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5/08 KilProjIAccéiPres/ClRC/DateDue.indd

ESSAYS ON OFF-FARM LABOR MARKET PARTICIPATION, FARM
PRODUCTION DECISIONS AND HOUSEHOLD ECONOMIC WELLBEING:
EMPIRICAL EVIDENCE FROM RURAL KENYA

By

Mary W. Kiiru Mathenge

A DISSERTATION
Submitted to
Michigan State University
in partial fulfillment of the requirements
for the Degree of

DOCTOR OF PHOLOSOPHY
Department of Agricultural Economics

2008

ABSTRACT

ESSAYS ON OFF-FARM LABOR MARKET PARTICIPATION, FARM
PRODUCTION DECISIONS AND HOUSEHOLD ECONOMIC WELLBEING:
EMPIRICAL EVIDENCE FROM RURAL KENYA
By

Mary W. Kiiru Mathenge

This study uses household level data collected across different regions of rural
Kenya to study household welfare dynamics, engagement in the off-farm labor market
and its effects on agricultural intensification for these rural households. The dissertation
consists of three separate essays.

The first essay estimates a dynamic panel data model Of income to determine the
pattern of income growth for these rural households. The paper seeks to determine the
relationship between educational attainment and the initial economic position of
households on their subsequent income growth and mobility. Results show strong
evidence of (low) income persistence for the poor and those in the low agricultural
potential areas without at least a secondary school education. As expected, higher
education seems to reduce income persistence for the very poor and those in the low
potential areas, but also enhances convergence for those in the high potential areas.
Overall, the results indicates the potential role of education in not only breaking the cycle
of poverty for those trapped in it, but also its ability to allow increased recovery from
income shocks. Notably, there is no conclusive evidence of the pattern of income grth
or the role of education for non-poor households, implying that such are less susceptible

to long-term effects of income shocks in either direction.

The second essay explores the relationship between off-farm work and farm
production decisions. In particular, the study examines the effects of a household’s
involvement in off-farm work on farm-input use and intesification namely, fertilizer and
improved seed on maize production. The empirical question of research in this paper
relate to whether Off-farm earnings contribute to the financing of productivity enhancing
investments in agriculture especially in credit constrained situations. The results fi'om the
study suggest differences in the impacts of Off-farm work on input use and intensification
across different inputs and off-farm activity types. While the results suggests possible use
of off-farm earnings for input purchase especially for those without other forms of credit,
the ‘combined’ input package seems to represent a substantially greater commitment and
one not possibly attractive to those with higher off-farm earnings.

Finally, the third essay seeks to analyze the influence Of agricultural and agro-
ecological factors in facilitating access to and earnings from the off-farm labor market for
these rural households. The study explores how these farm households respond ex-ante to
risky production environments and ex-post to unexpected rainfall shocks. Results indicate
that these rural households engage in off-farm work as a long-term strategy to deal with
anticipated weather risks to their farming operations. Although the results do not Show
significant short-term engagements as a result of unexpected rainfall shocks, there is
evidence of greater reliance on remittance income and petty agricultural wage labor in

response to such unexpected rainfall Shocks.

Copyright by
MARY W. KIIRU MATHENGE
2008

This Dissertation is dedicated to My Son Eric, who remained a Source of Joy and
Motivation throughout!

ACKNOWLEDGEMENTS

The completion of this dissertation and the entire graduate program would not
have been possible without the support and encouragement from several people. I would
like to express my deepest appreciation to my Major Advisor and Dissertation
Supervisor, Dr. David Tschirley for his total dedication, guidance and support throughout
the PhD program. Many thanks for the detailed comments and suggestions that were
instrumental in completing this final product. I am also indebted to my guidance
committee members; Dr. Eric Crawford, Dr. Scott Swinton, Dr. Valerie Kelly and Dr.
John Giles for their diligence in reading my work and offering positive feedback. Thank
you all for your individual contribution in bringing this work to completion.

My appreciation to other members of staff in the department; Debbie Conway,
Ann Robinson and Nancy Creed, many thanks for all your kindness and help whenever I
came to room 202. Thanks Linda Beck, for your patience and help with my laptop. I am
also grateful to the department of Agricultural Economics and particularly the Food
Security Team for their financial assistance throughout the program.

The support of my fellow students at the department Of Agricultural Economics
was a treasure; Laura Donnet, Lilian Kirimi, the late Lesiba Bopape, Sarma Aralas,
Denys Nzalov, Catherine Ragasa, Elan Satriawan, Kirimi Sindi, Antony chapoto,
Ricardo Labata and all others who made my stay in the department enjoyable. Special
mention to the late Lesiba Bopape whose positive energy and wisdom helped ease any

moments of despair. Thanks to Joshua Ariga for your help in those Stata do files and

vi

more so for your positive outlook towards life. Vandana Yadav and Lourdes Martinez,
you always made my day!

To my fiiends Nancy Kariuki and Grace Muna, many thanks for your prayers and
emotional support and for those long weekend calls. My appreciation to Muthoni Imungi,
and many others whose friendship and fellowship made my stay in East Lansing a
memorable time. To May Cho Nai, many thanks for your positive contribution during my
last leg of the program.

My special gratitude goes to my family, without whose love, support and
encouragement, this journey would not have been completed. Many thanks to my parents,
on whose counsel my very foundation is build today. May the good Lord keep both of
you ever strong! My appreciation to my sister and brothers for ever standing with me. To
Sammy, thanks for constantly checking on me; your calls and text messages kept me
uplifted. To my nieces, Anne, Leah and Maryann, you are the best!

My special appreciation to James for your encouragement and support to join the
PhD program and especially during those tough moments at the beginning. I owe it to
you for ever. And to Eric, you are my hero, thanks for graciously bearing with the
stresses of having a student mom and for your great sense of humor even in difficult
times. Remember our deal; I will be there for you too when you do yours!

Above all, I thank God for granting me special grace beyond any human
understanding, to overcome every obstacle and challenge during the entire period. And
unto Him who is able to do exceedingly, abundantly, above what I could ever ask or

imagine, to Him alone be the glory now and forever more.

vii

TABLE OF CONTENTS

Page
LIST OF TABLES .............................................................................................................. x
LIST OF FIGURES ......................................................................................................... xiii
LIST OF ACRONYMS ................................................................................................... xiv
INTRODUCTION .............................................................................................................. 1

ESSAY 1: INCOME GROWTH AND MOBILITY OF RURAL HOUSEHOLDS IN
KENYA: ROLE OF EDUCATION AND HISTORICAL PATTERNS IN

POVERTY REDUCTION .......................................................................... 5

1. Introduction and Problem Overview ........................................................................... 6
2. Methods ..................................................................................................................... 1 1
2.1. Conceptual Approach ......................................................................................... 1 1
2.2. Empirical Model ................................................................................................ 12
2.3. Estimation .......................................................................................................... 16

3. Data and Other Specification Issues ......................................................................... 17
3.1. Data and Sample Area ....................................................................................... 17
3.2. Specification Issues ............................................................................................ 18
4. Empirical Findings and Discussions ......................................................................... 20
4.1. Characteristics and Mobility of Households across Income Groups ................. 20
4.2. Econometric Results .......................................................................................... 23

5. Summary and Conclusions ....................................................................................... 35
References ..................................................................................................................... 37

ESSAY 2: OFF -FARM WORK AND FARM PRODUCTION DECISIONS:
EVIDENCE FROM MAIZE-PRODUCING HOUSEHOLDS IN RURAL

KENYA ..................................................................................................... 40

1. Introduction and Problem Overview ......................................................................... 41
2. Theory and Empirical Strategy ................................................................................. 46
2.1 Conceptual Model ............................................................................................... 46
2.2. Motivation and Empirical Strategy .................................................................... 51

3. Data ........................................................................................................................... 54
4. Model Specification and Estimation ......................................................................... 60
4.1. Econometric Model ............................................................................................ 60
4.2. Specification Issues ............................................................................................ 63
4.3. Estimation .......................................................................................................... 66

5. Empirical Findings and Discussion .......................................................................... 67
6. Summary and Conclusions ....................................................................................... 82
References ..................................................................................................................... 85

viii

ESSAY 3: OFF-FARM LABOR MARKET DECISIONS, MIGRATORY LABOR
AND AGRICULTURAL SHOCKS FOR RURAL HOUSEHOLDS IN

KENYA ..................................................................................................... 89

1. Introduction and Problem Overview ......................................................................... 90
2. Theory and Empirical Approach ............................................................................... 94
2.1. Conceptual Approach ......................................................................................... 94
2.2. Motivation and Empirical Strategy .................................................................... 99

3. Data ......................................................................................................................... 102
4. Model Specification and Estimation ....................................................................... 108
4.1. Empirical Model .............................................................................................. 108
4.2. Estimation ........................................................................................................ 1 12

5. Econometric Results and Discussion ...................................................................... 114
5.1. Participation in Off-farm Labor Market .......................................................... 114
5.2. Determinants of Earnings from Off-farm Work .............................................. 121

6. Summary and Conclusions ..................................................................................... 125
References ................................................................................................................... 127
APPENDICES ................................................................................................................ 13 1

ix

Table 1.1

Table 1.2

Tablel .3

Table 1.4

Table 1.5

Table 1.6

Table 1.7

Table 1.8

Table 2.1

Table 2.2

Table 2.3

Table 2.4

Table 2.5

Table 2.6

Table 2.7

Table 2.8

Table 3.1

Table 3.2

Table 3.3

LIST OF TABLES

Page
Summary Statistics Of Variables Used in the Models ....................... 18
Household Endowments by Income Quintiles ............................... 21
Mobility Of Households across Income Quintiles ........................... 23
Determinants of Income Growth ............................................... 25
Combined Effects of LID and Education at Mean Levels .................. 26
Comparison of the LDV Estimate across different Estimation Methods
(N 0 Interaction term) ............................................................ 28
Models Disaggregated by Poverty Status .................................... 32
Models Disaggregated by Agricultural Potential ............................ 34
Summary Statistics of Variables used in the Models ........................ 56
Fertilizer and Hybrid Seed Use by Type of Off-farm Work ................ 58
Double Hurdle and Tobit Estimates for Fertilizer Demand ................ 68

Double Hurdle and Tobit Estimates for Demand for Hybrid Seed ........ 69

Wald test for the Combined Effects in the Fertilizer Models ............... 72
Wald test for the Combined Effects in the Hybrid Seed Models. . . . . ......75
Double Hurdle and Tobit Estimates for Fertilizer Demand (Disaggregated
Off-farm) .......................................................................... 79
Double Hurdle and Tobit Estimates for Hybrid Seed (Disaggregated Off-

farm) ............................................................................... 80
Summary Statistics of Variables Used in the Models ..................... 103

Characteristics of Households by Year and Agricultural Zone (all
households) ..................................................................... 104

Characteristics of Households with Off-farm Work by Quintiles of Total
Income ........................................................................... 106

Table 3.4

Table 3.5

Table 3.6

Table 3.7

Table A1

TableAl . 1

Table A1.2.

Table A1.3
Table A1.4
Table A2.1
Table A2.2
Table A2.3

Table A2.4

Table A2.5

Table A2.6

Table A3.1
Table A3.2

Table A3.3

Table A3.4

Rainfall Variables by types of Off-farm Work ............................ 107

Rainfall Variables by quintiles of Off-farm Income ..................... 108
Regression Estimates of Off-farm Labor Market Participation Decision
(Two-Step and MLE Heckman Models .................................... 117
Determinants of Earnings from Off-farm Work ........................... 122
Classification of TAMPA Sample by Agricultural Potential ................ 131
Simple Regression Results of Distance Variables on Household

Income .......................................................................... 132
Mobility of Households across Income Quintiles ........................ 132
Results Of the First Stage Regression and Over-id test .................. 133
Comparison with different Education Levels ............................. 134
Mean Off-farm Shares by Region and Agricultural Zone ............... 135

Likelihood Ratio (LR) Test for the Tobit Formulation Hypothesis ...135

Likelihood Ratio (LR) Test for Joint Vs Separate Estimation .......... 135
Fertilizer and Hybrid Seed Use by “users” and ‘non-users’ of each

Input ............................................................................. 136
Probit Model Results for the Combined Fertilizer and Hybrid Seed
Use .............................................................................. 137
Wald Test for the Combined Effects in the Fertilizer and Hybrid Seed
Models (Disaggregated Off-farm) .......................................... 137
Tegemeo AgrO-regional zones .. ........................................................ 138
Poverty Disparities across and within Provinces in Kenya ............... 138

Results of the Wald test for the Correlation between the Selection and
Earnings Equation ............................................................. 138

Bivariate Probit Heckman Results for Salaried Wage and Self-
Employment .................................................................... 1 39

xi

Table A3.5

Table A3.6

Table A3.7

Disaggregated Results for agricultural Wage Labor and Other Informal
Business Off-farm Work ................................................... 140

Disaggregated Salaried Wage and Self Employment Models
(Participation) ................................................................ 141

Characteristics of Households with and without Off-farm Work... . . 142

xii

LIST OF FIGURES

Page
Figure 3.1 Effect of the Elasticities o the Supply and Demand for Labor on the
Quantity Supplied ............................................................. 98

xiii

TAMPA

SSA

PIH

OLS

GLS

FD-2SLS

LDV

LID

FD

FE

MVP

MPT

CPI

KG

OPV

LR

MLE

SD

CV

LIST OF ACRONYMS

- Tegemeo Agricultural Monitoring and Policy Analysis Project
-Sub-Saharan Afiica

-Permanent Income Hypothesis

-Ordinary Least Squares

-Generalized Least Squares

-First Difference Two Stage Least Squares
-Lagged Dependent Variable

-Lagged Income Difference

- First Difference

-Fixed Effects

-Marginal Value Product

-Modem Portfolio Theory

-Consumer Price Index

-Kilogram

-Open Pollinated seed Varieties

-Log Likelihood

-Maximum Likelihood Estimation
-Standard Deviation

-Coefficient of Variation

xiv

INTRODUCTION

Although global poverty has generally fallen in the last 40 years, progress in Sub-
Saharan Africa (SSA) has been slow and uneven. The number of people reported as
living on less than a dollar a day (the internationally agreed definition of absolute
poverty) has doubled over the past 20 years (World Bank, 2005). This has left many
questions as to the best strategies that should be used to deal with the problem, spurring
numerous research interests and massive donor funds to be used. The fight against
poverty however remains an elusive goal.

Poverty is often viewed as a predominantly rural phenomenon. About 75 percent
of the worlds poor are believed to work and live in rural areas (Rahman and Westley,
2001), and it is estimated that, by the year 2020, 60 percent Of the poor will still be rural.
In Kenya, nearly half of the rural population live below the poverty line (Republic of
Kenya, 2007) with meager incomes incapable of sustaining any meaningful livelihood.
Even worse, poverty rates in some regions have been on the increase Since the second
half of the 19903. Why? What are the alternative pathways out Of poverty, and where
should the limited resources be allocated? The answer to this question lies in
understanding the causes of poverty and whether/how policy can be used to break the
cycle. More importantly is the need to identify and target those who are economically
disadvantaged so as to set them up on a positive growth process.

Over the years, there have been different approaches to deal with rising poverty.
There is however widespread agreement that agricultural growth, especially in the early
phases of development, is fundamental to broader economic growth and to successfirl

poverty reduction. This is because of high concentration of the poor in this sector; its

strong growth linkages with the non-agricultural sector and its potential to Offer low food
prices to the urban poor. Infact, according to Byerlee et al. (2005), agriculture remains
important for pro-poor growth even in some middle income countries. In general,
however, the relative importance of agriculture declines — and that of the off-farm sector
rises with increased population density and rapid economic growth.

In the vast majority of countries in SSA, most agree that agriculture retains its
fundamental importance to pro-poor growth]. Yet poverty in rural SSA continues to be
high and agricultural productivity stagnating, thus limiting potential impacts on poverty
outcomes. Also, it is broadly recognized that smallholder households in SSA are quite
diversified in their income sources, and that higher income households tend to earn
greater shares of their income from off-farm sources. These findings point to the
important role that the rural off-farm sector can play in poverty reduction as discussed in
World Bank (2008). Under these circumstances, policy makers need a much greater
understanding of the actual role of the rural off-farm economy than they typically have.
More specifically, there is need to understand the importance of the Off-farm sector to
household welfare directly through its impacts on incomes and employment, and
indirectly through investment of earnings to the farm sector. In addition, as urbanization
progresses and the share of off-farm income increases, the rural off-farm sector could be
expected to take on its own dynamics, not fully dependent on agricultural growthz.

Compared to other SSA countries, the rural Off-farm sector in Kenya is

particularly important for several reasons. First, historically Kenya has had higher fully

 

lSee Byerlee et al. (2005) for a detailed discussion of the different arguments on the future role of
agriculture in pro-poor growth and poverty reduction.

2 According to Byerlee et al. (2005), there is evidence of increasing linkages of the rural off-farm sector to
urban industrialization in China and Latin America.

incomes and better rural infrastructure than any of its neighbors, and continues to have
substantially higher educational levels. Second, Kenya’s agricultural areas have high
population densities, which facilitate movement into off-farm activities. At the same
time, like the rest of SSA, Kenya’s smallholder agriculture and agricultural productivity
have been relatively stagnant over at least the past decade.

It is against this background that this study uses a 3-period panel of household
level data collected across different regions of rural Kenya with the following three broad
objectives, each of which constitute an essay topic. First, to study welfare dynamics of
smallholder households in agricultural areas of Kenya with a view to understanding the
pattern of income growth, any existence of poverty traps, and the role of education in
potentially breaking those traps. Second, to investigate the effects of off-farm work on
agricultural intensification, and third, to explore the effect of a region’s agro-ecological
factors on household diversification into off-farm work, and the ability of households to
use off-farm work to buffer the effects of climatic shocks to their farm operations.

Data for this study were drawn from the Tegemeo Agricultural Monitoring and
Policy Analysis (TAMPA) Project collected across different regions of rural Kenya3. The
data consists of a three-period panel covering the 1996/97, 1999/00 and 2003/4 cropping
seasons and 1324 households. Although the dissertation uses the broad data set,
individual essays are based on Slightly different samples. Essay 1 is based on the entire 3-
period panel, while essay two uses a smaller sample of maize producers. Although essay
3 uses the entire sample, we exclude 1997 due to some limitations with the Off-farm work

data. See separate descriptions of the data used within each individual essay.

 

3 A brief description of the Tegemeo/MSU data set and sample can be found in Argwings-Kodhek et al.
(1999,2001)

References

Argwings-Kodhek, 0., TS. Jayne, G. Nyarnbane, T. Awuor and T. Yamano. 1999. “How
can Micro-Level Household Information make a Difference for Agricultural
Policy Making? Selected Examples from the Kampap Survey of Smallholder
Agriculture and Non Farm Activities for Selected Districts in Kenya”. Tegemeo

Conference Papers. http://www.aec.msu.edu/st/kenya/hhinfo agpolpdf

Argwings-Kodhek, G., M.W. Kiiru, D. Tschirley, B. A. Ochieng and B.W. Landan. 2000.
“Measuring Income and the Potential for Poverty Reduction in Rural Kenya.”
Tegemeo Conference Papers.
http://www.tegemeo.org/documents/other/measuring incomepdf

Byerlee, D., Diao, X. and Jackson, C. 2005. “Agriculture, Rural Development and Pro-
poor Growth: Country Experiences in the Post Reform Era. Agriculture and Rural
Development.” Discussion Paper, No. 21, The World Bank.

Rahman, A. and J. Westley. 2001. “The Challenge of Ending Rural Poverty.”
Development Policy Review, 19 (4): 553-562.

Republic of Kenya. 2007. Economic Survey. Kenya Bureau of Statistics, Ministry of
Planning and National Development.

World Bank. 2005. World development Indicators. Available at
http://devdata.worldbank.org/wdi2005/Section1 l l.htm

World Bank. 2008. Agriculture for Development. World Development Report. The World
Bank, Washington.

ESSAY l: INCOME GROWTH AND MOBILITY OF RURAL HOUSEHOLDS
IN KENYA: ROLE OF EDUCATION AND HISTORICAL
PATTERNS IN POVERTY REDUCTION

Abstract

This paper explores the key factors that cause changes in the economic wellbeing of rural
households in Kenya. We specifically determine the relationship between educational
attainment and the initial economic position of households on their income growth and
mobility. We use a three-period panel dataset to estimate a dynamic panel data model of
income. Results show strong evidence of (low) income persistence for the poor without at
least a secondary school education. Similarly, there is evidence of income persistence for
those in the low potential areas and a (weak) convergence towards the average for those
in the high potential areas. The low income persistence for the poor and uneducated may
be evidence of cumulative dis-advantage and possible existence of poverty traps. As
expected, higher education seems to reduce income persistence for the very poor and
those in the low potential areas but also enhances convergence for those in the high
potential areas. This indicates the potential role of education in not only breaking the
cycle of poverty for those trapped in it, but also its ability to allow increased recovery
fiom income shocks. Notably, there is no conclusive evidence of the pattern of income
growth or the role of education for non-poor households, implying that such may be less
susceptible to long-term eflects of income shocks in either direction.

Keywords: Income growth; income persistence; convergence; education; Kenya

1. Introduction and Problem Overview

The first Millennium Development Goal (MDG) calls for reducing by half the
proportion of people living in extreme poverty and hunger by 2015. Studies of household
level poverty dynamics in developing countries Offer the prospect of contributing to the
attainment of this goal by identifying how many people are mired in poverty, who these
people are, and what might be done to pull them out of poverty and set them on a growth
path. Yet, reliably answering any of these questions poses substantial analytical
challenges. The main one among these has been lack of relevant panel data especially in
rural Africa4, where poverty is immense.

Poverty dynamics studies in Africa have used both expenditure and income as
their measure of economic well-being. Studies based on expenditure include Grootaert
and Kanbur (1995), Grootaert et al. (1997), Dercon and Krishnan (2000) and Dercon
2004. Baulch and Hoddinott (2000) provide a detailed review of these and other studies
in developing countries. Recent studies in Afiica that have used income include Gunning
et al. (2000), Carter and May (2001), Fields et al. (2003a, 2003b) and Woolard and
Klasen (2005). All of these studies are based on short panels (two periods at most), thus
limiting the extent to which relevant factors can be controlled for in the quantitative
analysis. In this paper, we take advantage of a unique, broadly representative three-period
panel data set from rural Kenya to study the pattern of income growth and explore any
existence of long term poverty.

In Kenya, studies on poverty dynamics have mainly focused on analyzing poverty

transitions and/or determinants of poverty status using discrete income-based measures of

 

4 Most poverty dynamics studies in Africa use the Cote 'd'Ivoire Living Standards Survey (CILSS) for Ivory
Coast and the Kwazulu—Natal Income Dynamics Survey (KIDS) data set for South Africa.

poverty (Gamba and Mghenyi, 2004; Kirimi and Sindi, 2006; Muyanga et al., 2006).
While knowledge of factors associated with movements into and out of poverty have
‘great value in the design of safety net policies’, an understanding of how and why
households increase their well-being relative to others is important for the design of
policies that promote equitable growth (Baulch and Hoddinott, 2000). Also, use of
transitions may provide only relative rankings and potentially ignore the life-cycle
phenomenon (Baulch and Hoddinott, 2000). A more recent study by Burke et al. (2007)
explores movement into and out of poverty using an asset based measure. In some ways,
the current study parallels Barrett et al. (2006) who uses non-parametric approaches to
draw inferences regarding poverty traps. This study was however carried out in a much
localized context both in scale and geographical scope, potentially limiting widespread
application and generalization.

This paper explores the key factors that cause changes in the economic wellbeing
of rural households in Kenya. We specifically determine the effect of a household’s
initial economic position and educational attainment on income growth and mobility.
Further, the study explores the extent to which education and educational policies could
be used to break income persistence and/or enhance recovery from negative shocks,
especially for the poor. Given the wide variation in poverty across and within regions,
differences in the above impacts across income groups and regions of the country are also
explored.

Use of expenditure measures in poverty studies has been widely advocated due to
the highly variable nature of income. Expenditure has been considered more stable based

on its relationship with consumption. The use of consumption, and hence the importance

of linking measures of wellbeing to it, has been mainly based on the concept of
consumption smoothing. The justification for using household income as a measure of
economic wellbeing has been the perceived inability of poor households to smooth their
consumption over time, especially within households facing liquidity constraints
(Morduch, 1995; Townsend, 1995) or with a limited asset base.

Using evidence from Ivory Coast and Thailand, Deaton (1997) finds consumption
profile to be closely linked to the income profile and argues that the ‘life-cycle model
overstates the degree to which consumption is in fact detached from income over the life
cycle’. In addition, Fields et al. (2003b) indicate that data from India and China does not
find consumption tO be clearly superior to income as an indicator of long term economic
wellbeing. This evidence implies failure of consumption smoothing in some cases, thus
confirming the relevance of income dynamics studies within the broader context of
poverty reduction research. According to Fields et al. (2003b), the rise and fall of income
and consumption experienced by households are the most direct indicators of who
benefits from economic development. The choice of income as opposed to a discrete
poverty measure is based on the advantages that come with analyzing income as a
continuous variable as Opposed to categorizing using an arbitrary poverty line, thus losing
useful information (Jenkins, 2000; Ravallion, 1996).

