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Today feels awesome. My thesis got accepted for publishing, which effectively means I am done with my MS training (the thesis defense was last week). I am pretty impressed with how much ground I covered for my thesis research. As I mentioned earlier, I have been working on measuring the impacts of the Farm Input Subsidy Program in Malawi on a series of phenomena. Previous evaluation studies have focused mainly on the program’s impact on national production of maize. My research investigated how the program impacted the behavior of smallholder farmers and other outcomes. Here’s an abstract of the thesis:



Thesis title: Measuring the Impacts of Agricultural Input Subsidies on Fertilizer Use, Land Allocation and Forest Pressure: Evidence from Malawi’s 2009 Farm Input Subsidy Program

This thesis investigates the impacts of Malawi’s Farm Input Subsidy Program (FISP) on smallholder farmers’ behavior, decisions, and outcomes. Four phenomena are studied: (1) use of fertilizer for maize production; (2) maize yields; (3) land allocation; and (4) forest clearing. The study uses cross-sectional data from 380 farm households in Kasungu and Machinga districts of Malawi. The FISP was implemented through a voucher system that targeted deserving households based on select criteria. To study the impacts of the FISP, a two-stage regression approach is used. In the first stage, selection into the subsidy program is treated as endogenous and conditional on household- and village-specific factors. A multinomial logistic regression is used to predict the probability of participation. In the second stage, Tobit regressions are used to examine the impacts of the subsidy program on fertilizer use and forest clearing. Subsequent to this, a production function for maize is used to measure differences in maize yields between program participants and non-participants. To examine the impacts of the FISP on land allocation, a system of three land share regressions is estimated.

Results suggest that the most vulnerable people in the communities studied were not the main recipients of the coupons, contrary to program design. Nevertheless, the results suggest that the subsidy program increased fertilizer use among participating households. Fertilizer use was found to be positively correlated with maize yields. In addition, farmers who planted improved maize seeds, such as those subsidized by the FISP, obtained higher yields than those producing traditional maize. The results also show that households that received coupons for maize inputs allocated 20% more land
to maize than those that received no coupon. The analysis suggests that the program may have promoted intensification rather than extensification of maize and tobacco production in the two study areas. Households that participated in the Farm Input Subsidy Program cleared less forest land for agricultural expansion in the study year than those that did not, although those who received subsidies related to tobacco production had a program-induced derived demand for trees, which were used to construct tobacco drying sheds.


Me and my advisers  are now working on publishing three papers (from three chapters) out of the thesis. I will continue to work on this when I get back to Malawi in a couple of weeks. I am very excited about the results and the storyline that we were able to uncover.

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Going through my old files, I found this article which I did way back in September of 2004. It appeared in The Nation newspaper of 28 September 2004. Note that I haven’t updated it so some information might be outdated, but it’s worth reading.


The World Trade Organization (WTO) replaced the General Agreement on Tariffs and Trade (GATT) in 1995. The three main objectives of the WTO are to help trade flow as freely as possible, to achieve further liberalisation gradually through negotiation, and to set up an impartial means of settling disputes on trade. Its main purpose is thus to promote free international trade. Compared to GATT, the WTO is much more powerful because of its institutional foundation and its dispute settlement system. Member countries that do not abide by the WTO’s trade rules are taken to court and can eventually face retaliation. The 134 countries members of the WTO have had to adapt their national legislation to the rules of the WTO. The most powerful members of the WTO are USA, the European Union (EU), Japan and Canada. Developing countries are the majority in number (2/3), but not in power. Malawi joined the WTO on 31 May 1995.

Historically, GATT enforced phased-in tariff reductions worldwide up until the Uruguay Round (1994). The trade negotiations focused on non-agricultural goods, mainly because the U.S. wanted to protect its farm sector. As the corporate interests of the developed countries have expanded, they have lobbied for an incorporation of more issues into the GATT/WTO. Its agenda now includes agriculture, services (financial, telecommunications, etc.), intellectual property rights, and electronic commerce.

Theoretically, the WTO is a democratic body, and all WTO members have an equal voice, but in practice, the WTO is still a way from being fully democratic, and poor countries are subject to bullying unlike at the UN. Decisions at the WTO are made behind the scenes, as countries trade concessions with one another and naturally this horse-trading favours those countries with a lot of financial & political power. Rich countries, particularly the US, EU, Japan and Canada, have well funded teams of specialist negotiators at the WTO headquarters, while half of the poorest countries in the WTO can’t afford even one and, in addition rich countries have been known to use intimidation and threats to get their way.

