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1 MPRA Munch Personal RePEc Archve The Impact of Access to Credt on the Adopton of hybrd maze n Malaw: An Emprcal test of an Agrcultural Household Model under credt market falure Frankln Smtowe and Manfred Zeller 30. September 2006 Onlne at MPRA Paper No. 45, posted 1. October 2006

2 The Impact of Access to Credt on the Adopton of hybrd maze n Malaw: An Emprcal test of an Agrcultural Household Model under credt market falure Frankln Smtowe 1, Manfred Zeller 2 Abstract A substantal amount of the lterature has reported on the mpact of access to credt on technology adopton, and many studes fnd that credt has a postve mpact on adopton. However, most exstng studes have faled to explctly measure and analyze the amount of credt that farm households are able to borrow and whether they are credt constraned or not. They overlooked the fact that credt access can be a panacea for non-adopton only f t s targeted at households that face bndng lqudty constrants. Guded by the frame work of a household model under credt market falure, ths paper ams at nvestgatng the mpact of access to credt on the adopton of hybrd maze among households that vary n ther credt constrants. The data used n the study s from Malaw collected by the Internatonal Food Polcy Research Insttute (IFPRI).Usng the drect elctaton approach, households are classfed nto constraned and unconstraned regmes. We start by estmatng the probablty of beng credt constraned, followed by an estmaton of the mpact of access to credt for the two categores of households (credt constraned and unconstraned), whle accountng for selecton bas. The mpact of access to credt s estmated usng a swtchng regresson n a Double-Hurdle model. Results reveal that whle access to credt ncreases adopton among credt constraned households, t has no effect among unconstraned households. Results also show that factors that affect adopton among credt constraned households are dfferent from those that that affect adopton among unconstraned household. Landholdng sze, for example, has opposte effects on adopton n the two regmes of households. The polcy mplcaton s that mcrofnance nsttutons should consder scalng up ther credt servces to ensure that more households beneft from t, and n so dong maze adopton wll be enhanced. Keywords: Credt constrants, Double-hurdle, hybrd maze, adopton, Malaw 1 PhD Fellow, Unversty of Bonn, Center for Development Research, Germany, and Research Fellow Unversty of Malaw, Bunda College of Agrculture. 2 Professor n Rural Development Theory and Polcy, Unversty of Hohenhem, Germany 1

3 1.0 Introducton Food securty n Malaw s manly defned n relaton to the avalablty of maze, the man staple n the country. It s for ths reason that the Malaw s agrcultural polcy for the past two decades, emphaszed the producton of hybrd maze, a captal ntensve and hgh yeldng technology as a substtute to the local maze varetes. Efforts to dversfy away from maze nto other food crops have faled largely because maze beng a C4 plant produces more calores per unt of land area than all other food crops grown n Malaw. It s therefore, lkely that Malaw wll contnue to rely on maze as a major food crop. In addton the polcy emphass has been on tobacco, a labor and captal ntensve cash crop. A combnaton of the two crops contnues to be seen as a potental opton for mprovng the ncome and food securty of rural households n Malaw (Zeller et al., 1998). The provson of mcro-credt to farmers s wdely perceved as an effectve strategy for promotng the adopton of mproved technologes. It s beleved that access to credt promotes the adopton of rsky technologes through the relaxaton of the lqudty constrant as well as through the boostng of household s-rsk bearng ablty. Wth an opton of borrowng, a household can do away wth rsk reducng but neffcent ncome dversfcaton strateges and concentrate on more rsky but effcent nvestments (Eswaran and Kotwal, 1990). Recognzng the potental contrbuton of credt n enhancng the adopton of hybrd maze among smallholders, the government of Malaw has been pursung a credt polcy that seeks to promote hybrd maze producton. The government of Malaw, through the Smallholder Agrcultural Credt Admnstraton (SACA), started provdng jont lablty loans to smallholder farmers as far back as 1973, three years before the Grameen Bank was created (Dagne, et al., 2000). The credt whose man purpose was to promote smallholders producton of hgh value crops (frst maze, then later n the 1990s also tobacco) was manly gven to farmers n the form of n-knd loans such as fertlzer and seed. However, despte such concerted efforts by the government, and more recently non-governmental organzatons n promotng the cultvaton of hybrd maze, ts adopton remans low. By 2003, more than half of the total maze land was allocated to local varetes (GOM, 2004). 2

4 It s often asserted that n addton to taste preferences an on-farm storage constrants (Smale, 1995), and to rsk averson (Smtowe et al, 2006), credt constrants are wdely responsble for the low adopton of hybrd maze due to ts requrements for costly nputs. A substantal amount of adopton lterature has reported on the mpact of access to credt on adopton, and a good deal of t showng that credt has a postve mpact on adopton. For, example, Feder and Umal (1993) and Cornejo and McBrd (2002) revew factors that affect technology adopton, and they hghlght access to credt as a key determnant of adopton of most agrcultural nnovatons. Nevertheless, most studes that have looked at the mpact of credt have generalzed ther analyss by assumng that credt access should always lead to postve mpact outcomes. Such studes have gnored household behavor wth regards to whether or not the household s credt constraned. In realty, however, there are crcumstances n whch access to credt may have no mpact on household welfare. Credt access wll only be effectve for the credt constraned thus those wth access to remuneratve consumpton, producton and nvestment opportuntes who are unable to pursue the opportuntes for lack of fnancal resources. A lack of access to credt may not necessarly mply an unmet credt need (de Janvry et al 1997). In the same way, the margnal contrbuton of credt s lkely to be hgh n households that have a larger bndng credt constrant than n those that are less constraned. Consderng separablty n producton decson models s mportant because the comparatve statcs for households facng a market falure such as credt constrants are dfferent from those wthout a market falure, such that models that do not take nto account such dfferences wll lead to nconsstent parameter estmates (Vaks et al., 2004). In Malaw, as else where, all credt mpact studes have not taken nto account the potental nconsstency that may result from such ncorrect modelng. Knowledge of whether or not access to credt enables a household to make ts producton and consumpton decsons separably s also crucal as t enables us to capture other potental constranng factors, such as complementary market falures and other factors that mght make credt neffectve to benefcary households. Buldng on the economc theory of the agrcultural household model under credt market falure, ths paper ams at nvestgatng the extent to whch access to credt enables smallholder farmers to adopt hybrd maze producton n Malaw. The study uses a Double- Hurdle model n estmatng the determnants of adopton due to a presumpton that factors that nfluence the household s decson to adopt are dfferent from those that affect the 3