Various theories Offer alternative predictions regarding the evolution of the
economic wellbeing of households over time. The theory of cumulative advantage posits
that the economic wellbeing of the initially better-Off households becomes better while
that of the initially disadvantaged worsens (Fields et al., 2003a). This is based on the

premise that wealthier households are endowed with both physical and human capital

assets, whose further investment (presumably in high return activities) results in higher
incomes. Access to skilled jobs, credit facilities and markets also helps in the
accumulation process. At the lower end of the income distribution, cumulative
disadvantage may be at work, whereby households without a ‘minimum level of human,
physical and social assets are confined to a life in poverty’ (Fields et al., 2003a).
Evidence of income persistence for the poor would be consistent with the notion of
crunulative (dis)advantage and possible existence of poverty traps.

An alternative theory is based on the notion of convergence of incomes towards
the average, thus enabling initially disadvantaged households to become better off and
vice versa. The convergence argument is based on the assumption that income shocks do
not persist and are not correlated over time. This argument parallels that of the Permanent
Income Hypothesis of Friedman which assumes that transitory shocks (both positive and
negative) are serially uncorrelated, thus leading household incomes to regress to their
expected level in the subsequent period. A more plausible hypothesis would allow for
partial correlation between successive transitory shocks, resulting in gradual convergence
of household incomes towards their mean level (Fields et al., 2003a).

While the theory of cumulative advantage implies targeting those who are
economically disadvantaged, to set them on a positive growth path, it may also be true
that some important income shocks are independent, especially for rural households who
mainly rely on agriculture, thus permitting quick recovery. Information about the extent
to which each process is taking place would especially be insightful when disaggregated
at regional level in explaining why households in some regions remain disadvantaged

over time. Suffice it to say that both these dynamic processes do potentially take place:

cumulative advantage as a result of using access to various endowments and market- and
financial institutions to increase future incomes (while disadvantaged households are
unable to do so) and convergence towards the mean given large and uncorrelated
transitory Shocks.

This study contributes to the existing body of literature in the following ways:
First, it adds to the limited empirical studies on income dynamics in sub-Saharan Afiica,
where poverty is immense. Second, the use of a three period panel enables us to control
for the household’s initial economic position and still benefit from panel data methods,
unlike Similar studies that have relied on two period panels. The ability to account for
both historical patterns and unobserved factors may provide more reliable estimates of
individual effects. Third, unlike any of the studies mentioned earlier, we disaggregate the
results by household poverty status and by the region’s agricultural potential, thus
allowing us to identify differential patterns Of income growth. This is potentially
important for policy design and targeting. Fourth, we look at how policies in education
can be used to break income persistence, especially for those trapped in a cycle of
poverty. Finally, we deal with the potential endogeneity of lagged income difference in a
dynamic panel data setting, a problem either commonly assumed away or not dealt with
exhaustively in earlier studies.

The rest Of the paper is organized as follows. Section two discusses the conceptual
approach, empirical model and estimation methods. The data used in the study and other
specification issues are presented in section three. Section four presents the empirical
results and discussion, and section 5 provides a summary of the findings and main

conclusions.

10

2. Methods

2.1. Conceptual Approach

The analytical framework used in this study is adopted from an agricultural
household model where we assume that households are maximizing utility from

consumption of goods and leisure subject to a cash income constraint5 given by:

Y=7tf+w0 L0+N (l)

where Y is cash income, nf is net farm profits, woLo is net Off-farm earnings and N
represents other non-labor income6. The maximized profits from the farrrr are a function
of farm wages (Wf), input prices (P2), output prices (PQ), human capital variables (H) and
locational and other sociO-economic characteristics of the household (G):

1r*f= f (Wf, Pz, PQ, H, G) (2)
Off-farm wages w0 depend on the human capital assets of the household (mainly
education and experience) and nature of the rural economy (E) such that:

wo = f ( H, E) and H = f ( education, experience) (3)

Combining (1), (2) and (3) above, and accounting for the value of total household time

and farm production, we write the full income production function of the household as:

Y‘ = f<wf, P0, P2, H, E, G, N) (4)

 

5 Among other constraints e.g. the production technology and time constraints.
6 Refer to Singh et al. (1986) and Huffman (1991) for a detailed exposition of this model.

11

which indicates that the full income of a household is dependent on performance at the
farm level, endowments and characteristics of the household, and the state of the local

economy.

2.2. Empirical Model

An income production function based on equation (4) is estimated to determine
the key factors that cause changes in the economic well being of rural households in
Kenya. In this study, we use the reduced form version of equation (4) consisting of the
exogenous variables in the system and other relevant variables.

In linking equation (4) and the estimated model, we proxy the prices of farm
inputs and outputs with distance and market access variables and other exogenous factors
that affect the earnings from the farm. We specifically include distance to the major input
suppliers (e.g., fertilizer) as an indication of access to farm-productivity enhancing
technology. Access to extension service is also accounted for.

In considering the role of participation in the off-farm labor market in income
growth, we take account of both the supply and demand factors that enable participation
in that market. The ability of a household to engage in the off-farm labor market can be
facilitated through enabling access, which further depends on the availability of a vibrant
economy within the region and good transportation. This is based on the incentives facing
the household in the forrrr of public assets, e.g. good infrastructural development,
provision of electricity and telecommunication services, public transport or the proximity
of a shopping centre.

The measures of access to the Off-farm labor market used in this study include

access to electricity and telephone services, the proportion of adults working off the farm

12

and the number of months (in a given year) the head of household was home, among
others. The proportion of adults working off the farm can be an indication of the
availability of employment opportunities in the area, while the number of months the
head was not at home could give an indication of the role of migratory labor in rural
income growth. Village level distance variables could proxy for the level of urbanization
and development in the area. We specifically pick electricity and public telephone as
these facilities are only likely to be present in growing rural economies. In addition, the
two are likely to have substantial impacts on Off-farm employment and growth, such as in
small manufacturing and service activities. Other variables such as the presence and
condition of the tarmac road, and distance to the market or shopping centre are good
measures of connection to the rest of the country/region and a vibrant economy, and also
facilitate input delivery and output sale for agricultural activities.

The ability of a household to engage in profitable income earning activities is
determined by its endowments of human and physical capital assets. Of major importance
here are the human capital assets as proxied by education, experience and household
composition. The education variables proxy for individual household’s ability to gain
access to the Off-farm labor market. The education of head of household is important as
he is the most likely to seek Off-farm employment.

Some distance variables in the model may be endogenous. Probable in this
category, are distance to electricity and phone service, since wealthier households may be
in a position to bring these services closer to them. While possession of these facilities at
the household level may be a function of ones’ income, the specific distance variable in

this case may be less endogenous as only about five percent of the sampled households

13

had electricity at their homestead while less than one percent had telephone service,
implying that such amenities are beyond the means of most of these rural households.
Other variables such as distance to tarmac road and shopping center are less likely to be
endogenous, since households would have to move to those services, and such movement
is relatively limited in rural Kenya7.

Simple regression models of these distance variables on income support these
views; income is not only insignificantly associated with distance to tarmac road and
shopping centre, but also with distance to electricity and telephone services (see Table
A1.1 in the appendices). As expected though, income did have a significant effect on
whether a household had electricity or telephone at home. Nevertheless, to reduce any
potential bias in using these distance variables, we use their respective village level
means which can be considered relatively exogenous to the household. Note that distance
to farm input suppliers may reflect response by input suppliers to the forces of demand
which in turn could depend on general incomes in the area and is thus treated likewise.

The empirical specification of the income model, accounting for the initial income

level is given by:

INC“ = (1.0 + INCitJGI + Xitfi + Git}. + Eitg + €it i = 1,.....,n F1, ....... ,T (5)

where INC is the real value of income. Included in X are variables related to the

household’s endowments of physical, social and human capital, G represents locational

 

7The low attrition rate per survey (discussed later in the paper) may attest to this fact. In addition, land
purchases/sales are minimal in these rural setups and most land is passed on through generations as
inheritance. See Low (1986) for a review of the traditional attitudes and non-market benefits of land in
much of nrral Africa.

14

and other socio-economic characteristics of the household, while E include variables that
proxy for the state of the local economy.

The inclusion Of a lagged dependent variable helps to account for historical
patterns and may also serve as control for some omitted variables (Wooldridge, 2003 pp
300). The coefficient on this variable indicates the extent to which income changes in one
year persist in future years. While an indication of the pattern of income grth is
undeniably relevant, it would be of additional policy importance to assess how education
affects income persistence, especially for low income households. For the model to
capture such an effect, the coefficient of lagged income must be allowed to vary across
households with different educational levels. The education of the head Of household is
used given that in most cases, the heads are responsible for making decisions for the
entire household regarding use of the available physical and human assets.

In addition, the inclusion of the lagged dependent variable enables us to allow for
any potential feedback process in some of the included variables. Such a feedback
process is plausible, given that income received during the previous period could be
invested in starting or expanding some income earning activity off the farm or could be
used to improve access to public assets such as telephone service. Thus the inclusion of a
lagged dependent variable as an explanatory variable in (5) not only serves to account for
historical patterns but also allows flexibility in the assumptions made on the regressors.

Accounting for initial income, delineating the education variable and including

the respective interaction term, model (5) above becomes:

INCit = 00+ INCit-rar + Edit 51 4." INCit-1*Edit (12 4' Xit5 + Git?» + EitC + 11i+ flit (6)

15

where: Ed is the education variable and X, G and E are as earlier defined. To control for
any omitted time invariant unobserved factors that may potentially correlate with the

above variables or other included explanatory variables, we have explicitly accounted for

them in the above model as m . uit is a purely random component.

2.3. Estimation

The dynamic panel data model (6) has implications on the estimation methods
Often used. First, the unobserved effects are most likely correlated with the lagged
dependent variable (LDV), thus rendering OLS inconsistent. Second, though we could
get rid of the unobserved effects through differencing or fixed effects, it is logical that

future values of the LDV are potentially correlated with the idiosyncratic error term (Cov
(INCis, pit) ¢ 0, for s>t) implying that the within estimation is also inconsistent. This
problem also bedevils Generalized Least Squares (GLS), since this method requires strict
exogeneity of the regressors. The most viable solution to this problem has been to take

first differences to eliminate the unobserved effects and then instrument for the lagged

difference variable (Ahn and Schmidt, 1995; Wooldridge, 2002).

AINCit=AINCit_]a] +AEditBl +A(INCit_1 *Edit)a2 +Axit5 +AGitA +AEit§ +Al‘it (7)

Taking first differences of the data eliminates the time-invariant unobservable
factors, but this comes at a cost of reducing variation in the regressors (Wooldridge,
2002) resulting in high standard errors. This problem may however be minimized in this

case since our panel has three- to four years between each round and thus expected to

16

show much more variability than would be across consecutive years. The first difference
approach also helps to explain changes in the economic wellbeing of households.

In this study, and to ensure consistency of the estimated parameters, equation (7)
is thus estimated using First Difference Two-stage Least Squares (FD-2SLS) so as to
account for the endogeneity of the lagged income difference (LID) in the model.

Following Anderson and Hsiao (1982) and Wooldridge (2002), we take advantage of the
three period panel and use previous lags of income level (INCM) as instruments for the

LID variable. Since we can only use one such instrument from our data, we also use
lagged mean rainfall deviation as another potential instrument. The rainfall variable
provides over-identifying restrictions to allow testing the validity of the instrument set.

To account for the potential lack of strict exogeneity of the interaction term with
education, we use the lagged interaction term (INCit.2*Edit-2) as an instrument. It is
however important to note that the use of previous income levels as potential instruments

is only legitimate when there is no serial correlation in the errors (Arellano and Bond,

1991; Wooldridge, 2002), a discussion we present later in this paper.

3. Data and Other Specification Issues
3.]. Data and Sample Area

The data used in this study come from the Tegemeo Agricultural Monitoring and
Policy Analysis Project (TAMPA) data set which consists Of a three-period panel
collected over a period of seven years. The household surveys cover the 1996/97,
1999/00 and 2003/04 cropping seasons. The specific sample used in this study consists

of a total of 3972 households (1324 for each year). The panel contains data on economic,

17

demographic and other social characteristics of the households. Table 1.1 presents the
description of the variables used in this study including their means and standard

deviations.

Table 1.1. Summary Statistics of Variables Used in the Models

 

 

Variable Description Unit Mean Std Deviation
Household Income Ksh (‘000) 165 193
Household Demographics

Education of head years 6.3 4.9
Age of head years 55 13.6
Gender of head (male headedness) 1/0 0.84 0.37
% adults working off farm years 0.36 0.27
Number of adult males count 2.5 1.6
Number of adult females count 2.4 1.4
Head completed primary school 1/0 0.53 0.50
Head completed high school 1/0 0.21 0.41
Head with some college education 1/0 0.17 0.38
Public Infrastructure

Distance to tarmac road Km 7.72 7.90
Mean distance to input seller Km 5.93 6.22
Distance to shopping centre Ksh 9.09 13.3
Distance to extension service Km 5.39 4.79
Mean dist to electricity & phone Km 4.53 4.86
Other Variables

Land cultivated acres 13.7 16.4
Number of livestock owned count 18.2 42.5
Months head at home months 10.4 3.53
Group Membership 1/0 0.78 0.42

 

No. of Observations=2648

3.2. Specification Issues

Sample Attrition/ Selection Bias
Biases can occur in estimation with incomplete panels. Our survey retained 86% of

all households over the three survey periods. Some of the reasons given for exclusion

18

were household dissolution, relocation, refusal to interview, and lack of contact, among
others. There would be no selection bias if we could assume that the attrition was a
purely random occurrence, but in practice, it is possible that households that were not
surveyed could be significantly different from those that remained in the panel. However,
previous studies using the same data set did not find significant evidence of any selection
bias (Burke et al., 2007). This evidence, and the fairly low attrition rate (about 7% for
each survey) allows us to consider attrition in this case as a fairly random occurrence and
the nature of those who left the sample unlikely to cause any substantial bias in the

results.

Measurement Error

A major source of bias with panel data comes from measurement error, due to the
relationship between the explanatory variables and the composite error that includes
measurement error. Measurement error could arise when computing final measures of
wellbeing. Other sources include a downward reporting bias for income, inaccurate
interviewing by enumerator, misreporting by respondents, or data entry mistakes. Many
of these types of measurement error could be purely random and so become part of uh;
others could be constant over time and hence eliminated during differencing.

The most serious estimation biases emanate from systematic measurement errors.
For instance, households with high incomes may tend to underreport them (to avoid
exclusion from any future income generating interventions) while those with very low
incomes may overestimate (to portray an average household and avoid dishonor).

However, consistent with the other income dynamics literature in Africa, these data Show

19

little mobility at the two extremes of the income distribution compared to middle income
households". This evidence suggests that errors among high and low income households
could mostly be eliminated through differencing. It is also plausible to expect minimal
misreporting among middle income groups (no incentive since they fall within the
average household). Further, we believe that thorough training of enumerators and close

supervision of data collection and data entry has minimized errors from such sources.

4. Empirical Findings and Discussions
4.1. Characteristics and Mobility of Households across Income Groups9

The economic wellbeing of a household is defined not only by the income earning
ability but more so the physical and human capital assets that each is endowed with. This
trend is evidenced in Table 1.2, which shows the endowments of the households by
income quintile. It is clear that each of the physical and human capital assets increases
with income, implying that the wealthy are not only able to earn higher incomes, but are
also endowed with higher levels of other assets including education. We consider the
education of the household head to be minimally influenced by current income since
rarely are any of these heads in the school-going age, and participation in adult education
in Kenya remains low (Republic of Kenya, 2007). Such causality may however be

established through income persistence over generations and inheritance.

 

8 See Table 1.3 whose contents are presented and discussed later in the paper.
9 For a detailed descriptive analysis of the characteristics of these households, see Burke at al. (2007).

20

Table 1.2. Household Endowments by Income Quintiles

 

 

Income Mean Total land Education of Value of Value of

Year Quintile Incomes cultivated head of livestock household
(Ksh) (acres) household owned and farm
(years) (Ksh) assets (Ksh)

2000 Lowest 25246 9.1 4.3 19017 43761

2 64936 14.2 5.1 26314 72538

3 108562 12.2 6.1 31984 87056

4 176770 14.1 6.9 47210 189702

Highest 421816 21.6 8.2 84143 316794
2004 Lowest 25739 7.3 4.2 17691 66861

2 68064 9.9 4.9 30980 83463

3 115561 13.6 6.4 44585 114666

4 189119 15.3 8.1 63833 207529

Highest 455967 19.5 9.2 128628 386362
Total Lowest 25493 8.2 4.3 18354 5531 1

2 66500 12.1 5.0 28647 78000

3 112062 12.9 6.3 38285 100861

4 182945 14.7 7.5 55522 198616

Highest 438891 20.5 8.7 106385 351578

 

Source: Author’s study

21

Interestingly, except for the education of the head, there is a sharp jump in the
incomes and other assets of the household between the 4th and 5th income quintiles. This
reveals the existence of some very wealthy households in these predominantly poor rural
communities. Noteworthy also, is the fact that the very poor as defined by the lowest
income category are limited in all their endowmentslo and have least education. This is
consistent with observations by Baulch and Hoddinott (2000) that ‘poverty reflects a
conjunction of low endowments, low returns to those endowments and vulnerability to
shocks’.

Further evidence can be seen in Table 1.3 which gives the income quintile
mobility matrix for these households between 2000 and 2004. The table shows that 48
percent of households in the lowest quintile in 2000 remained in the same quintile in
2004, while another 25 percent moved up only one quintile. On the other hand, about half
of the households that were in the highest income quintile in 2000 remained there in 2004
while another 26 percent moved just one quintile lower. In between though, there is
evidence of substantial mobility as earlier mentioned, a fact that could be explained by
the ability of these households to move in both directions, unlike the highest and lowest
income households. Overall, about 75 percent of all households remained relatively
immobile between 2000 and 2004 (38% maintained their status quo while 37% moved
only one quintile) with less than 10 percent moving across 3 or 4 quintiles (see Table

A12 in the appendices).

 

'0 Possibly due to negative shocks whose impacts tend to persist or lack of a minimum economic
empowerment adequate to push them into a positive grth process.

22

Table 1.3. Mobility of Households across Income Quintiles

 

 

2004 Income Quintiles
1 2 3 4 5

l 48 25 l 5 ' 8 4

2 23 3O 21 17 9
2000
Income 3 1 1 25 32 20 12
Quintiles

4 1 2 12 2 1 29 25

5 4 9 12 26 49

 

Source: Author’s study
N/B: Figures represent the distribution of households (%) from each income quintile in 2000 across the five
2004 income quintiles.

4.2. Econometric Results

General Results

Table 1.4 presents the parameter estimates of the first difference model given by
equation (7). For comparison purposes, five different models are estimated, representing
different treatments of the lagged dependent variable. Only model 5 involves IV
estimation. Model 1 is a first difference (FD) model that represents the most basic type of
estimation possible, especially with a two-period panel. This model ignores the role of
historical patterns in income determination.

Model 2 shows the results when we include lagged income as a level variable in a
differenced model. Three things are noteworthy here. One is that the lagged income
variable is not differenced. Second, there is a significant increase in the coefficient of
determination from the first model, thus indicating the importance of accounting for the

household’s initial economic position in an income model. Third, the results Show

23

evidence of convergence of income towards the mean, a result that is consistent with
earlier studies in Africa that followed a similar econometric approach, namely Grootaert
et al. (1997) and Fields et al. (2003a). The reliability of these results may however be in
question, as the estimation fails to account for the potential endogeneity of the lagged
income variable. Fields et al. (2003b) and Woolard and Klasen (2005) use a Similar
procedure but also instrument for the endogenous lagged income variable. Fields et al.
(2003b) find mixed results with the IV method and alludes to the sensitivity of results to
the treatment of the lagged income variable. On the other hand, Woolard and Klasen
(2005) find that reversion to the mean is maintained with the IV estimation (i.e., the
coefficient on LDV is negative) but the coefficient is greatly reduced for rural areas.
While this may be an accurate reflection of the KIDS data, it is also possible that the
inability to difference the lagged income variable and/or the validity of the instrument set
may be introducing additional bias to the results. Of concern here is the use of assets and
number of household earners as valid instruments for the lagged dependent variable in an
income model.

Model 3 also accounts for historical patterns by including the lagged income
variable, but this time in the initial formulation of the model such that it is differenced
with the other variables. This is only possible with at least a three year panel. As in
Model 2, the coefficient of the lagged income difference is negative and significant.
Models 4 and 5 both interact the LID with education; in the latter, we instrument for the

LID and its interaction with education as discussed in the methods section.

24

Table 1.4. Determinants of Income Growth

 

 

 

l 2 3 4 5
Model FD-No FD-with FD-with Full-No Full -
LDV LDV LID IV 2SLS
Lagged Income Variable (LDV) -0.68***
(14.31)
Lagged Income Difference (LID) -0.58*** -0.48*** 0.49*
(7.11) (3.99) (1.80)
LID“ Education -0.02 -0.15"'
(1.62) (1.95)
A Distance to tarmac road 0.66 0.61 -0.00 -0.17 -1.16
(0.34) (0.38) (0.00) (0.10) (0.48)
A Mean distance to input seller -1.08 1.00 1.07 0.76 -2.32
(0.97) (1.05) (0.58) (0.46) (1.29)
A Distance to shopping centre -0.13 -0.73** 0.48 0.41 -0.34
(0.30) (2.19) (0.96) (0.88) (0.66)
A Distance to extension service 0.81 1.01 3.67 3.32 -0.34
(0.34) (0.57) (1.46) (1.40) (0.12)
A Mean dist to electricity & phone 7.30" 4.69" 5.40” 5.48* 6.79"
(2.21) (2.28) (1.78) (1.87) (2.05)
A Age of head 2.83 3.51* 4.26* 3.78* -0.36
(1.05) (1.87) (1.89) (1.86) (0.08)
A Age of head squared -0.02 -0.02"' -0.03 -0.03* -0.01
(0.90) (1.67) (1.64) (1.66) (0.26)
A Education of head 2.41 478"" 1.54 6.09" 40.50"
(1.22) (3 .24) (1.03) (1.83) (2.23)
A Gender of head (male headedness) -4.57 29.28" 10.14 16.57 59.47
(0.25) (2.50) (0.50) (0.94) (1.31)
A % adults working off farm 102.60"* 89.17“" 7496*" 7649*" 9793*"
(5.82) (6.69) (4.82) (4.97) (4.14)
A Land cultivated 1.37 -0.14 1.45 1.19 -0.82
(0.71) (0.13) (1.06) (0.95) (0.54)
ANumber oflivestock owned l.27""'”'I 073*" 1.15*** 1.12"”'”'l 0.91“”
(3.93) (2.95) (5.41) (5.65) (3.73)
A Number of adult males 8.89 11.10" 9.74* 10.87“ 19.02“
(1.34) (2.46) (1.88) (2.22) (1.94)
A Number of adult females 12.38" 10.96""'”‘I 1311*" 12.71 *" 9.45
(2.44) (3.18) (3.03) (2.95) (1.54)
A Months head at home -2.92 -2.08 -2.19 -2.34 -3.73
(1.53) (1.23) (1.51) (1.62) (1.51)
A Group Membership 11.83 3.66 11.49 10.67 4.69
(0.98) (0.45) (1.16) (1.12) (0.34)
year dummy 62.08"" 9860*" -9.15 -5.73 11.66
(3.47) (8.55) (1.06) (0.68) (0.32)
Observations 1324 1324 1324 1324 1324
R-squared 0.09 0.51 0.43 0.44

 

Dependent Variable = A Income
Robust t statistics in parentheses

* significant at 10%; ** significant at 5%; "* significant at 1%

 

Source: Author’s study

25

As shown from the results, the parameters from models 4 and 5 Show broadly
similar patterns, but with important exceptions for the LID. Without accounting for the
endogeneity Of the LID (model 4), its coefficient is negative and significant and does not
vary significantly with education of the head. This implies that households are recovering
from income shocks, such that worse off households become better in future periods and
vice versa. This result is consistent with earlier studies which find overwhelming support
for the convergence of household incomes towards the mean, and suggests that serially
uncorrelated gains/losses are a substantial proportion of the full income of households.

