DOES PROVIDING SUBSIDIED CREDIT TO RURAL FARMERS IMPROVE FOOD SECURITY?

Responsible researcher: Eduarda Miller de Figueiredo

Authors: Günther Fink, B. Kelsey Jack, Felix Masive

Intervention Location: Zambia

Sample Size: 175 villages

Sector: Agricultural

Variable of Main Interest: Work and wages

Type of Intervention: Cash or corn loans

Methodology: Experimental Evaluation

In Sub-Saharan Africa there is an incidence of rain, which results in only a single harvest each year. And, with access to formal savings opportunities is limited, food reserves are highly seasonal, peaking post-harvest and lowest in the “hunger season.” The intervention in the treatment group was through loans offered at the beginning of the “hunger season”: cash or corn loan treatment. The regressions demonstrate that borrowing during the “hungry season” results in welfare improvements through lower borrowing costs during that period. Furthermore, they suggest that greater treatment intensity is associated with greater effects on general equilibrium wages. Providing subsidized credit to rural farmers increases wages and agricultural production, as well as improving food security in the “famine shortage” period.

1. Policy Problem

In agricultural settings, low returns to saving and high borrowing costs increase the cost of smoothing consumption from one harvest to the next, resulting in a distinct “lean season” or “hungry season” in the months leading up to harvest.

Jayachandran (2006) shows that the lack of access to credit leads to an increase in labor supply and a reduction in wages for landless rural workers when the economy is exposed to aggregate productivity shocks. Other evidence suggests high returns from synchronizing loan or investment opportunities with financial flows in rural agricultural environments where incomes and prices are highly seasonal (Duflo, Kremer, and Robinson, 2011; Burke, Bergquist, and Miguel, 2019).

2. Implementation and Evaluation Context

In Sub-Saharan Africa there is an incidence of rain, which results in only a single harvest each year. And, with access to formal savings opportunities is limited and informal alternatives have low returns and are accompanied by extremely high interest rates, food reserves are highly seasonal, with a post-harvest peak and their lowest point in the “season.” of hunger.”

To cover short-term needs, most families in the study sample report reducing consumption and selling family labor in local labor markets. These labor sales typically occur within a village with better-off farmers hiring relatively poor farmers. Thus, poorer households also reported higher loan rates and, consequently, a greater marginal product of labor over poorer households during the “hunger season.”

In the case of this study, it was applied in the district of Chipata in Zambia, which had a population of 456,000 individuals in 2010, in which ¾ of the population lives in rural areas, with small-scale agriculture as the main source of income. The average monthly expenditure of rural families in this district was estimated at US$122 (US$0.8 per person-day), that is, about 1/3 of the national average (US$389).

3. Policy/Program Details

The study was based on Jayachandran's (2006) agrarian labor model, where the economy of each village has a finite number of agricultural families that seek to maximize utility in 2 periods. Thus, each family has initial liquid resources and needs to allocate their labor allocation between sales to the market and working on their own farms, which have heterogeneous production.

The survey was implemented between October 2013 and September 2015, with data covering three agricultural cycles (1 per year), in Chipata District, Zambia. It targeted small-scale farmers, that is, families with crops of less than 5 hectares.

The experiment was designed to coincide with the region's agricultural cycle, which begins with field preparation in September and continues in November with planting activities due to the time of the first rains. Between January and April weeding takes place, which is the time known as the “hunger season” or “scarce season”. In April, the first crops begin to become available and harvesting begins in earnest in May. Between August and October few agricultural activities take place.

The study included two types of loan treatment that were offered at the start of the “hunger season” in January: (i) cash loan treatment; (ii) corn loan treatment. Repayment was to occur at harvest in July, and loans could be repaid in cash, corn, or both. Of the 175 villages participating in the study, 58 (1,033 farms) were selected as control group, 58 (1,092 farms) are cash loan treatment group, and 59 (1,095 farms) are corn loan treatment group.

The loan in corn occurs through the offer of 3 bags of 50 kilos of unchopped corn. Since maize is the staple crop in Zambia and 150 kilograms provides enough grain for a family of 5 for at least 2 months. The cash loan provides families with US$33, which is approximately the value of 3 bags of corn.

4. Method

In year 1 of the program, villages were divided into 3 equally sized groups: control, cash loan treatment, and corn loan treatment. In year 2, 50% of the villages treated in year 1 were randomly selected to continue in the program and the others were eliminated from the program. Furthermore, 35% of the villages in the control group in year 1 were randomly selected for one of the treatment types in year 2. In doing so, the authors seek three main types of outcomes: (i) labor allocation and daily earnings; (ii) agricultural production; and (iii) consumption.

Intention-to-treat regressions grouped into treatment types were estimated for each year of the study. The high acceptance in both years means that the estimates are very close to the effect on the treaty. The model used predicts that the effects of the treatment will vary with interest rates and the family's available liquid resources.

• Main Results

Estimates identify that loan acceptance was greater than 98% and repayment rates in year 1 were 94%, which demonstrates that the high acceptance was not driven by expectations of default. In year 2, the average reimbursement rate was substantially lower, 80%, which may have been driven in part by the worse rains that occurred in the period that led to lower agricultural production in 2015.

In relation to labor demand and increases in equilibrium wages, the results suggest that loans will increase labor demand among treated farmers, where there will be an increase in family work. These increases in family work are consistent with consumption-related constraints on the initial labor supply.

Regarding general equilibrium wage effects, comparing with reported earnings between treated and control families, the results suggest that the probability of supplying labor to the labor market also decreases with loans. Furthermore, estimates indicate that greater treatment intensity is associated with greater effects on general equilibrium wages.

Borrowing during the “hungry season” results in welfare improvements through lower borrowing costs during this period. Furthermore, they result in an increase in aggregate agricultural production due to a more efficient system for allocating labor. Therefore, the results presented in the article highlight the importance of seasonal income, access to credit and liquidity for labor markets and agricultural production.

• Public Policy Lessons

Providing subsidized credit to rural farmers increases wages and agricultural production, as well as improving food security in the “famine shortage” period.

Reference

FINK, Gunther; JACK, B. Kelsey; MASIYE, Felix. Seasonal liquidity, rural labor markets, and agricultural production. American Economic Review , vol. 110, no. 11, p. 3351-92, 2020.