Investment and Technology: Should We Subsidize...

Lecture 15: Investment and Technology: ShouldWe Subsidize Fertilizer?

Dave Donaldson and Esther Duflo

14.73 Challenges of World Poverty

Fertilizer

� Previous lecture: by how much should anti-malarial bednets be subsidized?

� This lecture: by how much should an agricultural input (like fertilizer) be subsidized?

How Can We Feed a Growing/Crowded Planet?

� A quote from Johnson (Presidential Address, American Economic Association, 2004):

� “Indeed it is certain...all places are full of business. The most charming farms obliterate empty places, ploughed fields vanquish forests, herds drive out wild beasts, sandy places are planted with crops, swamps are drained, and there are great cities where formerly hardly a hut...everywhere there is a dwelling, everywhere a multitude, everywhere a government, everywhere there is life. The greatest evidence of the large number of people: we are burdensome to the world, the resources are scarcely adequate to us; and our needs straiten us and complaints are everywhere while already nature does not sustain us. Truly, pestilence and hunger, and war and flood, must be considered as a remedy for nations, like a pruning back of the human race becoming excessive in numbers.”

The Problem: Food Output per Person From “Fertilizer Use in African Agriculture”

1960 1965 1970 1975 1980 1985 1990 1995 2000 2005

180

170

160

150

140

130

120

110

100

90

80

East and Southeast AsiaLatin AmericaSouth Asia

Sub-Saharan Africa

Index of Food Production Per Capita, 1961-2004 (1961 = 100)

Figure by MIT OpenCourseWare.

Source: FAOSTAT.

The Problem: No ‘Green Revolution’ From “Fertilizer Use in African Agriculture”

Source: FAOSTAT.MT = metric ton; ha = hectare.

Table 2.1 Fertilizer Use Intensity and Growth by Developing Region, 1962, 1982, and 2002

South AsiaEast and Southeast Asia 12 53 96 7.64 3.39Latin America 10 43 78 7.79 3.06Sub-Saharan Africa 1 7 8 8.71 0.93Developing countries 6 52 102 11.26 2.32

Source: Calculated from FAOSTAT data on fertilizer consumption and land use.kg = kilogram; ha = hectare; % = percent.

East and Southeast AsiaLatin AmericaSouth Asia

Sub-Saharan Africa

4.0

3.5

3.0

2.5

2.0

1.5

1.0

0.5

01960 1965 1970 1975 1980 1985 1990 1995 2000 2005

Cereal Yields, Developing Regions, 1960-2005 (Average cereal yields [MT/hal])


The Solution? Fertilizer I From “Fertilizer Use in African Agriculture”

Source: FAOSTAT.

45

40

35

30

25

20

15

10

5

01970 1975 1980 1985 1990 1995 2000 2005

East AsiaLatin AmericaSouth Asia

Sub-Saharan Africa

Ferti

lizer

con

sum

ptio

n (m

ill to

ns)

Southeast Asia

Fertilizer Consumption, Developing Regions, 1970-2004


The Solution? Fertilizer II From Mundlak (Journal of Economic Literature, 2004) 992 Journal of Economic Literature, Vol. XLIII (December 2005)

figure

million in 1990.4 As figure 1 shows, land, capital, and labor grew (or are assumed to have grown) at similar rates at the begin- ning of the nineteenth century, but as the century wore on the growth rate of labor started to lag behind that of land, leading to

a rise in the land-labor ratio.5 The decline in the growth rate of labor-unlike that of output, land, and capital-continued throughout the century and accelerated in the twentieth century.