The least developed countries (LDCs) are less likely to benefit from the WTO because they are marginalized in the world trade system, and their products continue to face tariff escalations. US and other industrial countries have exorbitant textile tariffs which constitute big barriers to the export of textile and clothes from Africa (Zimbabwe, Zambia, Uganda, Tanzania, Mozambique, and Malawi), one of the sectors where these countries could be competitive. Washington has promoted free trade principles only in sectors that benefit the U.S. economy; in other sectors, like textiles, protectionism reigns.

While at the UN, the principle is “one nation one vote”, this is not the case at the WTO, where the big countries are the real “decision-makers”. Within the WTO framework, developing countries have less power and influence because although they make up 75% of WTO membership and by their vote can in theory influence the agenda and outcome of trade negotiations, they have never used this to their advantage. Most developing country economies are in one way or another dependent on the U.S., the EU, or Japan in terms of imports, exports, aid, etc. Any obstruction of a consensus at the WTO might threaten the overall well-being of dissenting developing nations. Trade negotiations are based on the principle of reciprocity (or “trade-offs”) i.e. one country gives a concession in an area, such as the lowering of tariffs for a certain product, in return for another country acceding to a certain agreement. This trade-off benefits only the large and diversified economies, because they can get more by giving more. Negotiations and trade-offs therefore take place among the developed countries and some of the richer or larger developing countries. Sub-Saharan African countries have fewer human and technical resources. Many cannot cope with the 40-50 meetings held in Geneva each week. Hence they often enter negotiations less prepared than their developed country counterparts.

Africa has very little saying and on top of it, it has not the means to participate fully in all the discussions in the working groups in Geneva, because it lacks the economic and technical fibre. Only 26 out of the 39 African countries have a permanent ambassador in Geneva, and only Uganda has an ambassador specially attached to the WTO. Even the countries having ambassadors in Geneva they can hardly follow all that is going on at the Geneva WTO Centre.

Under the WTO, use of subsidies in production is discouraged so that all countries have a level playing field. Subsidies help reduce the cost of production to the producer and this implies a relatively lower output (and selling price) is required to break-even. However rich countries use subsidies to support their own large companies and traders while poor countries have been forced to reduce the protection that they can give their own producers. Both the European Union and the United States protect and subsidise their agricultural producers, encouraging production of large surpluses of food while there are no such subsidies for the smallholder producer in Malawi. The African market is often flooded with European or USA food dumped products (sold at a price lower than its real value because they are subsidised by their governments). These lowers prices threaten local production of food as local producers cannot compete in these conditions. A country’s staple crop production can be easily devastated by an influx of cheap imports. Trade liberalisation can cause deterioration of farmers’ life standards and influence negatively food security. Small producers in poor countries are increasingly expected to compete with large scale, technically advanced, subsidised producers on the world market. Removing subsidies that lead to dumping of cheap exports in poor countries is certainly beneficial and the UK Government deserves credit for having pushed for this in the EU.

The rich countries claim that the WTO is helping the world move towards a system of ’free trade’ in which every country will specialise in producing what it’s good at, and everyone will benefit. They claim that if all countries play by the same rules, this will be fairer for all, but in such an unequal world, this kind of trade would be far from fair. It would be like a football match between Manchester United and the local Bunda Socials FC – there might be a level playing field, but Manchester United will still win each time the two sides clash.

For African countries, a change in the EU farm policies e.g. by eliminating subsidies, would benefit them far more than all the EU aid programs to help poor countries. Africa could also benefit from processing its agricultural products, but the barriers to imports in industrial countries make it difficult to export them. The EU and the USA fear competition, and thus keep their trade barriers for processed food.

There is little or no evidence to support claims that free trade lifts people out of poverty and, in fact, there is much that indicates to the contrary. Such countries that have rapidly opened their markets to free trade, as Mali and Zambia, have very poor records of economic growth and poverty reduction. On the other hand, South East Asian countries, which have successfully reduced poverty through trade, did not use free trade policies. Some of the policies they used (such as restrictions on investments by transnational companies, selective protection of imports, and flexibility on patents) would not have been allowed under current WTO rules.

