Seasonal liquidity constraints and agricultural productivity: Evidence from Zambia

Small-scale farming remains the primary source of income for a majority of the population in developing countries. In rainfed agricultural settings, income typically arrives only once a year. To meet consumption and investment needs over the subsequent months in the absence of formal financial markets, households adopt a range of coping strategies. Two common strategies are reducing food consumption and selling labor to other farms, both of which improve short term liquidity, but may harm subsequent harvest outcomes. To investigate whether farm productivity is increased by access to short-term credit, we conducted a randomized controlled trial across 175 villages rural Zambia, which provided selected households with access to approximately US$ 40 of loans during the lean season, with repayment due after harvest. We find that access to credit during the lean season increases harvest output and revenue by around 10 percent relative to the control group, an increase similar in magnitude to the amount owed on the loan. This impact is driven mostly by increases in food consumption and labor hiring, as well as decreases in the frequency of selling labor to other farms. We observe no statistical impact on other agricultural input expenditures, and no effect on other consumption smoothing strategies that are less seasonal in nature, such as asset sales. Our results suggest that both the seasonal consumption and labor allocation of small-scale farmers are affected by frictions in the capital market. The high take up and repayment rates for the loans as well as reduced prevalence of hunger and improvements in self-reported well-being suggest that the overall welfare gains associated with increased access to credit may be substantial. ⇤We thank audience members at IGC Growth Week for comments and suggestions. We are grateful to the Growth and Labor Markets in Low Income Countries (GLM-LIC), the International Growth Centre, the Agricultural Technology Adoption Initiative (JPAL/CEGA) and an anonymous donor for financial support, and to Innovations for Poverty Action for logistical support. Many thanks to Rachel Levenson for management of the field work and to Chantelle Boudreaux and Carlos Riumallo Herl for assistance with the data.