Financial Markets, Investment and Productivity in Agriculture Christopher Udry Yale University
Root of rural poverty is low agricultural productivity i. Yields mostly stagnant, improving recently, ag output/ag population not moving, output growth generated by extensification ii. Irrigation essentially does not exist iii. Fertilizer use: north America 200 kg/ha; Africa 20 kg/ha
Start with a simple question • Why is fertilizer use so low? • This is not the essential question, but perhaps can be answered • Prices are high (infrastructure, pop density) • But, even at market prices, use appears to be profitable • Looks uniform • Ask people
Despite consistent responses 1. Barriers are dramatically different across countries 2. Even within communities, heterogeneity is a key feature
Credit Policy Lessons Preview • Credit constraints rarely the primary barrier to improving farm profitability • Take-up of credit is often low About Credit Information Risk Input/Outputs Policy Lessons Preview Credit Market Inefficiencies Emerging Lessons ATAI Projects Summary
How might credit market constraints affect technology adoption? • Farmers don’t have cash to cover the upfront costs of adoption • • Farmers don’t have collateral to back a loan • • Farmers don’t have financial literacy needed to use credit • • There is no credit available • • Farmers struggle to save income from one harvest to the next About Credit Information Risk Input/Outputs Policy Lessons Preview Credit Market Inefficiencies Emerging Lessons ATAI Projects Summary
Does improving access to credit help? • Access to financial products can affect agricultural activity: • Switching to higher-value crops • crop-related expenditures • fertilizer use Ashraf et al. 2009; Crepon et al. 2013; Tarozzi et al. 2013; Beaman et al. 2014; Karlan et al. 2013; Carter et al. 2013; Osei et al. nd About Credit Information Risk Input/Outputs Policy Lessons Preview Credit Market Inefficiencies Emerging Lessons ATAI Projects Summary
Does improving access to credit help? • But in most cases, access to credit has no effect on farm profits • I will discuss 3 cases Ashraf et al. 2009; Crepon et al. 2011; Karlan et al. 2013 About Credit Information Risk Input/Outputs Policy Lessons Preview Credit Market Inefficiencies Emerging Lessons ATAI Projects Summary
1. Capital constraints in Ghana? MiDA agriculture program in Ghana takes off from this. • 5 years (2007-12), >$60 million • 30 hours of agronomic training to almost 70,000 farmers • $230 “starter pack” of seed + fertilizer • Randomized roll-out to FBOs
Osei, Osei-Akoto and Udry (2013) use the randomization in the program to show that
Osei, Osei-Akoto and Udry (2013) use the randomization in the program to show that … little changed • Small increases in input use (less than the value of the ‘starter pack’) • Nothing observed on yields, output, income, welfare
Credit is not the only constraint • Increasing access to credit alone rarely improves farmer income Karlan et al 2013 About Credit Information Risk Input/Outputs Policy Lessons Preview Credit Market Inefficiencies Emerging Lessons ATAI Projects Summary
Credit is not the only constraint • Increasing access to credit alone rarely improves farmer income 2. Credit and the poor: Maize Farmers in the Northern Region (Karlan, Osei, Osei-Akoto and Udry) • Uninsured risk is often the binding constraint Karlan et al 2013 About Credit Information Risk Input/Outputs Policy Lessons Preview Credit Market Inefficiencies Emerging Lessons ATAI Projects Summary
Credit is not the only constraint • Increasing access to credit alone rarely improves farmer income 2. Credit and the poor: Maize Farmers in the Northern Region (Karlan, Osei, Osei-Akoto and Udry) • Uninsured risk is often the binding constraint Insurance … Cash… Insurance+Cash...Control Karlan et al 2013 About Credit Information Risk Input/Outputs Policy Lessons Preview Credit Market Inefficiencies Emerging Lessons ATAI Projects Summary
