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Agricultural Input SubsidiesThe Recent Malawi Experience$

Ephraim Chirwa and Andrew Dorward

Print publication date: 2013

Print ISBN-13: 9780199683529

Published to Oxford Scholarship Online: January 2014

DOI: 10.1093/acprof:oso/9780199683529.001.0001

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(p.260) 12 Conclusions
Agricultural Input Subsidies

Ephraim Chirwa

Andrew Dorward

Oxford University Press

Abstract and Keywords

This chapter pulls together the main themes and issues in the book. Following the book’s three part structure, it first summarizes changing subsidy theory and practice, with theoretical recognition of a wide range of potential direct beneficiary and wider indirect subsidy benefits and of conditions necessary for these to be achieved. Recent agricultural input subsidy programmes in Africa vary in their attention to these different benefits and conditions. Major conclusions from Malawi’s programme are summarized, emphasizing the importance of its specific context and large scale as well as evidence of the mix of outputs and of direct and indirect impacts. Targeting and graduation are identified as critically important issues requiring continuing attention. Both are related to programme sustainability, which is considered in terms of financial, political, and agro-ecological sustainability. A particularly challenging issue is the paradox of political interests that both drive the introduction of large subsidy programmes and undermine their better implementation.

Keywords:   input subsidies, agricultural development, Africa, Malawi, fertilizers

12.1. Introduction

This book attempts to contribute to greater understanding of agricultural input subsidies’ potential contributions and pitfalls as instruments promoting food security, poverty reduction, social protection, and wider economic growth in poor agrarian economies. This has been approached through a theoretical and practical discussion of agricultural input subsidies and their impacts (in Chapters 2 and 3), through detailed examination of Malawi’s experience in implementing a large-scale agricultural input subsidy programme (in Chapters 4 to 9), and (in Chapters 10 and 11) through consideration of targeting and graduation as two specific issues needing more strategic attention in the design and implementation of large-scale agricultural input subsidies in contemporary low-income agrarian economies. This concluding chapter draws these three topics together, and links them to a discussion of a major concern for agricultural input subsidies: their sustainability. We consider each of these topics (subsidies’ changing theory and practice, Malawi’s experience, targeting and graduation, and sustainability) in turn. We conclude by considering possible lessons and ways forward from this for the wider application of agricultural input subsidies in Africa.

12.2. Subsidies’ changing theory and practice

Consideration of conventional and more recent theoretical and empirical analysis of agricultural input subsidies in Chapter 2 suggests a number of potential contributions that input subsidies can make to economic development in poor agrarian economies. In addition to reducing food insecurity, ameliorating soil fertility problems, and increasing land and agricultural labour productivity, they can also drive wider, dynamic processes of pro-poor growth, structural change, economic diversification, and market thickening and development. (p.261)

There are, however, a number of necessary conditions in order for subsidy programmes to make these contributions. The principle conditions are targeting of subsidies to address market failures (in, for example, access to knowledge or to input or capital markets) with significant and normally labour-demanding productivity increases for crops produced by large numbers of smallholders. Such crops will generally be staple crops, with a ‘double benefit’ if staple food markets are relatively isolated from international markets, in which case the provision of inputs may also promote possible market or pecuniary externalities from staple crop cultivation. Programme design and implementation should then pay attention to, or at least be integrated with, policies promoting wider processes of growth and, where double benefits can be achieved, to net buyer’s interests in programme impacts.

Large per unit price subsidies may be needed to address ‘affordability’ constraints on input purchases and use, and these lead to a particular need for good targeting and rationing systems. Poor systems may reduce programme effectiveness and efficiency as problems of ‘exclusion’ limit receipt of subsidized inputs by farmers facing market failures and able to make the most productive use of these inputs. Problems of ‘inclusion’, on the other hand, raise costs of supply to farmers whose productive input use is not otherwise constrained by the market failures addressed by the subsidy, and whose receipt of subsidies therefore does not yield benefits from incremental production. Inclusion of such farmers may also inhibit the development of unsubsidized input supply markets, and these may also be damaged by subsidy systems that undermine private sector investment incentives. Poor design and/or implementation of graduation policies may lead to increasing problems of exclusion, together with rising and unsustainable subsidy costs, falling benefits, and increasing opportunity costs from crowding out of more productive investment of scarce government resources. Effective input subsidies may also need attention to complementary policies and investments—needed to improve direct input uptake and production impacts, or to facilitate wider, dynamic benefits.