5 extent of adopton. Usng the drect elctaton approach developed by Dagne, Zeller Sharma (200), households are classfed nto credt constraned and unconstraned regmes. The effect of access to credt on the adopton of hybrd maze s estmated usng a swtchng regresson approach by takng nto account the selecton bas assocated wth categorzng the sample nto constraned and unconstraned regmes. We start by estmatng the probablty of beng credt constraned, followed by an estmaton of the mpact of access to credt for the two regmes of households (credt constraned and unconstraned), whle accountng for selecton bas. Data used n ths study s from Malaw collected by the Internatonal Food Polcy Research Insttute (IFPRI). The rest of the paper s arranged as follows: n secton two we present a revew of maze producton n Malaw and the role of credt. In secton three we present the theoretcal framework whle the emprcal approach used s presented n secton four. The data used for the estmaton s descrbed n secton fve. In secton sx we present and dscuss results, whle secton seven concludes. 2.0 Maze producton n Malaw: a revew A sgnfcant feature n Malaw s agrculture s the domnance of maze n the farmng systems. It s estmated that more than 70 percent of the arable land s allocated to maze producton (Government of Malaw, 2004). It s also noted that despte efforts to dversfy away from maze, the land allocated to maze contnues to rse. Carr (1997) notes that the contnued rse n the land allocated to maze could be attrbuted to the fact that maze s a C4 plant, such that t produces more calores per unt land area than other crops grown n Malaw. Wth the declne n farm sze, small holders have allocated more of ther land to maze. Nevertheless due to the short and sngle farmng season, combned wth the lack of nputs that accompany the producton of maze, yelds of maze reman low leadng to food nsecurty for more than 60 percent of the households who run out of food 4 months before the next harvest(world bank, 1996). The natural response by the government of Malaw has been the ntroducton of hybrd maze suted for both the clmate and food preferences of farmers. Due to the contnuous declne n sol fertlty, farmers developed specal nterest n the use of fertlzer such that by 1995 over 90 percent of the maze was fertlzed (CIMMYT, 1995). 4

6 As a way of achevng the polcy of ntensfyng maze producton through the use of hybrd maze seed and fertlzer, the government embarked on an ambtous credt program based on jont lablty lendng. Agrcultural extenson offcers were gven a task of overseeng the functonng of the credt groups and montorng loan repayment. Supported by the Malaw Congress Party (MCP), the rulng party at that tme, Conroy (1992) notes that ths exerted pressure on farmers to repay, enablng Malaw to regster the hghest repayment rates of 95 percent for a number of years. In hs paper a green revoluton frustrated Carr (1997) notes that the rapd ncrease n hybrd maze seed and fertlzer use whch was encouraged by a sharp rse n the supply of credt to smallholder farmers led a number of observers n the World Bank and CYMMT to refer to developments n Malaw as beng a Green Revoluton. In her paper Maze s Lfe: Malaw s delayed Green revoluton, Smale (1995) expected that there would be a contnued ncrease n both the area allocated to hybrd maze as well as the yeld. The realty though s that the land allocated to hybrd maze remans low. Proporton (%) Perod n years Fgure 1: Share of maze land allocated to hybrd maze producton Fgure 1 presents the trend n the share of land allocated to hybrd maze from 1984 to Although there s appostve trend n land allocated to hybrd maze (as shown by the ncrease from about 8 percent n 1984 to 30 percent n 2003), there has been a number of fluctuatons resultng from both polcy nfluences as well as natural dsasters such as drought. The steady ncrease n the share of hybrd maze area was halted n 1994 when t fell to 18 percent due to the collapse of the Small holder Agrcultural Credt Admnstraton (SACA). 5

7 Zeller et al (1998) note that, whle 400,000 farmers receved credt n 1992 only 34,000 dd so n Ths led to an ncrease n the share of small holder land area planted to non-maze crops such as cassava and pulses. Zeller et al (1998) observe that the response of farmers to the perceved advantages of drought-resstant crops, the sudden collapse of the publc system for dstrbutng credt for maze producton, and the government polcy orentaton towards dversfyng smallholder crop producton may all have played a role n ths outcome. Nevertheless, the ncreasng trend pcked up after 1994 due to the large scale dstrbuton of free fertlzer and hybrd maze seed. A sharp fall was experenced n 2001 and 2002 but 2003 saw a recovery to 30 percent of the land allocated to hybrd maze. From the revew t s clear that more has to be done f the government polcy of expandng the producton of hybrd maze to more than half of the total maze land area s to be acheved. A research on the role of credt on adopton of hybrd maze whch takes nto account the household credt constrant status s pertnent n that t wll nform credt polcy makers on the type of farmers to target for credt (or on the role of credt n fosterng hybrd maze producton). 3.0 Theoretcal framework Statc household models that stress the role of pervasve rsks, lmted nformaton, and mperfect markets on household s behavor have been wdely used. Sngh et al. (1986) note that predctons derved from these models dffer markedly from those under a standard household model where separablty between producton and consumpton decsons s assumed. Under separablty, allocaton of resources n producton can be decded ndependently of consumpton decsons. However, separablty breaks down when there s a market falure such that producton and consumpton decsons need to be taken jontly. In agrcultural producton, expendture and ncome profles are markedly seasonal and thus the lqudty constrants n fnancng producton and consumpton can be partcularly acute (de Janvry et al., 1999). Ths prompts households to adjust ther ncome generatng strateges and ther expendture patterns to brng the dstance between the two profles wthn the range of avalable credt. Thus n ths study we assume a statc household model that lnks adopton of mproved technologes wth a growng season lqudty constrant. It s assumed that a household chooses between growng a local maze varety (lm) that s not subject to the 6

