Subsidies to Inputs

Low prices of agricultural products are often partly offset by subsidies to inputs. The most commonly subsidized items are fertilizers, credit, tractors, pesticides, seeds and the services of infrastructure. In some cases the subsidies are intended to compensate for the protection of high-cost industries, such as fertilizer, farm chemicals and tractors. They are then ‘distortions’ that compensate for other ‘distortions’. These subsidies to inputs can be useful to encourage farmers to use a new input, or where external economies are important, so that benefits accrue to others, in addition to the farmer using the input. But they also often have some undesirable and unintended effects. They tend to encourage the inefficient use of inputs, for example, the waste of water. They encourage the use of certain types of input, such as fertilizer, but not of the most abundant factor, labour. Subsidies should never encourage substitution of a scarcer factor for a more abundant factor. Though not inherent in subsidies, as is shown by Korea, in fact they often benefit only or mainly the large and rich farmer and, if accompanied by rationing, can actually deprive the small and poor farmer, who uses his land more productively, of resources. In Kenya, for example, 80 per cent of subsidized fertilizer has gone to larger farmers. If the subsidized input is exported at a profit, or smuggled abroad, the price paid by the domestic producer can be higher than it would have been in the absence of the subsidy.