Finally, political commitment is critically important for major resource investments in large-scale input subsidies. However this itself raises major difficulties where such commitment is driven by short-term patronage interests rather than longer term developmental interests.

The examination in Chapter 3 of recent subsidy programmes in sub-Saharan Africa suggests that recognition of and attention to these issues is mixed—across countries and issues. Thus, almost all the national programmes reviewed involved large-scale subsidies for inputs for staple food production by large numbers of smallholders, with substantial price reductions, generally addressing (implicitly at least) affordability constraints on farmers’ input purchases. This is associated with a general focus on producer benefits, including producers’ food security (though in Mali and Senegal it was also intended to (p.262) reduce urban rice prices). Late delivery of inputs, and hence reduced returns to farmers, were common. In no programme was there any reported recognition of potential wider dynamic growth benefits, nor any consideration of graduation processes and criteria. With regard to graduation, aspirations of time limits and scaling down were expressed in some cases, but there was no apparent in-depth consideration of processes by which the need for subsidies would be reduced (apart from some explicit support to input supplier development).

Support to input suppliers was therefore one issue where intentions and practice varied across programmes—with some programmes giving it little or no attention, others recognizing its importance without effective action (and perhaps in practice undermining it), and others seriously pursuing it. Attention to targeting was similarly varied as regards stated intentions, but there were few if any cases of the achievement of effective targeting. Voucher-based entitlement systems were common but not universal. Integrated attention to complementary policies and investments was relatively rare and where present appeared to be restricted to direct promotion of programme effectiveness in raising on-farm input productivity or supporting input supplier development. Political factors around programme initiation and implementation are not widely discussed, but are specifically reported in some programmes and their general importance and influence may be inferred for most.

12.3. The Malawi experience

The introduction of the large-scale Farm Input Subsidy Programme in 2005/6 in Malawi and its subsequent continuation have to be understood in the context of Malawi’s specific political, social, economic, food security, and agricultural policy history and conditions as set out in Chapter 4. These led to the emergence of ‘fertilizer politics’, with popular demands for fertilizer subsidies providing political opportunities that also had a technical rationale in addressing food insecurity and, with the ‘low maize productivity trap’, potential wider dynamic benefits for peoples’ livelihoods and wider economic growth. The first four years of the programme were, however, also shaped by very specific political challenges facing the minority government of President Bingu wa Mutharika.

The detailed description of the FISP in Chapter 5 shows that the FISP focused largely (but not exclusively at first) on staple crop production, operated on a very large scale (reaching an impressively large number of dispersed smallholders), provided large (and generally growing) price reductions explicitly addressing affordability constraints on input purchases, and focused on producers’ (as opposed to buyers’) welfare and food security. The programme (p.263) did not explicitly articulate any longer term dynamic growth objectives, and consideration of graduation processes was initially absent, but has become more of an issue over time. However, the issue of graduation has not found its way into policy articulation and programme design. Engagement with input suppliers has varied—with fairly consistent engagement with private sector seed suppliers and fertilizer importers and transporters, but policy reversals on the involvement of private sector fertilizer retailers. Targeting objectives, criteria, and methods have evolved, but without dramatic changes in outcomes. Complementary policies and investments have focused on direct promotion of complementary inputs (seeds and maize storage chemicals), with some attention to extension messages and some complementary research on integrated soil fertility technologies.

There have been substantial changes in various aspects of programme design and implementation over the life of the programme. These have incorporated growing experience, responded to emerging problems and different stakeholder interests, and recognized local solutions and good practice. Changes have involved removal of cash crop subsidies and modifications to targeting and allocation systems, to tender award and importation processes, and to coupon design and printing. These have led to improvements in timing of input purchase and distribution and in control of some aspects of fraud. There is also greater emphasis on the need for transparency in allocation and distribution of coupons, although in practice this has proved difficult to implement. However there are, inevitably, continuing challenges on these issues, and little evidence of improved targeting. Political considerations have appeared to dominate others, certainly up to the 2008/9 elections, and these appear to have been a major influence on the growing programme scale and costs from 2005/6 to 2007/8 (exceptionally high fertilizer prices led to a spike in costs in 2008/9, with subsequent costs being more tightly controlled).