8 growng season lqudty constrant and hybrd maze (hm) whch s subject to the growng season lqudty constrant. The household s assumed to be maxmzng the followng utlty functon: Max qhm, qlm, llmlhm, qxhm, chmclm, cm, cl U ( c hm, c lm, c m, c ; z l h ) (1) where: U s the utlty functon to be maxmzed, c, hm, clm cm and l c are quanttes consumed of hybrd maze, local maze, manufactured good, and lesure, respectvely. h z s a set of household characterstcs that nfluence consumpton Subject to: (2) pxhm qxhm + pmcm + phmchm + plmclm = phmqhm + plmqlm + w( ls ) + K Seasonal lqudty constrant q g ( q, q, l, l, q,; z ) =0 producton functon hm lm lm hm xhm l + l + l + c E, tme constrant s lm hm l = where: q q hm, lm are quanttes of hybrd maze and local maze produced, respectvely l lm, l hm and l s are quanttes of labor used n the producton of local maze, hybrd maze, and labor sold out by the household, respectvely qxhm s the quantty of extra nputs requred for the producton of hybrd maze, such as mproved seed, pestcdes, etc, q Z s a set of fxed factors n producton and farm household specfc characterstcs that nfluence producton, 7

9 p xhm and w are nput prces for nputs specfc to hybrd maze and the wage rate on the labor market, respectvely, p hm and p lm are farm gate prces for hybrd maze and local maze. pm s the prce for the manufactured good, E s the total tme endowment, K s the lqudty from past savngs, credt, and pre-harvest transfers. In peasant economes wth rare opportuntes for off farm ncome, maxmzng the consumpton functon s closely assocated wth maxmzng farm profts whch are then used to fnance the consumpton decsons. In ths case t means maxmzng profts from the producton of hybrd maze and local maze. The maxmzaton problem above yelds the followng Lagrangean functon: h L= U ( c, c, c, c ; z ) (3) hm lm m l + λ 1 { p q + p q + w( l + K hm hm lm lm s ) p xhm q xhm p m c m p hm c hm p lm c lm } q + λ g( q, q, l, l, q,; z ) + λ ( E l l l c ) 2 ( hm lm lm hm xhm 3 s lm hm l Assumng an nteror soluton, the maxmzaton problems yelds the followng frst order condtons: L c hm = U hm λ 1 phm = 0 (4) L c lm = U lm λ 1 plm = 0 (5) L c m = U m λ 1 pm = 0 (6) 8

10 L c l = U cl λ = 0 3 (7) L q xhm = λ2 qxhm pxhm ( 1+ λ1 ) = 0, λ 1 0 (8) L l hm =λ l 2 hm λ 3 =0 (9) L l lm =λ l 2 lm λ 3 =0 (10) λ 1 s a multpler assocated wth the credt constrant. The multpler represents an addtonal amount of nputs for the producton of hybrd maze ( q xhm ) that a farmer wll purchase for each addtonal unt of cash or credt. Ths s vald only when the farmer fals to acqure optmum nputs requred due to lack of cash. Thus t s only relevant to credt or lqudty constraned households. For unconstraned households the multpler does not have an effect on ther producton decson. There are, therefore, two scenaros dependng on whether the credt constrant s bndng or not. Frst, we consder a case where there s no bndng constrant on the amount whch the household can borrow. Thus the credt constrant s not bndng and therefore, λ 1 = 0. Under ths scenaro, the frst order condtons for the optmum nput requrements are gven as follows: L q xhm = λ q p =0 (11) 2 xhm xhm The optmum quantty of nput q xhm s gven by: u u q q xhm = q xhm ( phm, plm, pxhm, z, E) (12) The superscrpt u refers to the unconstraned case. 9

11 In the second scenaro we have a household that can not borrow as much as t wants. The household s sad to face a credt constrant ( λ 1 > 0). The frst order Kuhn Tucker condtons under such a scenaro are stll based on the same objectves functon (..) except that n ths case the amount of credt K, s treated as one of the parameters that s exogenously determned by the lender. The frst order condtons for the nteror soluton are : L q xhm = λ2 qxhm pxhm ( 1+ λ1 ) = 0, λ 1 > 0 (13) Snce the constrant s bndng we must solve the optmum quanttes of follows: q xhm and λ1 as c c q q xhm = q xhm ( phm, plm, pxhm, z, E, K) The superscrpt c refers to the constraned case. (14) The dfference between the two (constraned and constraned) s that n the constraned case farmers are unable to buy optmal quanttes of hybrd maze nput q xhm. The amount of credt therefore becomes an mportant determnant of the farmer s ablty to adopt hybrd maze. The amount demanded for hybrd maze nput does not only depend on the prces of maze and other nputs but also on the amount of credt (K) avalable to the household. The hypothess to be emprcally tested s that whle access to credt (K) does not nfluence the adopton decson for the lqudty unconstraned farmers, t does so for the constraned. 4.0 Emprcal Model Our emprcal strategy starts by categorzng households nto credt constraned and unconstraned regmes. The elctaton approach allows us to capture whether or not a 10

