Allocative Efficiency and Input Subsidy in Asian Agriculture

In this paper, input subsidies (fertiliser subsidies to be exact) have been related to the allocative efficiency of fertiliser input. Fertiliser was singled out not to ignore other inputs but to emphasise the fact that fertiliser accounts for at least 30 percent of the total farm expenditure in most of Asia, and the rest of the expense is accounted for by labour (which is primarily family labour). The regression results are based on a sample survey data of 150 farms of Khulna Division (Bangladesh) for the year 1986-87. We have first estimated a production function based on Hoque (1991) and then calculated the efficiency indices based on the estimated parameters of the production function. In the second stage regression, different farm sizes were regressed on efficiency indices which showed an overall inverse relationship (that is, the smaller the farm size, the higher the efficiency). This tendency is observed upto the size of 10 acres in case of fertiliser input. Thus, the farms upto the size of 10 acres should be subsidised to promote efficiency in production. However, if the selective subsidy programme is difficult to administer, one hundred percent subsidy may be worthwhile. It is argued that the withdrawal of the fertiliser subsidy will reduce efficiency and have an adverse impact on employment and output in the rural sector of Asia. The IFPRI (1987) study on Indonesia also clearly indicates this. Some indicative discussions in Section II and Section V support the statistical results in favour of fertiliser subsidy.