits of their additional efforts. Moreover, businesses that might be willing to invest in larger scale farming ventures don’t do so because risk is too high.

Interestingly, Will Masters' paper points a finger at "market failures". Given that free markets as we typically understand them in the West don't exist in the countries in question (Masters somewhat euphemistically says there are "weak" markets), it seems odd to say they have already failed.

Until government corruption and bureaucracy is drastically reduced in these countries, development will be extremely difficult, regardless of what brilliant economic solutions we may dream up.

As a side note, Heritage's Index of Economic Freedom rates Malawi 106 out of 157 countries, with its lowest scores for protection of property rights (40%) and freedom from corruption (28%). (http://www.heritage.org/index/country.cfm?id=Malawi).

Adam Jackson

Justin - That's part of the problem, but anyone who's spent time in rural parts of Africa will tell you that inequalities at village level, which have nothing at all to do with Government as we think of it, are just as responsible for the huge risks of doing business and the high charges farmers pay.

Whether that be Chiefs taxing arbitrarily or local money-lenders giving credit at extortionate rates, a blanket statement that it's all Government corruption misses half the story.

JMG3Y

As is only now becoming sufficiently understood even by farmers in developed countries, mineral fertilizer use is not nearly as straightforward as it first appeared to many to be. Even while apparently markedly increasing yields over the short term, we have only recently understood how inappropriate usage severely damages soil structure over the long term. A paradox is that damage from common but inappropriate usages results in a dependency on continuing usage. The technology for measuring these recently recognized but important soil parameters (beyond the conventional) mineral ones on which to inform fertilizer usage is not readily available even in the US.

The importance of soil organic matter: Key to drought-resistant soil and sustained food production
ftp://ftp.fao.org/agl/agll/docs/sb80e.pdf

The Soil Biology Primer
http://soils.usda.gov/sqi/concepts/soil_biology/biology.html

Building Soils for Better Crops, 2nd ed., Fred Magdoff, Harold van Es, 2000
http://www.sare.org/publications/bsbc/bsbc.pdf

Unlike some, I'm NOT saying that fertilizer use should be abandoned but rather that its use should be approached and managed much more carefully that it has in the past. Given the education level of many farmers in LDC's, I suspect this presents a very difficult problem.


Adam Jackson

That's a very good point. And I think that farmers in LDCs actually understand to a much greater extent than policymakers in Washington or London what inorganic fertilisers can do to the soils.

That doesn't mean they won't use them though; slash and burn agriculture has a firm pedigree.

Random African

Justin Reitz,

I would suggest that you read this paper:
http://72.14.253.104/search?q=cache:MDu7ULWU2-cJ:www.csae.ox.ac.uk/conferences/2000-OiA/pdfpapers/minot.PDF
Comparing fertilizer use in Benin (114th on the heritage index) and Malawi attempts to explain the difference (Benin does WAAAY better).
Also one should keep in mind that the Malawian export sector, which produces Tea and Tobacco has far better access to credit, inputs and is organized in large estates while Maize, the staple food, is produced by small subsitence farmers and is sold on the local market.
That explains a lot more than blanket statements about corruption and propriety rights.

Justin Rietz

Adam -

I would consider Chieftains arbitrarily taxing others or other obstacles to a free market as corruption or beauruecratic constraints. As far as lenders charging exorbitant interest rates, they are able to do this because competitive avenues of credit aren't willing to take the risk for hte aforementioned reasons.

R.A. -

I am going to stick by my blanket statement - this time :-). First, I should clarify that I was speaking of markets in general, not specifically the fertilizer or seed market. And as I recall from several articles on Malawi, the government actively pushes certain crops over others, hardly a market free of government interactions. In any case, Benin and Malawi are both poor, developing nations with substantial corruption.

Random African

"as I recall from several articles on Malawi, the government actively pushes certain crops over others, hardly a market free of government interactions"

So where exactly do you find those "markets free of government interactions" in which government doesn't actively push certain crops ?
Yes, Benin and Malawi are both poor and corrupt but corruption hardly explains why they're poor or what kind of constrains people actually living there face.
But then again one would need to be interested in understanding the world rather than making it fit in a small box.

