EFFECTS OF CREDIT SUBSIDY ON SMALLHOLDERS MAIZE PRODUCTIVITY AND FARM INCOME IN CHÓKWÈ DISTRICT, MOZAMBIQUE

ABSTRACT
Credit constraints hinder development of agriculture in developing countries, yet access is mainly associated with increased farm productivity and crop incomes. For over a decade, Mozambican smallholders have accessed a decoupled credit subsidy under the seven million program for agricultural development. However, little is known about the influence of the program on crop productivity and farm incomes in rural areas. This study therefore, examined whether there are productivity and income benefits for program beneficiaries in Chókwè district using maize crop as an example. To accomplish these objectives, a random sample of 159 farmers was interviewed using a structured questionnaire but only 107 farmers with complete data on credit subsidy and other socio-economic characteristics, farm outputs and incomes were used in the analysis. The econometric results were obtained using Endogenous Switching Regression (ESR) technique and its robustness compared with results from the Propensity Score matching model. The Endogenous Switching Regression results indicated that credit had significant and positive effect on maize productivity. Further, the age of the farmer, number of contacts with extension services providers, distance to input markets and source of income influenced decision to participate in the subsidy market. The same results were found using Propensity Score matching approach. An Analysis of Variance showed higher incomes for those participating in the program. These results suggest that a decoupled credit subsidy could influence both crop productivity and farmers’ incomes when infrastructural and off-farm income differences are corrected. Consequently, the study recommends increased coverage of the subsidy program, extension advocacy and opening up of rural areas through quality roads to ensure agricultural productivity and increased farm incomes.

CHAPTER ONE 
INTRODUCTION 
Background to the study 
Rising farm productivity and farm incomes are variously considered as important in the fight against prevalent hunger and malnutrition in rural areas of most developing countries. For instance, the Sustainable Development Goals (previously Millennium Development goals) recognize access to sustainable production and marketing systems as the basis for ensuring reduction in environmental degradation and consequently high production and low poverty levels. 

Agriculture contributes significant portion of most African countries gross domestic product, informal employment, food and farm incomes for more than a half of rural population (Dorward et al., 2010). Therefore, it is believed that by increasing the production potential per land unit and with access to ready markets, rural populations could experience less hunger and high incomes (Chirwa & Dorward, 2013). However, this requires increased investments in research and development, and use of new farmer friendly technologies in agriculture which in turn increase productivity and ensure food security and better returns. Nevertheless, smallholder farmers face low producer prices and hence incomes, and find it constraining to purchase costly farm inputs and adopt new technologies. This is mainly due to the bureaucracy in procuring formal credit that demands collateral, high interest rates and the risk-averse behavior by agricultural farmers to demand credit considering the risk associated with failure to repay. 

Countries that depend on agriculture or that protect infant agricultural sectors use some form of subsidy to cushion farmers against high prices and to increase farm outputs, however subsidies may negatively affect productivity when they distort production structure which lead to allocative inefficiency through investment in subsidy-seeking activities that are relatively less productive (Alston & James, 2002). 

In the context of World Trade Organization (WTO) agenda agricultural subsidy has a negative effect on agricultural markets. In order to avoid the negative effect of coupled subsidies, governments of many countries have shifted from coupled to decoupled subsidies that are independent from farm production and input use decision (Rizov, Pokrivcak,& Ciaian, 2013). 

Overview of Agricultural Sector in Mozambique 
In Mozambique there are almost 36 million hectares of arable land with only 4 million or about 11% in productive use (CEPAGRI, 2009). The wide diversity of soil and climate conditions is suitable for large variety of crops. 90% of cultivated land is occupied by smallholder farmers with an average of less than 2 hectares per household. It is estimated that about 3.3 million hectares of land can be irrigated but currently only 3% is under irrigation (MINAG, 2012). The most important scheme is in Chókwè district with about 30.000 ha of equipped area. 95% of cultivated land is for staple crops and is dominated by smallholder farmers, while 5% is for cash crops (Kalaba, Kapuya, & Mapila, 2011). 

