Principal investigator: Eduarda Miller de Figueiredo
Authors: Günther Fink, B. Kelsey Jack, Felix Masive
Location of the Intervention: Zambia
Sample Size: 175 villages
Sector: Agricultural
Primary Variable of Interest: Work and wages
Type of Intervention: Loans in cash or in corn
Methodology: Experimental Evaluation
In Sub-Saharan Africa, rainfall is scarce, resulting in only a single harvest each year. Furthermore, with limited access to formal savings opportunities, food reserves are highly seasonal, peaking post-harvest and reaching their lowest point during the "hunger season." The intervention in the treatment group was through loans offered at the beginning of the "hunger season": cash or maize loan treatment. Regressions demonstrate that loans during the "hunger season" result in welfare improvements through lower borrowing costs during this period. Additionally, they suggest that a higher treatment intensity is associated with greater effects on overall equilibrium wages. Providing subsidized credit to rural farmers increases wages and agricultural production, as well as improving food security during the "hunger scarcity" period.
- Policy Problem
In agricultural settings, low returns to savings and high borrowing costs increase the cost of smoothing consumption from one crop to the next, resulting in a distinct "lean season" or "famine season" in the months leading up to the harvest.
Jayachandran (2006) shows that lack of access to credit leads to increased labor supply and reduced 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 revenues and prices are highly seasonal (Duflo, Kremer, and Robinson, 2011; Burke, Bergquist, and Miguel, 2019).
- Implementation and Evaluation Context
In Sub-Saharan Africa, rainfall is so low that it results in only a single harvest each year. Furthermore, with limited access to formal savings opportunities and informal alternatives offering low returns and extremely high interest rates, food reserves are highly seasonal, peaking after the harvest and reaching their lowest point during the "hunger season."
To cover short-term needs, most families in the study sample reported reducing consumption and selling family labor in local labor markets. These sales of labor typically occur within a village, with farmers in better conditions hiring relatively poor farmers. Thus, poorer families also reported higher interest rates on loans and, consequently, a higher marginal product of labor for poorer families during the "hunger season."
In this study, it was applied in the Chipata district of Zambia, which had a population of 456.000 individuals in 2010, where ¾ of the population live 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), or about 1/3 of the national average (US$389).
- Policy/Program Details
The study was based on Jayachandran's (2006) agricultural labor model, where the economy of each village has a finite number of farming families seeking to maximize utility in two periods. Thus, each family has initial net resources and needs to allocate its labor endowment between sales to the market and working on their own farms, which have heterogeneous production.
The research was implemented between October 2013 and September 2015, with data covering the three agricultural cycles (1 per year), in the Chipata district, Zambia. It targeted small-scale farmers, i.e., families with farms 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 first rains. Between January and April, weeding takes place, a period known as the "hunger season" or "scarcity season." In April, the first crops begin to become available, and the harvest begins in earnest in May. Between August and October, little agricultural activity occurs.
The study included two types of loan treatment that were offered at the beginning of the “hunger season” in January: (i) cash loan treatment; (ii) maize loan treatment. Repayment was to occur at harvest time in July, and loans could be repaid in cash, maize, or both. Of the 175 villages participating in the study, 58 (1.033 farms) were selected as the control group, 58 (1.092 farms) are the cash loan treatment group, and 59 (1.095 farms) are the maize loan treatment group.
The loan in maize is made by offering 3 sacks of 50 kilograms of unpeeled maize. Since maize is a staple crop in Zambia, and 150 kilograms provides enough grain for a family of 5 for at least 2 months, the cash loan provides US$33 to families, which is approximately the value of the 3 sacks of maize.
- Method
In year 1 of the program, the villages were divided into 3 groups of equal size: control, cash loan treatment, and maize 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. Additionally, 35% of the villages in the control group in year 1 were randomly selected for one of the treatment types in year 2. With this, the authors seek three main types of outcomes: (i) allocation of labor and daily earnings; (ii) agricultural production; and (iii) consumption.
Grouped intention-to-treat regressions were estimated by treatment type for each year of the study. The high acceptance rate in both years means that the estimates are very close to the effect on the treated individual. The model used predicts that the effects of treatment will vary with interest rates and the family's available net resources.
- Main results
Estimates indicate that loan acceptance exceeded 98% and repayment rates in year 1 were 94%, demonstrating that the high acceptance rate was not driven by expectations of default. However, in year 2, the average repayment rate was substantially lower, at 80%, which may have been partly due to heavier rainfall during that period, resulting in lower agricultural production in 2015.
Regarding 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 labor. These increases in family labor are consistent with consumption-related constraints on the initial labor supply.
Regarding the overall equilibrium wage effects, comparing reported incomes between treated and control households, the results suggest that the probability of supplying labor to the labor market also decreases with loans. Furthermore, estimates indicate that a higher treatment intensity is associated with greater effects on overall equilibrium wages.
Loans during the "hunger season" result in welfare improvements through lower borrowing costs during this period. Furthermore, they lead to an increase in aggregate agricultural production due to a more efficient system of labor allocation. Therefore, the results presented in this article highlight the importance of seasonal income, access to credit, and liquidity for labor markets and agricultural production.
- Lessons in Public Policy
Providing subsidized credit to rural farmers increases wages and agricultural production, as well as improving food security during periods of "hunger scarcity."
Reference
FINK, Gunther; JACK, B. Kelsey; MASIYE, Felix. Seasonal liquidity, rural labor markets, and agricultural production. American Economic Review, v. 110, no. 11, p. 3351-92, 2020.
