Synergy for Poverty Reduction: The Complementary Roles of Microfinance and Agricultural Input Subsidies in Tanzania

This paper investigates how and to what extent state-funded interventions can synergise with non-state programmes to achieve broader welfare effects for households in developing countries. We study two prominent programmes that benefit different groups of low-income households: state-funded agricultural input subsidies (AISs) and microfinance from non-state lenders. We use household data from Tanzania to estimate the effects of AISs and microfinance on the welfare of farmers and examine whether, as complementary, the two programmes benefit different groups of farmers. Using control function and instrumental variable approaches to control for the endogeneity of AISs and microfinance, we find that both programmes are effective in increasing household consumption. Moreover, results show that the two programmes operate in a complementary manner, whereby AISs are effective among low and middle-income farmers but not among well-off farmers. On the contrary, microfinance is effective among well-off farmers but not among low-income farmers.