Financial Markets, Investment and Productivity in Agriculture

1. Financial Markets, Investment and Productivity in Agriculture Christopher Udry Yale University

2. 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

3. 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

4. Despite consistent responses • Barriers are dramatically different across countries • Even within communities, heterogeneity is a key feature

5. Credit Policy Lessons Preview • Credit constraints rarely the primary barrier to improving farm profitability • Take-up of credit is often low Policy Lessons Preview  Credit Market Inefficiencies Emerging Lessons ATAI Projects Summary

6. How might credit market constraints affect technology adoption? • Farmers don’t have cashto cover the upfront costs of adoption • Farmers don’t have collateralto 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 Policy Lessons Preview  Credit Market Inefficiencies Emerging Lessons ATAI Projects Summary

7. 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; Oseiet al. nd Policy Lessons Preview  Credit Market Inefficiencies Emerging Lessons ATAI Projects Summary

8. Does improving access to credit help? • But in most cases, access to credit has no effecton farm profits • I will discuss 3 cases • Ashraf et al. 2009; Creponet al. 2011; Karlanet al. 2013 Policy Lessons Preview  Credit Market Inefficiencies Emerging Lessons ATAI Projects Summary

9. 1. Capital constraints in Ghana? MiDAagriculture 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

10. Osei, Osei-Akoto and Udry (2013) use the randomization in the program to show that

11. 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

12. Credit is not the only constraint • Increasing access to credit alone rarely improves farmer income • Karlanet al 2013 Policy Lessons Preview  Credit Market Inefficiencies Emerging Lessons ATAI Projects Summary

13. 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 • Karlanet al 2013 Policy Lessons Preview  Credit Market Inefficiencies Emerging Lessons ATAI Projects Summary

14. 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 • Karlanet al 2013 Policy Lessons Preview  Credit Market Inefficiencies Emerging Lessons ATAI Projects Summary

16. Innovations for Poverty Action Ghana Agricultural Insurance Programme

17. Take up of credit is low ½ Only half the farmers took up vouchers for fertilizers and seeds in Mozambique 30% Only 30% of eligible households borrow from MFIs Carter et al 2013; Banerjee et al. 2013;Beamanet al. 2014 Policy Lessons Preview  Credit Market Inefficiencies Emerging Lessons ATAI Projects Summary

18. 3. Even in one place, households face varied constraints • Mali (Beaman, Karlan, Thuysbaert, Udry 2014) The most productive farmers are more likely to borrow

21. 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 Policy Lessons Preview  Credit Market Inefficiencies Emerging Lessons ATAI Projects Summary

22. Summary: Policy Lessons • There is evidence of positive selection into borrowing: high marginal productivity farmers who are credit constrained borrow Policy Lessons Preview  Credit Market Inefficiencies Emerging Lessons ATAI Projects Summary

23. Resources

24. 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.

25. References • Duflo, E., Kremer, M., & Robinson, J. (2009). Nudging farmers to use fertilizer: Theory and experimental evidence from Kenya (No. w15131). National Bureau of Economic Research. • Field, Erica, RohiniPande, John Papp, and Natalia Rigol. 2013. Does the Classic Microfinance Model Discourage Entrepreneurship Among the Poor? Experimental Evidence from India. American Economic Review 103 (6): 2196–2226. • Giné, X., Goldberg, J., Silverman, D., & Yang, D. (2012). Revising commitments: Field evidence on the adjustment of prior choices. (No. w18065). National Bureau of Economic Research. • Giné, X., Goldberg, J., & Yang, D. (2010). Identification strategy: A field experiment on dynamic incentives in rural credit markets. • Gine, X., Karlan, D., & Ngatia, M. (2011). Social networks, financial literacy and index insurance. Mimeo. • Karlan, D., Osei, R. D., Osei-Akoto, I., & Udry, C. (2012). Agricultural decisions after relaxing credit and risk constraints. (No. w18463). National Bureau of Economic Research. • Kaboski, Joseph P, and Robert M Townsend. (2011). A Structural Evaluation of a Large-Scale Quasi-Experimental Microfinance Initiative. Econometrica 79 (5): 1357–1406 • Kaboski, Joseph P., and Robert M. Townsend. The impact of credit on village economies. American economic journal. Applied economics 4.2 (2012): 98. • Matsumoto, T., Yamano, T., & Sserunkuuma, D. (2013). Technology adoption in agriculture: evidence from experimental intervention in maize production in Uganda. In An African Green Revolution (pp. 261-278). Springer Netherlands. • Osei, R., Osei-Akoto, I., and C. Udry (2013). The Importance of Farmer Training in changing the Subsistence Nature of Agriculture: The Case of MCA-Ghana Programme” • Tarozzi, A., Desai, J., & Johnson, K. (2013). On the impact of microcredit: Evidence from a randomized intervention in rural Ethiopia.