CDF of Total Costs CDF of Total Costs 1 1 .2 .4 .6 .8 .2 .4 .6 .8 0 0 0 1000 2000 3000 4000 0 1000 2000 3000 4000 Control Insurance Control Capital p-value of KSM test of equality of distributions= .05 p-value of KSM test of equality of distributions= .21 CDF of Total Costs 1 .2 .4 .6 .8 0 0 1000 2000 3000 4000 Control Both p-value of KSM test of equality of distributions= .07
CDF of Total Costs CDF of Total Costs 1 1 .2 .4 .6 .8 .2 .4 .6 .8 0 0 0 1000 2000 3000 4000 0 1000 2000 3000 4000 Control Insurance Control Capital p-value of KSM test of equality of distributions= .05 p-value of KSM test of equality of distributions= .21 CDF of Total Costs Innovations for Poverty 1 .2 .4 .6 .8 Action Ghana Agricultural 0 0 1000 2000 3000 4000 Insurance Programme Control Both p-value of KSM test of equality of distributions= .07
Take up of credit is low Only half the farmers took up ½ vouchers for fertilizers and seeds in Mozambique 30% Only 30% of eligible households borrow from MFIs Carter et al 2013; Banerjee et al. 2013; Beaman et al. 2014 About Credit Information Risk Input/Outputs Policy Lessons Preview Credit Market Inefficiencies Emerging Lessons ATAI Projects Summary
3. Even in one place, households face varied constraints • Mali (Beaman, Karlan, Thuysbaert, Udry 2014) The most productive farmers are more likely to borrow
Annual Farm Profits 380 370 360 350 340 330 320 310 300 control grant in no-loan grant to non- village borrowers in loan village
Summary: Policy Lessons • Credit constraints are not a primary barrier to increasing farm profitability. • Take-up of credit is often low, suggesting that other constraints play an important role • In some cases, agricultural activity and profits increase when access to capital is improved About Credit Information Risk Input/Outputs Policy Lessons Preview Credit Market Inefficiencies Emerging Lessons ATAI Projects Summary
Summary: Policy Lessons • There is evidence of positive selection into borrowing: high marginal productivity farmers who are credit constrained borrow About Credit Information Risk Input/Outputs Policy Lessons Preview Credit Market Inefficiencies Emerging Lessons ATAI Projects Summary
Resources atai-research.org International Growth Centre www.theigc.org
References • Ashraf, N., Giné, X., & Karlan, D. (2009). Finding missing markets (and a disturbing epilogue): Evidence from an export crop adoption and marketing intervention in Kenya. American Journal of Agricultural Economics , 91 (4), 973-990. • Ashraf, N., Karlan, D., & Yin, W. (2006). Tying Odysseus to the mast: Evidence from a commitment savings product in the Philippines. The Quarterly Journal of Economics , 121 (2), 635-672. • Augsburg, Britta, Ralph de Haas, Heike Harmgart, and Costas Meghir. 2012. Microfinance at the Margin: Experimental Evidence from Bosnia and Herzegovina. Working Paper , September. • Banerjee, A., Duflo, E., Glennerster, R., & Kinnan, C. (2013). The miracle of microfinance? Evidence from a randomized evaluation. (No. w18950). National Bureau of Economic Research. • Beaman, L., Karlan, D., Thuysbaert, B., & Udry, C. (2014). Self-Selection into Credit Markets: Evidence from Agriculture in Mali. • Burke, M., & Miguel, T. (2013). Selling low and buying high: An arbitrage puzzle in Kenyan villages. • Carter, M. R., Laajaj, R., & Yang, D. (2013). The Impact of Voucher Coupons on the Uptake of Fertilizer and Improved Seeds: Evidence from a Randomized Trial in Mozambique. American Journal of Agricultural Economics , 95 (5), 1345-1351. • Crépon, B., Devoto, F., Duflo, E., & Pariente, W. (2014). Estimating the impact of microcredit on those who take it up: Evidence from a randomized experiment in Morocco. Working Paper. • De Janvry, A., McIntosh, C., & Sadoulet, E. (2010). The supply-and demand-side impacts of credit market information. Journal of Development Economics , 93 (2), 173-188.
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