The discussion of direct programme impacts in Chapter 6 is constrained by weaknesses in critical data on crop production and the number of farm families. However it suggests that production impacts have been smaller than might be suggested by increases in official production estimates following the introduction of the subsidy, with very high maize prices in some years. Nevertheless, it still appears that there were substantial production impacts. Study of specific impacts on beneficiary households shows immediate benefits in maize production, net crop income, household income, and to a lesser extent food consumption, with continued (lagged) benefits on beneficiaries’ maize production, and to a lesser extent food consumption. School enrolment and child health also appear to have benefited from subsidy receipt. No significant impacts of subsidy receipt were detected on subjective well-being and investment in physical assets, but this may be affected by investment of gains from increased maize production in food consumption, school (p.264) enrolment, and health. The widespread practice of sharing subsidized fertilizers and more general increases in subjective well-being and asset ownership may also mask direct benefits. However, as discussed in Chapter 10, use of fertilizer on female controlled plots is increased by subsidy receipt.

As argued in Chapter 2, large-scale subsidy programmes like the Malawi FISP should have beneficial economy-wide impacts affecting both subsidy recipients and non-recipients. Chapter 7 reports difficulties with attribution of macro-economic changes to the FISP and with possible unreliability in GDP estimates. However, implementation of the FISP appears to be associated with good agricultural GDP growth, although high costs of the FISP in 2008/9 were also a contributor to an increased budget deficit—along with other expenditures related to the 2009 elections. There has also been some improvement in maize trade balances (except in 2008/9). There is stronger evidence of increases in real wage rates as a result of the FISP (despite more mixed evidence on maize price impacts), some evidence of increased national food availability and improved child nutrition, and mixed evidence on national changes in income and poverty incidence. Chapter 6 also reports wider positive changes in maize production, net crop income, subjective well-being, physical assets, school enrolment, and child health. Overall there is evidence of economy-wide changes, but it is not as strong as one would expect and hope for from a programme as large as the Malawi FISP.

FISP’s engagement with and impacts on suppliers, fertilizer importers and retailers, and seed growers and retailers is reported in Chapter 8.

The increasing use of private fertilizer importers has been associated with an increase in the number of firms tendering and being awarded tenders, but some of these have not been able to deliver timely supplies. Tenders have also been affected by late awards and payments, which increase supplier costs and risks and hence prices, although there have been some improvements in tender procedures during the life of the programme. Engagement with fertilizer retailers has been limited, with six retail firms contracted to sell subsidized fertilizers in 2006/7 and 2008/9, and sudden termination of these arrangements at the start of the 2008/9 season. There is potential for re-engagement with private retailing of subsidized fertilizers, but this requires increased mutual trust and would be more effective if it was open to a wider range of retail outlets, including agro-dealers (and applying lessons from experience with seed retail systems). Potential benefits from private sector involvement with retailing of subsidized fertilizers include greater efficiency with lower costs, freeing and adding to government resources (including staff, transport logistics, and storage facilities), potential promotion of input outlets in remote areas, broadening of farmer choice with competition between outlets, and reduced farmer transaction costs and queuing. Impacts of the programme on private retail sales of fertilizer have been mixed, with some displacement (p.265) of unsubsidized purchases by subsidized purchases, but also more recent evidence of some ‘crowding in’ and increases in unsubsidized purchases.

Seed procurement has been exclusively from private organizations, with the number of suppliers growing from 6 to 12. These suppliers are responsible for seed distribution to both parastatal and private retailers including agro-dealers, removing from government all responsibilities for managing and coordinating supply and also removing the risk of unsold stock holdings. Despite the increase in the number of seed suppliers, the market remains oligopolistic with collective negotiation of prices charged to the government for subsidized seed supply. Large increases in the number of agro-dealers selling subsidized seeds have, however, contributed to increased competition and farmer choice among retail outlets. There is limited industry information available on unsubsidized seed sales. Farmers reported purchases suggest substantial rates of displacement of unsubsidized by subsidized maize seed purchases, but large increases in total purchases due to the large increases in subsidized maize seed supply.

