Ebook Liquidity constraints and farm household technical efficiency. Evidence from South Africa
Farm household efficiency is a multidimensional concept that has been widely analysed in the empirical literature and consists of two main components: technical and allocative efficiency. This papers focuses on farm household technical efficiency and adopts a household level approach that takes into account the role of non-farming activities. The analysis helps to understand farm households’ behaviour and the constraints that prevent the optimal use of household resources. A large fraction of rural households in KwaZulu Natal province of South Africa has access to land for agricultural purposes. Nevertheless farming activities, remain a marginal source of income. Understanding the reasons underlying poor performances in agriculture is an important task to provide insights for the ongoing land reform and redistribution programs and to improve the role of agriculture in contributing to the livelihood of rural households.
A previous study done by Piesse et al. (1996) provides a first analysis of South African farms’ technical efficiency that is, however, confined to a limited sample of households in the three homelands of KaNgwane, Lebowa and Venda. It is recognised in the literature that rural households engage in a wide range of activities in order to generate a livelihood. The standard analysis of technical efficiency is here extended to capture the linkages between farming and non-farming activities that characterised most of rural households. This paper follows the work of Chavas et al. (2005) who show that in the presence of market imperfections or when farming and non-farming technologies are joint, farm and off farm decisions are non - separable and a household level analysis of technical efficiency is more appropriate than a farm level analysis. This approach, initially introduced by Chavas and Alibert (1993), has been adopted more recently by Fletschner (2008), Fletschner and Zepeda (2002), Anriquez and Daidone (2008) and Fernandez-Cornejo (2007).
The impact of liquidity constraints on household behavior is analysed considering the pension transfer provided by the South Africa Old Age Pension Program to all women over age 60 and men over age 65. Through this analysis, this paper contributes to the current debate on the effects of the South African Old Age Pension Program on household behaviour. One of the controversies lies on whether the pension receipt induces an income or a liquidity effect. In the first case, the receipt of the pension reduces recipient and, possibly, other family members’ labor supply. On the other hand, if the household is liquidity constraint, the pension receipt can have a positive effect on labor supply enabling farm investment and financing job searching also through migration. On one side Bertrand et al. (2003) argues that the pension transfer has a negative effect on labour supply of the prime age adults living with a pensioner, the impact differs according to the age and gender of the individuals. Ranchhod (2006) also finds a negative effect of the pension on the labour supply of the beneficiaries. On the other side, Klasen (2008) finds no effect of pension income on the reservation wage of the unemployed and Jensen (2004) finds no evidence that households reduce labor supply when they receive the pension. Moreover, Posel et al. (2006) and Ardington et al. (2009) questioned the findings in Bertrand et al. (2003) arguing that once migrants are included in the analysis the results change considerably.
This study attempts to further address this issue by focusing on farm households that have the peculiar characteristic of being a supplier and an employer of labor at the same time. The relationship between pension and labour supply is analysed from a different perspective. In the empirical estimation of technical efficiency the number of adult family members are considered as inputs in the production of on and off farm outputs. In this context, a negative labor supply effect will imply a negative impact of the pension on technical efficiency since labor inputs are left unproductive. On the other hand, if households are liquidity constrained, access to the transfer is expected to improve household technical efficiency, for example, by enabling the use of more expensive and higher quality inputs and factors or by allowing households to overcome the entry barriers in the labor market.
In the empirical estimation, the liquidity effect is identified by exploiting the age eligibility criteria adopted by the South Africa Old Age Pension Program. Pension eligibility is used instead of actual pension receipt and several checks are conducted in order to examine the presence of potential confounding effects between the eligibility indicator and age trends or differences in background. Instrumental variable technique is also used to address the potential endogeneity of the income diversification index. The results show that access to liquidity and income diversification have a positive effect on household technical efficiency suggesting that institutional reforms to improve access to labor and credit markets can allow a more efficient use of farm household resources.
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