Agriculture: A loan for lean season
Insights on the enormous impact seasons have in agricultural economies
could help inform new development strategies

Date:
November 2, 2020
Source:
University of California - Santa Barbara
Summary:
For farmers in rural Zambia, payday comes just once a year, at
harvest time. This fact impacts nearly every aspect of their lives,
but until now researchers hadn't realized the true extent.



FULL STORY ==========================================================================
For farmers in rural Zambia, payday comes just once a year, at harvest
time.

This fact impacts nearly every aspect of their lives, but until now
researchers hadn't realized the true extent.


========================================================================== Economist Kelsey Jack, an associate professor at UC Santa Barbara,
sought to investigate how this extreme seasonality affects farmers' livelihoods, as well as development initiatives aimed at improving their condition. She and her coauthors conducted a two-year experiment in which
they offered loans to help families through the months before harvest.

The researchers found that small loans in the lean season led to higher
quality of life, more time invested in one's own farm, and greater
agricultural output, all of which contributed to higher wages in the
labor market. The study, which appears in the American Economic Review,
is part of a new wave of research re- evaluating the importance of
seasonality in rural agricultural settings.

Jack came to this research topic through her personal experience
working with communities in rural Zambia over the past 12 years. She
would often ask folks what made their lives harder, and she kept hearing
the same story. These farmers rely on rainfall, rather than irrigation,
for their crops. So their harvest follows the seasons. This means that
all of their income arrives at once, during harvest time in June.

"Imagine if you got your paycheck once a year, and then you had to make
that last for the remaining 11 months," Jack said. This leads to what's referred to locally as the hungry season, or lean season, in the months preceding harvest.

When households find themselves low on food and cash, they rely on
selling labor in a practice known as ganyu to make ends meet. Instead of working on their own farms, family members work on other people's farms, essentially reallocating labor from poor families to those of better
means -- though it's not always the same people in these positions from
year to year.



==========================================================================
When Jack spoke about this with her collaborator Gu"nter Fink at the
University of Basel, in Switzerland, he mentioned hearing the same story
during his work in the region. They contacted another colleague, Felix
Masiye, chair of the economics department at the University of Zambia,
who said that while this was a known phenomenon in Zambia, no one had researched it yet. The three decided to validate the farmers' story and quantify its effects.

"This is basically the farmers' paper," said Jack. "They told us to
write it and we did. And it turned out to be a really interesting story." Before even launching this project, the researchers met with communities
and conducted a full 1-year pilot study across 40 villages. They designed
the experiment around the input they received, including loan sizes,
interest rates, payment timeframes and so forth. Throughout the project
the team worked with village leadership and the district agricultural
office, and had their proposal evaluated by institutional review boards
in both the United States and Zambia.

The experiment consisted of a large randomized control trial with 175
villages in Zambia's Chipata District. It essentially spanned the whole district, Jack said. The project lasted two years and comprised over
3,100 farmers.

The researchers randomly assigned participants to three groups: a control
group in which business proceeded as usual, a group that received cash
loans, and a group that received loans in the form of maize. The loans
were designed to feed a family of four for four months and were issued
at the start of the lean season in January, with payments due in July,
after harvest.



========================================================================== "They were designed to coincide with people's actual income flows,"
Jack said.

She contrasted this with most lending and microfinance in rural areas,
which doesn't account for the seasonality of income.

The project provided loans to around 2,000 families the first year and
about 1,500 the second year. Some of the households were assigned to
different groups in the second year to measure how long the effect of
the loan persisted.

In addition to collecting data on metrics like crop yield, ganyu wages
and default rates, the team conducted thousands of surveys over the
course of the study to learn about behaviors like consumption and labor.

Overall, the results affirmed the importance of seasonal variability
to the livelihoods of rural farmers and the impact of any economic interventions.

"Transferring money to a rural agricultural family during the hungry
season is a lot more valuable to that family than transferring money at
harvest time," Jack said.

The experiment's most striking result was simply how many people took
the loan.

"The take-up rates that we saw were absolutely astounding," Jack
exclaimed. "I don't think there's an analogue for it in any kind of
lending intervention." A full 98% of eligible households took the loan
the first year, and more surprisingly, the second year as well. "If the
only measure for whether this intervention helped people was whether
they wanted it again, that alone would be enough to say people were
better off," Jack stated.