Chapter 9 identifies a number of challenges in estimating the benefits and costs of the FISP, and of input subsidy programmes in general. These include problems with data availability, with practicable methodologies that capture both indirect and direct impacts, and with consistency and comparability across estimates of costs and returns for different investments. Extension of standard partial equilibrium methods to include estimates of economy-wide impacts increases estimated benefit–cost ratios for the programme. This suggests that the programme has yielded an average BCR of around 1.35 after allowing for the effects of multipliers but ignoring potential long-term benefits from improved food consumption on children’s physical and mental development and long-term development of human capital. The most valuable use of these methods, however, is in identification of design and implementation parameters with critical impacts on programme efficiency and effectiveness. Returns would be improved by measures that increase yield responses to fertilizer (for example, earlier input delivery, greater emphasis on integrated soil fertility management, improved application, more cost effective formulations, more targeting to the poor) and that reduce displacement and costs (for example, better regional and household targeting, better control of diversion and fraud, earlier registration and input delivery). The inclusion of multipliers in the BCA strengthens the importance of all of these issues and also adds further weight to the importance of targeting, of ensuring that maize marketing policies allow increased maize production to lower maize prices, and of complementary investments in measures facilitating the growth of the non-farm economy and of non-staple agriculture in response to subsidy-led growth in real incomes. Difficulties with the availability of data needed for benefit–cost analysis highlight the need for critical agricultural production statistics. (p.266)

This summary of FISP’s features shows that it shares many of the features of the other African programmes reviewed in Chapter 3: indeed many of these programmes were influenced by reports of dramatic success with the Malawi programme. These features include its emphasis on staple crop production, its scale, its large price reductions, its focus on producers’ welfare and food security, its lack of dynamic growth objectives or consideration of graduation, its variable engagement with inputs suppliers, the challenges it has faced with targeting, and limited complementary policies and investments, focusing on complementary inputs and to a lesser extent research and extension.

The very limited information on the impacts of the programmes discussed in Chapter 3 makes comparison with FISP’s impacts difficult. Reports of late delivery of inputs are common, as are reports of impacts on private sector input suppliers—though these are sometimes positive and sometimes negative. Incremental input use and increased production and productivity are reported for some. There is only one programme where an ex post estimated benefit–cost ratio is reported, and the benefits considered are restricted to the direct value of incremental production. There is virtually no consideration of macro-economic impacts, and no discussion of wage rate or wider growth impacts. Most of the estimates in Chapters 6 and 7 of the direct and indirect impacts of the Malawi FISP are unique. Detailed consideration of the political, livelihood, and economic background and context of the FISP is also unique, though less detailed examination of the policy and rural livelihood context is not uncommon. This raises critical questions as regards the uniqueness and importance for the Malawian programme of the emergence of ‘fertilizer politics’, of the particular challenges facing President Bingu wa Mutharika’s minority government in the first four years of the programme, and of the nature and extent of the ‘low maize productivity trap’ in Malawi.

12.4. Targeting and graduation

Targeting is an issue that was given a considerable amount of attention in Chapter 2 as a critical element in input subsidy programmes, with implications for displacement, productivity, economy-wide effects, graduation, programme costs, and distribution of direct beneficiary benefits. It is an important issue across the Malawi FISP and a number of the programmes reviewed in Chapter 3—either because it is being attempted but not very successfully, or because it does not appear to be considered an important issue.

Chapter 10 develops ideas introduced in Chapter 2 with a conceptual framework looking at the links between targeting and programme objectives and distinguishing between area and beneficiary targeting. Both of these face political difficulties, of different kinds, while there are also common practical (p.267) information and methodological difficulties with beneficiary targeting. It is suggested in the Malawian context that these difficulties are sufficiently serious for there to be a strong case for providing a universal but smaller subsidy to all households. This would also reduce opportunities for diversion and fraud that arise from lack of transparency and accountability in targeting processes.

