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Agricultural Input SubsidiesThe Recent Malawi Experience$

Ephraim Chirwa and Andrew Dorward

Print publication date: 2013

Print ISBN-13: 9780199683529

Published to Oxford Scholarship Online: January 2014

DOI: 10.1093/acprof:oso/9780199683529.001.0001

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Graduation1

Graduation1

Chapter:
(p.248) 11 Graduation1
Source:
Agricultural Input Subsidies
Author(s):

Ephraim Chirwa

Andrew Dorward

Publisher:
Oxford University Press
DOI:10.1093/acprof:oso/9780199683529.003.0011

Abstract and Keywords

Graduation has emerged as an issue in debates about the future of the agricultural input subsidy programme in Malawi, amid concerns about the programme’s high cost and fiscal sustainability. However, graduation processes hardly feature in theoretical consideration of subsidy programmes and the current design of the programme does not make any explicit allowance for the graduation of some farmers from the subsidy over time. This chapter considers ways in which the concept of graduation may be usefully applied to the FISP and sets out a broad conceptualization of graduation for potential application in programme design and implementation. Graduation is conceptualized as a removal of access to the programme that ‘does not leave current beneficiaries supported by the programme unable to pursue sustainable independent livelihoods’. The chapter also highlights the need for a multi-scale approach to facilitate graduation and the political difficulties associated with programme reduction and increasing farmer contributions.

Keywords:   input subsidies, graduation, Malawi

11.1. Introduction

Graduation has emerged as an issue in debates about the future of the farm subsidy programme at the interface of a number of issues. The high costs of the programme pose serious questions about its fiscal and macro-economic sustainability and suggest a need for a process that goes beyond simple exits (as discussed in Chapter 2) to allow a phased scaling down that builds on (rather than undermines) the growth, food security, and market development impacts of the programme.

11.2. Conceptualizing graduation

Graduation is a concept that is found in discussions about the impact, dependency, exit, and sustainability of social protection programmes, addressing questions about the extent to which the financial transfers to beneficiaries should and can enable them to exit from the programme of assistance and hence reduce the scope and costs of social protection over time. Governments with tight budgets may be more willing to support social protection if access is time-bound or if there are clear prospects of a higher proportion of the target beneficiaries voluntarily exiting over time. The issue of graduation from social protection is thus closely linked to the developmental or transformative role of social protection, and also to the need to avoid ‘dependency syndrome’ among beneficiaries (Devereux, 2010).

These issues are highly relevant to the FISP, and Chirwa et al. (2011a) discuss the application to the FISP of the conceptualization of graduation in social protection. A review of this conceptualization leads to the conclusion (p.249) that graduation is viewed as the achievement of ‘the potential to embark on sustainable, independent livelihoods without social protection’ (p. 3). This requires further ‘unpacking’, leading them to define potential graduation as the use of transfers to achieve a shift in livelihood activities with ‘stepping up’ (intensification and increased productivity in existing activities) and ‘stepping out’ (into new more productive activities), and reduced emphasis on ‘hanging in’ (avoidance of ‘falling down and out’) (Dorward et al., 2006, 2009a). These changes involve investing some of the transfers into productive activities and the building of assets, capabilities, or livelihood changes that allow beneficiaries to embark on sustainable, independent livelihoods without transfers. Actual graduation is then the removal of access to a transfer programme that does not leave current beneficiaries supported by the programme unable to pursue sustainable independent livelihoods. The distinction between actual and potential graduation is explored in Figure 11.1, where a movement from left to right (from A or C to B or D) represents the termination either of access to programme benefit or of a programme itself, a movement from A to C downwards represents potential graduation, and a movement from A to D represents actual graduation.

These concepts can be applied at different scales of analysis (individual, household, area, or programme), where they raise questions about the relationships between graduation at different scales. These are particularly important when considering a large-scale programme with both household and economy-wide effects.

The more obvious relationship is dependence of graduation at wider scales on the graduation of its components—for example, the dependence of

Graduation1

Figure 11.1. Termination, potential graduation, and actual graduation

(p.250) programme graduation on achievement of some minimum scale of (potential) area graduation, and of area graduation on achievement of some minimum scale of (potential) household graduation). This raises questions about the criteria used at different scales, in both the definition of (potential) household graduation and the required number or percentage of households graduating (or conversely the maximum number or percentage of ungraduated households) for area and/or programme graduation.