The above results however change when we account for the weak exogeneity Of
the LID (model 5). The coefficient of the LID turns positive and significant and varies
significantly with education of the household head. The combined effect however
remains positive but insignificantly different from zero at mean education changes (0.43
increase in years of education between 2000 and 2004; see Table 1.5). The positive and
significant coefficient of the LID provides evidence of income persistence for those with
less education. It is noteworthy that a 3.3 increase in years of education fully eliminates
income persistence, after which the coefficient of the LID turns negative. This indicates

possible recovery of income Shocks for those with higher education.

Table 1.5. Combined Effects of LID and Education at Mean Levels

 

 

Table Model Variable Combined F- statistics p-value
effects
4 LID -0.48 19.67 .0000
1 .4 Education 5.47 3 .37 .0668
5 LID 0.42 1.59 .2073
Education 39.88 4.98 .0258

 

Source: Author’s study

26

The difference in the results given by Models 4 and 5 may not be very surprising
and could be explained by looking at the estimation methods applied to both models. The
method of 2SLS applied to Model 5 uses only the predicted portion of the suspect
endogenous variable; this prediction can be viewed as the permanent income component
of full income. On the other hand, the LID variable in model 4 consists of both the
permanent and transitory components, the latter part possibly generating the ‘reversion
towards the mean’ phenomenon. The differences in these results justify the use of
appropriate estimation methods to enable the drawing Of relevant conclusions. In this
paper, we take Model 5 as representing the most reliable parameter estimates based on
the appropriateness of the estimation procedure that not only accounts for the
endogeneity of the LID, but its interaction with education as well. An additional benefit
of the approach is that, by eliminating the transitory component Of income, model 5
allows us to focus on whether long-term income persistence is present. This argument is
fairly consistent with that in Barrett et al. (2006).

The results of the over identification test for the validity of the instrument set used
in model 5 and the first stage regressions are given in Table A13 in the appendices. The
instruments are both individually and jointly significant in the first stage regressions of
the two endogenous variables. There is also strong evidence of failure to reject

exogeneity of the instrument set.

Specification Issues with Dynamic Panel Data Models

As discussed earlier in section 2.3, the estimation of a dynamic panel data model

as given in this study has implications for estimation. The presence of the potentially

27

endogenous lagged dependent variable as an explanatory variable results in inconsistent
estimates for many estimation procedures. As discussed by Bond (2002), standard results
for omitted variable bias are likely to result in a pooled OLS estimator that is biased
upwards while the fixed effects (FE) estimator (and by extension the Simple first
difference (FD) estimator) is biased downwards, at least in panels with large samples (N)
but small/short time periods (T)”. Consistent estimates could however be obtained by
taking first differences]2 to eliminate the unobserved effects and then estimate using
instrumental variables method with lagged values (2 or more periods) of the dependent
variable as potential instruments. Thus, in a well specified model, it is expected that the
consistent estimator as obtained by the 2SLS method, should lie between the OLS and the
FE/FD estimators. Our results (excluding the interaction term) as indicated in the table
below seem to follow this pattern. The coefficient of the LDV/LID is clearly biased
upwards of the ZSLS estimator for the OLS estimate and downward for the within and
simple FD estimate. As expected, the FE and the simple FD estimates are comparable.

Table 1.6. Comparison of the LDV Estimate across Different Estimation
Methods (No interaction term)

 

 

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

OLS FE FD-No IV FD-2SLS
LDV/LID 026*" -0.58*** -0.58*** 0.08

(5.85) (7.11) (7.11) (0.32)
Controls Yes Yes Yes Yes
Observations 2648 2648 1324 1324
R-squared 0.59 0.43 0.43

 

Robust t statistics in parentheses
* significant at 10%; ** significant at 5%; "* significant at 1%

 

Source: Author’s study

 

” The inconsistency in the FE estimator vanishes in panels with large T. However, the correlation between
LDV and individual effects (part of the error term) in an OLS estimation persists even with large T. See
detailed discussions on the sources of these biases in Nickel] (1981) and Bond (2002).

'2 First differencing allows for more general violations of strict exogeneity than the within transformation
(Wooldridge 2002). Unlike in the latter case, its inconsistency does not depend on time period T.

28

The consistency of the 2SLS estimator is dependent upon the validity of the

instruments which in this case imply that the Incm must be correlated with LID but
orthogonal to Ann. The validity of lagged values as instruments is also dependent upon

the time series properties of the data. As mentioned earlier, original errors (without the
fixed effects) are assumed to be serially uncorrelated. Arellano and Bond (1991) suggest
using a second order test for serial correlation or the Sagan test of over-identifying
restrictions. Given that we have only 3 time periods, it was not possible to perform a
second order test for serial correlation. However, the general failure to reject the
exogeneity of the instrument set and the fact that the 2SLS estimator lies within the
expected bounds (between OLS and within estimates) does provide support to the
Specification and validity of our model.

Another concern usually stems from the level Of persistence in the data series. If

a] is high, use of lagged levels of the dependent variable provide weak instruments. For a
pure random walk (011:1), the LID is uncorrelated with previous income levels dated t-2
and earlier and such instruments cannot be used to identify the pattern of income growth.
Our results Show an a] between -0.58 and 0.47 for all estimation methods including the
autoregressive model without other regressors. The ZSLS estimate of 0.47 reflects some
level of persistence in the series but not sufficient enough as to weaken identification.
The results of the first stage regressions and the validity of the instruments set does
attests to the relevance of the lagged income level in identifying the coefficient of interest

in this case.

29

Disaggregated Results

Though the result of how education can break the cycle of low income persistence
for the poor is interesting by itself, deriving policy recommendations requires further
analysis as to the level of education that can achieve the required results. Table Al.4 in
the appendices presents regression results of model 5 with four different specifications
for the education variable: continuous (as in the original model) and three binary
variables indicating completion of primary school, completion of secondary school, and
at least some college education. Results Show that attainment of a primary school
education made no significant contribution to household income and also failed to
significantly reduce income persistence or enhance convergence. Among households
whose head had attained either a secondary or some college education, the respective
education variable was positive and highly significant on its own, and also caused large
reductions in the positive coefficient for the LID. This is an indication of the role of post-
primary education in feeding income growth and also in breaking (low) income

persistence for the poor.

Results by Poverty Status: Based on the above findings, Table 1.7 presents the
regression results of the models with the binary variable for secondary education,
disaggregated by poverty status.13 For poor households, the coefficient on LID is positive
and significant, while the coefficient on its interaction with education is negative and
significant. These results Show that poor households whose heads have less than a

secondary education are locked in a cycle of low income persistence, which is evidence

 

‘3 We use the Kenya Central Bureau of Statistics (CBS) definition of poverty line to define households
above and below this line.

30

of cumulative disadvantage and possible existence of poverty traps. This is in contrast to
their counterparts with secondary education that manage to break this cycle and recover
from negative shocks and hopefully into a positive grth process. However, for
households above the poverty line, there is neither evidence of income persistence, nor
the role of education in breaking that persistence; these households may be less
susceptible to long-term effects of income shocks in either direction”. On its own,
attainment of secondary education does not have a significant influence on income
growth for those who are non-poor, but has a very large and significant positive effect for
the poor.

As for the other determinants of income growth, it seems that having a male head
of household positively influences income grth for poor households, but has no
significant effect for the non-poor. This could possibly be explained by the reduction of
discriminatory practices based on gender for non-poor female heads as compared to their
poor counterparts. The proportion of adults working off the farm, which could be an
indication of the availability of employment opportunities in the area, Shows the same
pattern: a clear positive effect for the poor but not as clearly for the non-poor. This is not
surprising given that the poor are endowed with less land and other assets hence likely to
benefit from other income earning activities and is further an indication of the role of
access to the off-farm labor market in rural income growth. These findings are consistent
with those of Giles (2006) in studying China’s rural labor market.

A similar pattern is observed for the number of months the head stayed home. The
higher the number of months the head was at home, the lower the impact on income

growth for the poor, which again implies that working away from the farm for the head,

 

” It is possible that incomes for such non-poor households is driven by their (higher) asset holdings.

31

Table 1.7. Models Disaggregated by Poverty Status

 

 

1 2 3
General Below Poverty Above Poverty
LID 0.13 0.32"" -0.01
(0.53) (3.02) (0.01)
LID*Secondary education -1 .43" -3.07*** -1.15
(1.93) (4.36) (0.84)
A Distance to tarmac road 0.44 5.23“ -3.32
(0.21) (1.82) (0.86)
A Mean distance to input seller -0.47 -l.15 2.85
(0.34) (0.83) (0.69)
A Distance to shopping centre -0.17 -0.73 0.35
(0.39) (1.42) (0.23)
A Distance to extension service 1.81 -1.23 13.35
(0.66) (0.51) (1.55)
A Mean dist to electricity & phone 571* 2.78 10.46
(1.75) (0.87) (0.95)
A Age of head 2.03 -0.95 13.66*
(0.77) (0.18) (1.70)
A Age of head squared -0.02 -0.01 -0. 12
(1.09) (0.22) (1.62)
A Secondary education 354.60" $39.79*" 475.07
(2.19) (4.32) (1.18)
A Gender of head (male headedness) 42.11 87.62" 49.15
(1.36) (2.31) (0.55)
A % adults working Off farm 108.10*** 92.60“" 137.76
(5.05) (3.71) (1.34)
A Land cultivated -0.13 -2.01 -2.21
(0.16) (1.47) (1.40)
A Number of livestock owned 121*" 0.73" 2.42"
(5 .39) (2.14) (2.42)
A Number of adult males 14.54" 1.56 4977*"
(2.05) (0.23) (2.59)
A Number of adult females 10.46* 12.12“ 19.65
(1.91) (1.85) (0.93)
A Months head at home -2.62 -3.75* 1.42
(1.31) (1.75) (0.34)
A Group Membership 5.61 2.48 15.42
(0.48) (0.13) (0.46)
year dummy -8.60 -27.78** 52.02
(0.45) (2.16) (0.62)
Observations 1 324 93 5 3 89

 

Robust t statistics in parentheses

* significant at 10%; ** significant at 5%; "* significant at 1%

 

Source: Author’s study

32

resulted in positive income gains for the poor. This may indicate the role of migratory
labor in rural income growth. The number of livestock owned had positive income effects
for both the poor and non-poor, but the amount of land cultivated had no significant
influence on either. This latter result is surprising given that we observe a general
increase in land cultivated with income, but is consistent with findings from Burke et al.
(2007). It is however possible (as may be the case with a few other variables) that the low
variability Of these variables across the years may cause an insignificant result in an

otherwise significant variable.

Results by Agricultural Potential: Considering the pattern of income growth by
agricultural potential15 (Table 1.8), we Observe strong evidence of income persistence for
those households in the lower agricultural potential areas whose heads had no college
training”. This persistence is however broken for households with post secondary
training (as indicated by the negative coefficient of -0.89 on the interaction term), thus
showing evidence of convergence towards the average for such households. This
observation is plausible given the low returns to agriculture in the low potential areas and
the fact that reduction of income persistence in such areas may only be realized through
access to the off-farm labor market, whose entry may require more education and training
beyond what a secondary school education may offer. As expected, households in the
high potential areas seem to recover from shocks with or without college training.
However, those with college training tend to recover faster (coefficient of -1.14) from

such income Shocks than do their counterparts without this training.

 

'5 See the classification of the sample by agricultural potential in Table A1 in the appendices.
'6 Attainment of secondary education was found to result in insignificant results

33

Table 1.8. Models Disaggregated by Agricultural Potential

 

 

1 2 3
General Low Potential High Potential
LID 0.04 0. 16*" -0.03
(0.20) (2.65) (0.12)
LID*college education -1.19* -0.89"”" -1.11*
(1.94) (2.41) (1.84)
A Distance to tarmac road 0.19 -0.54 0.63
(0.10) (0.22) (0.24)
A Mean distance to input seller -0.68 0.86 -1.61
(0.52) (0.80) (0.50)
A Distance to shopping centre -0. 16 -0.00 0.15
(0.37) (0.01) (0.22)
A Distance to extension service 1.44 0.91 5.89
(0.57) (0.44) (0.99)
A Mean dist to electricity & phone 6.52" 2.55 11.45""
(2.24) (0.70) (2.59)
A Age of head 1.32 0.80 3.67
(0.54) (0.26) (1.07)
A Age of head squared -0.01 -0.01 -0.03
(0.75) (0.21) (1.30)
A College Education 321.63" 200.32" 329.15"
(2.33) (2.42) (2.28)
A Gender of head (male headedness) 30.55 19.41 47.60
(1.18) (0.81) (1.49)
A % adults working off farm 105.78*** 122.79*** 8878*"
(5.32) (4.62) (3.18)
A Land cultivated 0.38 -0.36 0.99
(0.42) (0.63) (0.50)
A Number of livestock owned 078* 1.01 * 0.78
(1.77) (1.84) (1.62)
A Number of adult males 12.21 * 10.16 10.94
(1.90) (1.21) (1.32)
A Number of adult females 9.37“ 16.20" 3.28
(1.77) (2.30) (0.48)
A Months head at home -3.01"' -1.52 -4.l7"'
(1.69) (0.68) (1.85)
A Group Membership 1.71 8.79 -5.29
(0.17) (0.53) (0.37)
year dummy -9.38 17.91 -l.1.85
(0.51) (1.41) (0.40)
Observations 1324 430 894

 

Robust t statistics in parentheses

* significant at 10%; " significant at 5%; "* significant at 1%

 

Source: Author’s study

34

5. Summary and Conclusions

The results from the study suggest differences in the role of initial economic
position of households on rural income growth and mobility, across agricultural potential
areas and across poverty status. Overall, rural households in Kenya Show evidence (at
10% level) of income persistence, which is broken at higher levels of education. AS
discussed earlier, this result deviates somewhat from earlier findings from Africa where
overwhelming support for convergence of incomes has been indicated, possibly due to
the differences in the econometric procedures employed. These differences underscore
the importance of using appropriate estimation methods. Disaggregation of these results
by poverty status and agricultural potential does however provide some answers and also
reveal differences that could be important for policy.

Households below the poverty line and whose head does not have a secondary
education Show strong evidence of income persistence, which is clearly broken for
households whose head had a secondary education. NO clear pattern emerges for non-
poor households with or without secondary education; the direction of effects does
however Show faster recovery for those with higher education. The existence of income
persistence for the poor and uneducated is consistent with the theory of cumulative
advantage and possible existence of poverty traps. This does imply the need for targeting
those who are economically disadvantaged so as to set them on a positive growth process.
Overall, results indicate the potential role of education in not only breaking the cycle of
poverty for those trapped in it, but also its ability to allow increased recovery from

income shocks.

35

A similar pattern emerges for households in the low potential areas where
evidence of income persistence is observed. As expected, a much higher education in the
form of college training is required to break this cycle of low income persistence; the
need for such a high level of education is likely related to high entry barriers into viable
income earning activities in the off-farm sector as a substitute to the low returns from
agriculture. Higher education in this case enables quick recovery from income shocks for
those in the high agricultural potential areas.

The above results indicate the need for policy intervention for the poor and those
residing in the low agricultural potential areas. Of importance is the need to enact policies
that help break the low income persistence for these households. While the Kenya
government pronouncement of free primary education for all children four years ago was
a policy step of major importance, our analysis suggests that it is not sufficient to
improve income growth, nor is it adequate to break the cycle of persistent low incomes
for those trapped in poverty. Investments and programs in education to encourage
enrollment and completion of secondary school education are therefore going to be key

for future poverty reduction strategies.

36

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39

ESSAY 2: OFF-F ARM WORK AND FARM PRODUCTION DECISIONS:
EVIDENCE FROM MAIZE-PRODUCING HOUSEHOLDS IN
RURAL KENYA

Abstract

This paper explores the extent to which off-farm work aflects farm production decisions
through reinvestment in farm input use and intensification. We estimate farm input
demand functions for fertilizer and impoved seed for Kenyan maize producers. The
results indicate differences in off-farm work effects across different inputs and ofl-farm
activity types. While the results suggest possible use of ofl-farm earnings for input
purchase especially for those without other forms of credit, the ‘combined’ input package
seems to represent a substantially greater commitment and orientation, one possibly not
attractive to those with higher off-farm earnings. Thus, while engagement in ofl-farm
work may allow some partial intensification, it may also compete with farming at higher
levels with households shifting their resources to other uses perhaps with higher returns
than agriculture. We find the presence of a regular source of earnings to be the driving
force behind any reinvestment behavior.

Key words: Off-farm work; Input intensification; Credit; Kenya

40

1. Introduction and Problem Overview

It has been widely argued that, during early stages Of development and in societies
where most of the population is composed of rural smallholder farmers as in much of
Sub-Saharan Afiica (SSA), increased agricultural productivity is necessary to increase
incomes of most of the poor directly, and to stimulate the development of the rural non-
farm economy (Timrner, 1984; Block, 1994; Reardon et al., 1994; Reinert, 1998; Byerlee
et al., 2005). Without such impetus, broader growth in the rural economy will be
constrained and poverty reduction much more difficult to achieve.

Three Observations are noteworthy in this regard. First, agricultural productivity
has stagnated in SSA and, in many instances, poverty is rising (World Bank, 2005).
Productivity growth in the smallholder sector has been especially difficult to achieve.
Second, research has Shown that most households in rural Africa tend to earn larger
shares of their income and even higher absolute incomes from off-farm employment
(Reardon and Taylor, 1996; Reardon et al., 2000; Tschirley and Benfica, 2001). These
findings point to the important role that Off-farm employment can play in poverty
reduction as enumerated in vast literature (Reardon, 1997; Lanjouw and Lanjouw, 2001;
Barrett et al., 2001; Barrett et al., 2005). Finally, agricultural credit for smallholder
farmers is severely lacking in most countries of SSA, making it difficult for poor farmers
to finance the inputs typically needed for increased productivity (Carter, et al., 2004).
This difficulty is especially great for food crops, which lack the institutional
arrangements that sometimes relieve credit constraints for cash crops such as coffee, tea

and cotton.

41

While the above studies and many more have made numerous contributions on
the role of both farm and off-farm employment to poverty reduction, little is known about
the exact nature of the interaction between these two sectors at the household level.
Specifically, there exists minimal empirical literature on the relationship between off-
farm work and agricultural productivity. At an aggregate level, the relationship between
farm and Off-farm sectors can be explained through growth of linkages whereby an
increase in agricultural productivity increases agricultural output and incomes which spur
growth in the non-farm sector (Reinert, 1998). While this is indeed very important for
rural development, the design of specific pro-poor policies could benefit from more
specific information on the nature of the interaction between farm and off-farm sectors at
the household level.

The above Observations raise the question of research in this paper: do off-farm
earnings contribute to the financing of productivity enhancing investments in agriculture?
If so, such income could help drive a “virtuous circle” of self-reinforcing growth and
serve as an engine of rural transformation. If, on the other hand, off-farm income is
primarily used for consumption, investment in household assets, and expansion of other
off-farm activities, its contribution to agricultural transformation and thus to broad-based
grth and poverty reduction in rural areas will be more limited.

With limited availability of credit for smallholder agricultural activities,
productivity growth in the smallholder sector remains a major challenge. Under such
circumstances, agricultural intensification may be reliant on cash generated within the
household. According to Lamb (2003), households use Off-farm work to mitigate the

effects of production shocks, leading to greater use of fertilizer. He argues that, to the

42

extent that farmers choose traditional over modern inputs to lower their risk, any
mechanism that allows farmers to smooth consumption can be expected to raise the use
of modern inputs and increase farm productivity. Consistent with Lamb (2003), we argue
apriori that earnings from off the farm may be used to compensate for missing and
imperfect credit markets by providing ready cash for input purchases as well as other
household needs. These arguments are also consistent with those of Collier and Lal
(1984), Reardon et al. (1994) and Barrett et al. (2001). According to Clay et al. (1998),
greater off-farm income means more cash available to the household to invest on-farm.

A few earlier studies examining the interaction between farm and off-farm sectors
in Afiica have been empirical in nature (Collier and Lal, 1984; Haggblade et al., 1989;
Savadogo et al., 1994; Clay et al., 1998). These studies look at different aspects of farm
investment, and thus have found mixed evidence for the direction of off-farm work
effects on farm investment. Savadogo et al. (1994) conclude that non-farm earnings do
positively influence animal traction adoption. Clay et al. (1998) find a positive effect of
non-cropping income on land conservation investments and an insignificant effect on use
of chemical inputs. Reardon et al. (1994), using a capital market perspective, argue that
the evidence on the interaction between farm and off-farm sectors is mixed and point to
the lack of studies in Afiica that explore the ‘direction and nature of reinvestment’ into
the farm. A Similar finding was later echoed by Clay et al. (1998).

More recently, analysts have begun to explore more rigorously these
relationships, perhaps as a response to the growing need for increased farm productivity
and income grth in rural areas. Some of the studies have looked at the effects of Off-

farm work on farm investment (Ahituv and Kimhi, 2002; Chikwama, 2004; Morera and

43

Gladwin, 2006) while others have analyzed the impacts of off-farm work on various
aspects of farm production decisions (Lamb, 2003; Dusen and Taylor, 2005; Phimister
and Roberts, 2006). Though using different approaches and analytical tools, most of these
studies, with the exception of Lamb (2003), indicate a negative relationship between off-
farm work and agricultural investment/production.

Among those finding a positive relationship, Lamb (2003) indicates that fertilizer
demand in the semi-arid tropics of India increases with the depth of the off-farm labor
market, thus suggesting some complementarities between the off-farm labor market and
own-farm production. In addition, while studying poverty-environment patterns in Chile,
Baharnondes (2003), concludes that ‘non—farm employment permitted agricultural
intensification’ that in turn reduced pressure on the natural resource base. A similar
finding was echoed by Gasson (1988) who suggested that off-farm work was frequently
undertaken to finance debts on the farm, purchase machinery and other farm equipments
in addition to other family needs (p.27). See Phimister and Roberts (2006) for a review of
other arguments for the two alternative predictions.

In this study, we look at how off-farm earnings affect farm input use and
intensification. As with Clay et al. (1998)”, Lamb (2003) and Phimister and Roberts
(2006), the paper analyzes the relationship between off-farm work and fertilizer use in
addition to the use of improved seed for maize-producing rural households in Kenya. We
however deviate from the above studies by looking at input intensification in a particular

crop, maize, thus facilitating more concrete interpretation of results.

 

'7 Clay et al (1998) analyzes the effects of non-farm income on an aggregate of chemical inputs which
include fertilizer, pesticides and lime.

44

The study uses maize to explore this relationship for the following reasons. First,
it is the most widely grown and locally traded crop in Kenya, with 98 percent of
households outside of semi-arid areas growing it. Second, the crop uses substantial inputs
in form of fertilizer and hybrid seeds and accounts for about 28 percent Of gross farm
output from the small-scale farming sector. Third, maize is far and away the main staple
food in the country. Finally, there is hardly any organized credit system for maize (and
most other annual crops), thus creating potential for use of other off-farm sources of cash
to finance input purchases. This collection of facts suggests that increased maize
productivity is likely to be an important goal for most households, and that maize will be
among the first choices for many of them in deciding whether and how to intensify their
agricultural production.

This paper adds to the literature in a number of ways. First, it is a contribution to
the sparse body of literature that empirically examines the effects of Off-farm work on
agriculture. Among the studies reviewed in this paper, only Clay et al. (1998) and
Chikwama (2004) were carried out in Africa where increased agricultural productivity is
much needed and credit limited. The current paper adds to this course. Second, the paper
distinguishes the effects of different types Of Off-farm work on agricultural
intensification. Finally, by using a particularly rich data set, the analysis controls for a
number of other relevant household and locational characteristics frequently omitted in
other studies. In addition, we deal with the possible endogeneity Of Off-farm work, thus
allowing identification of off-farm work effects.

The paper is organized as follows. In section 2, we develop a conceptual model to

motivate the rest of the paper and also outline the empirical strategy adopted in the study.

45

Section 3 decribes the data used in the analysis. The econometric models to be estimated
plus the specification and estimation issues are discussed in section 4. In Section 5, the

results are discussed and summary and conclusions given in section 6.

2. Theory and Empirical Strategy
2.1 Conceptual Model

We consider a risk averse, Single member household engaged in a portfolio of on-
farm and off-farm activities. Returns from each activity are uncertain and imperfectly
correlated. In a two period decision model”, the household decides at period t=0 how to
allocate its time and previously earned income. Earned cash can be spent on input
purchases, on hired farm labor, or can be invested in an Off-farm enterprise, among
others. The household may also attempt in this initial period to obtain credit. In the

second period (t=l), the household earns income and repays credit.
We define an on-farm production function Q=Q(Lf, Lh, Z; A, H, G), where Lf is
on-farm family labor, L'1 is hired labor, Z represents a vector of purchased inputs, and A,

H, and G are vectors relating to agrO-ecological conditions, hmnan capital, and other
household and locational characteristics, respectively. H embodies both the skills and the

orientation of the household. The household is endowed with a fixed quantity of labor

time, L=LO + Lf, where L0 represents off-farm labor. In a credit constrained world, credit

(CR0), cash allocated to off-farm activities (CO), and the quantity of purchased inputs and

 

'8 We consider two periods, rather than n periods, to simplify the derivations that follow. This
simplification should not affect the key implications from the model.