Maize, Cassava and beans occupy around 60% of cultivated land by smallholder farmers. The major cash crops include sugarcane, cotton, tobacco and cashew nut (FAOSTAT, 2014). In spite of the fact that soils and climate conditions offer wide range of opportunities, agricultural sector in Mozambique is characterized by low yields mainly due to limited use of purchased inputs such as improved seeds, fertilizers and pesticides. Agricultural systems are predominantly rain fed and less than 5% use fertilizer (Kalaba et al., 2011). 

Most staple crops produced by smallholder farmers are for home consumption while coconut and cashew nut are important source of foreign exchange earnings (Kalaba et al., 2011, Mucavele, 2009). Though most crop yields in Mozambique are low, agriculture is an integral part of Mozambican economy; it contributes a quarter of the gross domestic product (GDP) and provides livelihoods to more than 80% of the population (IFAD, 2010). 

Mucavele (2009) states that the long run goals of the agricultural sector in Mozambique consist of improving food security and reduce poverty by supporting smallholder farmers to increase sustainable agricultural productivity. 

According to Sitoe (2005) there are seven key elements hindering the progress of agricultural sector in the country, mostly dominated by smallholder farmers; these include: Low use of improved technologies (improved seed, fertilizers and pesticides), inequalities in access and use of land, poor infrastructures for irrigation, poor access to input markets, low access to financial services by producers, low quantities produced by smallholder farmers and scattered producers. 

Agricultural Policies in Mozambique 
Since 1999 the government of Mozambique in partnership with national and international organizations has been developing a set of strategies to boost agricultural production and productivity, such strategies focus on executing the poverty reduction plan (Kalaba et al., 2011). 

The National Program for Agricultural Development (ProAgri I) was scheduled to run for five years from 1998 to 2003 but it was extended to the end of 2005 for the first stage, the second phase (ProAgri II) from 2007 to 2010. This program is a key element of absolute poverty reduction plan strategy (MINAG, 2012). The aim of ProAgri is to provide financial and technical assistance for agricultural development. Numerous donors pooled funds to support financial activities and, in order to ensure technical, extension services and overcome agricultural research problems; the Institute of Agricultural Research was created in 2005. 

In 2000 the government launched the Action Plan for the Reduction of Absolute Poverty (PARPA); this plan is a strategic framework involving many sectors of the economy. In agricultural sector its aim consists of (i) improving access to technology, information and extension, (ii) promote construction and rehabilitation of agricultural infrastructures, (iii) improve access to agricultural market information, (iv) increase availability and access to agricultural inputs (MINAG, 2009). This plan forced the government to assess how programs and strategies affect marginalized groups (Mucavele, 2009). 

In 2007 the Rural Development Strategy was approved and its main objective was to promote good governance, promoting initiatives for rural and sustainable development. In the same year a long run strategy Green Revolution and Action Plan was approved to increase agricultural production and productivity through use of improved technology (PARPA, 2009). It is a multidimensional strategy to fight against hunger and poverty. In order to accelerate the implementation of this strategy, the Action Plan for Food Production was approved in 2008 as a government response to the global increase of grain’s prices and shortage of food stuffs. It was a 3 year plan 2008-2011 targeting especially to reduce the deficit in food production through investment in production, storage, processing and marketing (MINAG, 2008). 

In order to align the country’ strategies with the Comprehensive African Agriculture Development Program (CAADP) in 2009 the government approved the Strategic Plan for development of the Agricultural Sector (PEDSA: 2011-2020). The main objective of the PEDSA is to contribute to ensure food security, farm income in sustainable and competitive manner, observing social and gender equity (PEDSA, 2008). The plan defines four pillars to materialize its objective: first, is productivity consisting of increasing agricultural productivity, competitiveness to ensure food security secondly is market access to ensure improvement in rural infrastructures to enable better access to input and output markets then natural resources for sustainable use and management of natural resource (land, water and forest) and finally institutions that will ensure capacity building in rural and agricultural institutions. 

