To Target or Not to Target? The cost efficiency of indicator-based targeting

This paper assesses the cost efficiency of indicator-based targeting. Using household survey data from Malawi, we examine whether an indicator-based targeting of the poor is more target- and cost-efficient than the currently used mechanisms for targeting agricultural subsidy programs in the country. There is compelling evidence in favor of targeting Malawi’s poor based on the newly developed system. An indicator-based targeting system appears to be more target- and cost-efficient than the 2000/01 Starter Pack and the 2006/07 Agricultural Input Subsidy Program (AISP). While the Starter Pack and the AISP transferred about 50% of total transfer, under an indicator-based system, about 73% of transfers are delivered to the poor. Likewise, under an indicator-based system, the costs of leakage are cut down by more than 50% compared to Starter Pack and AISP. This work is prospectively relevant for Malawi as its policy makers reflect on improving the efficiency of the country’s pro-poor development programs. Likewise, the research can be applied in other countries with similar targeting problems.