46

hired labor are determined Simultaneously. Purchased inputs and on-farm labor (both
family and hired) are assumed to be complements in production”.

The household’s objective is to maximize the risk-adjusted discounted total net

earnings (Y) from its portfolio; only revenues and costs from the second period are

discounted:
Y: __R_1__CO + CR0__C_R_1_ (1)
1+r+a 1+r+a

Where all subscripts indicate time period, R1 is total revenue (on- and off-farm), Co is
total costs (on- and off-farm)”, r is the household’s risk-free discount rate, a is its risk
premium, CR'l is the nominal value of repaid credit, and all other terms are as

previously defined.

Incorporating the production function and time constraint, we have:

P1QQ(o)+ WIOL?()

(1+r+or)

 

 

Max (Y) = CROOO + O] (2)

—PZ —w“Lh . —C0- + C -—
0Z0 0 00 00 R00 (””00
Where P]Q is output price, W10 is the Off-farm wage rate“, P02 is the price of inputs, W61

is the wage paid to hired labor, C8 (-) is cash allocated to off-farm work at period t=0,

and r' is the rate of interest paid on any credit the household obtains. The first term in

 

'9 While this is considered true for the kind of inputs referred to in this study, it is however not necessarily
so for all other inputs. Herbicides are clearly an exception.

2° For ease of exposition, we do not distinguish between capital costs and variable costs for off-farm work.
2' We conceive this as a general term reflecting both wages and returns to labor in businesses operated by
the household.

47

brackets is the risk adjusted discounted net earnings on— and off-farm, while the second

bracketed term is the risk adjusted discounted cost of credit.

Taking first order conditions with respect to Z, we get:

f h 0
P(){ao aQa_L oQaL]+W06L

 

 

az 51]" a aLh 62 52 haLh at:O
_pZ_w _____
(1+r+or) OZ OZ
I O f
6CR[1_ 1+r )_l aL +92. =0 (3)
OZ I+r+0t OZ OZ

Where ’1 is the shadow wage rate. Re-arranging, we find the Optimality conditions:

 

 

PC2333 PQan af P062 aLh wO aLO
PZ=—fiZ—+ ——5—L —>. i+ ——5—L —wh —+ 4.—
1+r+or l+r+or OZ 1+r+0t OZ 1+r+or OZ
6C_R_( 1+r' )_ a_c_O
1— (4)
az 1+r+a az

Equation (4) indicates that at the Optimal solution, inputs should be used up to the
point where the risk adjusted discounted marginal value product (MVP) of inputs equals

its price. The first term on the right is the risk adjusted discounted marginal value product

48

of inputs without taking into account imperfections in labor and credit markets. We
denote this MVP'Z. We find that accounting for the risk associated with earnings
reduces MVP'Z , thus resulting in decreased input use. More specifically, MVP’Z is

decreasing in the variance of returns to input use and in the correlation of those returns
with returns from the existing portfolio. Using the familiar Beta approach (Boardman et

al., 2001 pp 251), we can represent the risk premium as:

a =1E<rm)— n16,- (5)
where:

._ Cov(rmrj) _ _ _O_j_

J“ Varm _ me cm (6)

Where r denotes a rate Of return, subscripts m, j, and f refer to the portfolio, the
investment/activity of interest, and a risk-free asset, respectively, E is the expectations

operator, p denotes a correlation coefficient, anda denotes standard deviation. Bj (and
hence or) increases — and MVP'Z declines -- with the variance Of returns of the
investment of interest (as indicated by oj ) and with its correlation with the existing
portfolio ( pjm).

Terms two through four in equation (4) capture the effects of labor market
imperfections. Examining the second term, the bracket is the risk adjusted discounted
marginal value product of family labor on the farm minus the shadow wage rate. This

value is multiplied by the marginal effect of inputs on family labor use on the farm

(assumed positive, as the two are complements). Assuming household input choices do

49

not affect input prices, the bracketed term is non-negative, and will equal zero if the
household is able to optimize its time allocation. If non-zero, this term is decreasing in
risk. The same logic applies to the third term: an optimizing household will not pay hired
labor more than its risk adjusted discounted marginal value product, and the term is thus

either equal to zero or, if non-zero, is decreasing in risk.

By the same logic, the fourth term will be either zero or negative, since OLO/ OZ is

expected to be negative. However, because few households in sub-Saharan Afiica hire in
farm labor, OLO/ OZ for most households will (by the labor constraint) be comparable in

absolute value to OLf / OZ. As a group, therefore, we expect terms two through four to be
positive or zero and, if positive, to be decreasing in risk. These terms thus reinforce the
effect of risk seen in the first term, implying that demand for inputs will decrease with the
variance of returns to their use and with their covariance with the existing portfolio.

The fifth and sixth terms capture imperfections in credit markets. The partial
derivative in the fifth term is positive, and the bracketed term is positive or zero: a
household will not pay more than r + or in interest, and perfectly competitive credit
markets dictate r' = (r + or ). Demand for inputs will rise for households able to Obtain
credit at rates below (r +OL ). An example here would be for households that belong to
farmer groups/cooperatives which generally provide inputs at lower cost through bulk
buying and lower borrowing rates. Finally, perfectly competitive credit markets will
allow decisions on purchase of inputs and investment in an Off-farm enterprise to be
made independently, driving both these terms to zero.

Note that including off-farm considerations, as captured in terms four (negative)

and six (positive), has an ambiguous effect on input use.

50

In general, anything that increases (decreases) the right hand side of equation (4)
will increase (decrease) demand for inputs. Thus, in addition to the above, we can also

generate the following expectations regarding MVP'Z. First, it is increasing in A by the

definition of A. Second, MVP'Z is ambiguous in education (a key component of H):

while education should increase skills that would increase the efficiency of input use, it
may also reflect a greater orientation away from agriculture towards off—farm activities,
which would tend to decrease input use efficiency.

To evaluate the implications of the above theoretical model on farm input use, we
solve the resulting first order conditions with respect to all the choice variables to derive
input and labor demand functions. In particular, the input demand function defined by the

vector of inputs Z is given by:

2* = f(w", wo, PZ, PQ, CR, A, H, G) (7)

2.2. Motivation and Empirical Strategy

From Modern Portfolio Theory (MPT), diversification involves the reduction of
market risk through investment in several instruments with imperfectly correlated returns.
Thus, in making decisions on whether to invest earnings from Off-farm into farming
activities, our conceptual model Shows that farm households consider how the anticipated
returns may be correlated with their current portfolio. Risk-averse households are likely
to prefer portfolios with activities whose individual returns are uncorrelated or negatively
correlated. Since diversification does not eliminate all variance (Markowitz, 1952), the

optimal portfolio is a trade-Off between expected returns and associated risk. On the

51

margin, a household’s propensity to invest off-farm earnings into farm intensification will
depend on 1) the expected returns from intensification (and their variance) as dictated by
agro-climatic conditions and the household’s aptitude for farming and 2) the correlation
of those returns with the existing portfolio; of special interest here is the type of off-farm
activity already in the portfolio, and its relationship to farm activities.

The fact that Off-farm activities may differ in their relative returns and riskness,
and more importantly in how they relate to farm activities, is an indication that the
probability that earnings from these activities will be invested in agriculture may also
differ by type of off-farm activity. This is implied in equation (4) by the fact that for a
given risk preference, different portfolio composition may lead to different levels of risk

premitun and thus different implications for input use. In this study, and guided by both
data and the perceived levels of pJ-m22 hence Bj and a for different Off-farm work types, we

explore the impacts of three different types of off-farm earning activities, based on their
stability and likely correlation between their returns and returns to agriculture: salaried

labor/pension, remittances, and other business and service activities.

Salaried labor/pension: Salaried wage labor and pensions have relatively high returns,
low risk and low correlation with earnings from agriculture: these activities are unlikely
to suffer from shocks such as weather that impact farming, and will on average depend
less on local demand (which is driven to a great extent by agricultural outcomes) than

other types of off-farm activities. Thus, we expect households with salaried wage (part of

 

‘2 Data shows correlations of 0.1344, 0.0490 and 0.0298 of crop income with informal business, salaried
wage and remittance income, respectively. Only the correlation with informal business is significant at 1%
level.

52

portfolio m) to have a lower 13,- and hence lower a as compared to households with

informal business activities. For a given risk preference, expected return and activity mix,
households with salaried income may be more willing to take on the risk of modern

inputs23 than those with informal business and remittance income“.

Remittances: Remittances are likely to be a heterogeneous category, because the level,
timing and volatility of income from this source for the receiving households depends on
the characteristics of the remitter, including their relationship with the household, and on
the characteristics and geographical location of activities they engage in. Overall, we
expect this source of income to be more uncertain than income from salaries/pensions.
However, specific impacts will depend on the above three issues and the expected returns
from agriculture. For example, a salaried head of household living away from the family
may remit higher amounts on a regular basis, hence facilitating investment into
agriculture. Similarly, since remittances could come from an explicit strategy Of
migratory labor to spread risk over Space, the low correlation of such earnings with local
agriculture could imply potential reinvestment behavior into agriculture. Because we do
not have information on the remitter and the activities they are involved in, the expected
effects of this category remain an empirical question. We can however draw a priori

expectations from Collier and Lal (1984) who found that in Kenya, remittance income

 

23 Though the use of fertilizer and improved seed is likely to increase both the expected returns and the
variance of those returns, there are other important non-monetary gains from investing in farming such as
food security which can affect the above expectations.

24 The broader point is that salaried income will most likely allow investment in two types of activities:
those with higher return and higher risk, and those with a longer time horizon, such as education or
mortgage payments. Investment in hybrid seed and fertilizer is one example of the first type, but of course
is not the only type of investment that will be more likely due to the presence of salaried income.

53

from urban wage employment was being used to finance farming activities resulting in

increased agricultural incomes.

Other business and service activities: This classification includes several types of
activities such as agricultural wages (typically seasonal, low wage work on neighboring
farms), trade, manufacturing, and services. The expected returns, relative riskiness and
correlation with agriculture may differ with specific activity types, but generally, the
returns from these activities will be less stable than salaried wages. They are also more
likely to depend on local demand, meaning that returns are expected to be correlated with
returns to the dominant income source in the area. Reinvestment Of income from these
activities into farming may thus be expected to increase with: 1) the Share Of off-farm
earnings in total cash income in the geographical region, and 2) the expected returns from
farming as determined by the agricultural potential of the region. However, given that
low potential regions (with low expected returns from farming) tend to have high shares
of off-farm income”, the net effect of these counteracting forces becomes an empirical

question.

3. Data

Data for this study were drawn from the Tegemeo Agricultural Monitoring and
Policy Analysis Project (TAMPA) data set. It consists of a household level panel
collected during the 1999/00 and 2003/04 cropping seasons by Tegemeo Institute, Kenya.

The specific sample used in this study consists of 1832 observations i.e. 916 maize-

 

” Mean off-farm shares for the low and high potential regions are 46% and 35% respectively. Much wider
differences exist with more disaggregated data (see Table A21).

54

producing rural households for each year. The households included in this analysis live in
regions that have bimodal rainfall patterns, which enables the assessment of the impact of
income earned in the previous season on current use of inputs within a given year (see
later discussion on endogeneity). Because the “high potential maize zone” of the Rift
Valley has a single cropping season (higher altitude means that maize takes much longer
to mature), we were unable to use this part of the sample. The sample that we did use
accounted for 66 percent of all farms, 45 percent of the total value of fertilizer use during
2003/04, and includes high potential areas such as the Central and Western Highlands,
low potential areas such as the coastal, eastern, and western lowlands, and other medium
potential areas. The data contains information on economic, demographic and other
locational characteristics of the households.

Table 2.1 presents the description of variables used in this study including their
means and standard deviations. The dependent variables include the binary input
adoption variables and the intensity of use as given by the amount used per acre for both
fertilizer and hybrid seed. Given the nature of the problem, we use off-farm earnings in
place of wages (W.,) as indicated in equation (7). Prices of inputs and all cash values are
adjusted for inflation (to 2004) using the respective consumer price indices (CPI). The
binary variable for agricultural potential was constructed based on agrO-regional zones26
as defined in the TAMPA data set. Based on maize productivity in low- and medium-
high altitude areas, the lowlands were assigned to the low agricultural potential areas
while the highlands were put in the high agricultural potential areas. See Table Al on the

TAMPA sample and its distribution across Kenya in the appendices.

 

2" These agro-regional zones were created by Tegemeo during sample design and are based on agro-
ecological zones and population densities.

55

Table 2.1. Summary Statistics of Variables used in the Models

 

 

Variable Description Type Unit Mean Std Deviation
Adoption and Intensity Measures

Fertilizer Amount continuous kg 14.5 32.19
Hybrid seed Amount continuous kg 2.4 5.16
Fertilizer adoption binary 1/0 0.36 0.48
Hybrid Seed adoption binary 1/0 0.31 0.46
Fertilizer and Seed adoption binary 1/0 0.25 0.43
Monetary Incentives

Price of fertilizer continuous Ksh/kg 30.02 6.71
Price of hybrid seed continuous Ksh/kg 120.10 19.65
Price of other seed continuous Ksh/kg 28.30 31.43
Farm wage rate continuous Ksh.day 71.85 30.94
Price of maize continuous Ksh/kg 13.08 1.87
Presence of major cash crop binary 1/0 0.29 0.45
Income sources(previous season)

Agricultural Cash Income continuous Ksh(‘000) 33.07 58.48
Off-farm Earnings continuous Ksh(‘000) 22.96 42.07
Informal Income continuous Ksh(‘000) 9.60 24. 13
Salary/pension Income continuous Ksh(‘000) 12.02 30.75
Remittances continuous Ksh(‘000) 1 .33 5.23
Public Infrastructure

Distance (fertilizer seller) continuous km 3.96 5.62
Distance (seed seller) continuous km 3.68 4.86
A gro-ecological conditions

Main (planting) season binary 1/0 .26 .44
Agricultural Potential binary 1/0 .48 .49
Long-term rainfall mean continuous mm 946.19 256.85
Demographics

Age of head continuous years 55.27 13.51
Male head of household binary 1/0 .81 .39
Number of adults continuous count 4.72 2.30
Primary Education binary 1/0 .37 .48
Access to credit

Group Membership binary 1/0 .82 .38

 

No. ofObservations=1832

56

Group membership is a binary variable representing whether a household
belonged to a farmer cooperative/group or not. We use this variable to proxy for access to
credit given that nearly all agricultural credit was received through cooperative societies:
in the 2003/04 survey, 96 percent of those who received agricultural credit were members
of a cooperative society.

The table shows that about 36 percent of households in our sub-sample used
fertilizer and 31 percent used hybrid seed, while about 25 percent used both inputs during
the period under consideration. Table 2.2 shows that adoption rates for hybrid seed and
the combined package are clearly lower for those households with Off-farm work (any
type) than for those without. A similar pattern is observed for fertilizer though the
difference in means is not significant. When disaggregated by type of off-farm work,
informal business and remittances follow a pattern similar to overall off-farm work. This
is in contrast to the pattern that emerges with salaried wage and pension. We Observe a
higher proportion of households using both fertilizer and hybrid seed for those

households with salaried wage and pension than for those without.

57

Table 2.2. Fertilizer and Hybrid Seed Use by Type of Off-farm Work

 

 

Fertilizer Hybrid Seed Fertilizer and Hybrid
Seed
Type of off-farm
work Adoption Intensity Adoption Intensity Adoption Intensity
(% of hhs) (kg/acre) (% of hhs) (kg/acre) (% of hhs) (Ksh/acre)

Any ofl-farm work
No 0.39 43.65 0.36 7.84 0.28 2466
Yes 0.36 38.40 0.30 7.63 0.24 2387
t-value 1.17 1.34 2.18“ 0.32 2.03“ 0.29
Salary/pension
No 0.34 40.86 0.30 8.02 0.23 2515
Yes 0.43 37.67 0.34 7.03 0.29 2218
t-value -3.60*** 0.96 -I .85“ 1.91“ -2.82*** 1.28
Informal/business
NO 0.41 40.94 0.35 7.58 0.29 2344
Yes 0.32 38.27 0.27 7.82 0.21 2492
t-value 3.59*** 0.80 3.61 *** 0.43 377*" -0.56
Remittances
No 0.37 40.79 0.32 7.77 0.26 2436
Yes 0.36 35.53 0.27 7.32 0.20 2272
t-value 0.33 1.29 2.02“ 0.62 2.29‘ "' 0.54

 

N/B: Quantity figures represent amount of inputs used among those using. The t-value represents the
tabulated t for the difference in the means for each respective category while *** significance at 1%, **
significance at 5% and * significance at 10%

In the past, Kenya has been categorized as a high cost maize producer relative to
neighboring countries such as Uganda (Nyoro et al., 2004). Among the reasons for this
lack of competitiveness are high cost of farm inputs, low seed quality and a weak
extension system. Nyoro et al. (2004) Show that fertilizer and seed expenses account for
about a third of the total cost of production for most production systems. Yet previous
studies (mostly using this data set) have clearly shown that fertilizer use remains
profitable in most agricultural areas of Kenya (See Wanzala et al., 2001 for a brief review
of these studies). In addition, data presented in Muyanga et al. (2005), show relatively
high maize fertilizer productivity (maize output/kg of fertilizer) even for the lowland

areas. Although maize is the most fertilized crop, intensity Of use tends to be less than on

58

high-value and export crops (Nyoro et a1, 2006), a factor that has been identified as
limiting maize productivity. This has called for an effective extension system to educate
farmers on the appropriate fertilizer types and recommended levels of use.

One of the factors hampering the adoption of hybrid seed and its relative
profitability has been a decline in seed quality (Nyoro et al., 2004; Ayieko and Tschirley,
2006). This is indicative from the TAMPA data set, which shows declining use rates and
intensity for hybrid seed between 2000 and 200427. According to Ayieko and Tschirley
(2006), a large share of seed used in Kenya is from the informal sector with no clear
certification procedures. This scenario has potential for Opening up room for production
of low quality seeds, an issue that not only raises the relative cost Of production as yields
decline, but also acts as disincentive to use of improved seed.

It is also possible that hybrid seed is being used in areas less suited to its use. It
has been shown that a higher maize output per unit of seed can be achieved in some
regions like the lowlands and some of the highlands when Open pollinated seed varieties
(OPV) are used as compared to hybrid seed (Muyanga et al., 2005). Also, in comparing
Ugandan and Kenyan maize production systems, Nyoro et al. (2004) concludes that
Ugandan households achieve higher profitability using OPV and lower levels of fertilizer
than their Kenyan counterparts who mainly used hybrid seed and higher levels of
fertilizer. Though it would have been insightful to estimate input demand functions for
OPV, the limited number of cases available thwarted any such efforts. Only about 10% of
reported seed type was OPV. Local varieties formed about 37% of the total reported

cases.

 

27 Adoption of hybrid seed for our sample households declined from 35% to 28% (8.4 kgs to 6.7 kgs for
intensity among those using) between 2000 and 2004.

59

4. Model Specification and Estimation
4.1. Econometric Model

Input demand functions based on equation (7) were modeled to determine the
factors that drive farmer’s decision to use inputs and to assess how engagement in off-
farm work affects this decision. Separate regression models for fertilizer and hybrid seed
are estimated, each with aggregated and disaggregated Off-farm work types. The timing
of cash flow from the off-farm sector and farm input requirements are harmonized by
considering the impact of past earnings on current use of farm inputs. To ensure
identification of the coefficients of interest, we control for the economic incentives facing
the households, household resource endowments, investment in public infrastructure,
credit availability, other income sources and agrO-ecological and locational
characteristics of households.

Input prices were included to control for variations in input use as a result of
changes in economic incentives facing households. We included the previous season’s
price of maize based on a naive expectations model of farmer decision making. Previous
cash income from agriculture is included as a control for other potential sources of
income to finance input purchases, and also to capture the household’s capacity and
orientation towards agriculture. Presence of a major cash crop28 in the household was
included to capture how this affects input intensification Of food crops like maize.
Distance to the respective input seller was included to proxy for the cost of transport from

the input supplier to the farm.

 

28 Major cash crops include tea, coffee and sugarcane, all of which involve long term investments that
households cannot easily move in and out of.

60

The data used in this study run across areas of differing agricultural potential and
planting seasons; we include dummies to allow for the regression intercept to vary across
each. We expect input use to be higher during the ‘main’ season and in the high potential
areas as discussed in section 2.1. The inclusion of the long term (village) rainfall variable
helps control for heterogeneity within zones of broadly comparable agricultural potential.

To control for the availability of inputs through credit, we use membership in a
cooperative society or any such group as discussed earlier. It is noteworthy that these
groups tend to provide inputs on credit to cash crop growers, but experience has Shown
that there is a Spillover effect to cereal and other food crops. It is therefore expected that
households that are members of a group will have a higher likelihood Of using these
modern inputs and may use them more intensely when they do. The period dummy is
equal to one for 2004 and captures any trend in input use as a result Of external factors
common to all households.

We control for household resource endowments and characteristics using the
education, gender, and age of the head of household. Education is captured in a dummy
variable for whether the household head had acquired a primary school education or not.
We control for experience using age and include gender (male headedness) to assess
whether and how the regression intercept changes between male and female head of
household who is assumed to make decisions on input use. Consistent with other studies

(Lamb, 2003), our conceptual model assumes that input use and farm labor are

61

complements” in production, thus we include number of adult household members to
control for labor availability.

The model allows the coefficient Of off-farm work to differ across agricultural
potential, group membership and households with and without primary education. With
the exception of the interaction with group membership, we cannot form clear apriori
expectations on the other two variables, for several reasons, First, while education may
imply more specialization in off-farm work, the ability to get earnings from these
activities may also allow households to take on more risk from agricultural production.
However, based on extensive literature showing higher returns to education in the off-
farrn sector (Huffman, 1980; Yang, 1997), it is plausible to expect that, holding all other
factors constant, more educated households may prefer to invest their Off-farm earnings
outside their farms. Second, although households in high potential areas may generally
invest more in input use (given the higher expected returns), it may be difficult to isolate
the specific off-farm work effects from these general effects. Further, given the argument
presented earlier, we expect households with some group membership and hence access

to some credit, to rely less on their off-farm earnings to finance farm intensification.

Following the above discussion, the basic model for estimation is given by:

Zits = 30 +PIOFEits-r +Nits-1B2 + MitsB3 +YIits*0FEits-l +5od04t +€its i= lr-aN t=l,2 (3)

S=1, 2

 

‘9 Though not much additional labor would be needed during planting, demand for harvest and topdressing
(if any) labor would clearly go up. Also, timely weed control is a critical factor affecting fertilizer
profitability.

62

Where Zits represents different aspects of input intensification namely fertilizer and
hybrid seed use per acre for household i in period t and season 3. OFEitH represent
previous season’s off-farm earnings, Nita] include variables that control for other sources

of income in the previous season, Mits is a vector of all other exogenous variables

affecting Z which includes input prices, characteristics of the head of household, distance

variables, group membership and other locational and agrO-ecological characteristics of

the household, litS include variables in M that are interacted with off-farm earnings; d04t

is a time period dummy and Cit, is the composite error term.

4.2. Specification Issues
Zero-expenditure (non-adoption)

If every household in the sample were observed to have used the respective
inputs, estimation of model (8) would have been achieved through the standard panel data
methods (fixed or random effects). However, Table 1 showed that only 36% and 31% of
households used fertilizer and hybrid seed, respectively. Equation (8) can thus be

visualized as a latent variable30 model given by:

Ziits = 30 + 15101“ Eits-l + Nits-rllz + Mits I33 +Ylits*0FEits-r + 5od04t '1' €its

Such that Zits = Z*its if Z*its >0 and

 

3° Unlike in sample selection problems, we place less emphasis on the latent variable in such a comer
solution outcome given that our interest is in the conditional expectation of Z (Wooldridge, 2002 pp.520)

63

Zits = 0, otherwise

Thus our model becomes:

Zits = max (0, 130 + BIOFEits-r +Nits-1132 +Mits 133 + ‘Ylits*0FEits-r +5od04t +€its) (9)

Model (9) defines the usual Tobit model. This model however suffers from the
following major limitation. It postulates that the decision to use an input and the amount
used are defined by a single mechanism (Wooldridge, 2002). This implies that not only
does the same set of parameters and variables determine both the discrete probability of
adoption and the intensity of use, but that the magnitude Of effects are identical.