However, Chirwa et al. (2011a) also note that lower units’ potential graduation may sometimes depend upon the continuation of transfers (rather than graduation or termination) at a wider scale of analysis. The most likely causes of this in a social protection programme will be where there are significant insurance or indirect effects from transfers. The first case may arise when the presence of a programme offering transfers gives households insurance against livelihood shocks and stresses and this allows them to take ‘stepping up’ and ‘stepping out’ investment risks even when they are not direct beneficiaries of a programme. Their pursuit of (and hence graduation to) independent sustainable livelihoods may then be dependent on the presence of a transfer programme rather than on their direct receipt of benefits from it. Households that seem to have graduated from the programme may in fact still be dependent on its existence, though not, under normal circumstances, on their direct engagement with it. An example of such indirect effects is where there are significant multiplier effects from households in receipt of transfers, for example where these lead to greater demand by recipient households of particular services whose supply provides income for other households. Where this is the case then withdrawal of transfers from a significant number of households in an area may lead to a reduction in these multipliers and undermine the livelihoods of households who appeared to have achieved independent sustainable livelihoods.

Consideration of these multi-scale relationships allows the definition of an apparently simple core requirement for graduation: that removal of access to a programme (termination) does not leave beneficiaries currently supported by the programme unable to pursue sustainable independent livelihoods.

This requirement is only apparently simple because there are major practical and theoretical challenges in defining and measuring criteria for determining the point at which beneficiaries can be weaned off a transfer with some minimum acceptable standard of welfare or probability of achieving a stable or upward welfare or livelihood trajectory. Devereux (2010) argues that there are difficulties in identifying both indicators or variables and critical attainments of welfare and self-reliance, such as threshold values of incomes and assets that will not result in graduating households reverting back to situations of vulnerability. These thresholds may involve some minimum income line, the accumulation of control and access to assets (physical, (p.251) social, human, financial, and natural capital) that are necessary for sustainable livelihoods that can cope with shocks and stresses. These however, are likely to vary with household structure (for example, gender composition and dependency ratios), with socio-economic and cultural context, with livelihood strategies and opportunities, and with complex interactions between the different forms of capital listed above. Critically, graduation measures need to be concerned with the achievement of conditions (inputs and processes) necessary for the pursuit of sustainable independent livelihoods rather than the achievement of welfare outcomes which may tell us little about livelihoods, independence, or sustainability.

A further complexity arises with the conceptualization of poverty traps operating at wider scales of analysis in local economies (Rodenstein-Rodan, 1943; Dorward et al., 2005a, b, 2009). This is linked to different scales or units of graduation, as discussed above, and demands consideration of variables and thresholds for determining area and programme graduation. Determination of potential graduation for areas and programmes is likely to involve some threshold number or percentage of beneficiary graduation at the area or programme level, and consideration of volumes of livelihood activities at these wider scales.

A final comment is needed on the importance of social and political influences on processes and decisions in graduation from transfers. Termination decisions are highly political, in terms of local, national, and bureaucratic policies concerned with, respectively, questions about which people and groups of people benefit from transfers; which areas, constituencies, and ethnic groups benefit; and how limited resources are allocated between agencies and sectors.

11.3. Graduation pathways for the Malawi Farm Input Subsidy Programme

We now consider a definition of graduation specific to the FISP in order to identify possible processes, pathways, and criteria for graduation and design and implementation features that could promote graduation within the programme. This brings together insights from more general discussion of graduation processes (in Section 11.2) with particular understanding of the role of FISP in promoting livelihood development and economic growth, as set out in Chapters 2, 4, 6, and 7.

Our discussion of graduation processes in transfer programmes in Section 11.2 emphasized the processes of stepping up and stepping out; multi-scale aspects of interactions between graduation and termination; and alternative income, livelihood activity, and asset variables and thresholds in defining (p.252) potential graduation. Other issues discussed by Chirwa et al. (2011a) include the importance of a range of different conditions facilitating (or impeding) graduation (including the depth and incidence of poverty among beneficiaries and non-beneficiaries; the value, nature, and duration of benefits; complementary services, and the wider socio-economic environment); and socio-political factors. Graduation was defined as the removal of access to a transfer programme that does not leave current beneficiaries supported by the programme unable to pursue sustainable independent livelihoods.

Discussion of the impacts of FISP throughout this book have raised similar issues regarding stepping up and stepping out processes; multi-scale interactions; changes in livelihood activities as critical elements in economic growth and structural change within local and wider economies; and the importance of complementary services and the wider socio-economic environment. Issues which were implicitly rather than explicitly considered include effects on livelihoods of the depth and incidence of poverty among beneficiaries and non-beneficiaries; and the value, nature, and duration of subsidized benefits. Socio-political considerations in area and household targeting have also been discussed more specifically in Chapters 4, 5, and 10, while input market development is a major issue in Chapter 8.

