The Economic Impact of Frugality: Evidence from Tobacco Farmers in Malawi

Agriculture plays a significant economic role in Sub-Saharan Africa and has the potential to make a positive impact on poverty alleviation and food security. Despite these facts, there is a very limited supply of credit available for agriculture, particularly from increasingly popular microfinance institutions. This shortfall is thought to be due to asymmetric information in the rural credit market leaving lenders hesitant to provide agricultural microloans. In the study, “Facilitating Savings for Agriculture: Field Experimental Evidence from Malawi,” authors Lasse Brune, Xavier Giné, Jessica Goldberg, and Dean Yang analyze the impact of savings accounts as an alternative financial resource for farmers in Malawi.

Agriculture in Malawi, and in Sub-Saharan Africa more generally, employs approximately two thirds of the labor force and represents one third of GDP growth. A 2008 World Development Report found that GDP growth from agriculture is four times more effective at reducing poverty than GDP growth from other sources. Given these findings, it is critical to find resources for stimulating growth in the agricultural industry in this region. The authors conducted a randomized control trial among Malawian tobacco farmers, by offering a group of farmers the option or “treatment” of having a direct-deposit bank account opened for them in their names. Both treatment and control groups were given a financial education course and were encouraged to save for future agricultural input purchases, such as fertilizer. The control group did not receive any facilitation of formal savings accounts but instead continued to receive proceeds from crop sales in cash.

Creating these bank accounts would hypothetically alleviate the savings constraints of farmers who previously had imperfect ways of preserving funds between harvesting and planting seasons. Prior to this, the depletion of informal savings was likely due to self-control problems, sharing funds within communities, or losses from other factors, such as fire or theft.

Offering formal savings accounts resulted in a 75 percent increase in the likelihood of owning a formal account, higher savings levels prior to the next planting season, and an average 10 percent increase in household expenditures. The impacts on agricultural input expenditures and outputs—such as value of the crops, crop sale proceeds, and farm profits—were substantial, resulting in average increases of 13 percent and 21 percent, respectively. Additionally, one year after this intervention, farmers continued and expanded their usage of these accounts. Improved finances and buy-in from farmers clearly demonstrated the value of formal accounts.

Surprisingly, the authors found that the alleviation of savings constraints only accounted for approximately a quarter of these increases. Many farmers in the treatment group withdrew their deposits well before the next planting season, likely a result of the transaction costs of withdrawing money, including transportation to the bank and waiting time. Brune et al. hypothesize that the formal accounts may have additionally acted as a type of self-insurance, allowing farmers to feel safer investing in more agricultural inputs, or may have helped farmers resist the social pressure to share resources within their communities.

The results of this intervention suggest that formal savings accounts can play a substantial role in facilitating regional GDP growth by encouraging increased expenditures on agricultural inputs and expansion of cultivated land, thus leading to higher levels of proceeds. The potential impact of this relatively simple intervention on reducing poverty levels is substantial when considering the vital role that agriculture plays in fueling economic growth in Sub-Saharan Africa. Further research should investigate the additional mechanisms through which formal savings accounts facilitate these impacts.

 

Article Source: “Facilitating Savings for Agriculture: Field Experimental Evidence from Malawi,” Lasse Brune, Xavier Giné, Jessica Goldberg and Dean Yang, National Bureau of Economic Research, Working Paper, February 2015

Feature Photo: cc/(Magalie L’Abbé)