The “double hurdle” model helps to relax the above assumption. The specification
enables the modeling of two separate decisions in this case: the decision to use an input
and the intensity of use. To observe a positive level of input use, the model postulates that
two separate hurdles must be passed. First, the household must decide to use the input or
not, and second, conditional on the first hurdle, the household allocates some cash to

purchase a specified amount of the input. Model (9) can thus be defined using two latent

variables, Z‘itsl and Z’itszi
Z1kits]: Xian film. (10)

Ziitsz = Yits 1- +1lits (11)

Where Zfiitsl denotes the unobservable individual household propensity to use the

respective input as defined by a Probit model and Z3”; is a latent variable that describes

64

the intensity of input use. X and Y represent the vectors of explanatory variables that

affect the two decisions as given in model (8). Hits is assumed to be distributed as N(O,l)

and ma as N(0, 02).

Endogeneity:

We can potentially envision simultaneity of off-farm work and farm production
and investment decisions: while input use could depend on earnings from Off-farm work,
involvement in off-farm work could be triggered by financial need for farm inputs or
unemployment of family labor. In addition, involvement in Off-farm work could compete
for labor and capital with farming activities especially where input markets are missing.
To eliminate these potential endogeneity problems, we consider the impact of Off-farm
earnings during the previous season on current farm input use and intensification.

Given the difficulties in controlling for unobserved heterogeneity in non-linear
models like the ones in this study, we can expect potential biases in some of the estimated
parameters especially for those variables that may correlate with the farmer’s innate
ability and unmeasurable land characteristics e. g. inherent soil quality that may impact on
input use. One such variable would be education, whose coefficient may have an upward
bias, but given that this coefficient remains insignificant (see results in Table 2.3 and
2.4), the impact of this bias may be limited. The coefficient Of agricultural cash income
may be positively correlated with soil quality which may negatively affect input use.
This implies that this coefficient as Observed may be biased downwards. However, that
this coefficient remains positive and significant is an indication that any bias would only

reinforce the basic result.

65

4.3. Estimation

There are two formulations of the double hurdle model depending on the assumed
distribution of the second stage. Using the value of the log-likelihood, we rejected the
log-normal formulation in favor of the truncated normal regression. The advantage of the
truncated normal distribution version or the so called hurdle model of Cragg (1971) is
that it nests the usual Tobit, thus allowing us to test the Tobit formulation hypothesis.
Given the results of the likelihood ratio (LR) test in Table A2.2, the Tobit model
specification is rejected in both fertilizer models but not in the hybrid seed models.
Failure to reject the Tobit model implies that the Tobit results are not significantly
different from when the assumed restrictions do not hold and is thus equally well
specified for the hybrid seed models.

Under alternative assumptions, the two stages of the double hurdle model can be
estimated separately or jointly. Estimation of the two stages separately is based on the
assumption that there is no correlation between the errors in the two stages implying that
the two decisions are made independently Of each other. The LR test for this hypothesis
strongly rejects the composite model in favor of joint estimation which allows for
correlation between the two stages (see Table A2.3).

Following the discussion above, each of the two stages of input demand firnctions
for fertilizer and hybrid seed were estimated jointly using maximum likelihood
estimation (MLE) procedures. Although theory does not clearly point to the necessity of
imposing exclusion restrictions in the double hurdle model (as with the Heckman model),
we exclude distance to the respective input supplier in the second stage of the estimation.

This is plausible given that distance traveled may be largely a fixed cost for the second

66

hurdle, and is thus unlikely to affect the quantity decision3 1. These findings are consistent

with those of Ariga et al. (2006).

5. Empirical Findings and Discussion

Tables 2.3 and 2.4 present the joint MLE parameter estimates of both stages of
fertilizer and hybrid seed demand, respectively using aggregated off-farm earnings.
Given the failure to reject the Tobit hypothesis in the hybrid seed models, we report the
results from the Tobit model side by side and compare them. The results support the
hypothesis that fertilizer adoption decisions are driven by different mechanisms from the
intensity decision. This is especially so for variables like cash crop, previous agricultural
cash income, planting season, primary education, and gender of head, all of which Show
clear differences in their impacts between the double hurdle and Tobit model. For
example, having a male head seems to positively influence the decision to use fertilizer
but has no impact on the level used. On its own, the Tobit model predicts an overall
positive but insignificant impact of male headedness on fertilizer use. This coefficient is
however uniformly predicted for the hybrid seed model as seen in Table 2.4. A Similar
pattern is observed with the education variable.

It is noteworthy that both the Tobit and double hurdle models deliver comparable
estimates for off-farm work effects in both fertilizer and hybrid seed models. Overall, the
Tobit model unifome predicts (compared to the double hurdle) the impacts of more of

its variables in the hybrid seed model than it does with the fertilizer model. This evidence

 

3 ' The mean land cultivated for this sample is about an acre, implying relatively low amounts of fertilizer
and hybrid seed purchases (recommended DAP fertilizer and hybrid seed per acre are 50-75kg and 10kg
respectively). In addition, the distance variable turns out insignificant in the intensity models.

67

Table 2.3. Double Hurdle and Tobit Estimates for Fertilizer Demand (Aggregated Off-farm)

 

 

Double Hurdle Tobit
Adoption Intensity
Price of Fertilizer -0.1007** -0.0599*" -1.351 1”
(2.22) (5.04) (2.46)
Price of hybrid seed -0.0032 0.0048 -0. 1231
(0.15) (1.33) (0.68)
Price of other seed 0.0113" -0.0001 0.1180"
(2.02) (0.07) (2.27)
Daily Wage rate for farm labor -0.0127"”" 0.0003 ~0.2586"*
(2.19) (0.19) (3.69)
Price of maize (s-l) -0.l461"' -0.0247 1.5516“
(1.91) (1.51) (1.95)
Presence of major cash crop 0.8479 0.3619*** 16.4725**"'
(1.45) (3 .96) (3.26)
Agricultural cash income(s- 1) 0.0142“ "' * 0.0026* * * 0.0071
(3.24) (3.55) (0.26)
Off-farm eamings(s-l) 0.0673*" 0.0134*** 0.485?"
(2.65) (2.92) (2.76)
distance to fertilizer seller -0.1268*" -3.4813"*
(3.80) (4.91)
Main planting season 2.7515*" -0. 1296 33.354?"
(3.19) (1.62) (7.01)
Agricultural potential 3 .8 146*" 1.1250“ " 62.4628"*
(6.62) (10.84) (11.80)
Long term yearly average rainfall 0.0003 0.0002 -0.0195*
(0.20) (1.21) (1.82)
Age of head -0.0292** -0.0177"* -0.4974”*
(2.29) (7.61) (3.64)
Male head of household 1.0920“ 0.0501 4.6362
(2.57) (0.58) (0.98)
Number of adult members 0.0015 0.0383*** 0.9943
(0.02) (2.73) (1.31)
Primary education -0.0614 -0.1308* 2.0041
(0.14) (1.75) (0.48)
Group Membership 2.0549*" 0.4979*" 25.406?"
(4.29) (4.1 l) (3.99)
2004 period dummy 0.2349 ~0.4486"* 10.5849"I
(0.45) (3.06) (1.67)
off-farm*primary -0.003 1 -0.0009 0.0200
(0.34) (0.73) (0.29)
Ofi-farm*agric potential -0.0036 -0.0022 0.0365
(0.51) (1.57) (0.51)
off-farm*group membership -0.0662*** -0.0109*"' -0.5677*"
(2.61) (2.42) (3.25)
Constant 4.2869 4.7740‘" 0.7628
(1.03) (5.76) (0.02)
Observations 1832 1832

 

Absolute 2 statistics in parentheses; * significant at 10%; ** significant at 5%; “'* significant at 1%

 

Source: Author’s study

68

Table 2.4. Double Hurdle and Tobit Estimates for Demand for Hybrid Seed (Aggregated Off-farm)

 

 

Double Hurdle Tobit
Adoption Intensity
Price of Fertilizer -0.1390*"“" -0.0443*** -0.1783
(4.50) (3 .84) (1.64)
Price of hybrid seed 0.0032 0.0011 0.0138
(0.44) (0.35) (0.39)
Price of other seed 0.0088“I 0.0024 0.0046
(2.45) (1.55) (0.40)
Daily Wage rate for farm labor -0.0011 -0.0009 -0.0342**
(0.33) (0.55) (2.52)
Price of maize (s-l) 0.1196*" 0.0104 0.4809*"
(3.11) (0.61) (3.21)
Presence of major cash crop 0.4934 0.0904 4.0627*"
(1.50) (0.82) (4.08)
Agricultural cash income (s-l) 0.0045" 0.0000 0.0029
(2.26) (0.06) (0.60)
Off-farm earnings (s-l) -0.0015 -0.0028 -0.0029
(0.18) (0.68) (0.07)
distance to hybrid seed seller -0.0783"* -0.2663*"
(3.26) (2.58)
Main planting season 1.389?" -0.2487"* 7.5674*"
(3.86) (3.04) (8.36)
Agricultural potential 1.9443"* 0.492?" 9.7837"*
(7.48) (4.44) (9.77)
Long-term yearly average rainfall 0.0008 -0.0003 0.0004
(1.19) (1.27) (0.20)
Age of head -0.0082 -0.0042 -0.0678***
(1.16) (1 .40) (2.59)
Male head of household 0.5595" 0.2459**"‘ 1.9199"
(2.50) (2.59) (2.08)
Number of adult members 0.0254 0.0307" 0.1660
(0.66) (2.02) (1.13)
Primary education -0.3034 -0.0209 -0.9143
(1.37) (0.25) (1.15)
Group Membership 0.8108*** 0.2285" 3.7035*"
(2.89) (1.80) (3.07)
2004 period dummy -1.8059"* -0.8286*" -2.0115
(5.20) (5.95) (1.63)
off-farm‘primary 0.0032 -0.0007 0.01 18
(0.90) (0.60) (0.86)
off-farm‘agric potential 0.0062“ 0.0024 0.0220
(1.82) (1.40) (1.41)
Off-farm*group membership -0.0071 -0.0007 -0.0343
(0.91) (0.19) (0.86)
Constant 1.0163 3.3467*** 2.3001***
(0.50) (4.35) (70.33)
Observations 1 832 1 832

 

Absolute 2 statistics in arentheses; "' si ificant at 10%; ** si nificant at 5%; "‘** si ificant at 1%
P gn g gn

 

Source: Author’s study

69

plus the general failure to reject the Tobit specification in the hybrid seed models, is not
unexpected, given the fact that we expect much lower variability of hybrid seed use per
acre, compared to fertilizer. This indicates a possible domination of the adoption decision
over the intensity one and thus no Significant difference in the two decisions. Table A2.4
offers statistical support for this argument: the coefficient of variation for the value of
fertilizer use per acre (among those using) is 1.59, while that for hybrid seed is 0.8832.

Given the above, we now focus on the double hurdle results, paying special
attention to the off-farm work effect and its interactions with primary education,
agricultural potential and group membership. We first discuss the results using the
aggregated off-farm earnings (Model set I) and then briefly with the disaggregated off-
farm work types (Model set 11). By and large, the results of the two sets of models are
plausible with quite stable coefficient estimates between the aggregated and the
disaggregated models. A few key points are however worth noting:

First, the results Of the test for the Tobit hypothesis have implications for the
estimation methods used, especially for fertilizer. The strong evidence of rejection for the
restrictions implied by the Tobit model may cast doubts on estimation results that assume
a single mechanism for both the adoption decision and the intensity of use. This
underscores the importance of using appropriate estimation methods.

Second, because of the interaction terms, the coefficients on Off-farm earnings
reflect the effect of that income among households whose heads did not complete
primary education, who live in lower potential agricultural areas, and who are not

members of any cooperative or group. The coefficients on the interaction terms show

 

’2 For input quantities, the coefficient of variation is greater than one in nearly all cases of fertilizer and less
than one for hybrid seed.

70

how the above off-farm work effects differ for households with primary education, those
in the high potential areas, and those with group membership. Results for the combined
effects Of primary education, agricultural potential and group membership and their
significance are also presented.

Third, the variables for cash earnings fiom agriculture and from off the farm each
embody two factors which can influence household decisions on agricultural
intensification. First, they directly capture cash availability with which to purchase the
inputs. Second, each variable reflects past decisions of households regarding how to
allocate their resources and captures the learning that resulted from these decisions.
Households with high incomes from off-farm activities are likely to have a stronger
orientation towards them and a greater level of knowledge usefirl in such activities.
Likewise, those with high cash income from agriculture are likely to have a stronger
orientation towards agriculture and to have developed greater capacity for it as a result.
Indeed, a household’s agricultural cash income may reflect the overall strategy and
orientation towards cash crops and production for the market in general.

Finally, most of the households using hybrid seed tend to also use fertilizer (see
Table A2.4). Thus, while the two inputs are likely complements, the use of hybrid seed
more often implies the use of a broader input package and thus may be a stronger
indicator of intensification than is the simple use of fertilizer. The effects of this
difference between the two inputs are clear in the data and are discussed in the results. In
addition, and as discussed in the beginning of this section, fertilizer use per acre is more
variable than is hybrid seed use. This difference again presents itself in the various results

to which we now turn.

71

From Table 2.3, previous off-farm earnings have a positive effect on both the
adoption of fertilizer and the intensity of its use. This implies that, in general and holding
other factors constant, households with higher previous Off-farm earnings have a higher
probability of using fertilizer and use more when they do. In this case, off-farm earnings
could be viewed as acting to relax the cash constraint on fertilizer use.

The presence of a household head with primary education does not affect the
probability of using fertilizer. It does however affect negatively (at 10% significance), the
intensity of use. As expected, households in the high potential areas tend to have a higher
probability and intensity of using fertilizer. This is because of the expected higher returns
to input use in these regions compared to the lower potential areas. The results in Table
2.3 and 2.5 (below) clearly show that fertilizer adoption and use is greater and highly
significant in high potential areas (3.8146 for adoption and 1.1250 for intensity), but that
the (still positive and significant) effects (3.7319 and 1.0745 respectively) are slightly
less at mean levels of off-farm earnings. Membership in a group seems to increase
significantly the probability of using fertilizer and the intensity of use, an Observation

consistent with expectations.

Table 2.5. Wald Test for the Combined Effects in the Fertilizer Models (Aggregated Model)

 

 

Adoption Model Level Model
Variable Combined Wald Stat p-value Combined Wald Stat p-value
Effect Effect
Primary education -0.1326 0.02 0.8792 -0.1515 3.18 0.0744
Agric potential 3.7319 44.04 .0000 1.0745 1 17.15 .0000
Group Member 0.5349 18.15 .0000 0.2476 12.81 .0003

 

Source: Author’s study

72

It is important to note that the positive effect of off-farm work on the probability
and intensity of using fertilizer does not vary significantly with education of head. In
addition, the hypothesis that the impact of off-farm work varies across agricultural
potential is rejected for both fertilizer adoption and intensity models. The coefficient of
this interaction term is insignificant in both models.

The impact of off-farm earnings varies Significantly between households with
membership in a farmer group and those without such membership. The results in Table
2.3 Show that households belonging to a group are much less likely to allocate their off-
farrn earnings to fertilizer adoption and allocate less when they do. In fact, the coefficient
of off-farm income in fertilizer adoption nearly vanishes for households with group
membership (.0673-.0662) implying that the positive off—farm effects on fertilizer
adoption are minimal for such households. This is plausible given that group
membership, especially in producer cooperatives, is a major source of credit or direct
receipt of inputs for agricultural production. In this case, off-farm earnings may not be
needed to relieve cash constraints for input purchase.

The high and significant Off-farm work effects on fertilizer adoption for
households without group membership imply that Off-farm income relieves credit
constraints to agricultural intensification within such households. This result is consistent
with findings from Chile that ‘targeted credit’ (and off-farm employment) help to
overcome the capacity barrier allowing increased agricultural intensification and reduced
overgrazing (Swinton et al., 2003). Note that the coefficient on the intensity model is also

positive, implying that once the decision to adopt has been made, the off-farm work

73

effects on fertilizer intensity remain positive for both group and non-group members
though clearly reduced for group members.

For hybrid seed models, the impact of previous off-farm earnings is insignificant
in both the adoption and intensity models (See Table 2.4). This implies that increased off-
farm earnings have no impact on hybrid seed use in maize. While this result is clearly
surprising given the fertilizer result, our data does however shed some light. First, Table
A24 in the appendices shows that, while only 68% of households that used fertilizer also
used hybrid seed, about 80% of hybrid seed users also used fertilizer. These differences
are more pronounced in 2004, where only about 59% of households using fertilizer also
used hybrid seed compared to 85% of hybrid seed users who also used fertilizer. These
results may indicate that, for most households, the use of hybrid seed implies using
fertilizer as well, a combination which may imply deeper crop intensification and
orientation in maize, and one possibly not attractive to those with higher earnings from
Off-farm work.

The argument above is partly supported by the regression results of the Probit
model on the combined use of both inputs presented in Table A2.5. These results show
that previous off-farm earnings have no significant impact on current use of the combined
fertilizer and hybrid seed package. The implication could be that while households may
be willing to invest their off-farm earnings into partially intensifying their maize through
use of some fertilizer, using fertilizer plus hybrid seed may represent a substantially
greater commitment and orientation in maize. This argument is indicative given that the

coefficient of agricultural cash income is positive and significant in the hybrid seed

74

I.33 This coefficient is also significant in the combined fertilizer and hybrid

adoption mode
seed adoption model (Table A2.5). It is thus possible that only those households with a
strong orientation towards agriculture and more specifically toward market oriented crops
are willing to invest in hybrid seed.

It is also noteworthy that hybrid seed use and intensity declined over the study
period, implying that the hybrid seed models could be missing out on some important
factors that could have contributed to the decline. An example here could be the limited
supply of certified hybrid seed and the grth of informal seed marketing that have
resulted in declining quality of seed as earlier discussed.

The education variable remains insignificant in the two hybrid seed models which
is consistent with earlier findings. As expected, and holding other factors constant,
households in the high potential areas have a higher probability of using hybrid seed, and

use more intensely (plant at higher density) when they do. AS Shown in Table 2.6, these

effects change minimally at mean levels of off-farm earnings.

Table 2.6. Wald Test for the Combined Effects in the Hybrid Seed Models (Aggregated

 

 

Models)
Adoption Model Level Model
Variable Combined Wald Stat p-value Combined Wald Stat p-value
Effect Effect
Primary education -0.2299 1.87 0.1713 -0.0369 0.04 0.8333
Agric potential 2.0866 56.74 .0000 0.5473 20.34 .0000
Group Member 0.6478 8.46 .0036 0.2124 3.09 .0788

 

Source: Author’s study

 

3’ That this coefficient remains insignificant in the hybrid seed intensity model is not surprising as earlier
discussed.

75

As with fertilizer models, the coefficient of off-farm work in hybrid seed models
does not vary significantly with education. This is not surprising given that off-farm work
and education variables are both insignificant in the adoption and the intensity models.
The off-farm work effect does however vary across agricultural potential for the adoption
of hybrid seed (at 10% significance level). Households in the high potential areas have a
higher probability of allocating their off-farm earnings to using hybrid seed compared to
their counterparts in the lower potential areas.

The impact of Off-farm earnings on hybrid seed use and intensification does not
Significantly differ with group membership as in the fertilizer models. This result is not
surprising given that most cooperatives deal with cash crops where fertilizer is the key
input and Opportunities do exist for diverting this fertilizer to maize and other food crops.
Since hardly any such groups are specific for maize nor provide hybrid maize seed,
belonging to a group is less likely to have a bearing on whether Off-farm earnings are
allocated for hybrid seed purchase. It is however plausible that belonging to a group may
ease the financial constraints on the entire input purchase allowing households to more
easily purchase those inputs not offered by the cooperatives. This is consistent with our
finding that, on its own, group membership significantly increases both the probability of
using hybrid seed and the intensity of use.

To identify the impact of off-farm earnings on input intensification, it is important
to control for other sources of cash income that could potentially be used to finance input
purchases. The variable for cash earnings from agriculture in the previous season has
positive and significant effects in all the models except intensity of hybrid use as

previously discussed. This implies that households that earn high incomes from farmng

76

tend to continue to earn more through modern input use and intensification. In addition,
households with major cash crops tend to intensify more in their maize production. This
is evident given the highly Significant and positive coefficient of cash crop in the
fertilizer intensity models. This coefficient is also nearly Significant in both fertilizer and
hybrid seed adoption models. This finding is consistent with earlier studies that find a
positive relationship between cash and food crop intensification within households (see
discussions on this in Kelly et al., 1996; Govereh and Jayne, (1999); Freeman and Omiti,
2003).

AS expected, distance to the nearest input seller negatively and significantly
influences the probability of using each of the inputs. It is noteworthy, however, that the
average distance to the nearest fertilizer seller has declined from 4.7 km in 2000 to 3.2
km in 2004 and from 4.5 to 2.9 for hybrid seed which could be a result of improved input
delivery systems after liberalization, a point well advanced by Freeman and Omiti (2003)
and Ariga et al. (2006).

Most of the other variables we used as controls generally behaved as expected,
with a few exceptions. The price of fertilizer was found to negatively and significantly
influence its adoption and intensity of use, and also that of hybrid seed. This is plausible
given that most households using hybrid seed also used fertilizer; while the fertilizer
adoption decision can be made independently of the hybrid decision, use of hybrid seed
typically implies the use of fertilizer. The price of hybrid seed however remains
insignificant in both the fertilizer and hybrid seed models. Price of other seed was
expected to be positive in hybrid seed and most likely in fertilizer regressions (for both

adoption and levels). The results meet these expectations in both adoption models and

77

remain insignificant in the intensity models. The previous season’s maize price is positive
and significant in the hybrid seed adoption model and has no impact on the intensity of
hybrid seed. That this coefficient remains negative and significant in the fertilizer
adoption model is both puzzling and an issue of further investigation.

The main season variable is positive and significant in both adoption models as
expected, but it turns out negative and significant in the hybrid seed intensity model.
While it may be possible that households tend to follow recommended input rates when
the weather is unfavorable than when it is, this result may also reflect the fact that the
planting season variable only runs across regions given the inability to use data for both
seasons from the same households. Long-term mean rainfall is insignificant in both
fertilizer and hybrid seed models. While this may seem unexpected, it is possible that its
effects are captured through related variables like agricultural incomes, the season
variable, and agricultural potential.

As expected, the number of adult household members positively and significantly
influences the intensity decisions in both fertilizer and hybrid seed models. Other
characteristics of the household, for example, age and gender of the head generally

behaved according to expectations.

Tables 2.7 and 2.8 present the regression results with disaggregated off-farm
earnings as described in section 2.2 (the results of the combined effects are presented in
Table A26 in the appendices). This analysis was done to identify which of the different
types of off-farm work drives reinvestment decisions. As mentioned earlier, other

coefficients remain relatively stable across the aggregated and disaggregated models.

