During the 1990s, Malawian farmers experienced a rough transition from government policies that controlled and supported the agricultural sector, such as fertilizer subsidies and price stabilization, to a more liberalized agricultural policy environment. In the wake of this change, prices for staple foods and inputs fluctuated widely, and the majority of smallholder farmers were unable to afford the fertilizer and seed that they desperately needed. This period of economic instability coincided with a Southern-Africa wide drought, resulting in extremely low yields. It was a recipe for disaster.

In response to the crisis, the Malawian government introduced an input subsidy in 1998-99, known as the Starter Pack (SP). This ‘universal' SP programme provides free packs containing fertilizer and maize, beans or groundnut seeds to millions of rural households. Later, in 2004, the government decided to subsidize the price of fertilizer to targeted small-holder farmers. This input subsidy attracted world-wide attention, in part because it was enacted in the face of opposition from some important donors. Yet despite the drawbacks of the fertilizer subsidy - high fiscal cost, difficult targeting, and crowding out of commercial sales - it receives strong support from smallholder farmers, as well as from some international policy makers.

Stronger food security in the short-term

Crucially, the 'universal' SP programme was sufficiently comprehensive in its coverage of farmers to achieve the impact on maize markets that was required to keep prices in check and ensure food security. And, so far, the subsidized-input programmes have increased supply steadily over the last several growing seasons - enough to keep food prices affordable.

The government knows that, unless it is prepared to risk another food crisis, and the resulting reversal of progress on education, health, and poverty reduction, it should not abruptly abandon (or scale down) the input subsidies. Poverty is so extreme and widespread, and food security so precarious, that any shock could precipitate a crisis. Resources spent on social welfare and development would be undermined by a food shortage. Farmers that have built up assets, if hit by another food crisis, could be thrown back to where they started, or worse.

Forming an exit strategy in the longer-term

The input subsidies should be viewed as an important part of a two-pronged strategy to help farmers break out of their precarious situation. Despite its short-term success, the fertilizer subsidy is not sustainable in the long term. Subsidies for inputs cannot turn non-competitive producers into competitive producers. By subsidizing smallholder farmers, the government is ultimately delaying a process of restructuring at great cost to society in terms of alternative output. Moreover, when smallholder farmers come to rely on subsidies, incentives to improve productivity are diminished. Other non-subsidized countries will increase productivity and lower production costs to the point where they will be competitive, in spite of the Malawi's attempts to protect its farmers.

Therefore, over the long term, the Malawian government needs to think about an exit strategy. There are some factors that should be applied as a test to assess the possibility of ‘exit', and indicators to monitor their progress. These include:

• Improve the availability of agricultural extension services and advice.
   
• Enlist the aid of development agencies to put more effort into agricultural research.
   
• Increase smallholder purchasing power, such that more farmers can afford to buy the inputs they need to increase maize yields on poor soils. One way to do that is to increase opportunities for piecework and other off-farm activities, promoting cash crops that smallholders can grow without displacing food crops (for example, inter-cropping), and boosting livestock ownership.
   
• Improve the marketing and distribution of seeds and fertilizer. The availability of seeds at an affordable price has often been a serious problem. And although fertilizer may be available in most parts of Malawi, it is not always offered in the small quantities that most farmers can afford.
   
• Diversify food crops in maize-dependent districts. The parts of Malawi where farmers' only food crop is maize suffer much worse food insecurity than the areas which have diversified food sources, like the cassava-growing areas of Nkhotakota and Nkhata-Bay.

Working toward these goals will help Malawian farmers transition away from the fertilizer-and-seed subsidy, without causing the sorts of turmoil that they experienced in the 1990s. Politically, however, the subsidy will still be very hard to remove. Ultimate responsibility for the subsidy falls with Dr Bingu wa Mutharika, the current president of Malawi. This is both a strength and a source of concern. The subsidy has become an entrenched political tool which no political leader is seriously questioning.

Nelson Nsiku is a lecturer of Economics at the University of Malawi – The Polytechnic.