Capital grew faster than labor, and more so in the economy than in agriculture. The major part of the agricultural capital was comprised initially of land improvement,

4 Data up to 1950 come from Tostlebe (1957, table 4); for later years I use figures based on census data reported by Andrew P. Barkley (1990) for the period 1940-85. The extension to 1990 is based on growth rates derived from Gardner (2002, figures 8.1 and 8.2). 5 Wayne D. Rasmussen (1962, pp. 573-74).

cc~

~18 , ~"

-3

-2

-1

0

1

2

3

4

Perc

ent

Output Labor Land Capital Fertilizers

1800-1840

1840-1880

1880-1900

1900-1940

1940-1990

U.S. Agriculture 1800-1990-Growth rates


The Solution? Fertilizer III

� What was the claim of the 2007 NYT article (“Ending Famine, Simply by Ignoring the Experts”) on the reading list?

� Do you agree with the claim?

Subsidize Fertilizer?

� Huge swings in subsidy policy in developing countries in last 3 decades

� Huge issue: � Fertilizer subsidies: 0.75 % of GDP in India in 1999-2000 � Fertilizer subsidies: 2 % of government budget in Zambia in

2008

� Should fertilizer be subsidized?

Answer from World Bank I Chapter 1 of “Fertilizer Use in African Agriculture”

� No.

� “Whenever direct price subsidies have been used to promote fertilizer, the results have almost always been disappointing: the cost of the subsidies has been high, and the benefits generated by the incremental fertilizer use have been modest.”

� What do they propose instead?

Answer from World Bank II Chapter 1 of “Fertilizer Use in African Agriculture”

� Improve the supply of fertilizer (shift S curve up): � Reduce fertilizer sourcing costs (lower tariffs, adopt common

quality standards, harmonize approval processes—to create larger markets)

� Reduce fertilizer distribution costs (better road and rail infrastructure)

� Strengthen (fertilizer manufacturer and distributor) business finance and risk management instruments

� Improve supply chain coordination mechanisms (system of product quality grades, improved market information systems)

Answer from World Bank III Chapter 1 of “Fertilizer Use in African Agriculture”

� Improve the demand for fertilizer (shift D curve up): � Strengthen ag research and extension (sponsoring research and

demonstrations) � Improve farmers’ ability to purchase fertilizer (better access to

credit) � Provide farmers with better tools to manage risk (weather

insurance) � Improve market information systems � Protect farmers against low and volatile output prices (eg,

irrigation) � Empower farmers (by supporting producer organizations) � Improve the ag resource base (soil and water conservation,

irrigation)

Answer from World Bank IVChapter 1 of “Fertilizer Use in African Agriculture”

� What do you think about all of this?

Answer from Economists I From discussion in Duflo, Kremer and Robinson (2009)

� ‘Chicago tradition’ and others: farmers are rational profit maximizers

� So if there is no externality, subsidies/taxes will make farmers do something non-optimal

� Plus, subsidies are ‘regressive’: the rich (those with more land) benefit more

� Plus, public distribution programs are full of corruption, waste, and ‘politically motivations’ for their distribution

� Plus, overuse of fertilizer can be environmentally damaging

Answer from Economists II From discussion in Duflo, Kremer and Robinson (2009)

� But if the ‘Chicago tradition’ is right, and fertilizer use is obviously profitable, why aren’t farmers using it?

� Possible answers (and replies from DKR09): � ‘Fertilizer use isn’t profitable’. (But demonstration farms show,

time and time again, that it is profitable.) � ‘Fertilizer use requires a combination of conditions that may be

true on demonstration farms, but isn’t true on real farms.’ (But even on real farms, if you use fertilizer randomly, it can be profitable.)

� ‘Farmers don’t know about the benefits.’ (But fertilizer is used extensively and for decades in our study area. And when we showed every farmer the improved profitability on their own farm, most still don’t use it.)

� ‘Farmers are credit constrained.’ (But fertilizer is divisible. You can buy and use tiny amounts or large amounts.)

Answer from Economists III

� Duflo, Kremer and Robinson (2009) propose an alternative answer to the question: If fertilizer use is obviously profitable, why aren’t farmers using it?