According to the IMF, sixteen sub-Saharan African countries have lower trade barriers than the EU, yet these countries are struggling to improve living conditions for their people. As Nelson Mandela observed, rules uniformly applied to WTO members have brought about inequalities because each member has different economic circumstances. The WTO should therefore put poor people and the planet first, rather than apply the same rules to all countries regardless of their specific needs.

For most poor producers, local markets are far more important than international markets. Poor producers do not have a realistic chance of benefiting from foreign markets, so it is very important that they can sell their produce locally other than focus on the international market fantasy. African firms and farmers are small and lack the technology and marketing skills to compete in the world market. The opening of markets has mainly benefited the transnational corporations at the expense of national African economies and the small farmers, workers, and jobless persons.

Economic theory suggests that protectionism enhances growth of infant industries. If poor countries’ industries are to reach the standards and productivity required to benefit from international trade, then they need the support of their governments and require a protected local market in which to grow. Many developed countries used government intervention in the past to develop their own industries, but the UK Government is trying to make it difficult for poor countries to follow the same course.

In countries such as Zambia and Malawi, where 85% of people depend on farming for their living, millions of farming families don’t have electricity, piped water, adequate housing, or money for shoes, medicines, school fees and sometimes even food. Poor farmers, who lack tools, transport, capital to buy seeds, and even proper roads to reach markets, simply can’t compete equally with agri-businesses in rich countries. Poor countries need special treatment to protect their agricultural sectors and small-scale producers.

Much has been said about the agricultural input subsidy program that was introduced by government in 2005. The success of the subsidy program, aside from pop star Madonna’s adoption of David and Mercy, is one story that has helped transform the profile of the country. It is a successful case study that is now often cited in agricultural policy classroom sessions to demonstrate to students about how governments in the developing world can help attain food security for their populace. In a world faced with widespread food shortages coupled with increasing food prices, Malawi has become an example of how sound domestic policies, rather than imported ideas, can work for the people. As a result of the successful implementation of the subsidy program, coupled with favourable weather, the country has since 2005 trebled maize production from 1.2 million tonnes to 3.4 million tonnes in the 2007/2008 agricultural season. It has never felt so good to be a Malawian.

Malawi’s recent success in turning around the agriculture sector and ensuring food security for the country has confounded critics. Economists have generally tended to regard subsidies as inefficient, expensive, socially inequitable and environmentally harmful, imposing a burden on government budgets and tax payers – all seemingly strong arguments against using them. They argue that subsidies distort prices and resource allocation decisions, thereby altering the amount of goods and services produced and consumed in an economy. A subsidy is government interference that takes money from taxpayers and gives it back to producers. While food prices tend to become lower, the savings are paid for by the taxpayer. This can be inefficient if the goal is to redistribute income as there are arguably better ways to do it, such as progressive taxation or even negative income taxes.

But how has the country gained from implementing the program? Malawi’s success in this program, against donor advice, has made the country a grain exporter and helped contain food costs. In addition, the program has helped save the country of the much needed foreign exchange. In fact, the phenomenal increase in maize production has saved the country a reported yearly budget of US$120 million that it had spent in 2005 importing food aid (was that free food?). Malawi has become a model to follow when it comes to using local policies to boost agricultural production. The emerging consensus now is that such subsidies are essential for African agriculture. As a result, last year the United Nations’ Food and Agricultural Organization rewarded President Bingu wa Mutharika, who also serves as the country’s Minister of Agriculture, with the Agricola Prize.

The rich nations have continued to prod the poor ones (through such institutions as the IMF and World Bank) to deregulate their economies by, among other things, eliminating subsidies and opening up their borders to free trade. Ironically, this donor opposition to agricultural subsidies in Africa is coupled with refusal by rich countries to reduce their own expensive subsidies to commercial farmers in their own countries and imposing prohibitive tariffs on commodities for which they know Africa has a comparative advantage, such as sugar. Yet the case for subsidies is far more compelling for African smallholder farmers who often lack minimum access to agricultural inputs.

The justification often given for the removal of subsidies has been that, with the cost of food so cheap globally, poor nations can always buy staple goods on the world market if necessary, and so would be better off putting their farmers and farmland to more efficient use (I would also argue that the food is supposedly ‘cheap’ globally because the rich countries are subsidizing its production). But with increasing global food prices, relying on the global market to feed your own is a highly flawed undertaking.

