consumption smoothing and productive investments in rural zambia

Consumption Smoothing and Productive Investments in Rural Zambia

Juan Bonilla – AIRA. Handa (UNICEF), N. Rai (AIR), D. Seidenfeld (AIR)

November 2015

Copyright © 2015 American Institutes for Research. All rights reserved.

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The case for Consumption Smoothing

• Rural households in developing countries face substantial risk• Need to free consumption from income so not to be driven to extremities

when income is low – LC/PIH: Modigiliani, 1959; Friedman, 1957.

• CS mechanisms: precautionary savings, risk pooling, assets as buffer stocks, crop diversification.

• but, evidence suggests HHs only partially able to protect consumption from income shocks – (Kaziaga & Udri, 2006; Alderman & Paxon, 1994; Jalan and Ravallion, 1999; Townsend, 1994)

• A minimum level of income required?

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Consumption Smoothing & UCTs

• Cash transfers: potential vehicle for sustaining household consumption– Settings with limited formal insurance and weak credit markets– Limited empirical evidence

Research Question: • Do UCTs for very low income households reduce consumption

variability over time?– If so, what are the mechanisms used to smooth consumption

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Zambia’s Child Grant Program

- Started in 2010- Households with a child under 3 enrolled- Unconditional- 55 Kwacha per month (increased over time)- No differentiation by household size

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CGP Districts: Greatest Poverty Levels(Travel Time from Lusaka by Vehicle)

Kaputa(20 Hrs)

Kalabo(12 Hrs)

Shangombo(16 Hrs)

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2010: Less than Half the Consumption Compared to Similar Rural Households

-

20,000

40,000

60,000

80,000

100,000

120,000

140,000

TotalFood

Kw

per

cap

ita

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2010: 96% below extreme poverty line, much higher than similar rural households

CGP LCMS Rural LCMS Rural Child <5 LCMS 3 districts, Child<5

0

10

20

30

40

50

60

70

80

90

100

National Extreme Poverty Line

Perc

ent

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DATA: 4 Years with 5 Rounds of Data Collection• Baseline: Sep/Oct 2010 (early Lean Season)• 24M: Sep/Oct 2012• 30M: June/July 2013 (Harvest Season)• 36M: Sep/Oct 2013• 48M: Sep/Oct 2014

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Empirical Strategies (ES)Use two complementary identification strategies:

1. Changes in consumption for those exposed to aggregate negative shocks vary by treatment condition

2. Experimental Design: Consumption by treatment condition

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ES 1: DD over shocks and CGP

log of consumption for hh in district at time = 1 if i affected by shock at time t = 1 if i is a CGP beneficiary

time and district fixed effects

Test for Consumption Smoothing:

Consistency: Shocks and CGP

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No difference in reporting shocks by T and C

Affected by Affected by Price Changes in Any Drought Flood Crop Inputs Food

(1) (2) (3) (4) (5) (6)

CGP x Post 0.062 -0.009 0.062 0.010 0.002 -0.009 (0.055) (0.041) (0.045) (0.012) (0.013) (0.043) Shock Mean 0.55 0.28 0.20 0.05 0.03 0.27 Adj. R2 0.17 0.32 0.13 0.01 0.01 0.06 N 12056 12056 12056 12056 12056 12056

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… and no correlation between observables and reporting a negative shocks

Coefficient SE CGP recipient -0.003 0.014 Household size 0.001 0.021 Recipient is married 0.010 0.009 Age of recipient -0.000 0.001 Recipient highest grade -0.000 0.001 Number of people ages 0-5 0.001 0.021 Number of people ages 6-12 0.002 0.021 Number of people ages 13-18 -0.002 0.022 Number of people ages 19-35 -0.005 0.023 Number of people ages 36-55 0.004 0.022 Number of people ages 56-69 -0.013 0.027

N 9523

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Coefficient SE Maize grain price -0.000 0.001 Bean price 0.010*** 0.004 Dry fish price -0.003 0.003 Cooking oil price 0.007 0.006 Sugar price -0.006 0.007 Table salt price -0.000 0.002 Toilet soap price -0.001 0.009 Laundry soap price -0.009 0.008 Secondary school fee -0.000 0.000 Total expenditures 0.000 0.001 HH owned any chickens 0.008 0.008 HH owned any cows 0.018 0.019 HH owned any milk cows -0.019 0.014 HH owned any goats 0.014 0.028 HH owned any goats 0.014 0.021 N 9523

… and no correlation between observables and reporting a negative shocks

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Results: CGP insulates recipients against shocks