For the most part farmers were able to repay their loans. Only 5% of
families defaulted in the first year, though this rose a bit to around
15% in year two.

Though she can't be certain, Jack suspects poorer growing conditions in
the second year may have contributed to this increase.

Of course, loan uptake was far from the only promising sign the
researchers saw. Food consumption in the lean season increased by 5.5%
for households in the treatment groups, relative to the control, which essentially bridged the difference between the hungry season and the
harvest season.

Families that received loans were also able to devote more energy to
their own fields. These households reported a 25% drop in total hours
working ganyu, which translated to around 60 hours of additional labor
on their own land over the course of the season. This saw agricultural production rise by about 9% in households eligible for the loan, which
was more than the value of the loan itself.

With fewer people selling their labor, those who did choose to do ganyu
saw their wages increase by 17 to 19% in villages where the program
was offered.

This was buoyed by a 40% rise in hiring from those who received loans,
which helped address economic inequality in the community.

What's more, Jack and her colleagues found little difference in the
outcomes between families in the cash group versus those who received
shipments of maize. It was a welcome finding, since cash is much cheaper
to deliver than sacks of corn, though by no means inexpensive.

In fact, a huge challenge the researchers faced was simply the cost of delivering and collecting the small loans. In rural Zambia people are
spread out, financial institutions are rudimentary, and infrastructure
like roads are underdeveloped.

"If it was profitable to get these farmers loans then people would be
giving them loans," Jack said. "But loans for things like food, school
fees, and other basic needs just don't exist at reasonable interest
rates." To account for the large transaction costs, a lender could
simply increase the size of their loans. That way the same interest
rate yields more money to cover the fixed costs. But according to Jack,
most families don't want to take on the burden of a large loan.

The alternative is to charge higher interest on small loans. Interest
rates for the loans in the study were 4.5% per month over the course of
half a year, which worked out to a 30% interest rate over the six-month
loan. This is steep compared to most lenders in countries like the United States; however, it was vastly lower than the 40-100% monthly interest
rates otherwise available in these communities.

Several other factors contribute to these sky-high interest rates in
addition to the transaction costs, including high risks and the difficulty
of enforcing contracts. What's more, the low availability of creditors
makes it essentially a lender's market. Economists continue to search
for solutions to these challenges.

Until recently, economists had largely written off seasonality as an
important factor in rural development, Jack explained. But the results
of this study underscore how everything -- from grain prices to wages to
labor allocation - - fluctuates around the fact that everyone is poorer
at one time of year and better off at another.

"As a result, there are potentially large gains for interventions that
help people smooth their very infrequent income over the rest of the
year," she said. These can take many forms in addition to loans, from irrigation and new crops to bank accounts and farmer cooperatives --
basically anything that helps smooth out resources or enables income to
arrive more frequently.

The upshot is that governments and NGOs can increase their impact by incorporating seasonality into their interventions. Making better use of resources is particularly critical in light of budget cuts and economic hardships caused by the COVID-19 pandemic.

In fact, many of Jack's current projects have been disrupted by the
pandemic, including another randomized control trial that sought to
build on the understanding gleaned from this experiment. She hopes to
resume these studies, as well as discussions with different governments,
as conditions improve.

Nevertheless, this study has provided a wealth of insights in its
own right.

"Crucially, the value of a dollar depends a lot on how many dollars you
have," Jack said, "so you want to direct assistance to those times of
the year when they will be most helpful."

========================================================================== Story Source: Materials provided by
University_of_California_-_Santa_Barbara. Original written by Harrison
Tasoff. Note: Content may be edited for style and length.


========================================================================== Journal Reference:
1. Gu"nther Fink, B. Kelsey Jack, Felix Masiye. Seasonal Liquidity,
Rural
Labor Markets, and Agricultural Production. American Economic
Review, 2020; 110 (11): 3351 DOI: 10.1257/aer.20180607 ==========================================================================

Link to news story: https://www.sciencedaily.com/releases/2020/11/201102133338.htm

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