12 household s credt constraned by drectly askng the household whether they needed more credt for ts nvestment actvtes. Through a seres of questons t s possble to know whether or not a household had excess demand (ED) for credt n a gven recall perod. The procedure allows for the treatment of excess demand for credt (ED) =(Demand Supply), as a latent varable for each household h. Followng ths procedure t s not possble to assess the magntude of the constrant, nstead only an ndcator of whether or not the household s credt constraned s observed (Gllgan et al., 2005). The specfcaton for the two categores of households can thus be wrtten as follows: * ' k = 1 f ED h X α + u 0 (15) h = h h * ' k = 0 f ED h X α + u 0 h Where: = h h X h represents household and farm characterstcs that determne credt demand as well as characterstcs of the household and the lendng nsttuton that determne the supply of credt u h s a random error term wth zero mean capturng stochastc factors affectng both the demand and supply Based on the theoretcal framework presented earler, the underlyng assumpton n assessng the effect of credt on adopton s that adopton S s a functon of a vector, X consstng of exogenous varables and endogenous credt access, K, such that: S = S( X, K,; β ) + ε (16) In ths specfcaton credt access K s endogenous because factors that affect the household s access to credt K may also affect the household s share of land allocated to hybrd maze. In order to solve ths problem Zeller et, al (1998) recommend a smultaneous modelng of both the adopton decson and access to credt. As such, an extra equaton s requred to estmate the predcted access to credt, K expressed as K = K( X, w; γ ) + ω (17) 11

13 The theoretcal framework outlned earler postulates that credt access K s only an mportant varable for adopton among households that are credt constraned. The adopton of hybrd maze by a credt constraned household can thus be specfed as follows: Where: 3 S c K c = S ( X, K,; ) β + ε = K( X, w; γ ) + ω (18) (19) X s a vector of characterstcs that affect both the adopton decson and the endogenous credt access, K, w = s a vector of nstruments correlated wth credt access but not wth adopton, ε 1 and ε 2 are random error terms, where as β, γ are vectors of coeffcents. As for the unconstraned households, snce t s assumed that credt access does not affect ther decson to adopt hybrd maze, credt access, K, should have no mpact on adopton. The specfcaton s as follows: S u u = A ( X,; v) +η (20) where: v and η are a coeffcent to be estmated and the error tem, respectvely. The estmaton of equatons for the two regmes, thus the credt constraned regme and the unconstraned regme s done usng a swtchng regresson approach. Estmatng the two equatons separately s used as a counterfactual test of whether or not credt access affects adopton among constraned households. In the emprcal estmaton we nclude the predcted access to credt as one of the explanatory varables n both regmes. Usng equaton 15 as a crteron functon for whether or not a household s credt constraned and S to represent the dependent varable for adopton, we estmate an endogenous swtchng regresson model as specfed n Maddala, (1986) of the followng form 3 Results for ths equaton are not dscussed n ths paper but can be requested from the authors 12

14 c ' S h W1 h 1+ v1 h = φ f k = 1 (21a) u ' S h W2 h 2 + v2h h = φ f k = 0 (21b) h where [ δ β ] φ =..., 0 1 β n W vh ' h = [ X, Kˆ ] h = ε for =1 f the household s credt constraned and =2 f unconstraned. The endogenety n a swtchng regresson comes from the fact that we allow for correlaton between the error terms n the credt constrant crteron functon (15) and the equatons of nterest (21a) and (21b). Thus the error terms v, 1h, v2h, and uh are assumed to be jontly normally dstrbuted wth zero mean and the followng covarance matrx. σ 11 σ 12 σ 1u σ σ σ u σ 1u σ 2u σ uu The swtchng regresson model accounts for the fact that each household has a nonzero probablty of beng credt constraned n each perod, that ths probablty vares dependng on household characterstcs, and that only one realzaton of these probabltes s observed n each perod (Gllgan et al., 2005). Consstent estmates of parameters φ 1 and φ 2 can be obtaned by followng a two step Heckman procedure of estmatng the credt constrant equaton n (15) as a Probt and estmatng equaton 21a and 21b separately, whle correctng for the selecton bas by ncludng the nverse Mlls rato from equaton 15 as a regressor n the two equatons. Followng Feder, Just and Zlberman (1985) we defne adopters as households that reported that they grew hybrd maze. The extent of adopton s defned as degree of use of a technology, whch for ths study s taken as the proporton of maze land that s allocated to hybrd maze. The decson of whether or not to adopt hybrd maze varety and how much 13

15 land to allocate to hybrd maze can be estmated usng a censored Tobt model (Zlberman and Just 1984) or a P-Tobt model (Deaton and Irsh (1984). However, the man weakness wth the Tobt model s that t only allows one type of zero observaton, namely, a corner soluton, snce t s based on the mplct assumpton that zeros arse only as a result of the respondent s economc crcumstances (Martínez-Espñera, 2006). In the same context Moffat (2003) observes that n some cases there are household that would never take some postve values, (thus they would never adopt under any crcumstances because they consder the technology to be nferor), then the use of a restrctve Tobt model wthout consderng the group that would never adopt may gve based results. Deaton and Irsh (1984) propose a relaxaton of ths restrcton by consderng the probablty that one would never adopt. Wth respect to ths study, let us assume that the proporton of households that are potental adopters of hybrd maze s p, such that the proporton of households that would never adopt hybrd maze s (1-p). The Tobt model would apply for the group of potental adopters whle t wouldn t for the never adopters snce the ntensty of adopton would be automatcally zero. Ths gave rse to the P-Tobt model wth the followng lkelhood functon (Moffat 2003): x ' β 1 y x ' β LogL = ln 1 pφ + ln p φ (22) 0 δ + δ δ Thus n addton to estmatng β and δ the P-Tobt also estmates the p. Nevertheless, as noted by Martínez-Espñera (2006), the P-Tobt model fals to analyze the factors that wll make a respondent more or less lkely to adopt a technology. A further generalzaton allows for the parameter p to vary accordng to respondent s characterstcs. Ths gves rse to the Double-Hurdle model whch s an mprovement over a P-Tobt. The underlyng assumpton n the Double-Hurdle approach s that ndvduals make two decsons wth regard to ther wllngness to grow hybrd maze. The frst decson s whether they wll allocate a postve amount of land to hybrd maze at all. The second decson s about the share of land that they wll allocate, condtonal on the frst decson. The two decsons are, therefore, whether to grow hybrd maze and how much to grow. The mportance of treatng the two decsons ndependently les n the fact that factors that affect one s decson to adopt may be dfferent from those that affect the decson on how much to 14

