2010 AMA Innovation Lab Annual Report

The May 2010 release of the Feed the Future Guide signaled the commitment of USAID and the US Government to accelerate inclusive agricultural sector growth. (The guide is available online: http://www.feedthefuture.gov/guide.html.) This goal is in keeping with the strong body of evidence that agricultural growth, especially when inclusive or broadly-based, helps reduce poverty. Therefore, meeting Feed the Future poverty reduction and hunger elimination targets requires strategies that focus on inclusive agricultural growth.

To date, sound mechanisms to involve low-wealth rural households in the growth process have proven elusive. Therefore, AMA CRSP’s new and ongoing research and pilot projects speak directly to the need for innovations that will:

provide sound and affordable risk management services to smallscale producers and their communities

improve small farmer access to business development and financial services. Let’s look more closely at AMA work in these areas.

Risk Management

In 2010, AMA and USAID convened a meeting in Rome of leading thinkers on rural risk and risk management, which helped launch the I4 Index Insurance Innovation Initiative. The meeting resulted in a clear set of priorities and promising directions for I4 pilot schemes to build risk management instruments that are sustainably implemented by the private sector and meet the needs of small-scale farming and pastoral communities. These priorities were incorporated into a call for proposals, and by mid-2010 five new index insurance projects were
selected and funded, joining three projects in this area already underway with AMA sponsorship.

By employing rigorous impact evaluation and research methods on index insurance products, these exciting new pilot projects will help rural families link to new economic growth opportunities. In Ethiopia, for example, an I4 pilot uses weatherbased index insurance to tackle the interlocking
market failures that currently inhibit rural development and result in low fertilizer use and low credit uptake. The project will pilot a form of insured credit to local cooperatives. In years of poor harvest the insurance will pay back the annual investment required for farming, thus providing a comprehensive risk management tool for Ethiopian farmers. The provision of insured credit should crowd in investment and inform best practices from other I4 projects that also link credit and insurance.

Climate change is another force that threatens rural livelihoods in many parts of Africa. While insurance may seem like an obvious solution to the threat of increased climatic instability, the insurance industry is logically wary of issuing contracts in areas with shifting, unknown levels of risk. In Ethiopia, a second I4 pilot project is trying to break through this problem by designing an index-based livestock insurance that explicitly takes into account the threats and opportunities presented by climate change. Specifically, this project draws on the Intergovernmental Panel on Climate Change (IPCC) predictions of climate change and associated rangeland biomass dynamics in order to explore dynamic pricing that fairly accounts for expected climate change impacts. In addition, this project will explore the potential for conditional insurance transfer programs that link livestock insurance to the adoption of strategies designed to minimize the deleterious consequences of climate change.

In Mali, an I4 pilot will design a district-level areabased yield index insurance product for cotton producers. In Mali, cotton producers are organized into cooperatives and are jointly liable for investment loans that cover seed and fertilizer inputs. By targeting cooperative groups that are vulnerable to loan default from variable weather, this pilot will provide insight into both cooperative risk management strategies and joint liability. Through comparisons with other I4 activities focusing on group-based contracts or credit linkages, this project will identify best practices that can be applied to similar insurance products in other regional contexts.

Importantly, these three pilots, along with the two others selected by I4, build on lessons from ongoing I4 projects. The Mali cotton farmer pilot, for example, is developing a new, innovative dual strike point contract, the inspiration for which emerged directly from conversations with Peruvian cotton farmers involved in the area-based yield insurance project for Peruvian coastal agriculture, which has now entered its third year. (See page 31 for the chapter on the Peru project.) Similarly, the Ethiopia index-based livestock insurance pilot draws on lessons from a highly innovative venture underway in northern Kenya and now entering its second year. This latter project has generated a wealth of ideas and materials useful for helping new projects tackle the difficult task of educating small-scale farmers about how index insurance works and what its limitations are. (See page 25 for the chapter on this project.)

This educational aspect is of critical importance. Several AMA projects show that subsidies can encourage take up of novel insurance products, such as health insurance in Cambodia (see page 9) and weather insurance in India (see page 19). Yet, while subsidies, or improved efficiencies in pricing, may be necessary to facilitate dramatic increases in risk coverage, providing financial education may prove to be the most important ingredient for getting insurance into the hands of the poor. In India, for example, take up of weather insurance has increased over the three years of the project, as the project has provided financial education to farmers. In spite of the complexity of these insurance products, AMA work shows that financial education can be as important as subsidies in increasing take up by families.

The launch of the new pilot projects and the ongoing AMA work on risk management already has yielded exciting preliminary results; the work of the next few years will reveal the way in which these novel forms of risk management can provide productive social protection.

Increased Savings, Affordable Inputs and Improved Technologies

World food prices returned to record levels in late 2010, reviving concerns about impoverishment, hunger and social unrest in the developing world. Being a net food importer, Sub-Saharan Africa is severely affected, in particular the 320 million inhabitants living on less than a dollar a day, with food representing the bulk of their consumption. Yet, Sub-Saharan Africa has substantial agricultural potential that remains untapped because of farmers’ limited use of existing modern agricultural technologies.

One effort to tap this potential has been the provision of seed-fertilizer subsidies to small-scale farmers. While adopted on an increasingly wide scale across the continent, there has been relatively little effort to evaluate the effectiveness of subsidies in either the short or long run. A new AMA study attempted to fill these lacunae by estimating the impacts of Malawi’s 2009 Farm Input Subsidy Program (FISP) on fertilizer use and maize yields (see page 89). The findings show positive and statistically significant correlations between participation in the FISP and intensity of fertilizer use. Fertilizer use is higher among households that plant improved maize varieties than among those that plant traditional varieties. FISP was associated with an increase in maize availability of approximately 250kg per household in the AMA sample.