With the rising price of oil, the United States and the EU began providing incentives for their farmers to switch production from food to biofuels. Overall, rich nations now spend as much as $15 billion annually in biofuel subsidies. In the United States alone, some 20 million acres of cropland have been converted from growing maize for food to growing maize for fuel. This number is sure to rise, since America’s Renewable Fuel Standard legislation mandates that, by 2010, at least 28 billion liters of fuel used in the country must come from non-petroleum sources. There is thus no guarantee that Malawians will be able to access maize from these countries, let alone afford the ‘oil price of maize’.

If you cannot take care of your own, do not expect others to do it for you and the president is only trying to live up to that. If the argument is that the program is so costly and a huge burden on the government budget, someone will have to tell me how cheap it is to import maize from the US or Europe. My simple back-of-the-envelope calculation tells me it is more convenient and efficient to buy fertilizer now than to compete for maize with American and European vehicles later. In Malawi, the subsidy program has more than paid for itself by reducing costs for food imports, and therefore improving the country’s balance of payments. It is a lesson to the proponents of agricultural privatization that privatizing agriculture simply does not work for African countries. Removing the input subsidy program and privatizing ADMARC is simply not an option for Malawi, especially at this time in global history. Instead of pursuing a one-size-fits-all policy in Africa, the World Bank and IMF must start looking at each country individually.

However, even supporters of increased subsidies warn that subsidies must also be sustainable, and that other factors must be considered, including the cost of imported inorganic fertilizers and long-term impacts on the environment. It is imperative on the government to strongly consider increasing funding for agricultural research, the kinds of efforts that sparked the original Green Revolution–and might just provide the country with new ways to increase crop yields. Much focus should also be placed on promoting proper food storage and processing, which would help add value to production. In addition, there is a great need to develop rural market infrastructure so that farmers get good value for their production. This includes strengthening producer groups and other rural organizations to enable them gain mastery of the market and reduce transaction costs; gain access to information on domestic, regional and international markets and facilitate technology transfer.

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The Malawi Kwacha

The Malawi Kwacha

The Malawi Kwacha has for the past three years been trading at K140 to the United States Dollar. In the wake of the recent global economic crisis that has seen the devaluation of some of the world’s major currencies – key among them being the United States Dollar and the British Pound Sterling, there have been calls from some sections of the Malawian society and the international donor community for the government to devalue our local currency, the Kwacha. The Bretton Woods Institutions (the World Bank and the IMF) too have been calling on the government to lessen its grip on the exchange rate. The president has however stood his ground (just as he did when he first introduced the fertilizer subsidy program) and has so far resisted all calls to devalue the Kwacha. What, though, is devaluation and what are the likely consequences of such a move? In this article I attempt to explain this and more.

The Malawi Government maintains a managed float exchange rate system, which is a hybrid of a fixed exchange rate system and a flexible exchange rate system. Unlike in a fixed rate regime, the Reserve Bank does not have an explicit set value for the currency; and unlike in a flexible exchange rate regime, it doesn’t allow the market to freely determine the value of the currency either. Instead, the Reserve Bank has either an implicit target value or an explicit range of target values for the currency, determined by pegging the Kwacha against a trade-weighted basket of currencies of the country’s major trading partners. The Bank intervenes in the foreign exchange market by buying and selling domestic and foreign currency to keep the exchange rate close to this desired implicit value or within the desired target values.

Only a decision by the government through the Reserve Bank of Malawi can thus alter the official value of the currency. The government could, if it wished, take such a measure, often in response to unusual market pressures. Devaluation, the deliberate downward adjustment in the official exchange rate, would reduce the Kwacha’s value. To illustrate, the present exchange rate is K140 to one dollar. To devalue, government, through the Reserve Bank might announce that from now on K280 will be equal to one dollar. This would make the Kwacha half as expensive to Americans or anyone intending to buy it, and the U.S. dollar twice as expensive to Malawians.

Under what circumstances might a government devalue its currency? It is often because the interaction of market forces and policy decisions has made the currency’s fixed exchange rate untenable. In order to sustain a fixed exchange rate, a country must have sufficient foreign exchange reserves, often dollars, and be willing to spend them, to purchase all offers of its currency at the established exchange rate. When a country is unable or unwilling to do so, then it must devalue its currency to a level that it is able and willing to support with its foreign exchange reserves. Going back home, there have been numerous cries about the shortage of foreign currency in the country, which climaxed with the arrests of several people suspected of externalizing forex and the closure of all unlicensed forex bureaus which were thought to be hoarding forex. This is one of the reasons why the aforementioned stakeholders have been calling for the devaluation of the Kwacha.