16 adopt. Ths mples that households must cross two hurdles n order to adopt. The frst hurdle needs to be crossed n order to be a potental adopter. Gven that the households s a potental adopter, ther current crcumstances then dctate whether or not they do n fact adopt- ths s the second hurdle (Moffat 2003). The Double-Hurdle model allows for the possblty that these two decsons are affected by a dfferent set of varables. The advantage wth ths approach s that t allows us to understand characterstcs of a class of households that would never adopt hybrd maze. Thus the probablty of a household to belong to a partcular class depends on a set of household characterstcs. Orgnally proposed by Cragg (1971), the Double-Hurdle model has been recently appled n a varety of areas. Martínez-Espñera (2006) ctes the use of the Double -Hurdle model by Burton, Dorset and Young s (1996), who model US food expendture away from home; Yen and Jones (1997) who apply the model to alcohol consumpton and US household consumpton of cheese, respectvely. Moffat (2003) used the model to model loan default. The Double-Hurdle model s a parametrc generalzaton of the P-Tobt model n whch the decson to adopt and the ntensty of adopton are determned by two separate stochastc processes and therefore, two equatons. The frst equaton n the Double-Hurdle relates to the decson to adopt and t can be expressed as follows: * * d = 1 f d > 0 and 0 f d 0 (23) d * = 'α + ε z d * s latent adopton varable that takes the value of 1 f a household grew hybrd maze and 0 otherwse, z s a vector of household characterstcs and α s a vector of parameters; The second hurdle, whch closely resembles the Tobt model s expressed as: * y y = f y 0 and d 0 * > y = 0 otherwse * > * y = x ' β + u (24) where y s the observed response on how much land one allocated to hybrd maze, x s a vector of the household characterstcs and β s a vector of parameters. 15

17 The decson of whether or not to adopt hybrd maze and about how much land to allocate to hybrd maze can be jontly modeled, f they are made smultaneously by the household; ndependently, f the are made separately; or sequentally, f one s made frst and affects the other one as n the domnance model (Martínez-Espñera, 2006). If the ndependence model apples, the error terms are dstrbuted as follows: ε.~ N(0,1) 2 u.~ N(0, δ ) If both decsons are made jontly (the Dependent Double - Hurdle) the error term can be defned as ε µ ).~ BVN(0, Υ) where 1 = ρδ ρδ δ Υ 2 The model s sad to be a dependent model f there s a relatonshp between the decson to adopt and the ntensty of adopton. Ths relatonshp can be expressed as follows: cov( ε µ ) ρ = (25) var( ε ) var( µ ) f ρ = 0 and there s domnance (the zeros are only assocated to non-partcpaton, not standard corner solutons) then the model decomposes nto a Probt for partcpaton and a standard OLS for y. Followng Smth (2003) we assume that the error terms ε and µ are ndependently and normally dstrbuted 4 and thus we have the followng expresson: ε 0 1 N, u δ 4 See Smth (2003) for a theoretcal analyss of why there mght lttle gan from modelng dependence 16

18 And fnally, the observed varable n a Double-Hurdle model s y = d y * The log-lkelhood functon for the double hurdle model s: x ' β 1 y x ' β LogL = ln 1 Φ( z ' α) Φ + ln Φ( z ' α) φ (26) 0 δ + δ δ Emprcal results by both Moffat (2003) and Martínez-Espñera (2006) reveal that the Double-Hurdle model gves superor results to those obtaned from Tobt and P-Tobt models. Thus n ths study we estmate the decson to adopt and the extent of adopton usng a Double-Hurdle model. 5.0 Data The data used n ths analyss draws from a survey of households conducted by the Internatonal Food Polcy Research Insttute (IFPRI), and the Department of Rural Development at Bunda College of Agrculture n 1996 (for detals see Dagne and Zeller 2001). The survey was conducted n three rounds, however ths study used data from the frst round of the survey. The objectve of the IFPRI study was to nvestgate the effects of access to credt on household welfare. The survey covered 404 households selected va stratfed random samplng method, from the three regons and from 5 dstrcts of Rumph, Nkhotakota, Dowa and Dedza and Mangoch. The survey questonnare conssts of seven modules. Only 3 modules were of relevance to ths study, namely, household demographcs, crop and lvestock producton and credt and savngs. The data s avalable from on request from the Internatonal Food Polcy Research Insttute (IFPRI). Descrptve statstcs for selected varables ncluded n the adopton model dfferentated by the adopton status are presented n Table 1. They nclude soco-economc characterstcs such as age, sex and educaton level of a household head. We also nclude wealth status ndcators such as land sze, the value of assets, amount of off farm ncome and market access factors (supply related factors) such as credt, dstance to markets, and access to the extenson servces. Our a pror expectaton s that wealth proxy varables wll have a postve effect on the adopton of hybrd maze (Feder et al., 1985). We expect that access to credt wll ncrease adopton among credt constraned households through the relaxaton of 17

