Income and welfare effects of input subsidies across representative agricultural households of rural Rwanda

Subsidies for intermediate inputs represent considerable transfers from governments to farmers and, are implemented on a large scale in many developing countries to primarily achieve objectives of (1) national food security and (2) raising incomes for the poor and technology constrained farmers. Clearly, a trade-off exists between the two objectives whereby targeting beneficiaries for achieving pro-poor growth may lead to equity at the expense of efficiency. Nevertheless, knowing which group of farmers benefit more or less from these budgetary transfers is essential in order to re-allocate scarce budgetary resources more effectively. Taking the case of Rwanda as an example, this study uses an empirical modelling approach to assess the income and welfare effects of subsidies for intermediate inputs (i.e. fertilizers and improved seeds) across a heterogeneous set of agricultural households, under competitive and monopolistic input market structures. The results show positive policy outcomes for all representative households and these outcomes are twice higher when the input market structure is competitive. Although subsidies for inputs eventually help poor households to overcome cost burdens and participate in markets, a large share of the policy transfers is captured by large-scale producers who generally have the liquidity to purchase unsubsidized inputs. Acknowledgement : This paper analyses the income and welfare effects of government subsidies for intermediate inputs across heterogeneous farmers' households in Rwanda. Authors wish to acknowledge that the analysis relies on the Development Policy Evaluation Model (DevPEM) developed by the OECD. The study was conducted as part of the Monitoring and Analysing Food and Agricultural Policy (MAFAP) program implemented in the Food and Agriculture Organization (FAO) and funded by the Bill and Melinda Gates Foundation, USAID, and the governments of the Netherlands and Germany.