Impact of agricultural input subsidy policy on market participation and income distribution in Africa: A bottom-up/top-down approach

Abstract

Previous literature on the effects of agricultural input subsidy programs on smallholder market participation has only focused on partial equilibrium analysis, while ignoring important general equilibrium effects. Therefore, this study fills this gap by highlighting the critical role of targeting in the implementation of the agricultural input policy in the Malawian context. Specifically, we establish a bi-directional link between a farm household model and a general equilibrium model in order to explore the spillover effects of the input policy on market orientation and income distribution. Based on the findings, the partial equilibrium analysis underestimates the effect of the input policy and neglects important heterogeneities between farmers. More importantly, we find that extending the program to farmers who are excluded from the cereal and/or labor markets can lead to higher market participation, economic growth, and a reduction in poverty. Our findings suggest better targeting to increase the impact of agricultural input policy on market participation.