19 the lqudty constrants. We expect farmers that are close to nput and output markets as well as close to extenson servce centers to adopt hybrd maze due to the reducton n transacton costs. Descrptve statstcs ndcate that adopters have hgh off-farm ncomes (MK 3050) than non-adopters (MK 2167). At the tme of the survey, 1 US-dollar was worth 44 Malaw Kwacha (MK). There are no marked dfferences n terms of gender, age and educaton of household head between adopters and non-adopters. However, adoptng households are sgnfcantly (at 5 percent level) larger (4.9 persons) than non adopters (4.3 persons). It s also observed that adoptng households have sgnfcantly larger (P<0.05) land holdngs (1.8 hectares) than non adopters (1.5 hectares). Wth regards to wealth, adopters are wealther wth sgnfcantly larger asset values (MK 2762) than the non adopters (MK 1006). In addton, adopters have sgnfcantly hgher levels of access to formal credt than nonadoptng households. A larger proporton of non-adopters (86%) than adopters (50%) rely on agrculture as ther prmary occupaton. Other major sources of lvelhoods for adopters are self employment (10%) and wage employment (15%). Table 1: Varable Means of selected varables, dfferentated by adopton status for hybrd maze Adopters (n=161) non-adopters (n=243) Total (n=404) Yearly off-farm ncome (MK) Female- headed (%) Age of household head(years) Years of schoolng of household head Years of schoolng of spouse Household sze Number of adult males (15-64 years) Number of adult females(15-64 years) Land holdng sze n hectares Number of persons per hectare cultvated Credt access (MK/year) Percentage of households ownng lvestock Value of assets owned (MK) Occupaton of household head Farmng Household worker Wage laborer Trade Other self-employment Unemployed Other Source: Own calculaton from RDD/IFPRI Rural Fnance Survey 18

20 6.0 Results and dscussons 6.1 Full sample estmates Table 2 presents results from the double hurdle model of determnants on adopton. In addton to credt varables we nclude other varables that are theoretcally lnked to technology adopton. We estmate three separate equatons and observe dfferences n the mpact of credt between credt-constraned and unconstraned households. Columns 1 and 2 present estmates of the adopton model for the full sample of farmers. Results show that access to credt has a postve and sgnfcant effect on the probablty of adopton, whle ts effect on the extent of adopton s not sgnfcant. The mplcaton from ths fndng s that access to credt ncreases the lkelhood that a household wll potentally adopt hybrd maze but condtonal on adopton, access to credt does not lead to hgh levels of adopton. One explanaton to the nsgnfcant effect of credt on the extent of adopton n the full sample could be that the credt provded s not hgh enough to sgnfcantly mprove the ntensty of adopton. Ths s consstent wth the fndng by Dagne and Zeller (2001) that the credt lmts granted by formal lenders n Malaw were relatvely small n relaton to the amount of credt demanded. Zeller and Dagne (2001) therefore recommend to gradually ncrease loan szes to repeat borrowers. The other explanaton could be that not all credt s used for the producton of hybrd maze whch s also confrmed by Dagne and Zeller (2001). Nevertheless, the fndng that credt sgnfcantly ncreases the lkelhood of adopton s nlne wth a pror expectatons and n concurrence wth fndngs from a number of studes that have shown that the lack of access to credt sgnfcantly nhbts the adopton of hgh yeldng varetes even when fxed pecunary costs are not large (Feder et al., 1985). Other than credt, a number of other varables returned sgnfcant sgns n the full sample estmates. The amount of off- farm ncome had a postve and sgnfcant effect on the lkelhood of adopton but t returned a negatve and sgnfcant effect on the extent of adopton. Theoretcally, off-farm ncome can help to overcome a workng captal constrant or may even fnance the purchase of a fxed nvestment type of nnovaton. Emprcal evdence of smlar fndngs has been reported by Feder et al (1985). These results mply that households wth hgh off-farm ncome have a hgher potental of becomng adopters, thus they are more lkely to pass through the frst hurdle than those wth less offfarm-ncome. However, condtonal on adopton households wth hgh off farm ncome wll 19

21 allocate smaller portons of land to hybrd producton. One reason s that households wth hgh off-farm ncomes are located n Nkhotakota and Mangoch dstrcts where maze s not a prme crop and where households derve most of ther lvelhoods from fshng n the lake or fsh sellng such that the amount of off-farm ncome earned s not renvested nto hybrd maze producton. The average off-farm ncomes for Nkhotakota and Mangoch were MK 5808 and MK 4440, respectvely. These ncomes were twce as hgh as the average off-farm ncome for the sample of MK Regardng the age of the household head, results ndcate that t has a negatve and sgnfcant effect on the probablty of adopton. The age of household head had no effect on the extent of adopton. Old age happens to be one of the human captal characterstcs that have been frequently assocated wth non-adopton n most adopton studes. Among the several reasons that could explan the negatve effect of age on adopton s the fact that older farmers have a tendency to stck to ther old producton technques and that they are usually unwllng to accept change. In addton young people are assocated wth a hgher rsk takng behavor than the elderly. At the tme of the survey, more than 60 percent of the heads of households were more than 40 years old. The sze of a household has a postve and sgnfcant effect on the probablty of adopton. However, t has a negatve and sgnfcant effect on the extent of adopton for hybrd maze. The postve effect on the probablty of adopton can be explaned by the fact that labor s an mportant nput n the producton of maze and therefore, larger households have abundant labor requred for maze producton. The negatve effect of household sze on the extent of adopton can be explaned by the fact that once the decson to grow hybrd maze s made based on abundant labor avalable, the extent of adopton wll depend on the ablty of the household to fnance the purchase of nputs requred for the cultvaton of hybrd maze. Ths s partcularly true because hybrd maze requres more captal for the purchase of fertlzer and seed than t requres labor because t s not labor ntensve. Households that receved free nputs n form of fertlzer and seed were more lkely to adopt hybrd maze than those that dd not but condtonal on adopton, free nputs had no effects on the extent of adopton. Ths can be explaned by the fact that the amount of free nputs dstrbuted n form of fertlzer and seed are usually the same across households and that they are usually enough for the cultvaton of very small portons of land of about 0.25 acres. 20