While the Malawi study provides needed evidence about the short-term impact of small farm technology subsidies, do these impacts persist once subsidies are removed? A second AMA project is examining this longer-term question, asking if farmer practices change fundamentally after subsidy programs or change only in direct reaction to the availability of subsidies and fade after these are withdrawn. If subsidy impacts are to persist, then clearly farmers need to be able to replace the value of the subsidies with their own savings (or other sources of capital).

This second AMA pilot project distributed vouchers for fertilizer in a randomized fashion to a sample of farmers in Mozambique (see page 53). In partnership with a local financial institution, the researchers then randomized offers of a matched savings account to farmers. Designed to get farmers into the habit of both saving and interacting with formal financial institutions, the matched savings program pays a 50% match to farmers who meet a savings target tied to the amount of funds needed to finance improved agricultural technologies without subsidies. After an initial small-scale pilot phase (in which a group matched savings account was piloted and rejected), this new program is currently in the field.

As illustrated by this Mozambique project, facilitating savings can be a key to the type of longrun growth for the small farm sector that is central to the Feed the Future initiative. Another AMA project on savings incentives provides further lessons on strategies whereby offering a commitment savings product alongside a loan can allow an individual who would otherwise borrow indefinitely to both increase his or her savings and repay the loan.

In an experiment with the largest public bank in Guatemala, AMA analyzed the savings response of microfinance borrowers who were given the opportunity to contribute to a savings account at the time they made their regular monthly loan payment (see page 47). The bank engaged in a promotional campaign to induce its microfinance clients to open a savings account. Clients were then offered one of three options: a savings account with no commitment to save (the control group), a commitment savings account where each time clients paid their loan they committed to save an amount they themselves had decided upon, and a commitment savings account where the default level of saving was set at 10% of the loan payment.

The results on product acceptance rates and savings behavior were striking. The savings promotion was powerful in inducing clients to open a savings account, with roughly 40% in both the control group and the commitment savings group that self-determined the level of savings choosing to open a savings account. Nearly 80% of those in the savings group that had a 10% default level of savings opened an account.

For all savers, a faster rate of savings accumulation corresponded to a faster rate of capital repayment on the loan and a weakly lower incidence of repayment problems, indicating that savings and loan repayment were complementary. These AMA treatments represent scalable commitment savings products, with results showing that borrowers who recognize that they lack the self-discipline to save and are willing to bind themselves would experience welfare benefits that could possibly move them from a debt-driven to a savings-driven investment path.

Access to Business Development and Financial Services

Low levels of education and lack of access to credit—constraints such as these are typical of rural areas in most developing countries, particularly in the agricultural sector. Implementing development strategies to eliminate or ease these constraints can help farmers realize a greater productive potential.

A Nicaraguan entity, the Millennium Challenge Account (MCA), was established to implement a program that offered farmers rural business development services, including technical and financial assistance and improved market information and linkages. AMA was brought in to evaluate the direct impacts of this rural business development project (see page 59). Preliminary results show that the project does have significant impact on the economic wellbeing of many rural households, but it does not work for everyone. Variables such as credit constraints and tenure conditions could explain some of this impact heterogeneity.

The analysis shows that the project did not directly benefit many households below the mid-point of the rural income distribution. How far down the distribution a technology and business skill transfer project can go is an important and always difficult question. The results so far obtained from this study show that the effect of the program has no relation to the initial living standard of a household. Households close to the eligibility floor could obtain the same absolute benefit from the project as easily as households with a higher endowment of assets. This finding suggests that this MCA project, as well as similar projects, might consider reaching further down the wealth distribution.

Poor, rural farmers are often left out of the market altogether. A study in Peru measured improvements to overall farmer welfare based on their participation in a contract with a firm (see page 43). The findings show that contract farming arrangements can favor the inclusion of smallholders and link them to dynamic markets. The farmers in the study received more inputs and financial assistance from the firm with which they contracted. This led to building a long-term relationship with the firm and receiving higher prices for production.

Initial findings from an AMA project in Ghana found that providing capital and insurance to farmers made a difference in their practices, investments and behaviors (see page 71). Farmers with capital and insurance spent much more on fertilizer compared to the control group, and farmers also increased revenue from bagged crops. These farmers cultivated more acres compared to the control group and increased the proportion of hired labor.

Continued Opportunities to Make a Difference

As illustrated above, AMA has demonstrated impact in critical areas that can lead to agricultural growth and economic opportunities for the rural poor in developing countries: risk management, savings, inputs and technologies, and business development and financial services.

AMA has made strides in other areas. In Nicaragua, a study of an ongoing conditional cash transfer program found significant effects on cognitive
outcomes, especially language. These impacts were in evidence two years after the program ended. The cash transfer program increased intake of nutrientrich foods, early stimulation, and use of preventive health care—all of which have been identified as risk factors for development in early childhood. Households increased expenditures on these inputs more than can be accounted for by the increases in cash income only, further suggesting that the program changed behavior on the part of the parents. The findings suggest that gains in early childhood development outcomes should be taken into account when assessing the benefits of cash transfer programs in developing countries.

AMA encourages innovations, as evidenced by a project in India that uses mobile phone technology to disseminate futures prices to farmers. Previously, farmers had to travel to price boards to check futures prices; now mobile technology makes it possible to cater financial information to individual farmers and provides insight into how information spreads among farmers. Mobile phones also prove to be a benefit to research as they can lower the cost of conducting farmer surveys and enable more frequent surveys; this in turn helps paint a more nuanced picture of how farmers make decisions on planting crops and what price expectations they have.