� Their alternative answer: Some farmers are ‘irrational’: � Farmers are present-biased (they procrastinate; they are

impatient now) � Farmers don’t realize that they procrastinate (they

underestimate the chance that they will again be impatient in the future)

� So if faced with a cost of buying fertilizer, even a small cost, even farmers who plan to use fertilizer will procrastinate on incurring this cost

� Examples of this cost: going to the store, deciding which type to buy, figuring out how to use it

� Strong evidence of this type of behavior among US workers deciding about which pension plan to use. (Nudge)

Duflo, Kremer and Robinson (2009)

� Build on over five years of randomized experiments in Western Kenya

� Examine fertilizer use and effects among maize farmers

� Randomly offer free fertilizer delivery, in four different ways, designed to examine whether procrastination could explain low fertilizer usage.

What Do Kenyan Farmers Say?

� Why don’t you use fertilizer? � Not that it’s ‘unprofitable’ (9 %), ‘unsuitable for my soil’, or

‘too risky’. � “I want to use fertilizer but I don’t have the money to

purchase it.” (79 %) � Do you plan to use fertilizer next season?

� 97.7 % say yes. � 36.8 % follow through

First Randomized Intervention

� ‘Basic SAFI’: � Field officer visits farmer’s home at harvest time � Offers free delivery of any amount of fertilizer � Delivery date can be any date the farmer wants � Farmer must decide now

� What does this intervention do? � Saves trip into town to buy fertilizer � Forces quick decision (lower decision cost?) � Allows farmer the chance to pre-commit

� What effect do you think this will have on fertilizer use in T vs C?

First Intervention: Results

Table 2. Adoption for Parents Sampled for SAFI & Subsidy Programs

(1) (2) (3) (4) (5) (6)SAFI Season 1 0.114 0.143 0.007 0.007 0.006 0.01

(0.035)*** (0.038)*** (0.041) (0.044) (0.037) (0.041)Starter Kit Farmer 0.059 0.080 0.024 0.005 -0.009 -0.027

(0.042) (0.046)* (0.047) (0.051) (0.043) (0.048)Starter Kit Farmer * Demonstration Plot -0.026 -0.061 0.024 -0.005 0.004 -0.031 School (0.060) (0.066) (0.068) (0.075) (0.063) (0.070)Demonstration Plot School 0.006 0.441 0.362 0.464 0.362 0.437

(0.314) (0.435) (0.460) (0.463) (0.335) (0.465)Household had Used Fertilizer Prior 0.369 0.315 0.319 0.284 0.281 0.251 to Season 1 (0.031)*** (0.035)*** (0.035)*** (0.040)*** (0.033)*** (0.037)***Male 0.012 0.014 0.026

(0.033) (0.037) (0.034)Home has mud walls -0.193 -0.183 -0.021

(0.081)** (0.091)** (0.085)Education primary respondent 0.004 -0.004 0.015

(0.004) (0.005) (0.005)***Income in past month 0.004 0.006 0.002 (in 1,000 Kenyan shillings) (0.003) (0.003)** (0.003)Observations 876 716 756 626 902 734

Panel B. 2004 Season 2 Treatments (1) (2) (3) (4) (5) (6)SAFI Season 2 -0.009 0.042 0.165 0.181 -0.024 -0.005

(0.053) (0.057) (0.061)*** (0.066)*** (0.056) (0.061)SAFI Season 2 with Choice -0.014 0.03 0.207 0.216 -0.027 0.003 on Date of Return (0.048) (0.053) (0.055)*** (0.060)*** (0.050) (0.056)Half Price Subsidy Visit at Top Dressing -0.035 -0.039 0.142 0.127 0.023 0.041

(0.052) (0.057) (0.059)** (0.065)* (0.054) (0.061)Full Price Visit at Top Dressing -0.065 -0.034 0.096 0.104 -0.053 -0.031

(0.052) (0.058) (0.059) (0.066) (0.054) (0.061)Bought Maize -0.002 -0.011 -0.042 -0.079 0.002 -0.014