22 Table 2: Determnants of adopton Double-Hurdle model estmates Pooled of full sample (n=404) Frst hurdle Second hurdle Credt Constraned (n=223) Frst hurdle Second hurdle Credt unconstraned (n=181) Frst hurdle Second hurdle Coeffcent (std.errors) Coeffcent (std.errors) Coeffcent (std.errors) Off farm ncome *** *** (0.0001) (0.0003) (0.0001) Gender (1=male) (0.2463) (4.6639) (0.4079) Age household head * (0.0076) (0.1455) (0.0176) Assetvalue ** (0.0001) (0.0004) (0.0002) Household sze *** ** *** (0.0732) (1.3570) (0.1266) Total land holdng ** (0.1119) (1.4963) (0.2108) Educaton head (0.2157) (5.3272) (0.5051) Free nputs ** (0.3832) (3.7366) (0.8003) Tobacco growng household (0.3450) (6.7016) (0.7466) Dstance to extenson ** offce (0.0411) (1.1182) (0.1564) Dstance to market (0.0250) (0.5717) (0.0696) Formal credt *** (0.0004) (0.0020) (0.0005) Informal credt (0.0006) (0.0059) (0.0014) Land pressure *** *** *** (0.0554) (1.5095) (0.1146) Mangoch *** ** (0.4126) (8.6653) (0.8298) Nkhota * (0.5400) ( ) (1.2297) Rumph (0.6550) ( ) (2.2966) Dedza ** ** (0.2986) ) (1.4331) Lambda ** (0.6084) _cons *** * (0.6098) ( ) (1.9231) /lnsgma *** (0.0574) Sgma *** (1.3842) Coeffcent (std.errors) *** (0.0006) (5.3282) ** (0.2389) (0.0008) (2.0886) (2.8510) (7.3753) *** (4.3385) ( ) (2.4644) (0.4953) *** (0.0123) (0.0106) *** (2.1543) * ( ) ( ) ( ) *** ( ) ( ) ** ( ) *** (0.0710) *** (1.6260) Coeffcent (std.errors) (0.0001) (0.6020) (0.0143) (0.0001) (0.1645) *** (0.2307) (0.5566) (0.8043) ** (0.4776) (0.0951) (0.0628) (0.0001) (0.0005) * (0.1135) ** (1.1144) (1.1626) ** (1.7858) (0.5316) *** (0.3624) ** (1.4051) Coeffcent (std.errors) (0.0003) ** (7.7599) * (0.2036) (0.0003) *** (1.1912) ** (1.1093) * (5.0293) ** (6.2884) (5.3914) (0.8765) ** (0.5407) (0.0012) (0.0038) ** (1.7802) ** (8.3566) * ( ) (11.186) ** (7.6329) ** (3.1410) *** ( ) *** ( ) (1.3168) No. of obs Ch-square *** 208*** *** LL-functon Source: Own calculaton from RDD/IFPRI Rural Fnance Survey 21

23 Land pressure, whch s measured as the number of persons per hectare has a negatve and sgnfcant effect on the probablty of adopton, but condtonal on adopton households wth more ndvduals per hectare allocate more land to hybrd maze. Experence has shown that households wth hgh land pressure are also lkely to be poor households hence less lkely to fnance the purchase of costly nnovatons. However, upon surpassng the frst hurdle, households wth hgh land pressure wll ntensfy ther adopton of an mproved varety to maxmze productvty requred to meet ther food and cash requrements from the small sze of land. In most adopton lterature, hgh land pressure has been descrbed as a prerequste for agrcultural ntensfcaton. Results ndcate that households n Mangoch and Dedza are more lkely to allocate larger portons of land to hybrd maze than households from other dstrcts. The reman explanatory varables such as gender, educaton, land holdng as well as markets access varables such as dstance to market and dstance to extenson offce were not sgnfcant n the full sample estmates. 6.2 Constraned versus unconstraned households Columns 3-4 and columns 5-6 present estmates of the swtchng regresson model for the credt constraned and credt unconstraned households, respectvely. 5 Results from the credt constraned regme n columns 3 and 4 ndcate that credt has a postve and sgnfcant effect on the extent of adopton of hybrd maze but t had no effect on the lkelhood of adopton. The mplcaton from these fndngs s that once credt constraned households decde to adopt hybrd maze, credt sgnfcantly ncreases ther ablty to fnance the purchase of nputs requred for the producton of hybrd maze whch leads to an expanson of the area under hybrd maze. Therefore, condtonal on adopton, credt constraned households wth hgher amounts of credt allocate more land to hybrd maze producton. In the study area n partcular, formal credt s provded for the producton of tobacco as well as for off-farm employment actvtes. In concurrence wth the null hypothess that credt wll have no effect on the adopton of hybrd maze among unconstraned households, results n columns 5 and 6 5 The results for the swtchng regresson model are estmated usng a Heckman selecton model to estmate parameters n each regme whle adjustng standard errors accordngly. Estmates of the frst stage Probt model on credt constrants were presented earler. 22