78

Table 2.7. Double Hurdle and Tobit Estimates for Fertilizer Demand (Disaggregated Off-farm)

 

 

Double hurdle
Adoption Intensity Tobit
Price of Fertilizer -0.1008** -0.0587"‘** -1.3221"'*
(2.21) (4.88) (2.40)
Price of hybrid seed -0.0125 0.0036 -0.1434
(0.59) (0.94) (0.80)
Price of other seed 0.0103" 0.0005 0.1235"
(1.87) (0.54) (2.38)
Daily Wage rate for farm labor -0.0131" -0.0000 -0.2560*"
(2.26) (0.01) (3.66)
Price of maize (s-l) -0.1708*"' -0.0269 1.6433"
(2.27) (1.63) (2.06)
Presence of major cash crop 1.0338" 0.3361"* 17.139?"
(1.81) (3.62) (3.39)
Agricultural cash income (s-l) 0.0166‘" 0.0030*** 0.0061
(3.82) (4.13) (0.22)
Informal/business income(s- l ) -0.0050 -0.0009 -0.0235
(0.74) (0.81) (0.41)
Salaried/pension income (s-I) 0.0638*" 0.0128**"' 0.6999***
(2.75) (2.63) (2.83)
Remittances (s-l) -0.0030 -0.0100"‘ -0.5138*
(0.22) (1.71) (1.79)
distance to fertilizer seller -0.1287*** -3.5203“”
(3.83) (4.94)
Main planting season 3.0145"" -0.1120 33.5910”"‘
(3.52) (1.41) (7.06)
Agricultural potential 3.8296**"‘ 1.1900"* 62.8771 *"
(6.64) (12.11) (12.32)
Long-term yearly average rainfall 0.0004 0.0001 -0.0198"I
(0.30) (0.58) (1.85)
Age of head -0.0308" -0.0174”* -0.4620***
(2.41) (7.29) (3.33)
Male head of household 1.2094*" 0.0698 4.0637
(2.91) (0.80) (0.86)
Number of adult members -0.0120 0.0323" 0.9351
(0.19) (2.31) (1.23)
Primary education 0.0254 -0.0710 5.1 122
(0.06) (0.98) (1.30)
Group Membership 1.2774"* 0.3111*" 19.7213""‘
(3.10) (2.94) (3.44)
2004 period dummy 0.1497 -0.4457*** 105744"
(0.30) (2.99) (1.67)
salary*primary -0.0143 -0.0049** -0. 1701
(1.10) (2.50) (1.57)
salary‘agric potential -0.0041 -0.0051*** -0.0186
(0.49) (2.69) (0.20)
salary*group membership -0.0511"”" -0.0048 -0.5970**
(2.42) (0.97) (2.53)
Constant 6.4953 5.1394" ** 3 .9669“ "
(1.51) (5.94) (135.23)
Observations 1832 1832

 

Absolute 2 statistics in parentheses; * significant at 10%; ** significant at 5%; *** significant at 1%

 

Source: Author’s study

Table 2.8. Double Hurdle and Tobit Estimates for Hybrid Seed (Disaggregated Off-farm)

 

 

Double Hurdle
Adoption Intensity Tobit
Price of Fertilizer -0.1408*** -0.0491*** -0.1776
(4.53) (4.36) (1.63)
Price of hybrid seed 0.0034 0.0017 0.0144
(0.47) (0.54) (0.41)
Price of other seed 0.0095*** 0.0028" 0.0050
(2.62) (1 .80) (0.44)
Daily Wage rate for farm labor -0.0024 -0.0016 -0.0340**
(0.73) (1.06) (2.51)
Price of maize (s-I) 0.1202*** 0.0099 0.4797***
(3.12) (0.59) (3 .20)
Presence of major cash crop 0.5035 0.0726 4.1290"*
(1.52) (0.67) (4.14)
Agricultural cash income (s-l) 0.0054"* 0.0005 0.0028
(2.65) (0.70) (0.58)
Informal/business income(s- 1) -0.0037 -0.0028* "' -0.0139
(1 .3 7) (2.29) (1.29)
Salaried/pension income (s-l) 0.0009 -0.0005 -0.0162
(0.07) (0.08) (0.27)
Remittances (s-l) 0.0006 0.0063 -0.0151
(0.05) (1.03) (0.29)
distance to hybrid seed seller -0.0755*** -0.2676*"
(3.15) (2.58)
Main planting season 1.4204*** -0.2514*** 7.5574*"
(3.96) (3.06) (8.32)
Agricultural potential 2.0666"* 0.5615*** 10.1022***
(8.30) (5.71) (10.47)
Long-term yearly average rainfall 0.0007 -0.0003 0.0005
(1.06) (1.50) (0.26)
Age of head -0.0082 -0.0048 -0.0678“
(1.16) (1.61) (2.55)
Male head of household 0.5300" 0.2332" 1.9080"
(2.35) (2.48) (2.05)
Number of adult members 0.0168 0.0215 0.1534
(0.44) (1.42) (1 .04)
Primary education -0.2785 -0.0420 -0.6595
(1.34) (0.53) (0.87)
Group Membership 0.7068*** 0.1885“ 3.2572***
(2.86) (1.71) (2.98)
2004 period dummy -1.7974*** -0.8529""' -2.0208
(5.17) (6.25) (1.63)
salary*primary 0.0039 -0.0020 0.0091
(0.66) (1.1 1) (0.40)
salary’agric potential 0.0072 0.0028 0.0187
(1.52) (1.29) (0.89)
salary‘group membership -0.0101 -0.0018 -0.0176
(0.93) (0.30) (0.30)
Constant 1.2008 3.5935*" -14.7538*
(0.59) (4.78) (1.90)
Observations 1832 1832

 

Absolute 2 statistics in parentheses; * significant at 10%; *" significant at 5%; *** significant at 1%

 

Source: Author’s study

For the fertilizer demand models, we frnd that salaried work and pensions drive
the positive impact of off-farm income on both adoption and intensity of use: informal
business income is insignificant with small coefficients. This result is consistent with our
conceptual model and mirrors the bivariate result from Table 2.2, which showed that
households with salaried wage and pension income were more likely to use both inputs,
while those with the other off-farm activity types were less likely to do so. The combined
effects show similar patterns as with the aggregated model.

For hybrid seed, all three off-farm work types have insignificant coefficients in
the adoption models. The negative and Significant impact of informal business on the
intensity model is consistent with our expectations: use of both fertilizer and hybrid seed
increases the risk of farm earnings, which, coupled with the high correlation with
informal earnings, may reduce input use.

The results from this study indicate that previously received remittance income
has no bearing on input adoption decisions. Conditional on using fertilizer, households
with higher remittance income tend to use less. This result may seem to deviate from that
by Collier and Lal (1984) as discussed earlier. However, the kind of remittance in Collier
and Lal (1984) came strictly from wage employment and thus could be more regular and
stable. In our case, given that we have no information on the remitter and the kind of
activities they engage in, it is not possible to draw firm conclusions from this result.

The fact that salary and pension income is positive and significant on fertilizer
adoption and intensity but insignificant on both adoption and amount of hybrid seed used
suggests that these households are using some of their off-farm earnings to purchase

fertilizer, but they are not making the additional investment of money, time, and

81

knowledge to adopt the hybrid seed/fertilizer package. As with the aggregated off-farm
models, the impact Of salaried income on input intensification is greater for households
with no group membership and thus limited access to credit. This result is again
consistent with arguments by Collier and Lal (1984) that urban wage employment is an
important means of breaking both the credit and risk constraints upon agricultural

income.

6. Summary and Conclusions

The results from this study suggest differences in the impacts of off-farm earnings
on input use and intensification across different inputs and off-farm activity types. The
emerging picture is that, holding prices, other incomes, locational and relevant household
characteristics constant, previous off-farm earnings have a positive impact on fertilizer
use for maize producing households in Kenya. This impact is greatest for households
without any group membership thus indicating the importance of off-farm work in
relieving cash constraints for those households who have no access to other forms of
credit.

The impact on hybrid seed is however insignificant, suggesting that even though
households with high Off-farm earnings tend to use more fertilizer for their maize, using
hybrid seed (plus fertilizer) may imply deeper crop intensification and orientation in
maize, and one possibly not attractive to those with higher earnings from Off-farm work.
Off-farm earnings can thus be used to relax the cash constraint on farming, but only up to
some point, beyond which such households appear likely to shift their resources to other

uses perhaps with higher returns than agriculture.

82

Further, the presence of a regular source of earnings in form of a salary or pension
seems to be the driving force behind any reinvestment behavior that does occur as
originally hypothesized. This is consistent with our conceptual model, given that salaried
wages and pension are relatively stable and have low correlation with farming compared
to informal business and remittance income. Again, just as with overall off-farm work,
households with salaried income may find it optimal to invest some of their earnings to
intensify their maize production, but may not be willing to go all the way at which point
the two activities act as competitors for the available labor and capital resources.

The above results for Off-farm income are in stark contrast to the effects of
agricultural cash income which is positive and significant in all regressions except for the
level of hybrid seed use, an exception which is not surprising given discussions earlier in
the paper. Controlling for all cash income, the growing of a cash crop seems to positively
affect maize intensification. This is consistent with substantial other empirical evidence
regarding the Spillover effects of cash cropping on food crop production. Education of the
household head consistently has a negative effect on maize intensification, again
consistent with past literature showing that returns to education are higher off-farm than
on-farm, and more educated households as a result allocate more of their resources to Off-
farm activities.

This paper provides empirical evidence of the importance Of certain types of off-
farm work in relaxing the credit- and risk constraints that typically limit agricultural
intensification in Kenya. As regards policy, a multifaceted approach that considers other

contraints to intensification, especially in regards to technology generation, returns to

83

input use, input delivery systems and effectiveness Of extension, must be considered in
drawing policy recommendations.

Given the results of this study, firrther research on other major crops may help in
generating clear patterns, and hence conclusions. Additional important questions for
research would be whether off-farm earnings are reinvested in agriculture through
purchase of farm capital, commercialization or other non-income generating activities
e.g. education, health which too may have an impact on farmng and off-farm activities
but in the long-run. Further, it would also be important to understand how the household

member earning the income affects its reinvestment into agriculture.

84

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88

ESSAY 3: OFF-F ARM LABOR MARKET DECISIONS, MIGRATORY
LABOR AND AGRICULTURAL SHOCKS FOR RURAL
HOUSEHOLDS IN KENYA

Abstract

This paper analyzes the determinants of participation and earnings fiom the off-farm
labor market for rural households in Kenya. We specifically explore how these rural
households respond to risky agricultural production environments and existence of ex
post adjustments in off-farm labor supply in response to unexpected rainfall shocks.
While controlling for a wide range of educational, demographic, and other locational
factors, we look at how long-term weather risks and specific rainfall shocks influence a
household ’s decision to engage in the ofl-farm labor market and on the earnings
generated from such labor. Results indicate that these rural households engage in ofl-
farm work as a long-term strategy to deal with anticipated weather risks to their farming
operations. When examining off-farm work as a whole, we do not find adjustments in ofl-
farm labor supply as a result of specific, unexpected rainfall shocks. A disaggregated
analysis does, however find greater reliance on remittance income and petty agricultural
wage labor in response to such unexpected short-term rainfall shocks. Holding other
factors constant, and conditional on participation, households in areas with a more
productive local agriculture tend to earn more from off-farm work especially in self:-
employment than those living in regions with a less productive agriculture. As expected,
a vibrant local economy in form of public investment does increase the probability of
participation.

Key words: Off-farm labor market; agricultural shocks; rural economy; Kenya

89

1. Introduction and Problem Overview

The increasing importance of off-farm employment for rural households in
developing countries has been widely documented (Barrett et al., 2001a; Barrett et al.,
2005; Janvry and Sadoulet, 2001; Lanjouw and Lanjouw, 2001; Lanjouw et a1, 2001;
Reardon, 1997). In the past, rural development strategies and policies have emphasized
increasing farm productivity through use of modern technologies as a way out of poverty.
The effectiveness of this strategy has become a question of debate in the literature as
poverty rates in Sub-Saharan Africa continue to be high among rural communities and
agricultural productivity stagnates over time. Poverty rates are also found to be high in
low agricultural potential areas that are difficult to reach directly with interventions
targeted towards the farm sector. The off-farm sector could thus be a potential entry point
in such areas. Further, research has shown that most households in rural Africa tend to
earn larger shares of their income from off-farm employment. These findings point to the
important role that Off-farm employment can play in poverty reduction as enumerated in
vast literature.

AS in many other rural economies of developing countries, most rural households
in Kenya combine farming with off-farm work for their livelihoods. The nature of rural
off-farm work varies from high end salaried wage labor (such as teachers and doctors)
and profitable business enterprises to low wage labor and marginal businesses best
viewed as part of household survival strategies. A small proportion of households appear
not to engage in Off-farm work at all. The fact that the type and level of involvement in
off-farm work is unequally distributed across households indicates the importance of

understanding the main drivers of the different types of Off-farm activities. Of major

90

importance is an understanding of the reasons why rural farm households diversify into
Off-farm work. This is important if gainful advances are going to be made to poverty
reduction through expansion of off-farm Opportunities to the poor.

Although there is mixed evidence as to the reasons rural households diversify
their farming activities into some off-farm employment as reviewed in Goetz and
Debertin (2001) and Kimhi (2000), most studies agree that in most rural areas of
developing countries, Off-farm earnings supplement family income and are important to
both low and high income households (Davis, 2003; Barrett et a1, 2005). Even in
developed rural economies, studies have Shown that farmers View off-farm work as a
stable long-run combination with farming (Kimhi, 2000). According to Fuller (1991),
multiple job-holding is a key dynamic of rural systems. It is a flexible mechanism for
adjusting to changes in agriculture, family needs and the external environment. Although
uncommon outside of agriculture, multiple job—holding among farm households in
modern farming history has been the norm (Fuller, 1991) rather than the exception.

Barrett et al. (2001a) analyses different motives that prompt households to
diversify into Off-farm work and classifies them into a set of push and pull factors. From
the push factor perspective, Barrett et al. (20013) argues that diversification is driven by
limited risk-bearing capacity and climatic uncertainty, among others. This argument is
consistent with literature documenting the use of off-farm labor supply to deal with risky
production environments (see Lamb, 2003 for a discussion Of other mechanisms for
dealing with production risks in developing countries). Using mainly data from rural
India, Kochar (1995, 1999), Rose (2001) and Lamb (2003) Show that farm households

respond to farm production shocks through supply of labor to the Off-farm labor market.

91

In this study, we use data from rural households in Kenya to analyze the influence
of agricultural and agro-ecological factors in facilitating access to and earnings from the
off-farm labor market. As with Rose (2001), we look at how farm households respond ex-
ante to risky production environments and ex-post to unexpected rainfall shocks, while
controlling for a wide range of educational, demographic, and other locational factors.
We also consider the extent to which access to and earnings from off-farm work depend
on the dynamism of the local agricultural economy. Given that off-farm work
encompasses a great diversity of activities, we disaggregate the results based on different
types of off-farm work to understand household response and constraints to each.

A few empirical studies have examined the nature and role of rural off-farm work
in poverty reduction in Kenya (Barrett et al., 2001b; Barrett et al., 2005; Collier and Lal,
1986; Hoddinott, 1994). Most of these studies address particular aspects of the Off-farm
rural labor market. Barrett et al. (2001b) emphasized the importance of food-for-work
transfers on household liquidity constraints. In a cross-country study on income
diversification strategies, Barrett et al. (2005) includes a case from rural Kenya in which
they point out the important role played by inter-household heterogeneity in constraints
and incentives. Hoddinott (1994) looks at determinants of migration using data from
some villages in Western Kenya. Other studies like House and Rempel (1976) and Manda
et al. (2006) have looked at the determinants of earnings in the labor market, but focus on
urban areas. Most of such earlier studies also tend to concentrate on wage labor, leaving
out self-employment and migratory labor.

This study makes various contributions to the existing literature. First, we use a

relatively large, representative sample of rural households across all agricultural zones of

92

Kenya to explore determinants of participation in off-farm work. Second, we add to the
previous literature on off-farm work in rural Kenya by looking at whether and how long-
terrn weather risks and specific, unexpected rainfall shocks influence labor allocation to
the off—farm labor market for these rural households. As mentioned above, we
disaggregate into wage labor34 and self-employment35 so as to consider the main drivers
of each. We also analyze agricultural wage labor viS-a-vis other self-employment
activities to determine any divergent patterns. Since remittance income from migratory
labor is an important source Of income for some rural households, we also consider the
factors that affect the likelihood that a house will receive some remittances and the
amounts received. We also look at the role of sample selection bias in these models and
possible implications for estimation.

The rest of the paper is organized as follows: Section two discusses the
conceptual approach and the empirical strategy adopted in the paper. The data used in the
study is discussed in section three. The econometric model and other estimation issues
are presented in section four. Section five presents the empirical results and discussion,

and section 6 provides a summary of the findings and main conclusions.

 

3"In this paper, we use salaried employment and wage labor interchangeably to imply any regular paid job.
We also use informal business and self employment interchangeably to define household-owned trade and
business activities.

35 Though self employment typically entails sale of goods and services, we use a general term for the off-
farm labor market to imply both wage labor and business activities.

93

2. Theory and Empirical Approach

2.1. Conceptual Approach

We consider a rural farm household that combines production, consumption and
labor supply decisions. Following derivations well enumerated in Huffman (1991) and
Singh et al. (1986), a general supply of labor function to the off-farm labor market is

generated and can be summarized as:

L0=L0 (W0 P.I.H. G) (1)
where L0 represents individual household’s supply of labor to the off-farm labor market,

wo is the off-farm wage, P represents the economic incentives in the form of farm input

and output prices faced by the household at the farm level, I is a measure of household
wealth, H is human and other household characteristics, and G represents the state of the
local economy and local labor market characteristics. For a rural economy, we expect

wages received Off the farm to depend on human capital endowment, the state of the local
economy, the demand for labor (DL, which is derived from the demand for off-farm
goods and services, DO), and labor supply in the local area (SL). Thus our wage offer
equation would become w0= f (H, G, DL, SL) where H and G are as earlier defined.

Demand for off-farm goods and services (DG) depends upon the overall income in

the area, which for predominantly agricultural areas would depend heavily on the
performance of the farm sector in the short- and long-term. Thus the environment of the

farming community as dictated by agro-ecological conditions and weather related risks

are key. The local labor supply (SL) will also depend on the ability of the farming sector

94

to keep labor employed, which is again dependent on the weather and other agro-
ecological conditions. We characterize the environment of the farming sector using three

variables: 1) the distribution and riskiness of the rainfall regime as given by the long-term

rainfall average (R) and its standard deviation (SD), 2) the rainfall shock as defined by
the previous main season’s rainfall deviation from the long-term mean (DV)36 and 3) the

productivity of local agriculture as given by the mean district value of per capita
agricultural production (Vad ). Incorporating the above factors in the labor supply

function (1) above, we get:
L0 = L0 (wo {H,G, DL [DG (E, SD,DV,Vad ,M)J,S L(ii, SD,DV,V,§’ N)} P, 1,H,G) (2)

where M and N are other factors that affect DG and SL respectively. SO, how do the

variables that describe the farming environment affect the supply Of labor to the off-farm
labor market? More specifically, do rural households engage in Off-farm work as an
adaptation to the risky environment they live in, and how do they adjust ex-post to
unexpected weather shocks? Taking first order conditions with respect to these variables

of interest, we get:

(3)

 

 

6L0 _ OLO OwO ODL ODG +Ow0 asL
ODV Owo ODL ODG ODV asL ODV

 

’6 DV=R,-, - R where j stands for village and t is period.

95

_.:OwODOD _aS ._
OR 0 LGOR LOR

 

 

(4)

OLO _OL0 OwO ODL ODG OwO asL
aVad 5W0 50L 5190 6V0“ aSL aVa"

 

 

(5)

All three equations are mathematical representations of simple demand/supply
frameworks. In each case, the first term on the right hand side represents the change in
the quantity of labor supplied in response to a change in local wage rates. The terms in
parentheses expresses the change in local wage rates as the sum of two changes: the
change due to a shift in the demand for labor (driven by a shift in demand for local goods
and services), and the change due to a shift in the supply of labor, each in response to the
variable of interest: a rainfall shock in (3), long-term mean rainfall in (4), and local
agricultural productivity in (5). Focusing on the effect of a rainfall shock, a negative

rainfall deviation will typically affect farm outcomes negatively, thus shifting back the
ODG

effective demand for off-farm goods and services (— ODV G> 0). Decreased demand for off-

farm goods and services will reduce demand for off-farm labor, causing off-farm wages

to decline (assuming an upward-sloping supply of labor curve, implying-SEO— > 0).
L

On the other hand, and as a push factor, a negative rainfall Shock will generally

increase the supply of labor to the local Off-farm labor market as a coping strategy (thus

3%; < 0)- Increased labor supply In the local market will have a negative impact on off.

farm wages as long as the demand curve is negatively sloped (632)—0- < 0). Thus we find
L

96

that the overall impact of a negative rainfall shock through both the demand for and
supply of labor is a reduction in local wage rates.
The impact of this reduction in wage rates on the quantity of labor supplied off

the farm (OLO /Ow0 ) will depend on 1) the elasticities of demand and supply of labor37

and 2), the magnitude of the Shifts in demand and supply of labor. The first point is
illustrated in Figure 3.1. The value of L0 is identical in each of the four panels, and

supply and demand shift by exactly the same horizontal distance in every case. The only
thing that changes is the elasticity of supply (on the left) and the elasticity of demand (on
the right). More elastic supply increases the likelihood that quantity of labor supplied will
decrease as a result of the shock, while more elastic demand increases the likelihood that
it will increase.

The magnitude of shifts in the demand and supply of labor are positively related
to the share of local incomes generated from agriculture. Thus, although a negative
rainfall Shock is expected to decrease local Off-farm wages, the exact impact on the
supply of labor to the Off-farm labor market may be indeterminate a priori and may be
different for different regions and households. This means that the change in off-farm

earnings is also indeterminate and affected by the factors discussed above.

 

’7 See a graphical illustration of how the elasticities of demand and supply would affect the quantity of
labor supplied to the off-farm labor market later in this section.

97

Figure 3.1: Effect of the Elasticities of the Supply and Demand for Labor on the

Quantity Supplied
Effect of elasticity of supply Effect of elasticity of demand
w 30 s. w 30 s.

  
   

     

 

 

 

b---—---

 

 

r—
O
E-
r
I.—
O
E-

r

 

 

P--—--------
D----------

 

 

 

r—
0

L1

As for equations (4) and (5), an increase in long term average rainfall will
generally result in an increase in off-farm wages through a reduction in Off-farm labor
supply and an increase in the effective demand for off-farm good and services. A similar
argument may be made for regions with a high value of agricultural production. A high
value of agricultural production may reduce the need to have off-farm complements for

many households, thus contracting off-farm labor supply and a possible increase in off-

98

farm wages. At the same time, high incomes from agriculture would drive demand for the
local goods and services that are produced by self-employment activities, thus increasing
demand for off-farm labor and another possible increase in wages. The converse must
also be true; a region with a low rainfall regime and/or low agricultural productivity will
generally have lower off-farm wages. However, as discussed earlier, the impact on labor
supply (hence earnings), cannot be determined a priori and remains an empirical

question.

2.2. Motivation and Empirical Strategy

Various motives cause farm household to engage in alternative income earning
activities off the farm. We can generalize the determinants of supply of labor to the Off-
farm labor market from both the push and pull perspectives as discussed earlier. As a
push phenomenon, households will engage in Off-farm work so as to reduce risks on their
current portfolio of activities, cope with market imperfections especially in relation to
credit and crop insurance, counter the effects Of declining returns from agriculture as a
result of poor land quality, high input prices and low farm output prices, and cope with
external shocks to agriculture such as crop failure and other weather-related shocks (See
Barrett et al., 2001a for a broader discussion of why households diversify into off-farm
work). In this study, and following our conceptual approach, we concentrate on weather-
related push factors and specifically look at how households adjust their Off-farm labor
allocations in response to production risks and weather shocks to their farming

environment.

99

As discussed in section 2.1, we characterize the long-term rainfall environment by
a nine-year main season rainfall average and its standard deviation at the village level.
Long-term mean rainfall can be interpreted as a proxy for a households' perceived
probability that precipitation will fall below a critical threshold level that would put
household livelihoods at risk. The lower the mean rainfall, the higher this perceived
probability”. In response to this risk, households may adopt long-term strategies that
emphasize more off-farm work than in areas where rainfall is higher. The standard

139. Both the long term mean

deviation captures the variability of the main season rainfal
and standard deviation define the riskiness of the environment in which households live
and are at least known with some probability.

To capture the effects of unanticipated rainfall shocks, we use the previous
cropping seasons’ rainfall deviations from the long term mean. Here, the question is
whether households are able to respond to a negative rainfall shock (which will decrease
agricultural earnings) by increasing their participation in, and earnings from, the Off-farm
labor market. Whether households are able to do this in practice is again an empirical
question as discussed earlier.

Long-terrn rainfall clearly affects agricultural productivity, but so do many other
factors. For a given rainfall regime, productivity will be affected by soil quality, altitude,
the quality of infrastructure, institutional support to cash crop production (e.g., tea and

coffee), and attitudinal factors such as orientation to agriculture and interest in

intensifying. This introduces the possibility of separately testing the effect of the Size and

 

’8 In fact, mean rainfall in our data set is highly negatively correlated (-0.92) with a direct indicator of
stress: the proportion of 20 day periods in which rainfall fell below 40 mm during the growing season.
39 Other studies use the coefficient of variation (CV) which is not sensitive to scaling (Rose, 2001) but
given the high correlation of the mean and CV in our data, use Of both would cause identification problems.

100

productivity of local agriculture on off-farm decisions and thus the inclusion of this
variable40 in the model.

As argued by Rose (2001), the use of regional rainfall data (at village level in this
case) is important as an indicator of aggregate risk given the difficulties of insuring such
through formal and informal mechanisms“. The agricultural productivity variable is at
the district level due to having fewer cases in the sample for some regions at lower
geographical divisions.

In addition to the push factors, a household must have the capacity to access the
available opportunities in form of human and physical asset endowments. The level and
quality of assets required depends on the type of activity in question.

On the ’pull’ side, engagement in Off-farm employment is assumed to depend on
1) the incentives Offered by the labor market in form of wages and other benefits, and 2)
the availability of employment Opportunities as provided by the local labor market
characteristics and government investment in public assets such as infrastructure and
service provision in the area. The incentives offered by the off-farm labor market act as a
pull to better paying activities in the Off-farm market. These pull factors are strongly
influenced by the level of demand for off-farm goods and services. Any factors that
increase the demand for off-farm goods and services will, holding other factors constant,

increase derived demand for labor.

 

4° Note that multicollinearity among these variables does not appear to be a problem, with correlations all
below 0.22.
4' Refer to detailed discussion on risk and insurance in Townsend (1994).

101

3. Data

Data for this study were drawn from the Tegemeo Agricultural Monitoring and
Policy Analysis Project (TAMPA) data set collected during the 1999/00 and 2003/04
cropping seasons. The specific sample used in this study consists of a total of 2648
observations (1324 households for each year). The panel contains data on economic,
demographic and other social characteristics of the households. Table 3.1 presents the
description of the variables used in this study including their means and standard
deviations.