Discussion of such targeting options, however, also raises complex questions about graduation thresholds and processes. As outlined in Chapter 2, a major criticism of agricultural subsidies has been their tendency to continue long after they have outlived their usefulness in overcoming specific market failures. As a result ‘exits’ are a core feature of ‘smart subsidies’. These tend to focus on subsidies’ roles in farmers’ learning about input benefits and use, and on development of private sector input suppliers. There is, however, relatively little explicit consideration of other processes by which access to subsidies may lead to recipient households no longer needing them. Chapter 11 therefore extends the concept of ‘graduation’ from social protection programmes to the multi-scale dynamic processes of structural change promoted by large-scale agricultural input subsidy programmes in poor agrarian economies. A definition of graduation as the removal of access to subsidies without critical livelihood or wider reductions in land, labour, and capital productivity in staple crop production allows, in the Malawi case, the identification of a set of ‘graduation conditions’. These in turn allow identification of processes and requirements needed to achieve potential graduation conditions, and design and implementation focus on these processes and requirements. Adopting this approach in programme design and implementation could offer major benefits, not only by its promotion of graduation but through its focus on the core processes by which agricultural input subsidy programmes can stimulate and facilitate core developmental processes of productivity growth, market development, and structural change. Success here could in turn reduce the political pressures that militate against graduation and the withdrawal of subsidies from particular groups of people or areas.

12.5. Sustainability

An important issue that has not been addressed in previous chapters is sustainability. Short-term programmes that have strict time-bounds and exits do not need to be sustainable, although they should promote sustainable change. However, international experience suggests that quick exits from large input subsidy programmes are difficult and rarely achieved. It has been argued in Chapters 2 and 4 and in various parts of our analysis of the Malawi FISP that longer term subsidy implementation is often needed to achieve and (p.268) embed wider structural changes. In such circumstances a range of different aspects of programme sustainability become important—we consider fiscal, political, and agro-ecological sustainability.

Fiscal sustainability basically means that programmes must be fiscally affordable. Problems of high costs and crowding out of competing and complementary investments are a common concern. Fiscal sustainability therefore requires constant striving for reductions in programme cost without compromising programme outputs and impacts. This may be promoted by a range of measures promoting programme effectiveness and efficiency—for example, better use of private suppliers, control of fraud, improvements in input purchasing and distribution systems, more effective agronomic practices, budgeting and cost control, improved timing of input distribution, better targeting, increased farmer contributions, and judicious complementary investments, with constant adjustments to match changing circumstances. What is affordable depends, of course, upon available funds and competing claims on those funds. Ellis and Maliro (in press), for example, suggest that, based on Malawi’s expenditures on subsidies and cash transfers, a mix of subsidy and social transfer programmes could be affordable, with space for strategic choices on combinations of policies providing both safety nets and livelihood opportunities. However, high international fertilizer prices can pose particular problems, as experienced by Malawi in 2008/9. If these costs are not passed on to farmers in higher contributions then this can lead to dramatic increases in programme costs. However, passing such costs onto farmers may make inputs unaffordable, and hence defeat the purpose of the subsidy and undermine farmer confidence in the processes of change that are being promoted.

Continued political commitment to programme investment is essential for the resource allocations needed to sustain large-scale agricultural input programmes. Such programmes are politically attractive as fast and highly visible responses to food security problems, with potential opportunities for directing patronage to garner political support. Challenges are faced here in combining often short-term political interests with the longer term technical requirements of effective targeting and cost control to make the most developmental use of invested resources. The analysis of Poulton (2012) may be helpful here, where he suggests that effective agricultural policies result from convergence between technocratic and political interests, but effectiveness may weaken over time with divergence in interests. Such divergence is likely unless governments face quite substantial threats that are best countered by sustained government support from rural electorates.

Finally, we consider the agro-ecological sustainability of input subsidy programmes. In the programmes reviewed in Chapter 3 and in the case of Malawi there is a strong emphasis on inorganic fertilizer subsidies. Very low fertilizer (p.269) use in many African countries, as discussed in Chapter 1, is not sustainable, neither socially in supporting rural populations nor agro-ecologically, as continual cultivation without fertilization leads to soils losing their structure and becoming prone to erosion, while falling yields and growing populations encourage farmers to expand or shift cultivation to forests and steeper slopes—with consequent erosion and loss of trees. Over- or poor application of fertilizers can also have damaging impacts on water courses and on soil health and fauna, while inorganic nitrogenous fertilizer use encourages greenhouse gas emissions from the release of nitrous oxide (N2 O) and from CO2 emissions from large energy use in its manufacture.