Our consideration of multi-scale and dynamic subsidy programme contributions to development suggests that the core requirement for graduation from the subsidy programme should be that removal of access to the subsidy programme does not critically reduce land, labour, and capital productivity in maize production in the livelihoods of beneficiaries and in the economy as a whole. This provides a definition of graduation analogous to our earlier general definition of actual graduation from transfer programmes and it also, and importantly, allows the identification of a number of ‘potential graduation conditions’ which are required in some combination as a result of and during the implementation of the FISP for subsequent actual graduation. These comprise

  1. 1. Falls in unsubsidized farm-gate input prices and costs compared to pre-programme prices and costs.

  2. 2. Reduced requirements for the purchase of previously subsidized inputs due to increased efficiency in use.

  3. 3. Reduced requirements for the purchase of previously subsidized inputs due to substitution by cheaper inputs.

  4. 4. Increase in working capital among poor beneficiary households for the purchase of previously subsidized inputs.

  5. 5. Poor beneficiary households’ diversification out of maize production through either transfer of land to other high value production use (p.253) (diversification or stepping out of maize within agriculture) or transfer of land to another user with diversification or stepping out of agriculture into non-farm activities.

  6. 6. Access to low-cost credit by poor beneficiary households for the purchase of previously subsidized inputs.

These conditions share a number of features:

  • None of these potential and desirable changes can be ruled out as irrelevant or impossible, nor can any be identified as being of paramount importance.

  • Thresholds within each of these conditions cannot be determined independently of achievement of other conditions.

  • They are all dependent on the multi-scale processes of stepping up and stepping out to create the systemic conditions under which sufficient change can be achieved for them to contribute to graduation by some households.

  • They can all benefit from promotion in design and implementation.

We can, however, note that they are likely to vary in the extent to which they will be accessible to different households and in the speed at which necessary changes will happen. These changes also, of course, require different types of promotion in programme design and implementation and in complementary investments.

Table 11.1 summarizes the likely processes and requirements needed for each of the ‘potential graduation conditions’ listed above. The final two columns of the table classify these by the scale at which changes operate and the speed at which it is reasonable for the changes to become effective in promoting potential graduation. All processes and requirements operate at multiple scales, relying on wider structural, policy, and service changes at national and area level to support and be supported by each other and by changes within businesses or households’ livelihood activities. The speed of change then depends upon households’ initial structures and resource holdings, their receipt of subsidized inputs over the life of the subsidy programme, events and shocks affecting their welfare and resources, and both policy-induced and other changes in the local and wider socio-economic environment.

Most of the entries in Table 11.1 require little elaboration. For reduced input prices (1), there are a large number of reports on the potential for reducing prices for inorganic fertilizers by improving transport systems and management during importation and distribution, by switching from 23:21:12 to a cheaper but equally effective formulation, and possibly by investing in a (p.254)

Table 11.1. Graduation processes, requirements, and sequencing of changes

Potential graduation conditions

Likely processes and requirements

Scale

Order

1. Reduced input prices

Efficient & competitive importers, supplier(s), transporters; improved transport infrastructure

Business, area, national

1

2. Increased efficiency in input use

Improved agronomy, complementary seed, inorganic & organic fertilizers, soil management. Investment in agricultural research and extension

Household, area, national

1

3. Substitution by cheaper inputs

Increased legume cultivation with rotational fallows. Good legume seed supply, produce demand & markets. Stable & reliable low maize prices & high maize productivity for transition before subsidy removal

Household, area, national

1

4. Increase working capital for input purchases

Increased incomes, diversified incomes with reduced income seasonality

Household, area, national

1

5. Diversification out of maize production

Stable & reliable low maize prices, strong demand for high value farm products and/or non-farm goods & services, land markets & safety nets

Household, area, national

2

6. Access to low-cost credit for input purchases

Increased & diversified incomes, innovative & low-cost micro-finance systems.

Household, area, national

2

fertilizer blending plant in Malawi (for example, Munthali, 2007). Increasing working capital of beneficiary households (4) is the most commonly considered pathway for potential graduation in social protection programmes (as discussed earlier). Its effectiveness in actually allowing potential graduation, however, is also very dependent upon a household’s initial asset status relative to some threshold needed for sustainable independent livelihoods, and upon structural issues (such as household composition) and exposure to adverse shocks. Diversification out of maize production (5) is likely to take some time as it depends upon wider structural change and developing confidence of low and stable maize prices in consumer markets. It is, however, likely to be a condition for the development of access to low-cost credit (6), since this is only likely to be possible with some form of micro-finance system where borrowers engage in different micro-enterprises with different seasonal patterns of income and expenditure and different risks (see, for example, Dorward et al., 2001).