For the purposes of this study, we classify Off-farm work into salaried or wage
labor employment and informal business (self-employment) activities. Salaried
employment includes all types Of activities with a regular (usually monthly) wage paid
for labor while informal business encompasses a diverse group of self-employment
activities. We disaggregate further the informal business activities into agricultural wage
labor42 (farm kibarua) and all other informal activities so as to assess the pattern that
emerges.

The table shows that Slightly more than 73 percent of households are involved in
off-farm work, with the informal business sector taking the highest proportion of this
number. It is however noteworthy that this participation and the earnings from it vary
greatly across agrO-regional zones as shown in Table 3.2. Table A3.1 in the appendices
shows the Tegemeo sample districts included in this study by agrO-regional zones. Refer
to Table A1 for a classification of agrO-regions across agro-ecological zones and districts.

We also Show how the agricultural potential variable as used in this study was generated.

 

4‘ This represents piece meal work on neighboring farms. It doesn’t quite fit into salaried employment since
it’s not regular and it involves frequent decisions on whether to work or not.

102

Table 3.1.Summary Statistics of Variables Used in the Models

 

 

Variable Unit Mean Std Dev.
Participation and earning measures

Total Off-farm earnings Kshs (‘000) 61.9 124
Salaried wages Kshs (‘000) 31.0 75.3
Informal business income Kshs (‘000) 30.9 97.8
Remittance income Kshs (‘000) 3.60 12.4
Agricultural wages Kshs (‘000) 1.68 8.11
Other Informal business earnings Kshs (‘000) 29.2 94.5
Any off-farm work participation Binary 0.73 0.44
Salaried employment Binary 0.33 0.47
Any self employment (Informal/business) Binary 0.57 0.49
Received remittances Binary 0.30 0.46
Agricultural wage activities Binary 0.12 0.32
Other informal activities“ Binary 0.51 0.50
Household Demographics

Education of head Years 6.3 4.9
Education of spouse Years 4.6 4.4
Gender (Male head) Binary 0.84 0.37
Age of head Years 55 13
NO. of adult males Count 2.5 1.6
No. of female adults Count 2.4 1.4
Agricultural risk

Previous main season rainfall deviation mm -9.93 132
Long term main season rainfall average mm (’00) 5.41 1.72
Main season rainfall standard deviation mm (’00) 2.24 0.80
Other variables

Land cultivated Acres 13.7 16.4
Major cash crop Binary 0.55 0.50
Distance to electricity & phone Kilometers 4.53 4.73
Bus fare to shopping center Kshs 9.09 19.4
Distance to tarmac road Kilometers 7.72 7.90
Lagged value of non-land assets Kshs (‘000) 116 330
District mean value of agric prodn Kshs (‘000) 72.5 40.1
Agricultural Potential Binary 0.56 0.50

 

No. of Observations=2648 N/B: 1 US 8 was equivalent to ksh 80 as of 2004.

*’Other’ here implies other informal business activities except piecemeal agricultural work.

The share of off-farm earnings in total household income varies greatly across
regions. As expected, the lowland areas which define low agricultural potential areas are

characterized by relatively high off-farm shares and low crop shares as compared to the

103

highlands and the high potential maize zone (HPMZ) which define the high agricultural
potential areas. This implies that more households in the marginal agricultural potential
areas do look for alternative sources of income from the off-farm labor market to
complement their low earnings from farming thus depicting a ‘push’ factor in the
decision to sell labor Off the farm. A related result emerges from the proportion of
households with a major cash crop. Regions where a higher proportion of households
have a major cash crop and thus relatively high crop earnings and shares have generally
lower off-farm shares (and earnings) and fewer households engaging in the off-farm labor

market.

Table 3.2. Characteristics of Households by Agra-regional Zones (all households)

 

 

Net Off- % with

Total crop Off-farm cash crop farm offlfarm
Ago-regional zones income income earnings crop share share work
Coastal Lowlands 148,563 45,730 89,406 0.31 0.31 0.58 0.95
Eastern Lowlands 165,030 51,437 88,314 0.24 0.38 0.42 0.85
Western Lowlands 75,235 27,578 31,368 0.30 0.78 0.33 0.72
Western Transitional 156,633 89,755 46,990 0.85 0.59 0.25 0.70
High Potential Maize Zone 207,607 89,861 69,431 0.43 0.46 0.30 0.70
Western Highlands 113,163 51,377 36,081 0.82 0.53 0.26 0.67
Central Highlands 202,452 104,129 63,685 0.91 0.59 0.24 0.66
Total 165,292 72,461 61,888 0.55 0.52 0.32 0.73

 

Source: Author’s calculations

Though there is diversity across regions, the emerging picture is that supply of
labor to the Off-farm labor market likely compensates for the low returns to labor in
agriculture and thus a form of livelihood for such households. It is therefore not a surprise
that in some regions like the coastal and eastern lowlands, over 80 percent Of households

combine farming with off-farm work. An exception to this is seen with the western

104

lowlands where we observe not only relatively lower participation and shares Of off-farm
income (probably due to relatively poor opportunities to earn income), but also
exceptionally low mean total household income. This is however not surprising given
that Nyanza province which predominantly forms the western lowlands has been ranked
the poorest in the country (see Table A32 in the appendices) even below the ASAL
North Eastern province.

Table 3.3 shows that both the poor and non-poor households derive a good
proportion of their income from engaging in off-farm work (40-47) and the Share
increases steadily with income, a finding consistent with other studies from rural Africa
(Reardon 1997; Tschirley and Benfica, 2001; Reardon et al., 2000). In contrast, and as
expected, the share of crop income in total income decreases with income, though the
only major jump is evident between the lowest quintile and all others. Considering the
types of off-farm work, the majority of the households in the lowest quintile (88%) seem
to be involved in informal business activities while very few of them (19%) have salaried

jobs. The poor are also more likely to receive remittances.

105

Table 3.3. Characteristics of Households with Off-farm Work by Quintiles of Total Income

 

 

Share Share
Share w/ Crop Off-farm with with self Share

Total Land major share in share in salaried employ- received
Income Income cultivate cash total total wage ment remittanc
Quintile (Ksh) d (Acres) crop income income income income es
1 low 28,343 9 0.39 0.50 0.40 0.19 0.88 0.34
2 67,626 12 0.45 0.38 0.41 0.35 0.83 0.27
3 114,592 13 0.50 0.39 0.44 0.50 0.75 0.25
4 189,825 15 0.61 0.38 0.45 0.54 0.74 0.25
5 high 461,592 21 0.66 0.38 0.47 0.61 0.71 0.21
Total 184,632 14 0.53 0.40 0.44 0.46 0.77 0.26

 

Source: Author’s study
N/B: Livestock shares excluded in this table

Although we find relatively high participation rates in Off-farm work across all
agro-ecological zones (over 60 percent even in the highlands), Table 3.4 shows some
differences in long-term main season rainfall average and CV between those who
participate and those that do not. Households that engage in off-farm work live in regions
with lower mean rainfall and higher CV than non-participants. This pattern is duplicated
for the two off-farm work types but also for those who received remittance income. In
addition, those households that participate in Off-farm work seem to come from regions
with relatively low value of agricultural production. An exception here is salaried
employment where the value of agricultural production is not significantly different for

participants and non-participants.

106

Table 3.4. Rainfall Variables by Types of Off-farm Work

 

 

Long-term Main Season District mean
Type of off-farm main season rainfall Main season Main season value of agric
work rainfall mean deviations rainfall SD rainfall CV production
Any ofl-farm work
No 572*" -7.8 225 044*" 76353"'**
Yes 529 -10.7 224 0.50 71032
Salaried employment
No 547*“ -6.9** 221 ** 047*" 72681
Yes 528 -15.9 229 0.50 72020
Informal/business
No 557*“ -7.3 225 0.45*** 75185"*
Yes 528 -1 1.9 223 0.50 70379
Remittance
No 548*" -6.0*"'* 223* 047*" 75008"**
Yes 524 -19.2 227 0.51 66459
Total 541 -9.9 224 0.48 72461

 

Source: Author’s study
The stars indicate the significance level of the difference in the respective pair of means test where ***
significance at 1%, "'* significance at 5% and * significance at 10% level.

The pattern of earnings from off-farm work is not very clear except with the long-
terrn rainfall mean which shows a general increase in off-farm earnings (movement
across quintiles) as the rainfall average decreases (Table 3.5). However, with the
exception of the lowest quintile”, off-farm eanrings increase as rainfall SD (and hence

CV) and the value of agricultural production increases.

 

4’ Lowest quintile includes non-participants which may likely alter the pattern.

107

Table 3.5. Rainfall Variables by Quintiles of Off-farm Income

 

 

Previous Main season District
Quintiles of Long term main season Main season rainfall mean value
off-farm main season rainfall rainfall std coefficient of agric

Year income rainfall mean deviations dev of variation production
2000 1 (lowest) 583 25.4 223 0.42 82,649
2 533 6.3 219 0.48 63,555
3 533 6.7 219 0.48 77,591
4 526 1 1.8 224 0.50 78,800
5 (highest) 510 -24.1 234 0.53 81,927
Total 541 7.4 224 0.48 78,108
2004 1 (lowest) 562 -40.9 226 0.45 70,076
2 583 -2.4 209 0.41 64,713
3 561 -29.4 209 0.43 65,247
4 528 -16.3 232 0.52 65,043
5 (highest) 483 -32.6 236 0.57 66,908
Total 541 -27 .3 224 0.48 66,814
Total 1 (lowest) 572 -7.8 225 0.44 76,353
2 558 2.0 214 0.45 64,134
3 546 -10.4 214 0.46 71,727
4 527 -1.1 228 0.51 72,516
5 (highest) 495 -28.9 235 0.55 73,406
Total 541 -9.9 224 0.48 72,461

 

Source: Author’s study

4. Model Specification and Estimation
4.1. Empirical Model

Labor supply functions are estimated to determine the factors that drive rural
households to supply part of their labor to the off-farm labor market. Given that our data
do not have information on time spent working off the farm, we use participation and
earnings from the Off-farm labor market to model off-farm labor supply decisions and
households’ response to agricultural productions risks. To ensure identification of the
coefficients of interest, we control for household characteristics, human and physical
endowments, characteristics of the rural economy and external factors that affect both the

farm and off-farm sector.

108

Education of head and spouse are used to proxy for human capital endowments.
Evidence has shown that returns to education are higher in the off-farm labor market than
on the farm (Fafchamps and Quisumbing, 1999), suggesting that a highly educated
individual is more likely to supply labor off the farm. However, we would expect
differential impacts of education, depending on the type of activities considered and the
skill level they require. Thus we can hypothesize that households with highly educated
members are more likely to supply part of their labor to the off-farm labor market, but
more importantly that education will positively affect the probability of engaging in
salaried activities and negatively impact on casual agricultural wage labor and other low
wage and low return business activities.

Distance to the market or shopping centre is important as a proxy for both job
availability and, conditional on getting a job, the cost of travel to the job. Net earnings
will be dependent on the cost of travel to the job. Thus with wages W0, the effective daily
wage is given by We — C(d,S), were C is the cost of getting to and fi'om the job and is a
function of distance (d) and condition of the transport system (3). Access to public assets
like electricity and telephone within Short distances could proxy for the condition of
public infrastructure, which affects the cost of accessing the off-farm labor market.

Other factors that lower the returns from the farm could positively affect
participation in the off-farm labor market. For instance, low agricultural potential areas
are likely to encourage more diversification though mostly to low return activities (as a
push), or migratory labor in the form of salaried employment which may have relatively
lower risks. In addition, factors that increase the returns to the farm such as high output

prices, increased agricultural productivity and presence of a cash crop may have negative

109

impacts on labor supply to the off-farm market, at least in the short -term44. Physical
assets do also provide capacity for the households to invest in Off-farm work either for
direct use or as collateral. For direct use, we would expect households with a high value
of assets to invest heavily in high return businesses. The value of such non-land assets
may not however have large impacts on salaried employment and low return businesses.

In developing the estimating equations, it is important to note that our sample data
is such that off-farm earnings are only observed when the household decides to
participate in the off-farm labor market. This setting results in a form of sample selection
usually referred to as the incidental truncation problem (Wooldridge, 2002) thus
indicating the need to account for the resulting non-random nature of the sample. The
sample selection model defined in this paper follows Heckman (1979) and assumes that
people self-select into Off-farm employment and thus our observation of earnings in the
data is dependent upon an initial labor market participation decision. If the reason some
of the earnings data is unobserved was clearly exogenous, then a regression on the
selected data would do as well.

However, in this case, it is likely that the probability that a household participates
in the off-farm labor market is correlated with the level of earnings they receive. It is thus
plausible to expect that some unmeasured attributes that allow a household to participate
in the Off-farm labor market may also help to increase the earnings that result from such
participation. This may be especially so for high end wage labor activities where

intelligence and ambition are important -- and very difficult to measure. In other words,

 

‘4 1n the long-run, high agricultural productivity may increase the size of the rural off-farm sector, as those
with capacity for that type of activity respond to the demand created by a vibrant agriculture.

110

households engaging in the Off-farm labor market may have some common (unobserved)
characteristics that may in turn contribute to their earnings (Co et al., 2005).
Following the discussion above, the basic model for estimation consists of two

equations based on the same data. First, we define the auxiliary selection equation as:

S‘n=z,,a+vit (n
where S.“ defines a latent variable for the propensity of engagement in Off-farm work.
Though Sh: is unobserved, it is possible to observe the household’s participation choice
such that:

Sit=1 if (Zitb + vit ) > 0 (i.e. L0 > 0 and the household is observed to
engage in off-farm employment), and

Sit= 0, otherwise
Z defines a vector of exogenous characteristic that influence participation decisions.

Second, there is the outcome equation:

t

Y it = Xitl3 + air (2)
where Y.“ is the latent variable that describes the intensity of participation in off-farm
work. We Observe and model Yit (such that Y = WQLQ) which is equal to Y.“ only when

Sit=1. X represents exogenous variables that affect the earnings from Off-farm work.

Since the presence of selection bias in equation (2) can be viewed as a special
case of an omitted variable problem, its consistent estimation requires us to account for

the household’s decision to engage in off-farm work or not. We follow Heckrnan’s

111

(1976) computation of the conditional expectation Of Y given that Y is Observed (Sit=1)

as:
E (YIX, S,,=1) = XnB + Dav?» (21:5) (3)

Where MZitS) = cp(z,,5 )/<I>(Zit8) and its coefficient represents an estimate of the
covariance between a and v, p8,, (Errnisch and Wright, 1994). Estimation of equation 2
above is thus consistently done by adding the last term in (3). Note that when p8v= 0,

OLS regression provides unbiased estimates. When pay 76 0, the sample selection model

described above allows us to use the information from households that did not work off

the farm to improve the estimated parameters.

4.2. Estimation

The models described in the section above are estimated using the Heckman two-
step procedure. A Probit selection model (1) is first estimated and the correction term (A
(.)) computed. Model (2) is then estimated using the selected sample with the correction
term as an additional regressor to correct for self-selection into off-farm work.

Identification of [3 in the outcome equation (2) can be possible even if x=z due to
the non-linearity Of the selection bias correction term A (.). However, if there is not much
variation in the sample, having exactly the same variables in both the selection and the
outcome equation may result in severe collinearity problems (as it (.) is now just a
function of x alone) thus affecting identification (Stolzenberg and Relies, 1997;
Wooldridge, 2002)) as is characteristic Of regressions with near multicollinearity. This

implies that it’s necessary for x to be a strict subset of z.

112

In this study, we use a binary variable for agricultural potential as an exclusion
restriction”. Though the reliability of a particular exclusion restriction can be a subject of
debate and perhaps is the major source of criticism of the Heckman two-step procedure, it
is generally plausible to foresee the agricultural potential of a region acting as a ‘push’
factor to the off-farm labor market especially in the low marginal areas, but not directly
impacting on the earnings achieved“. In fact, regression results of earnings on this
variable turn out insignificant. However, given that this variable is also insignificant in
the first stage of the salaried model, we include the ‘number of female adults in the
household’ as an additional exclusion restriction for the salaried wage labor models. This
exclusion seems fairly plausible given that less than 10 percent of females engage in
salaried wage labor; the majority of females are in self employment and thus while their
presence in the household may allow release Of male labor Off the farm, this is unlikely to
have a major impact on the earnings received from wage labor.

Though the Heckman two-step estimator remains a common tool in empirical
work, literature has documented some weaknesses that may be worth paying attention to
(see detailed reviews in Puhani, 2000 and Stolzenberg and Relles, 1997). Thus, in
addition to the two-step Heckman estimates, a full-information maximum likelihood
estimation (MLE) was also carried out. Unlike the two-step method, the MLE procedure
(if it converges) provides estimates that are more efficient and have other desirable

properties of MLE“.

 

‘5 This implies that agricultural potential is excluded in X.

46 There may be some indirect impacts on earnings through differences in the dynamism of rural economies
between high and low potential areas, but this effect would be partially captured by the village and district
level variables.

47 Although MLE requires stronger distributional assumptions (See Wooldridge, 2002 pp 566).

113

S. Econometric Results and Discussion
5.1. Participation in Off-farm Labor Market

Table 3.6 presents parameter estimates of the Off-farm labor market participation
decision. Four different models are estimated involving the entire off-farm work and also
its disaggregation into wage labor and self-employment. A model for remittance income
received by the household from friends and family members living away is also included
to assess the role Of migratory labor as a coping strategy to weather risks in these
predominantly rural households.

The Heckman two-step procedure described in section 4.1 only serves to account
for the initial self selection into (overall) off-farm work. However, as discussed by Co et
al. (2005), it is possible to foresee a two-tier selection process where households first
make decisions on whether to participate in the off-farm labor market or not; then,
conditional on a positive decision to participate, a selection is made between salaried
work and self employment. To account for the two self selection terms in the
disaggregated salaried employment and the informal business models, the first stage
selection model is estimated using a Bivariate Probit model. The computed correction
terms are again included in the outcome equations.

In this study, we first estimated the usual two-step procedure for salaried work
and self employment models and then used a bivariate probit to control for the two self-
selection processes. The results of the latter are presented in Table A3.4 in the
appendices. They indicate an insignificant correction term for off-farm work choice in
both models and the coefficients are fairly comparable to the usual two-step Heckman.

We thus present the results of the two-step procedure in the following results.

114

As discussed earlier, both the two-step Heckman estimates and those from the
maximum likelihood estimation are presented for comparison purposes. In general, the
results from the two estimation methods are comparable for all four (selection) models.
This implies that there is not much efficiency lost with the two step procedure. This may
not always be the case as we will see later in Table 3.7. The result is however not
unexpected given that the main critiques of the two-step procedure focus on the manner
in which the correction term is computed and used to correct for selection bias in the
second stage. The results presented in Table 3.6 are for the selection equations and
involve the whole sample of both participating and non-participating households.

Turning to the results, we first consider the effects of weather and agricultural
risks to the participation decision. From Table 3.6, the long term mean rainfall of a region
has significant effects on the decision by households to engage in off-farm work. Thus,
households in areas with high rainfall regime are less likely to engage in any type of off-
farrn employment. This may be an indication of participation in Off-farm work as a long-
terrn strategy for households living in areas prone to rainfall Shortages thus negatively
impacting on farming activities. There is however an insignificant result on the
remittance 'model implying that these households may not be relying on remittance
income as a long term strategy to cope with anticipated weather risks.

However, these households do not respond to short term and unexpected rainfall
shocks by adjusting their off-farm work engagements; our results Show reliance on
remittance income to deal with such unforeseen Shocks to farming. The only exception to
this is evidenced in Table A3.5 presented in the appendices showing a negative and

Significant coefficient on the shock variable for the agricultural wage labor participation

115

regression. This exception is plausible given that these activities are fairly flexible48 and
require hardly any start-up capital.

While reinforcing each other, the above results Show that these households use
different coping mechanisms to deal with different sources of agricultural risks;
participation in the Off-farm labor market ex ante to deal with long-term weather risks
and remittance income and participation in casual agricultural wage labor to deal with
unforeseen rainfall Shocks ex post. This latter result is plausible given that households
may expect to recover from unforeseen shocks in the current period and are thus unlikely
to consider long-term labor reallocations. The results for the overall off-farm work
however seem to deviate from some earlier literature on this topic that Shows increased
participation in Off-farm work in response to unexpected rainfall/agricultural shocks
(Kochar 1999 and Rose 2001).

Further, households living in regions with a less productive agriculture have a
higher probability of receiving remittance income but show no significant difference with
respect to Off-farm work decisions.

On the other results, we find that education of the head of household and spouse
positively affects the probability of working off the farm. This result is maintained in
salaried work model but is reversed in the self employment model, where higher
education reduces the probability of households engaging in the informal business sector.
AS expected, this education impact is largest with participation in salaried work and

indeed seems to be the one driving the education result in the overall off-farm work.

 

48 Households can often regulate the labor supply to these activities as needed without much consequence.

116

 

 

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The negative and significant coefficient on education of head in the self
employment participation regression can be explained by the fact that most of these
business activities in the rural areas consist of low return petty trade businesses which
require minimal formal education. This finding is reinforced by a further disaggregation
of the salaried and self employment models as shown in Table A3.6 in the appendices.
This table shows that higher education reduces the probability of participating in low
return business activities; the coefficient on high return businesses is positive but
insignificant.

It is however possible that education of head and spouse could be correlated with
omitted unmeasured characteristics which may have influence on the participation and
earnings from off-farm work. This is more likely for salaried employment models, hence
a likely upward bias on the respective coefficients. The fact that these coefficients remain
positive and significant is however consistent with previous literature and our
expectations. While we expect the sign and significance to remain the same, the
magnitude of the coefficients may however change. Thus, our interest in this study is on
the direction and significance of the effects; we make no policy implications based on the
magnitude of such impacts.

The results show that households with a more educated head of household are
more likely to receive remittances, but, controlling for the education of head; those with
highly educated spouses are less likely to receive remittances. This result is a bit puzzling
as we would expect a negative coefficient on both variables and hence is a subject for

further investigation. The negative coefficient on spouse may be explained by the fact

119

that a highly educated person may also be working in the local town and is less likely to
receive remittances from those working in other areas.

As expected, a male headed household is more likely to work off the farm but less
likely to receive remittances as compared to a female headed household. Also, the
number of adults in the household increases the probability of a household engaging in
off-farm work (more labor to share out) but has no effect on the probability of the
household receiving remittances.

Land cultivated has a positive and significant effect on the overall off-farm work
but remains insignificant in both the disaggregated models and remittances. The positive
result can be explained by the fact that households with more land cultivated (and hence
higher total household incomes as shown in Table 3.2) may have the capacity to invest in
the off-farm labor market. This result is partially driven by the fact that households in low
potential areas (with high off-farm earnings and shares) own and cultivate more land than
their counterparts in the high potential areas.

Consistent with expectations, the presence of a major cash crop reduces the
probability that a household will engage in off-farm work, especially in self-employment
(though the coefficient is negative in all the models). Also, we find that households with
a higher value of assets tend to have a lower probability of engaging in salaried
employment and are less likely to receive remittances. As expected, the greater the
distance to important amenities like electricity and telephone, the less likely that
households will participate in the off-farm labor market. This is because there may not be

a sufficient pull element to draw labor out of the farm.

120

5.2. Determinants of Earnings from Off-farm Work

Table 3.7 presents the regression results of the off-farm earnings models. We
again present the Heckman two-step and MLE estimates. Comparing the two estimation
procedures, the models for overall off-farm work and remittances have comparable
estimates. The self-employment model shows fairly close estimates, while the salaried
work regressions show significant differences between the two estimates. The differences
in the two salaried work models can be explained by the likely higher selection bias in
salaried employment, given that these are usually desirable activities and individuals’
clearly self-select into such. Although the coefficient of the correction term for the
salaried earnings equation is not clearly significant, the general results of the correction
term across all models are clearly consistent with the pattern described above; the
selection term on both the salaried and self-employment models is close to being
significant while the remittance and overall off-farm work are clearly insignificant.

Further, the results of the Wald test for correlation between equations (1) and (2)
indicate that the null hypothesis of independent equations is clearly rejected in the
salaried employment model (see Table A33 in the appendices). Rejection of the null
hypothesis implies that the residuals in the two equations are correlated and hence the
need for joint estimation.

We now concentrate on the MLE estimates for the discussion of results. As with
the participation models, we find that a rainfall shock does not significantly affect the
earnings from off-farm work, reinforcing the finding from the participation regressions
that these households do not make significant short term off-farm labor supply

adjustments in response to unexpected rainfall shocks. However, conditional on

121

 

 

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participation, households in regions with lower rainfall regimes tend to earn more from
off-farm work than do their counterparts in the high rainfall areas. These results are
consistent with the pattern observed in Table 3.5 that shows increasing off-farm earnings
as the long term main season rainfall decreases. This argument is plausible given that a
household’s adaptive strategy in such drought prone areas would be to increase (and
stabilize) total incomes through their off-farm activities.