Log of Total Expenditures

(1) (2) (3) (4) Negative Shock (𝜷𝟏) -0.07*** -0.07*** -0.06** -0.05** (0.02) (0.02) (0.02) (0.02) CGP (𝛽2) 0.27*** 0.26*** 0.24*** 0.20*** (0.05) (0.05) (0.04) (0.03) CGP x Shock (𝛽3) 0.03 0.04 0.05 0.06* (0.04) (0.03) (0.03) (0.03) Shock, CGP -0.037 -0.024 -0.007 0.010 (𝜷𝟏 + 𝜷𝟑) (0.028) (0.029) (0.025) (0.022) Mean of Shock 0.60 0.60 0.60 0.60 Time FE Yes Yes Yes Demographics Yes Yes Food prices Yes Adj. R2 0.06 0.07 0.19 0.21 N 9541 9541 9541 9539

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… regardless of the type of shock

Affected by Affected by Price Changes in Any Drought Flood Crop Inputs Food

(1) (2) (3) (4) (5) (6)

Shock, CGP: Total Expenditures 0.010 -0.024 0.006 0.066 -0.026 0.021 (𝛽1 + 𝛽3) (0.022) (0.030) (0.033) (0.043) (0.061) (0.025) Food Expenditures 0.005 -0.003 0.002 0.017 -0.010 0.006 (𝛽1 + 𝛽3) (0.006) (0.009) (0.010) (0.013) (0.018) (0.007) Mean of Shock 0.60 0.32 0.16 0.06 0.03 0.30 N 9539 9539 9539 9539 9539 9539

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Empirical Strategy 2:Tracking expenditure levels over time

consumption for household in district at time = 1 if i is a CGP beneficiarytime fixed effects

Test for Consumption Smoothing:Control: CGP:

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𝑆24 𝑆30 𝑆36 𝑆48

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CGP recipients show more stable consumption levels over time

𝛾 2,24

𝛾3,24

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CGP recipients show more stable consumption levels over time

Total Food Domestic Health Other (1) (2) (3) (4) (5)

Baseline Mean 40.48 30.03 2.25 5.18 2.97 Tests (p-values): 𝛾2,24 = 𝛾2,30 = 𝛾2,36 = 𝛾2,48 0.00 0.00 0.04 0.10 0.99 ST,24=ST,30=ST,36=ST,48 0.17 0.12 0.02 0.42 0.23 Adj. R2 0.17 0.16 0.07 0.06 0.07 N 12054 12056 12054 12054 12053

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… the control group exhibits more food consumption volatility as a fraction of total spending

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Smoothing consumption shares Food Domestic Health Other (1) (2) (3) (4)

Baseline Mean 0.72 0.15 0.06 0.07 Tests (p-values): 𝛾2,24 = 𝛾2,30 = 𝛾2,36 = 𝛾2,48 0.00 0.10 0.00 0.02 ST,24=ST,30=ST,36=ST,48 0.93 0.58 0.00 0.09 Adj. R2 0.04 0.07 0.02 0.09 N 12054 12054 12054 12053

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Mechanisms for Consumption Smoothing

- Use of Livestock as buffer stock

- Build precautionary savings

- Invest in productive activities

- Reduce debt burden

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Livestock may be used as buffer stock

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CGP HHs own more livestock Proportion

Chickens Cattle Goats Ducks (1) (2) (3) (4)

Treat x Post 0.152*** 0.094*** 0.033** 0.027** (0.035) (0.020) (0.012) (0.008) Baseline Mean 0.43 0.10 0.02 0.03 Adj. R2 0.13 0.08 0.06 0.02 N 12038 12056 12056 12052

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Results consistent with reported coping strategies to negative shocks

Use Savings

Sold Assets

Reduce Expenses

Work More

Use CGP

(1) (2) (3) (4) (5)

Treat x Post 0.032* -0.002 -0.069* -0.115** 0.106*** (0.016) (0.006) (0.036) (0.044) (0.011) Outcome Mean 0.04 0.01 0.13 0.39 0.00

Adj. R2 0.04 0.01 0.04 0.05 0.17 N 6980 6980 6980 6980 5156

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Coping strategies to any negative shock

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Conclusions- CGP beneficiaries insulates against aggregate

negative shocks

- ... By investing in productive activities and engaging in CS mechanisms

- A minimum income value may be needed for subsistence HHs to overcome constraints preventing smooth consumption

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Juan Bonillajbonilla@air.org

1000 Thomas Jefferson Street NWWashington, DC 20007-3835General Information: 202-403-5000www.air.org