A key effect of devaluation is that it makes the domestic currency cheaper relative to other currencies. There are two implications of a devaluation. First, devaluation makes the country’s exports relatively less expensive for foreigners. This would seem to be consistent with the president’s vision of turning Malawi into a net exporter as it would drive up exports. Second, the devaluation makes foreign products relatively more expensive for domestic consumers, thus discouraging imports. This may help to increase the country’s exports and decrease imports, and may therefore help to reduce the current account deficit.

However, the president’s argument has been that devaluing the currency will make things more expensive for the average Malawian. “Devaluation of the kwacha would only benefit a few people, and most of them are not even Malawians,” the president is quoted as saying. “On the other hand, devaluation would impact badly on poor people as it would increase prices of commodities… the cost of raw materials and equipment importation for companies.” This is a highly valid argument as a significant risk is that by increasing the price of imports and stimulating greater demand for domestic products, devaluation can aggravate inflation. If this happens, the government may have to raise interest rates to control inflation, eventually slowing down economic growth.

One other risk of devaluation is psychological. Often times devaluation is seen as a sign of economic weakness. This would place the creditworthiness of the nation at risk. As a result, devaluation may lower investor confidence in the country’s economy and may reduce the country’s ability to secure foreign investment.

The government is thus faced with a tough choice here. In the end, it all depends on who has the most votes as the issue of devaluing the Kwacha becomes more of a political decision than an economic one. The business community, who the president argued he is trying to protect too, wants assurance that there will be enough foreign currency reserves in the country. I would not be surprised if I found the Kwacha still trading at K140 to the US$ come the World Cup in 2010!

This article was also published in Malawi’s Daily Times newspaper and the online Nyasa Times (http://www.nyasatimes.com/columns/of-devaluing-the-malawi-kwacha.html)

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Greetings once again. Today I decided to share my view of development aid. There is this other Zambian-born-dead-aid1Havard-trained economist by the name of Dambisa Moyo who has authored a book on development-related aid. Her book, titled “Dead Aid: Why Aid Is Not Working and How There Is a Better Way for Africa” has generated a lot of discussion about the effectiveness of aid to Africa. In her book, Ms. Moyo argues that despite rich countries having transferred to Africa more than $1 trillion in development-related aid over the past fifty years, this assistance has not improved the lives of Africans. In fact, she argues, across the continent the recipients of this aid are not better off as a result of it, but worse—much worse.

To me, it was high time one bold African stood up to challenge the aid theories of the west. I have always believed that the solution to Africa’s problems does not lie in ‘free’ money from western governments. Unfortunately, our African leaders have been blinded by this greatest myth of development of our time. As a result of this misconception, the majority of African countries, Malawi inclusive, have been trapped in this vicious circle of aid dependency. In Malawi, for instance, more than 40% of the government budget is donor money. We have been receiving aid since the early 80s, but what have we got to show for it?

The irony of the EU and US

The EU and the US are top in subsidizing their farmers

It is for such reasons that I welcomed the debate raised by Ms. Moyo through her book. In my opinion, the rich countries offer aid to Africa as compensation for the unfair trade practices they promote. It is common knowledge that almost all of the rich countries subsidize their rich farmers. This essentially means the cost of producing food in rich countries is very low and so the farmers can afford to market their produce at ridiculously low prices. Because these farmers produce more than what their countries need due to the low production cost, these cheap products are in turn dumped to Africa to compete against the African smallholder farmer’s output. What’s worse – the rich countries, led by the U.S. and the EU, have been aggressively pushing  for more trade liberalisation at a time of global crises of food and fuel. The result is that the African farmers have been affected by falling commodity prices, especially of agricultural products.

A fairer global trade system would be more useful to African nations than aid, which often times ends up in the private bank accounts of presidents and/or their accomplices. Producer subsidies in the United States and Europe are threatening Africa’s agricultural industry, and these subsidies drive the African producers out of the global market, exacerbating poverty as a result. Instead of giving “free money” to Africa, the continent’s trading partners could help by working out measures that would promote demand for the continent’s products. Fair trade, NOT aid is the solution to Africa’s poverty. Let Africa trade its products with the rest of the world at competitive prices – the benefits from such a move far outweigh any amount of development aid to the continent.