As discussed in section 2.1, a region with a low rainfall regime will generally
imply lower off-farm wage rates (compared to high rainfall regimes), but an overall
reduction in earnings would imply at least two things: 1) presence of a relatively elastic
supply curve implying a proportionately higher reduction in household labor supply in
response to decreasing off-farm wages and/or 2) a less than proportionate increase in
labor supply in a declining wage rural economy.

The results in Table 3.7 also show that, controlling for rainfall patterns,
households living in rich agricultural areas tend to earn more fi'om self employment and
hence overall off-farm work. This latter finding is suggestive of the fact that dynamic
rural agricultural economies may contribute to a flourishing off-farm labor market by
providing raw materials necessary for off-farm work, especially informal businesses. In
addition and as earlier discussed, regions with a rich agricultural base may imply
increased demand for off-farm goods and services thus increasing incomes of
participating households.

As with the participation models, education of both the head and spouse
positively affects salaried earnings and overall off-farm earnings, but has no significant

impact on earnings from self employment. The earnings from off-farm work increase

124

with age, but only up to a certain point (54 years) beyond which they start declining. This
result seems to be driven by salaried income as the combined effect of age is not
significant in the self-employment model nor does it affect the amount of remittance
income received. This result may be indicative given that most public employment in
Kenya has a retirement age of 55 years.

Unlike in the participation models, land cultivated and distance to electricity and
phone have no significant influence on the earnings from off-farm work. However,
households living farther away from the tarmac road do seem to earn less from wage
labor. Conditional on participation, households with high value of assets earn more from

the off-farm labor market.

6. Summary and Conclusions

The results of this study reveal the existence of ex ante off-farm labor supply
responses to anticipated weather risks to agricultural production for rural households in
Kenya. The results show that households living in regions with a lower rainfall regime
have a higher probability of participating in the off-farm labor market and, conditional on
participation, earn more from their engagements in off-farm work. This result shows
participation in off-farm work as a long-term coping strategy for these rural households
in response to anticipated weather risks to their agricultural operations.

For short-term unexpected rainfall shocks, these households seem to rely
primarily on increased remittance income from migratory labor and petty agricultural
wage activities. We find no significant adjustments in overall off-farm engagement in

response to such unexpected shocks. This result is broadly consistent with earlier findings

125

(in Essay 2) that show insignificant effects of remittance income on input use and
intensification; this current paper shows that these flmds are instead used for short-term
adaptation to shocks.

For a given mean rainfall, and holding all other factors constant, households in
regions with a more productive local agriculture, though less likely to participate in the
off-farm labor market, tend to earn more from it (especially in the informal business
sector) when they do participate. This result can be explained from the effective demand
created for off-farm goods and services from the high earnings from such vibrant
agricultural areas. This finding is consistent with the concept of structural transformation
that elucidates the need for a productive agriculture to enable growth in the off-farm
sector.

The results of this study also indicate the importance of disaggregating off-farm
work into specific activity types that unveil a lot of differences otherwise masked by
analyzing the overall off-farm work choice. In addition, the differences in the results
between the two-step procedure and MLE for salaried employment speak to the need for
using appropriate estimation methods so as to draw appropriate conclusions. It is
important to test the independence of the selection and outcome equations before
proceeding to the well known Heckman two-step method.

Consistent with earlier studies, we find that education increases the probability of
working off the farm, and also increases the earnings derived from such participation.
This positive education effect found in salaried labor and high return businesses further
emphasize the importance of education in getting the poor out of low return petty

informal businesses and enabling access into remunerative off-farm work types.

126

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129

APPENDICES

130

APPENDICES

TableAl. Classification of TAMPA Sample by Agra-regional Zones

 

 

Agro-ecological
Agricultural potential Agro—regional zones zone District No. of hhs
Low potential Coastal Lowlands Coastal lowland Kilifi 53
Kwale 25
Total 78
Eastern Lowlands Coastal lowland Taita Taveta 10
Lower midland 3-
6 Kitui l7
Machakos 21
Makueni 37
Mwingi 32
Upper midland 2-6 Makueni 35
Total 152
Western Lowlands Lower midland 3-6 Kisumu 94
Siaya 67
Total 161
Western Transitional Lower midland 1-2 Bungoma 44
Kakamega ll 1
Total 155
Marginal Rain Shadow Lowland Laikipia 39
Total 585
High potential High Potential Maize Zone Upper midland 2-6 Bungoma 35
Kakamega 24
Nakuru 24
Trans Nzoia 54
Lower highland Bomet 35
Nakuru 76
Narok 24
Uasin Gishu 51
Upper highland Uasin Gishu 39
Total 362
Western Highlands Upper midland 0-1 Kisii 78
Vihiga 53
Total 131
Central Highlands Upper midland 2-6 Muranga 48
Nyeri 40
Upper midland 0-1 Meru 81
Muranga 18
Lower highland Nyeri 59
Total 246
Total 739
Total 1324

 

Source: Author’s study

131

TableAl.1. Simple Regression Results of Distance Variables on Household

 

 

Income
Distance variable Coefficient p-value
Distance to tarmac road 0.00062 0.516
Mean distance to input seller 0.0010 0.778
Distance to shopping centre 0.0012 0.288
Distance to extension service -0.00024 0.837
Distance to electricity 0.00023 0.719
Distance to telephone 0.000033 0.934
Mean dist to electricity & phone 0.00062 0.617
Household had electricity .000110 0.000
Household had telephone .000042 0.000

 

Source: Author’s study

Table Al.2. Mobility of Households across Income Quintiles

 

2004 Income Quintiles

 

 

1 2 3 4 5
l 128 65 39 22 10
(9.7) (4.9) (2.9) (1.7) (.8)
2000 2 62 79 55 45 24
Income (4.7) (6.0) (4.2) (3.4) (1.8)
Quintiles
3 29 65 84 54 33
(2.2) (4.9) (6.3) (4.1) (2.5)
4 33 33 56 76 67
(2.5) (2.5) (4.2) (5.7) (5. 1)
5 12 23 31 68 131
(.9) (1.7) (2.3) (5. 1) 9.9)
Author’s study

N/B: Figures in parenthesis are percent of households in total sample.

132

Table A1.3. Results of the First Stage Regression and Over-id test

 

 

 

Dependent variable LlD LID“ Education
Coefficient. Std. Error Coefficient. Std. Error

A Distance to tarmac road '0-41 1.45 -12.99 12.37

A Mean distance to input seller 3-19" 1.43 1.54 9.99

A Distance to shopping centre '0-11 0.41 -1.51 3.58

A Distance to extension service 0.74 1.99 -1 1.17 17.43

A Mean dist to electricity & phone -4.42 2.98 -21.33 25.93

A Age of head -1.19 2.19 -37.98 40.40

A Age of head squared 0.01 0.02 0.19 0.26

A Education of head -6.67**"' 2.51 189.22’”* 25.85

A Gender (male headedness) 27.53 17.68 447.15“ 244.19

A % adults working off farm -25.40* 15.76 -90.12 124.81

A Land cultivated -0.88 1.16 -15.06 11.61

A Number of livestock owned '0-26 0.23 -1 .72 2.43

A Number of adult males 2-31 5.44 76.71 "' 45.76

A Number of adult females 0-43 4.65 -11.47 45.43

A Months head at home 0.68 1.50 -5.82 14.88

A Group Membership -4.50 9.37 -45.46 111.71

Year dummy 127.46*** 13.25 660.13‘” 133.04

Instruments

Lagged Income level -O.87*** 0.07 -4.01*** 1.10

Lagged income*education 004*" 0.01 0.33"" 0.1 1

Lag mean rainfall deviation 264*" 0.86 -20.84"* 7.11

Joint sig of Instrument set

F-statistics 55.93 6.93

p-value 0.0000 0.0001

Over-id Test

Chi-square statistic 0-039

p-value 0.7649

 

Source: Author’s study

133

TableAl.4. Comparison with different Education Levels

 

 

1 2 3 4
Continuous With primary With With
Education secondary College
education
LID 0.49* -0.08 0.13 0.04
(1.80) (0.20) (0.53) (0.20)
LID‘education -0.15"' 0.10 -1.43* -1.19*
(1 .94) (0.09) (1.93) (1 .94)
A Distance to tarmac road -1.16 0.69 0.44 0.19
(0.48) (0.35) (0.21) (0.10)
A Mean distance to input seller -2.32 -0.81 -0.47 -0.68
(1.29) (0.50) (0.34) (0.52)
A Distance to shopping centre -0.34 -0.07 -0.17 -0. 16
(0.66) (0.16) (0.39) (0.37)
A Distance to extension service -0.34 1.22 1.81 1.44
(0.12) (0.41) (0.66) (0.57)
A Mean dist to electricity & phone 6.79" 7.27 5.71 * 6.52"
(2.05) (1.53) (1.75) (2.24)
A Age ofhead -0.36 2.56 2.03 1.32
(0.08) (0.85) (0.77) (0.54)
A Age of head squared -0.01 -0.02 -0.02 -0.01
(0.26) (0.59) (1.09) (0.75)
A education of head 40.50"
(2.23)
A primary education -22.65
(0.12)
A secondary education 354.60“
(2.19)
A college education 321.63"
(2.33)
A Gender of head (male headedness) 57.46 -7.13 40.30 28.57
(1.26) (0.15) (1.29) (1.09)
A % adults working off farm 9675*" 9867*“ 106.48*** 103.33‘"
(4.19) (4.85) (4.97) (5.19)
A Land cultivated -0.77 1.56 -0.11 0.39
(0.51) (0.64) (0.12) (0.42)
A Number oflivestock owned 091*" 128*" 1.21 "* 0.78“
(3.73) (3.00) (5.39) (1.77)
A Number of adult males 1902* 8.54 14.54" 12.21“
(1 .94) (1 .07) (2.05) (1.90)
A Number of adult females 9.45 12.43" 10.46”“ 9.37“
(1.54) (2.47) (1.91) (1 .77)
A Months head at home -3.73 -2.92 -2.62 -3.01"'
(1.51) (1.64) (1.31) (1.69)
A Group Membership 4.69 11.45 5.61 1.71
(0.34) (0.83) (0.48) (0.17)
year dummy 1 1.66 -29.84 -8.60 ~9.38
(0.32) (1.34) (0.45) (0.51)
Observations 1324 1324 1324 1324

 

Robust t statistics in parentheses

* significant at 10%; *"‘ significant at 5%; *"”" significant at 1%

 

Source: Author’s study

134

Table A2.]. Mean Off-farm Shares by Region and Agricultural Zone

 

 

Region/Zone % of households with Off-farm Means shares of off-fann in
work total income (%)

Region

Eastern Lowlands 88 52

Western Lowlands 78 49

Western Transitional 72 34

Western Highlands 74 36

Central Highlands 73 34

Agricultural Zone

Low 80 46

High 72 35

Total 76 40

 

Source: Author’s study

Table A2.2. Likelihood Ratio (LR) Test for the Tobit Formulation Hypothesis

 

 

Model LR value P-value
Models 1 (Aggregated Off-farm)

Fertilizer 23 1.12 0.0000
Hybrid Seed -l31.30 1.0000
Models 11 (Disaggregated Off-farm)

Fertilizer 236.79 0.0000
Hybrid Seed -124.52 1.0000

 

Source: Author’s study

Table A2.3. Likelihood Ratio (LR) Test for Joint Vs Separate Estimation

 

Model LR value P-value

 

Models 1 (Aggregated Off-farm)

Fertilizer 53.76 0.0000
Hybrid Seed 223.54 0.0000
Models 11 (Disaggregated Off-farm)

Fertilizer 48.89 0.0000
Hybrid Seed 215.75 0.0000

 

Source: Author’s study

135

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136

Table A2.5. Probit Model Results for the Combined Fertilizer and Hybrid Seed Use

 

 

Variable Estimate Std Error
Price of Fertilizer -.0082 .0136
Price of Hybrid -.0022 .0044
Price of other seed .0005 .0014
Price of Maize 0563*" .0193
Cash crop .1265 .0938
Cash Income .0009* .0005
Off-farm Income .0036 .0046
Mean Distance (input seller) -.0683*** .0118
Season/Region 1.0301 *** .1 142
Agric Potential 1.4409**"‘ .1246
Primary education .1000 .0987
Age of head -.0086*** .0031
Gender of head .1485 .1 146
Group membership 5551"“ .1618
Period dummy .1458 .1538
Interactions

Off-fann*primary .0023 .001 8
Off-farm*Agric Potent .0014 .0019
Off-farm*Group -.0065 .0045
Constant -2.204"* .9030

 

Note: *** significance at 1% ** significance at 5% and * significance at 10% Note: *** significance at

1%
Source: Author’s study

Table A2.6. Wald Test for the Combined Effects in the Fertilizer and Hybrid Seed
Models (Disaggregated Off-farm)

 

 

Adoption Model Level Model

Variable Combined Wald Stat p-value . Combined Wald Stat p-value

Effect Effect
Fertilizer Models
Primary education -.1464 .00 .9780 -. 1299 1.35 .2461
Agric potential 3.7803 44.19 .0000 1.1287 145.50 .0000
Group Member .6632 9.01 .0027 .2534 5.85 .0156
Hybrid Seed Models
Primary education -.2316 1.77 .1834 -.0660 .23 .6327
Agric potential 2.1531 69.85 .0000 0.5952 33.37 .0000
Group Member .5854 8.21 .0042 .1669 2.61 .1061

 

Source: Author’s study

137

 

Table A3.1. Tegemeo Agra-regional Zones

 

 

Zone District

Coastal Lowlands Kilifi, Kwale

Eastern Lowland Taita, Kitui, Machakos, Makueni, Mwingi

Western Lowland Kisumu, Siaya

Western Transition BungomaKakamega

High Potential Maize Zone Bungoma, Kakamega, Bomet,Nakuru, Narok,
Tranzoia, Uasin-Gishu

Western Highland Vihiga, Kisii

Central Highland Muranga, Nyeri, Meru

Marginal Rain Shadow Laikipia

 

Table A3.2. Poverty Disparities across and within Provinces in Kenya

 

Poverty Rates (% of hhs below poverty)

 

Province Constituencies Overall
Richest Poorest
Nyanza 43 80 65
North eastern 59 70 64
Western 50 72 61
Eastern 34 76 58
Coast 30 84 57
R/Valley 43 64 48
Nairobi 3 1 59 44
Central 16 43 3 1
Overall 58

 

Source: Republic of Kenya (2005)

Table A3.3. Results of the Wald test for the Correlation between the Selection and

 

 

Earnifis Equation
Model Chi-value P-value
Overall off-farm 0.05 0.8267
Salaried wage 7.99 0.0044
Self-employment 1.17 0.23 52
Remittances 1 .67 0.4359

 

Source: Author’s study

138

 

Table A3.4. Bivariate Probit Heckman Results for Salaried Wage and Self-Employment

 

 

Participation Earnings
Salaried Self- Wage Earning
employment employment intensity intensity
Education of head 0.0521“" -0.0270*** 2.3548 1.1647
(7.32) (3.99) (1.11) (0.71)
Education of spouse 0.0234*** 0.0003 4.1356""‘ 0.8382
(2.86) (0.04) (2.96) (0.76)
Male headedness 0.1978" 0.2269**"' -34.6277*"‘ 16.3288
(2.28) (2.98) (2.34) (1.48)
Age of head 0.0246“ -0.0493*** 2.9492 1.1102
(1.68) (3 .68) (1 .37) (0.94)
Age of head squared -0.0003*"' 0.0003" -0.0150 -0.0139
(2.53) (2.28) (0.70) (1.48)
Number of adult males 0.0761 *" 0.0332" 1.7384 7.7664‘"
(3.95) (1.85) (0.3 7) (2.64)
Number of female adults 0.0698""' 0.0350" 0.2170
(3.41) (1 .71) (0.08)
Previous main season r/fall dev -0.0000 0.0000 0.0154 0.0350
(0.17) (0.06) (0.52) (1.37)
Square of rainfall deviations -0.0000 0.0000 -0.0001 -0.0002"'
(1.56) (0.02) (0.33) (1.70)
Long-term main season avg r/fall -0.0542*" -0.03 14* -3.7270 -7.7823*"
(3.07) (1 .84) (1.11) (2.77)
Main season r/fall std dev 0.0502 0.0051 7.4801 0.3054
(1.08) (0.12) (1 .21) (0.05)
Land cultivated 0.0024 0.0021 -0.3212 0.4294
(1.40) (1.15) (1.06) (1.56)
Major cash crop -0.0631 -0.1340" -1 1.8299 1 18584“
(1 .07) (2.40) (1.27) (1.74)
Mean dist to elect & phone -0.0206*** -0.0109 1.8426“ 0.6584
(2.88) (1.58) (1.75) (0.63)
Distance to shopping centre -0.0004 0.0037" 0.1828 0.1683
(0.29) (2.48) (0.71) (1.09)
Distance to tarmac road 0.0027 0.0028 -0.8628"”" -0.5024
(0.64) (0.70) (2.02) (1.17)
Value of assets -0.0003"'* -0.0001 0.0722" 0.2199"*
(2.57) (0.95) (2.50) (2.73)
Value of agric production -0.0012 0.0002 0.0834 0.3183*"
(1.43) (0.23) (0.82) (3.27)
Agricultural potential 0.0401 -0.3807*"
(0.65) (6.61)
year dummy 0.0520 0.0213 -8.5362 -5.7927
(0.85) (0.37) (1.12) (0.84)
Correction term for ofi-farm decision 6.4250 82.3761
(0.14) (0.84)
Correction term for salary/self -84.4160 -83. 1007
employment decisions (1 .44) (1.1 1)
Constant -1.3692*** 2.2737"* 56.5766 8.1403
(3.30) (5.54) (0.49) (0.23)
Observations 2648 2648 882 1524

 

Robust 2 statistics in parentheses; "' significant at 10%; "”“ significant at 5%; *** significant at 1%

Source: Author’s study

139

 

 

 

Table A3.5. Disaggregated Results for Agricultural Wage Labor and other Informal
Business Off-farm Work
Agricultural wage Labor Other Informal Business work

Participation Eamings Participation Earnings
Education of head -0.0449*"”“ 0.1251 -0.0156** -0.8762

(3.83) (0.34) (2.28) (0.62)
Education of spouse -0.0215* -0.6017 0.0082 0.3585

(1 .81) (1.58) (1 .03) (0.32)
Male headedness 0.1681 -7.5170 0.2078""‘ 20.4143“

(1.61) (1 .53) (2.72) (1.92)
Age of head 00359" -0.5599 -0.0362*"‘* 0.6170

(2.23) (1.25) (2.73) (0.57)
Age of head squared 0.0002 0.0025 0.0002 -0.0108

(1 .64) (0.74) (1.59) (1.15)
Number of adult males -0.0127 2.7593*** 0.0497*** 7.5271 *"

(0.50) (2.94) (2.79) (3.05)
Previous main season r/fall dev -0.0006** 0.0050 -0.0000 . 0.0407

(2.01) (0.56) (0.07) (1.38)
Square of rainfall deviations 0.0000 -0.0000 -0.0000 -0.0002

(1.12) (0.58) (0.72) (1.03)
Long-term main season avg r/fall -0.0908"'** -0.8030 -0.0201 -6.1804"*

(3.73) (1.04) (1.18) (3.07)
Main season r/fall std dev 0.0159 -l.5996 0.0232 3.5446

(0.23) (0.77) (0.53) (0.48)
Land cultivated -0.0055"' 0.1185 0.0032 0.4948

(1.94) (1.23) (1.61) (1.58)
Major cash crop -0.0935 -0.8143 -0.0827 8.9432

(1 . 19) (0.32) (1.46) (1 .40)
Mean dist to elect & phone -0.0082 0.3324 -0.0066 0.7583

(0.91) (0.66) (0.95) (0.79)
Distance to shopping centre -0.0013 0.1258 0.0037"* 0.2244

(0.72) (1.36) (2.58) (1 .38)
Distance to tarmac road 0.0174"* -0.0959 -0.0030 -0.4619

(3.55) (0.46) (0.75) (1.01)
Value of assets -0.0019" 0.0095 -0.0000 0.2162*"

(2.50) (0.49) (0.05) (2.66)
Value of agric production -0.0020"' 0.0542“ 0.0005 0.3223"*

(1.88) (1 .68) (0.60) (2.94)
year dummy -0.3343*** 3.0434 0.0681 -9.9171

(4.35) (1.03) (1.17) (1.41)
Number of female adults 0.0272 0.0303

(1 .00) (1.53)
Agricultural potential 0.3028*** -0.4684*"

(3.47) (7.87)
Constant 0.9073“ 44.5807*** 1.4083*" 6.3351

(1 .74) (2.69) (3.48) (0.16)
Observations 2648 2648 2648 2648

 

Robust 2 statistics in parentheses; * significant at 10%; ** significant at 5%; *" significant at 1%

 

Source: Author’s study

140

 

 

Table A3.6. Disaggregated Salaried Wage and Self Employment Models (Participation)
Low wage High wage Low return High return
labor labor business business
Education of head 0.0091 0.0996*** -0.0348*"‘* 0.0071
(1 . 12) (12.01) (4.70) (0.95)
Education of spouse -0.0073 0.0437 *** -0.0109 0.01 16
(0.79) (4.82) (1.33) (1.39)
Male headedness 0.3199*** -0.0527 0.1874" 0.2164"
(3.28) (0.52) (2.42) (2.42)
Age of head 0.0145 0.0422*** -0.0457*** -0.0135
(0.85) (2.58) (3.55) (1.01)
Age of head squared -0.0003* -0.0003** 0.0003" 0.0000
(1.83) (2.00) (2.27) (0.40)
Number of adult males 0.0428“ 0.1017*" 0.0354“ 0.0471 "
(2.05) (4.97) (1.97) (2.50)
Previous main season r/fall dev 0.0002 -0.0002 -0.0003 -0.0001
(0.88) (0.76) (1.19) (0.24)
Square of rainfall deviations -0.0000* -0.0000 0.0000 0.0000
(1 .84) (0.79) (0.45) (0.05)
Long-term main season avg r/fall -0.0570*** -0.0310 -0.0205 -0.0599*"
(2.91) (1 .57) (1.20) (3.34)
Main season r/fall std dev 0.0340 0.0777 -0.0251 0.0071
(0.65) (1.51) (0.55) (0.15)
Land cultivated 0.0014 0.0005 -0.0012 0.005?"
(0.69) (0.26) (0.69) (2.58)
Major cash crop -0.0926 0.0355 -0.1275** -0.1290**
(1 .38) (0.53) (2.24) (2.08)
Mean dist to elect & phone -0.0279*"'* -0.0017 -0.01 14 0.0052
(3.22) (0.20) (1.63) (0.71)
Distance to shopping centre -0.0024 0.0008 0.0005 0.0036"
(1 .44) (0.46) (0.34) (2.39)
Distance to tarmac road 0.0050 -0.0028 0.0022 -0.0037
(1 .08) (2.67) (0.56) (1.74)
Value of assets -0.0006** -0.0001 -0.0005*‘** 0.0002"
(2.17) (0.80) (3.49) (1 .74)
Value of agric production -0.0014 -0.0005 -0.0003 0.0023***
(1.46) (0.55) (0.3 8) (2.63)
year dummy 0.2703*** -0. 171 1'” -0.0292 0.0280
(3.93) (2.43) (0.50) (0.43)
Number of female adults 0.0481 "“' 0.0820**"‘ 0.0508" 0.0260
(2.13) (3.66) (2.55) (1.57)
Agricultural potential 0.0124 0.0540 -0.4354*** -0.1507***
(0.17) (0.76) (7.33) (2.91)
Constant -0.9591** -3.4 l 82"” 2.0516*** -0.4652
(1.99) (7.24) (5.12) (1.14)
Observations 2648 2648 2648 2648

 

Source: Author’s study

141

TableA3.7. Characteristics of Households with and without Off-farm Work

 

 

Land
Type of ofil Total Crop Value of cultivat Crop Education
farm work Status income income assets ed share of head
Non-
Off-farm participants 1 13380 75724 159475 1 1 0.86 4.8
Participants 184346 71262 156023 14 0.40 6.9
Non-
participants 137512 72596 144421 13 0.62 5.3
Salary
Participants 220913 72189 182036 14 0.32 8.4
Non-
participants 1 50351 74945 170470 12 0.66 6.5
Self-
employment
Participants 176708 70561 146619 13 0.42 6.3
Non-recipients 176345 76597 162198 14 0.54 7.0
Remittance
Recipients 139246 62713 144585 13 0.47 4.9

 

Author’s study

142

 

 

 

    

 
    
 

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