Agricultural Input Subsidies in General Equilibrium: Evaluation of FISP in Malawi

We quantitatively evaluate general equilibrium effects of the Farm Input Subsidy Program rolled out at large-scale in Malawi in 2005, with the aim of increasing food security and productivity of staples. First, we present cross-country evidence that while staple-targeting subsidy programs increase the value of produced staples, they reduce the value of produced cash crops. This trade-off is confirmed by our micro-evidence from Malawi showing that cultivating more staples reduces the overall value of household’s cultivated crops. We also document that in spite of FISP’s large fiscal costs, food insecurity in Malawi remains very high. Then, we build a dynamic general equilibrium framework with financial frictions, subsistence consumption constraints and heterogeneous agents making occupational choice between working as labourers in urban areas, and as staple or cash crop farmers in rural areas. Finally, we present preliminary quantitative results of a policy reform changing the size and targeting of FISP in Malawi.