1 IMPROVING BENEFIT COST ANALYSIS FOR MALAWI’S FARM INPUT SUBSIDY PROGRAMME, 2006/7 TO 2010/11

This paper develops improved estimates of benefits and costs of the Malawi Farm Input Subsidy from 2005/6 to 2010/11. It sets out principles and purposes for Benefit Cost Analysis (BCA) for the programme and applies them to develop a relatively formal partial equilibrium methodology for BCA that distinguishes between real income gains to subsidy recipients, other producers, and consumers. This allows differential multipliers to be applied to these income gains to allow simple analysis of wider equilibrium and dynamic effects of the subsidy programme. Benefit cost analysis faces difficulties due to lack of reliable data on the number of farm households in Malawi and on cropping parameters needed for estimation of the programmes ’ impact on production. Nevertheless the modified benefit cost analysis leads to increased estimates of returns to the subsidy programme. The benefit cost ratio averaged across 2005/6 to 2010/11 was previously estimated at 1.22, with an average fiscal efficiency of 0.31, using moderate assumptions regarding prices and yield responses to fertiliser and improved maize seed. Precise estimate of returns to the programme are difficult due to a variety of methodological and data quality difficulties, but with the revised methodology the average benefit cost ratio is estimated at around 1.6, with fiscal efficiency of around 0.45. The analysis provides important pointers to ways in which programme design and implementation can be improved to make the programme more effective and efficient. It also suggests that with good implementation the programme can provide returns that are comparable to and exceed those achievable from alternative and complementary investments in infrastructure, education and agricultural research. The programme therefore has an important role as a critical element in a strategy of balanced government investments promoting poverty reducing growth in Malawi