It is no secret that fertilizer subsidies are back in vogue across SSA as the preferred tool for governments trying to boost incomes of poor smallholder farmers by increasing farm production and agricultural productivity. The financial burden of fertilizer subsidies is also widely recognized, exacerbated by the expense of improving the accuracy of targeting, as discussed in Jayne et al, 2018.
Could targeting ensure that the poorest farmers receive subsidies and at the same time reduce administration costs? A recent IFPRI study set out to answer this question, by exploring the feasibility of targeting with proxy means tests (PMTs). A proxy means test (PMT) approach can be broadly defined in the following steps: (1) gathering information on observable characteristics of potential beneficiaries, (2) using the information as a proxy (measure) for determining the means (resources) of the potential beneficiaries, and (3) deciding who should benefit from a program on the basis of their estimated resource levels.
The researchers first examined how well existing mechanisms fare in terms of reaching the right beneficiaries. The authors assess intended versus actual subsidy beneficiaries in Ghana’s FSP, based on poverty levels. Ghana’s 2012 subsidy reached only 11 per cent of poor farmers nationwide, and benefits were leaked to 72 per cent of nonpoor farmers. While this is not surprising for a universal subsidy, the finding should give pause for thought among governments concerned about reaching poor farmers with subsidies. Unsurprisingly, a targeting approach improves pro-poor coverage, ensuring that about 70 percent of poor farming household in Ghana’s northern regions will be reached with the subsidy.
Second, they examined whether a targeting approach could work in practice? The authors evaluate how well and for how long a PMT will likely perform in correctly identifying the target group in the field, by conducting robustness tests using nationally representative data from three different time periods. The PMT can be used for up to 20 years without losses in targeting accuracy or a need for further calibration.
Lastly, with scarce development resources to go around, is a targeting approach worth the cost? The study analyzes whether administering a targeted approach is truly more cost-effective than implementing a universal subsidy. As one would expect, administrative costs for a targeted approach are higher, about 50-60% of the overall subsidy program costs, compared with about 15% for a universal approach. However, in terms of cost effectiveness, while GHS9.55 is spent for every cedi worth of fertilizer transferred to a poor farmer under the universal approach due to the leakage costs, a comparably smaller amount of GHS1.1 is needed under a targeted approach to provide a cedi of fertilizer to a poor farmer.
Ghana’s government has been providing input subsidies in an environment of constrained resources and risks of macroeconomic imbalances if such programs put an undue strain on the public purse. The oft-stated goal of the subsidy is ostensibly supporting poor farmers. This study shows the possibilities and limits for using improved targeting to achieve these objectives.
This blog post was written by Kwaw Andam. The paper it is based on is available here.