Is Paying for Fertilizer the Answer To Advancing African Agribusiness? Lessons From China

Agriculture is an important piece of Africa’s development puzzle. Resource-wise, the continent is blessed with 60% of the world’s arable land, yet only 17% of the world population. Dependency-wise, Africa is largely sustained by agriculture, with two-thirds of the population being employed within the sector. Nonetheless reality-wise, Africa is facing the challenge of food security and malnutrition. Africa imports US $35 billion worth of food annually, including staples such as wheat and rice. Yet, 332 million people, or 3 out of every 10 Africans, are classified as severely food insecure.

One major challenge put simply is – low productivity. Africa has the lowest crop productivity in the globe.  Even with two-thirds of the population employed, the African agri-sector collectively generates less than one-sixth of the continent’s GDP. There’s lots of labor, yet insufficient usage of agricultural inputs such as machinery or fertilizers.

In contrast, China has 8% of the world’s total arable land (7 times less than Africa), however 20% of the world population (more than the entire continent of Africa). Yet by 2015, China was already producing 95% of its own food. Over the last 40 years, China’s agriculture GDP grew at close to 5% per annum – with a major factor again, being continuous improvements in productivity.

Historically, many African countries have tried various strategies to increase productivity, including fertilizer subsidy programs.

Back in the 1980s, several African governments implemented universal fertilizer subsidy programs with support from international lenders. However, citing high budget deficits and macroeconomic imbalances, most countries were forced to discontinue these in the 1990s by the international lenders – who held a different view on the role of the state in business development. That said, by then, the programs had not been particularly effective in boosting agricultural productivity, with studies showing high costs and mismanagement of funds. By 2000s, Africa implemented a new type of fertilizer subsidy program. The program was led by the African Union, and incorporated more targeted subsidies in Eastern and Southern countries. For instance, Kenya targeted staples with vouchers for selected farmers to purchase fertilizer, Zambia targeted maize with direct physical distribution of subsidized fertilizer to designated farmer groups.

Unfortunately, these efforts did not yield high results. Most ‘smart’ targeting fertilizer subsidizing vouchers were bought by farmers who would otherwise have bought commercial fertilizer and much of the commercial fertilizer that other farmers did buy ended up being diverted and resold to commercial intermediates. In Kenya, the diversion effect alone accounted for over 100% of the ‘impact’ on the increase in fertilizer usage.

Thus, from the mid-2000s, a number of innovative Africa-wide solutions, such as AfDB’s Africa Fertilizer Financing Mechanism, which now provides credit guarantees to wholesalers, distributors, retailers, or other agro-dealers, emerged to tackle this old challenge. Another model that emerged was the Making Markets Work for the Poor (M4P) framework, for example in Nigeria with the “Promoting Pro-Poor Opportunities in Commodity and Service Markets” (PrOpCom) program. The idea was to address market gaps, such as ineffective distributing channels, and – to some degree – completely avoid the challenges in dealing with weak government capacity. But was “avoiding the state” and focusing only on the “private sector” the right direction? China’s experience sheds some light.

Can Africa Use Lessons From China’s Fertilizer Subsidy Schemes To Reimagine Its Fertilizer Market?

China’s fertilizer subsidy policy has rapidly evolved. From 1940-1984, the Chinese government controlled prices of the national fertilizer industry – from input prices to transportation prices, and even retail prices. Then, from 1985-1997, China implemented a dual-pricing system, allowing surplus fertilizers to be sold at market prices. Despite inherent differences in policy rationales, the dual-pricing system closely resembled Africa’s targeted subsidy program. Not surprisingly, a widening price-gap in China led to the same “diversion effect” between commercial and indirectly subsidized fertilizer. It was during that time that China therefore changed its approach and began to (1) replace the dual-price system with market-driven prices plus a maximum profit cap of 7%, and more strategically, (2) introduce a comprehensive fertilizer subsidy program.

What did this “comprehensive” policy look like? Well, the idea of China’s massive fertilizer subsidy program was to tackle pain points along the entire supply chain, from manufacturing to transport, storage, distribution, and consumption. The subsidies can largely be classified into 5 groups: (1) electricity subsidy for manufacturing, (2) transportation subsidy, (3) VAT exemptions, (4) concessional finance for storage, and (5) input subsidies for farmers.

Let’s take one of these – the transportation subsidy. Transport has been a major barrier to efficient markets in both China and Africa. From 2003-2010, China’s $1 billion of annual spending on this type of subsidy made it 50% cheaper to carry fertilizer than other goods. In contrast, with the highest fertilizer transportation costs in the world, African countries face huge difficulties moving fertilizer across the continent. In Uganda, where fertilizer transportation costs are painstakingly high, a recent study suggested that only farmers living close to the Kenyan border were able to use fertilizers.

Can reflecting on China’s success story provide an opportunity for African governments to also review how fertilizers are transported – whether ocean shipping or inland trucking? And can countries creatively reimagine structural and permanent ways to lower costs of fertilizer both within country and across the continent?

Transport is just one example from the “comprehensive policy” but the fact is, while bottom-up, private-sector focused approaches are important to align with market realities and can be transformational for some lives, they do not change nor tackle the structural barriers that people face in the long-term. That said, these approaches can complement each other. For instance, M4P’s bottom-up approach could be employed at the implementational level, to provide feedback and complement top-down policy changes in the long-term.

Could Africa Be at the Center of the World’s Fertilizer Market?

The African continent is endowed with abundant nitrogen, phosphate, and potash. Indeed, it has the potential to become a global fertilizer market. At Development Reimagined, we believe this should be the ambition that drives the policy response, especially with AfCFTA coming into effect, which could significantly improve regional trade cooperation within Africa.

But given China’s experience, development programs designed simply around the outcome – high market price of fertilizer – will be insufficient.  To improve productivity through fertilizer and even develop a surplus market for global sales the answer lies in dealing with the underlying causes – in particular how fertilizer is produced, transported, bought, and consumed.

At Development Reimagined, where we pride ourselves on thinking openly and critically about development solutions, we hope to not just see African productivity rise fast, but also witness the new era of a continent-wide fertilizer market in the making, inspired by China.

This article was originally published on The China Africa Project Website on August 28 2020

August 2020

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