May 29, 2015

Consumption loans: Breaking the cycle of hunger in Zambia

For the majority of the rural population of Zambia, small-scale farming is still the principal source of income. This is problematic as typically there are low levels of productivity and the farming income is insubstantial.

Between January and March (known as the “hungry season”), farmers who cannot obtain credit must supplement their income by working as casual day laborers. This practice drives down wages, and has the potential to damage future harvests as the farmers are forced to neglect their own fields in search of a living wage.

An IZA-coordinated research project, supported by the UK Department for International Development, looks into possible solutions to this dilemma. The project recommends providing consumption loans to farmers which will enable them to invest in their own fields, with the hope that it will also boost their productivity.

In the study, Günther Fink, Kelsey Jack, and Felix Masiye examined whether farmers would take up the offer of a loan with reasonable interest as an alternative to taking a second job to enable them to access food.

In randomly selected villages in eastern Zambia, farmers were offered enough maize flour to cover the consumption needs of an average household for the duration of the “hungry season” and asked to repay the loan with their own maize after the harvest.

The outcome was extremely positive, with 95% of farmers who were offered the loan accepting it. The farmers were also able and willing to repay the debt, and again over 95% repaid in full.

Most importantly of all, there were positive effects on consumption, labor supply, and remarkably local wages increased substantially. When the data was compared to a randomly selected control group, the farmers who took the offered loans missed 50% fewer meals and were forced to look for casual day labor 25 percent less often.

IZA author Ralitza Dimova writes in her article on how rising food prices affect poorer workers who produce more food than they consume, that "Rising food prices are likely to alleviate poverty and inequality in areas where poor people are net food producers."

Over the long-term, this could be beneficial to farmers in Zambia taking up the offered loans. If their productivity increases enough to produce more than their families can consume, there is the potential to earn increasing levels of profit as prices for their crops rise.

Read the whole paper here.

Related articles:
The welfare impact of rising food prices, by Ralitza Dimova