Turning now to consider (3)—‘increased efficiency in input use’—there is considerable evidence for the potential of raising returns to fertilizer use by greater use of high yielding seed, more timely planting, more effective (p.255) soil health management, timely weeding, more effective fertilizer application methods, and greater use of complementary organic fertilizers (Maize Productivity Task Force, 1997; Snapp et al., 2010). Holden and Lunduka (2012b) report encouraging findings of complementary use of organic and inorganic fertilizers in a sample of farmers from six districts in the Southern and Central Regions of Malawi.

Organic fertilizers and legume intercropping and rotation can also substitute for and augment inorganic fertilizers—listed under (4) above, ‘substitution by cheaper inputs’. However, major difficulties with the adoption of such systems have been the labour and/or land requirements for fallows, for tree planting and maintenance, and for growing green manures and mulches (for example, Barrett et al., 2002). These labour and land requirements are particularly problematic and high for land- and labour-constrained poor households who suffer most from the Low Maize Productivity Trap outlined in Chapter 4. Such households might be expected to gain significant benefits from an improved maize/semi-perennial legume (pigeon pea and groundnut inter-crop) rotation system which can offer equivalent maize production to unfertilized maize but with added legume grain sales and high protein consumption (Snapp et al., 2010). However, adoption of these systems faces major transition problems as a result of lost maize production when introducing a legume crop in the first year of a rotation. Participation in the subsidy programme, however, offers opportunities to address this problem in three ways:

  1. 1. By increasing maize productivity on people’s land, the programme should help farmers to get more maize from their land, so that if they allocate say 1/3 of their land to groundnuts/pigeon peas in year 1 and use fertilizer on the other 2/3 of their land, they could still have roughly the same or more maize as they would with all their land under maize production without the subsidy, plus the legume grain. In year 2 they could do the same but because of the benefits from the land rotated under the previous year, they would get more maize, and by year 4 they would have all their land under rotation.

  2. 2. By reducing the price of maize and raising wages, the programme should also make farmers less desperate to grow all their own maize, allowing them to buy any shortfall for less. This should reduce the risks of not producing enough maize during the transition.

  3. 3. By raising real incomes the programme should increase the demand for legumes within households and in the wider market, raising the value to households of their legume grain production.

(p.256)

11.4. Programme design and implementation to promote graduation

The identification of different and complementary potential graduation pathways has immediate implications for two aspects of programme design and implementation: first the programme should be implemented in ways that actively promote these graduation pathways, and second actual graduation procedures should be built into programme implementation.

The interventions needed to promote graduation pathways vary between pathways and generally align with and strengthen the importance of existing programme or development objectives. Thus, interventions to promote lower input prices and to increase efficiency in input use and substitution by cheaper inputs should all raise the efficiency of the programme—and indeed have substantial contributions to make in their own right, independent of the programme. Similarly, increases in working capital among poor beneficiary households should be aligned with programme objectives. Encouraging diversification out of maize and agriculture and promoting access to low-cost credit are valuable general objectives for rural development, but are not so obviously complementary to the implementation of FISP, and may therefore need special (and specialized) attention alongside FISP.

What is striking, however, about the graduation conditions, processes, requirements, and scales of change detailed in Table 11.1 is the importance of the multi-scale interactions between national, area, and household processes of change. This is supported by the analysis reported in Chapter 7 suggesting that indirect benefits may be larger than direct beneficiaries for poor beneficiaries in poorer areas, with beneficiary graduation therefore critically dependent upon wider processes of change and potential area graduation. This requires a holistic multi-scale approach that coordinates programme design and implementation with complementary policies and investments that operate outside the programme—in infrastructure, research, extension, stable maize markets, and the development of the non-farm economy. Since (as set out in Chapter 2, in the causal pathway in Figure II.1 and in the links between Chapters 6 and 7) this holistic approach is needed to obtain maximum food security and wider development benefits from the programme, there should be strong synergies between an emphasis on graduation and the wider pursuit of greater and lower cost achievement of a wide set of potential programme benefits.