Judicious combinations of organic and inorganic fertilizers in integrated soil fertility management (ISFM) offer the potential for lower cost, economically and ecologically efficient processes for increasing land and labour productivity. Input subsidy programmes that promote this could, in principle, be designed and implemented. Section 11.3 discusses ways that subsidized inorganic fertilization of maize could be combined with legume cultivation to reduce the need for and cost of inorganic fertilizers, increase the efficiency of their use, and promote agricultural and livelihood diversification. Developing and implementing such subsidy approaches presents a great opportunity and challenge.

12.6. Conclusions

We conclude by returning to the fundamental problems with which this book opened: low cereal yields and input use, particularly of fertilizers, as a major cause of continuing poverty in many countries in sub-Saharan Africa. Can large-scale agricultural input subsidies help overcome these problems?

Druilhe and Barreiro-Hurlé (2012) consider that large-scale agricultural input subsidies have become a de facto part of agricultural policies in many countries in sub-Saharan Africa. They conclude that most of the programmes they reviewed had been successful in raising agricultural production, but that they were generally poorly designed, poorly implemented, ‘highly politicised, very costly, lack any strategy for phasing out, and are unsustainable in the long term’. Despite some smart subsidy innovations in targeting and in support to private sector distribution, ‘the new subsidies carry many of the problems of the past’ (p. 36). They then discuss possible disadvantages of subsidies (for example, over-reliance on fertilizer subsidies as a ‘magic bullet’), but conclude that ‘their quick and visible results and direct political payoff’ means that they continue to be very attractive to governments. They go on to recommend means for improving implementation, which may be summarized as integrating subsidy programmes with complementary measures (p.270) promoting wider rural development and social protection, clear and complementary (not multiple and conflicting) objectives, simultaneous measures addressing supply and demand constraints on fertilizer use, and greater use of ‘smart’ design and implementation features, including appropriate targeting and entitlement systems, market friendliness, exit strategies, and monitoring and evaluation. They recognize, however, that these ‘smart design’ features make implementation more challenging.

These are in many ways admirable conclusions and recommendations. They may, however, be considered to be both too narrow and unambitious on the one hand and unrealistically over-ambitious on the other. They are too narrow and unambitious because they do not recognize the potential of such programmes to drive and support broad-based economic growth and economic structural change if they are able to fulfil their potential. On the other hand they are unrealistically over-ambitious because they do not address the fundamental paradox of political interests and processes both driving the introduction of large-scale agricultural input subsidies and undermining their better implementation.

Identifying mechanisms and processes which avoid this political paradox is very difficult. One approach that might help, however, could involve raising ambition with greater recognition of the role of agricultural input subsidies and their inclusion in national, rather than sectoral, economic policy. This could carry its own risks and difficulties, diluting responsibility outside the Ministry of Agriculture (normally responsible for such programmes) and reducing commitment to its success. However it could also lead to greater commitment by the Ministries of Finance and of Economic Development to ensuring timely availability of financial resources and to sharper monitoring of implementation, resource use, and outputs that extended beyond the agricultural sector to encompass much wider impacts (as, for example, set out earlier in Figure II.1). Reduced responsibilities for the Ministry of Agriculture would no doubt risk bureaucratic and power difficulties, but if handled well could be used to increase local government and private sector involvement in programme implementation—one means of reducing implementation challenges with ‘smart subsidies’. This could free up Ministry of Agriculture staff and other resources for greater involvement in the promotion of efficient input use with, for example, complementary use of organic fertilizers in integrated soil fertility management. Politically, spreading interest in and visibility of the longer term and wider objectives of such programmes across what are often the more powerful government ministries could provide more political and technical interest in improved design and implementation. This might fit well with urban middle-class demands for accountability in the use of likely increasing earnings from hydrocarbons and minerals in many countries in sub-Saharan Africa. (p.271)

These ideas may or may not work. They would face many challenges: in their genesis and adoption and in their execution. A particular initial challenge is in identifying the circumstances where agricultural input subsidies do and do not have the potential to drive wider economic growth—the necessary conditions summarized in Section 12.2 above. The wider impacts of the Malawi programme, though smaller than one would have hoped, suggest that this potential does exist in Malawi and much stronger wider impacts could be realized with greater programme effectiveness and efficiency and with better integration with complementary policies and investments. This is a prize worth pursuing in Malawi and, though Malawi’s situation is in some ways unique, it is likely to be a prize worth pursuing in other sub-Saharan African countries too. (p.272)