It has been more than a decade since the implementation of the first program and smallholder farmers in Mozambique still face constraints in accessing and affording credit. However, since 2006 the government has been loaning smallholder farmers’ farm credit through the district development fund (FDD) under the administration of local boards. This facility allocates annually, 7 million meticais (or about $220,000) to each district. The aim of the loan is to spur production and farm incomes through farming and engaging rural populations in gainful farm labour. As a subsidy, FDD loan could generate differential benefits to smallholder farmers on the said aims. Therefore, this study seeks to find whether small-scale farmers are benefiting from farm level credit subsidy, and to what extent by assessing how government intervention in incomplete input markets through provision of informal subsidized credit affects smallholder farmers in terms of productivity and farm incomes. 

The Statement of the Problem 
Credit is a major agricultural development constraint in most developing countries due its cost, incomplete credit markets and fear of bankruptcy among farmers. The decoupled credit subsidy among Mozambican farmers is administered by local authorities which might create bi- partisanship. Further, higher monitoring costs could make it difficult for the authorities to control whether the credit subsidy is used for the intended purposes. This creates heterogeneity in access and use at the farm level and could consequently generate varied influences on farm productivity and incomes. A dearth of empirical studies on the relationship between the decoupled credit subsidy, productivity and farm incomes exists. Therefore, the aim of this study was to analyse the subsidy’s influence on agricultural productivity and farm incomes using maize as an example. 

Objectives of the Study 
General Objective 
The overall objective of the study was to investigate how farm level credit subsidy affects smallholder farmers in the improvement of household livelihoods. 

Specific Objectives 
The specific Objectives of this study were: 
i. To evaluate the influence of credit subsidy under the Seven million program on maize productivity among beneficiaries in Chókwè district. 
ii. To compare farm incomes between users and non-users of credit subsidy under the Seven million program in Chókwè district. 

Research Questions 
i. Does the credit subsidy under the Seven million program have an influence on maize productivity in Chókwè? 
ii. Does income level differ between users and those not using credit subsidies under the Seven million program? 

Justification of the study 
At the turn of the century many leaders around the world decided to come together looking for solutions that would maintain human dignity and free the world from extreme poverty. The Millennium Development Goals (currently Sustainable Development Goals) with eight goals established a pattern for tackling the most pressing challenges and reduce extreme poverty around the globe (MDG, 2014). In 2000 the government of Mozambique launched the Poverty Reduction Action Plan (PARPA); this plan is a strategic framework involving many sectors of the economy. One of its aims in agricultural sector consists of increasing availability and access to agricultural inputs (MINAG, 2009). However, limited access to production credit continues to be the major limiting factor of small-scale farmers’ productivity and income growth in Mozambique since, they cannot afford yield-enhancing inputs such as seeds and fertilizers. Smallholder farmers form a large percentage of the farming population in Chókwè and more than 75% cannot access formal financial services (INE, 2012). Apart from production credit, smallholder farmers face budget constraint at the post-harvest period to pay storage facilities and they sell their produce at low prices missing opportunities to get higher returns (Meijerink & Onumah, 2011). Government intervention through provision of credit subsidy under the seven million program seems to be a good alternative for addressing such bottleneck in the production side. 

The providers of the funds (Government and donors) however need to know whether the program had impacted positively on beneficiaries, consumers and other stakeholders, hence impact assessment forms a basis for asking more funds. Given the cost nature of the programme it is indispensable to assess its effect and effectiveness. 

This study therefore provides useful information on how agricultural subsidies, particularly under the Seven million program affects maize productivity and farm income in Chókwè. This knowledge will support policymakers in re-assessing the implementation of the program and formulating policies that promote sustainable production and strengthen market participation among the poor and marginalized smallholder farmers. It also provides helpful information for academicians in related-research areas that are not covered by this study. 

Scope and limitations of the study 
This study was conducted with the knowledge that not all smallholder farmers have access to the loans under the Seven million program. Therefore, only smallholder farmers eligible for loaning under the Seven million program in chókwè district were considered. Further, a large dataset could not be obtained due to poor record keeping among farmers, time and financial constraints. As a result, out of 159 farmers interviewed during the survey, only data from 107 farmers were utilized for analysis. However, the results may be generalized to other regions benefiting from the decoupled credit subsidy.

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Item Type: Kenyan Project Material  |  Attribute: 52 pages  |  Chapters: 1-5
Format: MS Word  |  Price: KSh900  |  Delivery: Within 30Mins.
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