As regards actual graduation (and termination) procedures, three broad approaches may be followed, singly or in any combination: (a) reductions in subsidy per household; (b) a reduction in the number of areas or districts served by the programme with phased withdrawal of the programme from particular areas or districts; and (c) withdrawal of the programme from (p.257) particular households. Options (b) and (c) require criteria for determining graduation or termination of the subsidy by area or household, and these should be closely linked to targeting criteria and systems— the discussion on targeting in Chapter 10 is therefore critically relevant and consideration of the targeting alternatives discussed there should take account of the graduation options discussed here. One concern raised in focus group discussions and life histories about a smaller universal subsidy was that such subsidies were too small to improve households’ livelihoods sufficiently for them make any progress towards graduation (see Section 6.7), although this perhaps would not be such a concern if the subsidy was effectively driving positive economy-wide effects in maize prices, wages and livelihood, and local economy diversification. Where area and household targeting are employed then graduation (and hence targeting) criteria are likely to include consideration, at household and area scales, of budgetary constraints, political factors, efficiency differentials, and potential graduation.

Political issues associated with different approaches to graduation require a special mention. Political difficulties with reducing the scale of the subsidy per household by increasing farmer payments are evident from the determinants of falling nominal payments for subsidized fertilizer as reported earlier in Section 5.5.1. Farmer’s concerns expressed in focus group discussions and life histories (summarized in Chapter 6) suggest that there are also political difficulties with reducing household entitlements to one bag of fertilizer and associated seed. Reducing the number of subsidized households rather than the scale of subsidies to all households (by withdrawal of subsidies from particular areas and/or particular households) may face greater political opposition from smaller numbers of people. Political calculations will then consider which interest groups are politically most important or powerful with respect to the aspirations, strengths, and weaknesses of political leaders with responsibility for and/or power over the programme. Such calculations may not give technocratically preferred graduation policies, or any graduation policy at all.

Potential graduation may be measured using variables related to the potential graduation changes identified in Table 11.1. Attention should also be paid to questions about relationships between area graduation/termination and household graduation as touched on earlier in Section 11.2. Just as there are synergies between measures that will promote graduation and those that will promote wider achievement of programme objectives, there should be similar synergies between the development and use of graduation criteria and wider monitoring and evaluation of programme achievements. It is, however, also important to note that the use of poor criteria or procedures in trying to promote graduation is also likely to damage the effectiveness of the wider programme (if, for example, termination rather than graduation were (p.258) to be an important target in programme implementation, either explicitly or as a result of poor setting or application of graduation criteria).

11.5. Summary

In this chapter we have considered ways in which the concept of graduation may be usefully applied to the FISP. The conceptualization of graduation as the removal of access to transfers that does not leave current beneficiaries unable to pursue sustainable independent livelihoods allows a distinction to be made between potential graduation, actual graduation, and termination of access. It also helps in consideration of the differences and inter-relationships between graduation and termination at different scales, such as household, area, and programme. These conceptual issues suggest that measures of graduation should use variables and thresholds that measure assets and activities supporting sustainable independent livelihoods rather than income measures, and such measures need to take account of the different opportunities, threats, and difficulties facing different people in different contexts.

This conceptualization provides an explicit focus on graduation which, as shown in Chapter 3, appears to be lacking from most programmes, and indeed, as is evident in Chapter 2, is also lacking from most wider discussion of programme exits, despite the widespread consideration of time-bound exits as a key feature of ‘smart subsidies’ (for example, Minde et al., 2008; Morris et al., 2007). This conceptualization has important implications for core political and technical issues in programme design and implementation.

Application of these lessons to graduation in agricultural input subsidy programmes like the Malawi FISP requires some understanding of the processes by which these programme promote sustainable independent livelihoods. In the Malawi FISP this allows a specific definition of graduation as a removal of access to the subsidy programme that does not reduce land, labour, and capital productivity in maize production. ‘Potential graduation conditions’ that promote this include reduced input prices, increased efficiency in input use, substitution by cheaper inputs, increased working capital for input purchases, diversification out of maize production, and access to low-cost credit for input purchases. Identification of these potential graduation conditions is valuable for suggesting types of change that programme designers and implementers should seek to promote, as well as variables that may be used in making decisions about graduation criteria and processes. Further work is needed to determine what criteria (variables and thresholds) may be best for judging potential graduation at different scales. However, graduation, the withdrawal of access to subsidies, is an intensely political issue, and both political and technical considerations will be important determinants of graduation (p.259) policies and their implementation. The importance of wider indirect impacts of the programme for potential household and area graduation also suggests that there should be strong synergies between on the one hand a greater emphasis on graduation within the programme and on the other a more effective and efficient achievement of a food security and wider development objectives.

Notes:

(1) Much of this chapter draws heavily on Chirwa et al. (2011a).