24 reveal that ndeed credt had no effect on both the lkelhood of a adopton as well as the extent of adopton n the unconstraned regme. The value of assets whch was used as a proxy for household wealth had a postve and sgnfcant effect on the lkelhood of adopton n the credt constraned regme but t had no effect on the lkelhood of adopton n the unconstraned regme. Land holdng sze reduces the lkelhood of adopton n the credt constraned regme whle t ncreases the lkelhood of adopton n the unconstraned regme. Ths s not a surprsng fndng because as observed by Wel (1970) the negatve relatonshp between adopton and land holdng sze may be caused by credt constrants. Wel suggests that captal may be more avalable for larger farms, so that even though all farms may wsh to adopt, larger farms are more lkely to do so. Thus, households wth larger holdngs are also lkely to be wealther, wth ncreased ablty for self fnancng the purchasng of nputs but when such households are credt constraned then ther adopton rate s negatvely affected. The negatve effect of land holdng on the extent of adopton nn the unconstraned regme mples that smaller farmers exhbt hgher ntenstes of hybrd maze adopton than larger farms. Feder et al. (1975) suggested that the phenomenon may arse because small farms wll farm land more ntensvely to meet subsstence needs The gender of household head was sgnfcant only n the unconstraned regme. Thus male headed households that were not credt constraned allocated larger proportons of ther land to hybrd maze cultvaton than female headed households. Of nterest n the unconstraned regme s the fact that whle land holdng ncreases the lkelhood of adopton, t negatvely affects the extent of adopton. Whle the land allocated to tobacco was nsgnfcant n the constraned regme, results show that tobacco growng households that are unconstraned are less lkely to grow hybrd maze. Free nput dstrbuton among unconstraned households does not necessarly translate nto ncreased hybrd maze producton. The man reason s that the majorty of unconstraned households that receved free nputs were from Mangoch and Nkhotakota where maze farmng s not popular. Hence, because of such mstargetng of credt to on average wealther households, the expected effects on hybrd maze adopton and producton were not materalzng. 23

25 7.0 Conclusons and polcy mplcatons The current polcy emphass on credt as a development tool coupled wth the lmted avalablty of funds for credt mples that targetng credt to those that really need t has become a crucal ssue. In addton, t s theoretcally expected that credt provded at market nterest rate results nto margnal benefts among credt constraned households but does no welfare enhancement for unconstraned households. Therefore, achevng hgh economc effcency n credt allocaton requres targetng credt constraned households. Ths paper has nvestgated the mpact of access to credt among households that dffer n ther credt constrant status. Usng a swtchng regresson approach we nvestgated determnants of adopton of hybrd maze usng a Double-Hurdle model due to a hypothess that factors that affect the decson to adopt hybrd maze may be dfferent from those that nfluence the extent of adopton. Results reveal that factors that nfluence the decson to adopt hybrd maze are not necessarly the same factors that affect the extent of adopton. Results also ndcate that factors that affect adopton decsons among credt constraned households are dfferent from those that affect adopton n the unconstraned regme. For, example, whle credt had a postve effect on adopton n the constraned regme, t had no effect among unconstraned households. The effect of land sze on adopton s another example of varables wth an opposte effect between the two regmes. Results ndcated that whle larger land holdngs lead to ncreased adopton among the unconstraned regme, t has a negatve effect on adopton n the constraned regme probably due to credt constrants. An nterestng lesson from ths study s that t s mportant to consder the two stages of adopton separately when assessng strateges for promotng agrcultural technologes because factors that affect the decson to adopt are dfferent from those that affect the decson on the extent of adopton. The fact that credt access had a hgher mpact on the adopton of hybrd maze among credt constraned households justfes the need for credt targetng to acheve hgh economc effcency. Second, most of the formal credt from formal credt nsttutons n Malaw to rural households s n the form of n-knd credt, namely fertlzer and seeds ether for hybrd maze and tobacco. Our results show that unless such credt s 24

26 provded to credt-constraned households the current practce of loan delvery amed at ncreasng hybrd maze producton fals to acheve the objectve of ncreasng hybrd maze share. Farm households recevng such n-knd credt smply at best substtute own fnancng for credt, or worse, they wll on-sell the hybrd maze seed and fertlzer presumably at a loss, or use t for other crops. In any case, formal credt nsttutons n Malaw may reconsder the practce of n-knd loans, consderng that the net welfare beneft of cash credt for rural farm households wth multple sources of ncome, nvestment and consumpton opportuntes s lkely to be hgher than the one generated by n-knd credt. Thrd, our results ndcate that although credt access ncreases the lkelhood of adopton, t does not nfluence the extent of hybrd maze area cultvated. Ths ndcates that loan szes may be too small for makng a sgnfcant mpact on the cultvated area. The formal nsttutons may reconsder ther practce of gvng standardzed loan szes, and adopt a more demand-orented flexble polcy that rewards repeat borrowers wth mpeccular repayment records wth gradually ncreasng larger loans. Among hybrd maze farmers, ths change n polcy s lkely to ncrease the area of hybrd maze grown n Malaw. Fourth, only less than 6 percent of smallholders n Malaw have currently access to credt. Expandng the exstng rural credt system to more smallholders wll be crucal for fosterng the adopton of hgher-value food and cash crops, such as hybrd maze. Last, poverty n rural Malaw s wdespread and deep. The poorest of the poor among rural farm households need to be targeted through safety net schemes not credtn order to enable these households to adopt hgher value crops whle ensurng food securty after droughts or other natural dsasters. Hence, credt s only of relevance to a smaller set of rural households n Malaw. Other constrants, such as extreme vulnerablty and poverty, or lack of market access and road nfrastructure, need to be addressed by other polcy nstruments.. 25