Justin Rietz

Agreed that "free markets" is a relative term - I should have been more explicit about this. But as I believe you agree, the differences between the freedom of markets in many African countries versus those in Western Europe are quite apparent.

Re: "constraints people living there face" - I ask, why do these constraints exist? I often think we tend to deal with consequences rather than go to the real root of the problem. While I realize correlation does not equal causation, the relation between corruption and poverty is quite clear. Moreover, the negative affects of government corruption and bureaucracy on an economy are well known (I am happy to provide links to research, papers, data, etc.).

In the case of Malawi, how come farmers can't get credit to buy fertilizer or feed?

Random African

Is the difference in economic freedom apparent in general ? Sure.
Is it necessarily because the government is overreaching ? Not necessarily.

As far as the correlation between poverty and corruption, oh. please.
Sure corruption is an issue but it needs to be incredibly fine-tuned for it to be the main explanation of why Malawi does worse than China or Italy.

But since you asked, in the case of Malawi and input and maize the story goes something like this:
Seed and fertilizer are expensive. The fact that they're imported makes it already out of reach of many farmers (especially the one who don't produce a cash crop). Furthermore, transportation issues raises the prices where the farmers are even more.
Farmers can't get credit because potential creditors would need a collateral. Determining who owns what is hard and the land doesn't have much value by itself anyway, so it can't be used as a collateral. Farmers who produce export crops (in Malawi) can use their harvest as collateral because it's traceable (in Benin or Rwanda, the inputs are sold by the exporters so 90% of the inputs is bought on credit). And even that would be somehow less of an issue if there was local branches where buyers and sellers could build a trust relationship. But there's not and no one in Lilongwe would sell anything on credit to someone they don't know and who produces non-export maize anyway. At the end of the day, it's both government and market failure with both failling to collaborate on establishing processes that would improve the market.
I mean one would have to push real hard to think that corruption is the only issue there. Especially considering that Malawi election are almost solely decided on agricultural issues.

Justin Rietz

"Determining who owns what is hard and the land doesn't have much value by itself anyway, so it can't be used as a collateral"

1. Property rights, a key ingredient of a free market, are missing. Why haven't these been established?

2. Why doesn't land have any value? I assume it is because a) property ownership is unclear, and b) low production yields.

"no one in Lilongwe would sell anything on credit to someone they don't know and who produces non-export maize anyway"

1. This is backwards. Credit is given so that the farmers could produce at above-subsistence levels and thus have exportable goods. This is why many businesses get credit - to do something they currently don't have enough funds to do in order to secure greater profit in the future. And for startups, there usually is no collateral. The interesting point in this case is that there is already proof that farmers growing maize can grow enough to export given the right seed and/or fertilizer.

So, again, my question is why don't lenders go into the smaller villages and provide loans to farmers so that they (the farmers) my buy the needed fertilizer and seed to grow enough produce for export (as they have done in the past)?

Or why haven't larger farming concerns moved in and established themselves? It is known that it is possible to raise output of the land substantially, so there is profit potential - not to mention the benefit of economies of scale a larger firm would have.

Adam Jackson

Justin - how much time have you spent talking to African farmers? Or with African policymakers?

You seem to have a strong knowledge of free-market theoretical concepts, and not much in the way of practical knowledge of how markets and rural institutions work in Africa.

These are not by and large capitalist rural economies, they are traditional and subsistence. Market-making is a very different prospect here than in developed countries, requiring huge coordination between incipient entrepreneurs / capitalists and government agents, not the unconditional rolling back of the state, whatever that would mean here. Tax / GDP ratios are typically much, much lower than in the US for example.

Ragnar Oygard

Justin Rietz asks why Malawian farmers cannot borrow money to buy fertilizers. Well, one reason they can't get loans is that in order to finance this program (and similar ones in the past) the Malawian government has run big budget deficits financed largely through domestic borrowing. Malawian banks have been lending money to the government, not to the private sector (farmers included), and interest rates have been higher than returns from investment in fertilizers. On top of that we have the usual problems of credit market imperfections in developing countries. Lack of collateralizable land isn't really the issue. The issue is the high transaction costs of managing the tiny loans that would be demanded, and the yield uncertainties in rainfed farming in Malawi.

