Input Subsidies and Agricultural Development: Issues and Options for Developing and Transitional Economies

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World population is projected to reach over 8 billion in 2025 and over 9 billion in 2050. Over 90% of the projected increase will occur in the developing and transitional economies where food insecurity and environmental degradation are serious challenges. In confronting these challenges, the use of mineral fertilizer and associated inputs will continue to play a critical role, as it has done in the past. Environmentally sound use of modern inputs depends on technology, agronomy, and policy-related factors. Once the agronomic practices are known and suitably engineered products are available in the market, it is the policy-related factors that carry the burden of moving the cart forward. Through a conducive and stable policy environment, many countries, especially in Asia, have recorded high growth in fertilizer use and other inputs, and input subsidies played a central role in such policy environments. Nevertheless, driven by policy and market reforms, many countries have phased out input subsidies during the 1990s. In the context of market reforms and the Uruguay Round Agreement on Agriculture (URAA), this paper provides an assessment of arguments for and against input subsidies, especially fertilizer subsidies, and discusses various alternatives to subsidies and IFDC experiences in dealing with fertilizer subsidies. The assessment of various arguments and experiences indicates that arguments in favor of fertilizer subsidy are no longer as strong as those that are against it; and the sustainable alternatives to subsidy are even stronger, given the universal moves towards market-based developments. The alternatives include efforts to reduce the cost of fertilizers through a number of strategies that will shift the supply curve to the right and promote public investment in marketing infrastructures, improve profitability of fertilizer use through investment in soil fertility restoration, and provide support under the Green Box measures of the URAA. Situations are also identified in which direct subsidies could be considered, but even in those cases, accompanying measures should be taken to avoid misuse of resources and the distortionary impact on the market. However, national governments should continue to take the lead in investing in public goods through public-private partnerships, in internalizing the externality (leading to market failure), and in providing necessary support for soil fertility and natural resource management in a market-friendly way. Where the concern is poverty alleviation, a voucher system of support is preferred because it addresses the twin objectives of poverty alleviation and market development.
Fertilizers, Subsidies