Small-scale farming continues to be the principal source of employment and income for a majority of the population in low-income countries. Zambia is no exception: in 2008, 80% of employment was in agriculture. Even though Zambia has recently been re-classified as lower middle-income country primarily due to its large copper and cobalt exports, most Zambian farmers remain poor, with incomes substantially below the poverty line. In a previous study in the region of this research, the average income of small farmers was less than US$ 500 per year for a household of six individuals.
Zambia’s long dry season allows for only one harvest per year, which means that the harvest in any given season must generate a sufficient amount of financial reserves for the subsequent 10-12 months. With a large number of payments due at the end of the harvesting season (school fees, input loans, housing, and equipment repairs), many small-scale farmers are not able to set aside sufficient resources to cover their basic needs for an entire year and have to frequently engage in off-farm labour activities in order to cover short term financial needs in the absence of functioning credit markets. A large but most qualitative literature suggests that a large fraction of farms’ external labour supply is neither planned nor desired and potentially associated with large welfare losses at the individual as well as at the aggregate level.
To evaluate this conjecture empirically and to identify the causal impact of short-term labour supply on agricultural productivity, we conduct a cluster randomized controlled trial in Zambia’s Eastern Province. As part of the trial, randomly selected clusters of households are provided with access to loans of either cash or maize during the farming season. The comparison of the cash and maize loan programs with respect to repayment rates, labour supply, and total economic outcomes allow us to assess the importance of the in-kind nature of the credit.
The main objective of the maize loan intervention and the main scope of the project is to identify the degree to which short-term credit constraints affect farming households’ labour supply choices in the short-run, and the degree to which these effects translate into lower farm productivity and yields in the medium- to long-run. To distinguish more clearly short- and medium-term effects, we implement the intervention in two stages. In the first phase of the proposed intervention (year I), maize loans are offered to a selected group of farmers without prior announcement in the middle of the agricultural season (January). This first intervention allows us to estimate the short-term effects of loosening existing credit constraints on labour supply and agricultural productivity. Since all major farming decisions (area of cultivation, crops planted) were already in place at the time of the intervention, the primary adjustments we expected to see were an increase in on-farm labour supply. In the second phase of the intervention (year II), the loan program is announced to selected farmers prior to the initiation of fieldwork, which allows us to directly investigate the degree to which anticipated credit constraints affect the production plan chosen by farms in terms of plot size and crop mix. We observe how farmers adjust on the extensive margin, through changes to the area of cultivation and to the types of crops planted. Regular measurement of wages within the study villages and on neighbouring large farms helps identify the general labour market impacts of the intervention.
Given that the zero-interest loans correspond to a net transfer to farmers, we offered direct cash transfers in a separate treatment arm. The direct cash transfer allows us to disentangle the effects of access to food credit from basic income effects.
The project involves extensive data collection on around 3000 households in 150 villages over a period of 2 years, which generates a panel data set that is publicly available to other researchers.