What is seriously lacking in the NYT article is the cost of the subsidy program. One estimate I've seen puts the cost at 3% of GDP. One consequence is the loss of local democracy: The Malawi government has used the cost of the program as an excuse for not carrying out elections to District Assemblies as called for by the Constitution, and District Assemblies have been shut down. Another consequence is that there are hardly any resources available for research and development of more productive locally adapted farming systems. There is also less resources for more long term solutions to the problem of high relative fertilizer prices - such as better infrastructure. Several aspects of the way the government has handled the subsidy program may actually have increased the long-run costs of fertilizer.

It should not be a surprise that such a big program has big positive benefits. Anything else would be a scandal! (But I guess this says something about the low expectations we have to programs in developing countries!) The relevant comparison is whether the resources could have achieved more long term gains if used in another program for poverty reduction.

One reason why the program has been very popular among Malawian voters is that this is the program they have been offered, and it is much better than getting nothing.

Arun Kim

Maggie's paper clarified the New York Times article, which was optimistic about the use of fertilizer as a cure-all solution. I think that this point was argued brilliantly. I have also read your paper on Climate and Scale. I agree that there should be more research on the types of seeds that are more productive in the African climate.

I also enjoyed your anecdote about the case of Ethiopia. I think many policy makers often overlook that inputs can be productive but not profitable.

Random African

"1. Property rights, a key ingredient of a free market, are missing. Why haven't these been established?"

And how do you do that ? Who establishes propriety rights ?
This is not the USSR, the land is not owned by the government and establishing propriety rights is a bit harder than privatizing.
I mean you'd run into issues of registration, inheritance laws, multilayered and contradicting judicial authorities.

"So, again, my question is why don't lenders go into the smaller villages and provide loans to farmers so that they (the farmers) my buy the needed fertilizer and seed to grow enough produce for export (as they have done in the past)?"

First, remember where Malawi is. It's a landlocked country who's closer access to a seaport is via civil-war recovering Mozambique.
The transport costs are high. That means that imports cost a lot and export have to be very competitive to be profitable. So in the past, Malawi has exported commercial crops (tea, tobacco), interestingly enough, grown in the southern region bordering Mozambique but never enough for to be able to afford food (Maize) imports (like oil producing Gabon does for instance). And when Malawi exports maize, it has always been to neighbouring countries and when those were hit by droughts, wars or Mugabe.
So the export potential is not as clear cut as it may seem. Why don't companies think there's potential in the north of the country and/or in maize production ? That's a good question. It could be that they don't see a potential market, it could be that they don't think it could compete outside the local market, it could be that they'd want infrastructure to already be established, Or it could be that they haven't thought about it.

And Ragnar Oygard makes very good points too.

Justin Rietz

Ragnar and RA -

I agree with your points. One thing I would add is that unfortunately, corruption, war, and government problems are not limited by borders, especially for smaller nations - problems in one country affect its neighbors. The U.S. is fortunate in that it is big enough to be "self-sustaining" to a certain extent.

Regarding property rights, I do believe it is the role of the government to aid in this process, regardless of who owns the land. In Eastern European countries - where I have spend considerable time - the de facto situation was that the government did NOT own the land and was NOT able to parcel it out as it wished. In many cases, there were multiple private claims to one piece of land. However, many of these issues have been worked out over time though each country had to find its own way.

Adam -

I have not spent time in rural Africa. However, I have spent time in rural Eastern Europe and Latin America (I have family in both places), and they face similar problems - poor infrastructure, lack of funds for capital investment, subsistence level farming, etc. What has struck me are the common complaints in these countries from small business owners - government bureaucracy, restrictive regulations, and government employees demanding extra "fees". I believe there are enough commonalities among developing nations and regions to draw some general conclusions.

Random African

"What has struck me are the common complaints in these countries from small business owners - government bureaucracy, restrictive regulations, and government employees demanding extra "fees". I believe there are enough commonalities among developing nations and regions to draw some general conclusions."

You'll find those complaints in Africa but most likely in urban Africa.
In rural Africa, the complain is more likely to be about the complete absence of government activities or worse the presence of a small bureaucracy WITHOUT the provision of any service (not even land ownership registration).

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