(0.043) (0.048) (0.049) (0.054) (0.046) (0.050)Bought Maize * SAFI Season 2 -0.048 -0.073 -0.085 -0.057 0.005 -0.011



(0.081)** (0.091)** -0.086Education primary respondent 0.004 -0.003 0.015

(0.004) (0.005) (0.005)***Income in past month 0.004 0.006 0.003 (in 1,000 Kenyan shillings) (0.003) (0.003)** (0.003)

Mean Usage in Comparison Group 0.247 0.228 0.297 0.300 0.392 0.397Observations 876 716 756 626 902 734Note: Dependent variable is an indicator equal to 1 if the farmer adopted planting or top dressing fertilizer in thegiven season. All regressions control for school, and whether the farmer was a parent of a Standard 5 or 6child (see text). Panel B also include controls for the Season 1 Treatments listed in Panel A.The comparison group means listed in the bottom of the table are for individuals that did not participate in either SAFI, were not offered fertilizer at any price, and did not participate in the starter kit program. This accountsfor the difference in mean usage between this Table and Table 1.There are fewer observations than in Table 1 because of missing values for previous usage. For all programslisted above, respondents were allowed to buy either DAP (for planting) or CAN (for top dressing) fertilizer.Exchange rate was roughly 70 Kenyan shillings to US $1 during the study period.Standard errors in parentheses. * significant at 10%; ** significant at 5%; *** significant at 1%

Used FertilizerSeason 2






Second Randomized Intervention

� ‘Basic SAFI with ex ante timing choice’: � Field officer visits farmer’s home before harvest time � Offers farmer the choice of when he would like to be offered

‘Basic SAFI’ � What does this intervention do?

� Saves trip into town to buy fertilizer � Forces quick decision (lower decision cost?) � Allows farmer the chance to pre-commit

� When do you think farmers wanted to be offered SAFI?


Second Intervention: Results

� When did farmers want to be offered SAFI?: � 44 %: asked officer to come back immediately after harvest

(and among this 44 %, almost half bought ‘Basic SAFI’) � 52 %: asked officer to come back at time when fertilizer is to

be applied (and among this 52 %, 39 % bought the fertilizer) � 4 %: declined offer for officer to come back

Second Intervention: Results


(1) (2) (3) (4) (5) (6)SAFI Season 1 0.114 0.143 0.007 0.007 0.006 0.01










(0.052) (0.058) (0.059) (0.066) (0.054) (0.061)Bought Maize -0.002 -0.011 -0.042 -0.079 0.002 -0.014













Third Randomized Intervention

� ‘Free delivery at fertilizer application time’: � Field officer visits farmer’s home right at the time when

fertilizer needs to be applied � Offers farmer fertilizer with free delivery

� What does this intervention do? � Saves trip into town to buy fertilizer � Should be same as ‘Basic SAFI’, but without pre-commitment


Third Intervention: Results


(1) (2) (3) (4) (5) (6)SAFI Season 1 0.114 0.143 0.007 0.007 0.006 0.01










(0.052) (0.058) (0.059) (0.066) (0.054) (0.061)Bought Maize -0.002 -0.011 -0.042 -0.079 0.002 -0.014













Fourth Randomized Intervention

� ‘Free delivery of subsidized fertilizer at application time’: � Same as third intervention but fertilizer is offered at a 50 %

subsidy � What does this intervention do?

� Saves trip into town to buy fertilizer � Allows us to compare pre-commitment effect (of ‘Basic SAFI’)

with a pure subsidy


Fourth Intervention: Results


(1) (2) (3) (4) (5) (6)SAFI Season 1 0.114 0.143 0.007 0.007 0.006 0.01










(0.052) (0.058) (0.059) (0.066) (0.054) (0.061)Bought Maize -0.002 -0.011 -0.042 -0.079 0.002 -0.014













Should Fertilizer be Subsidized?

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