Essays on finance, productivity, market participation and welfare : the case of smallholder agricultural farmers in Ghana
Thesis (PhD)--Stellenbosch University, 2018.
ENGLISH SUMMARY : Access to finance plays a significant role in transforming or modernising the agricultural sector from subsistence to commercial farming; however, access to finance remains a challenge to smallholder farmers, especially for those in developing countries. Although the literature points to some directions on the transmission of finance into the productivity and welfare of smallholder farmers, very few rigorous studies have been conducted to investigate the impact of access to finance on smallholder agricultural productivity and household welfare, particularly in Sub-Saharan Africa. This study, therefore, tested for the finance-productivity and finance-welfare links in Ghana using rigorous evaluation techniques that address the problems of endogeneity and selection bias. Additionally, the study examined the determinants of smallholder market access and market participation as well as the impact of integrated soil fertility management (ISFM) on productivity. Data for the study was obtained through a field survey on the Agricultural Value Chain Facility (AVCF) project implemented in the Northern Region of Ghana. The outcomes of the study are presented in four essays. In the first essay, we estimate the effect of access to finance on the productivity of smallholder maize farmers in the Northern Region of Ghana. We applied instrumental variable (IV) estimation techniques to control for selection and endogeneity bias. Our results indicate that access to finance increases maize productivity. The second essay estimates the effect of access to finance on smallholder farmers’ welfare. We compared the average difference in welfare between farmers with access to finance and non-equivalent control groups. By adopting propensity score matching (PSM) and propensity score weighting (PSW) to control for selection bias, the results of the econometric estimation indicate that access to finance has a positive and significant effect on the welfare of smallholder farmers. Financial sector policies must be focused not only on rural finance in general but must also be geared towards unlocking the challenges of agricultural financing at all levels. To this end, developing a comprehensive agricultural value-chain finance policy will play a cardinal role towards improving access to finance and improving the welfare of smallholder farmers. Agricultural policies must have significant financing subcomponents aimed at financing the agricultural value chain. In the third essay we assess the market access and market participation amongst smallholder farmers. Using the double-hurdle model, we found that there are significant differences in the effect of market factors (transactions and transportation costs) and production factors on market participation and the intensity of participation. These differences also exist across crop types. Policies and strategies for increasing market access and market participation must not be the same for all smallholder farmers. The fourth and final essay estimates the impact of the Integrated Soil Fertility Management (ISFM) training program under the Danish International Development Assistance (DANIDA) Agricultural Value Chain Facility (AVCF) project on the productivity of smallholder farmers. We used a survey data of beneficiary and non-beneficiary non-equivalent control groups to compare the mean productivity. The propensity score matching (PSM) method was deployed to estimate the impact of the ISFM program. The results indicate a statistically significant increase in the farm-level productivity of the crops. In view of this, a policy direction towards increasing agricultural productivity of smallholder farmers must take into consideration the ISFM practices. This study makes unique contributions to the literature in several ways. First, we show that finance in the form of production credit is crucial for smallholder farmers. For these farmers a critical challenge to productivity is the ability to access short to medium-term credit on a regular basis to finance the cost of inputs, market access issues and other operational costs. Access to finance helps to mitigate against the shocks and risks (real and perceived) associated with smallholder farming and which make commercial banks shy away from lending in this area. Second, we present evidence on the effect of finance on the welfare of smallholder farmer households, using the case of Ghana. Although the literature on finance and welfare specifies a production channel via which finance affects welfare, it fails to show how this occurs with empirical evidence. Therefore, to better understand the link between finance and welfare, it is important to empirically test this amongst smallholder finance. Third, we present new dimensions to the literature and show, in particular, that there is substantial separability between the decision to access the market and that of market participation by smallholder farmers. The decision to market access and market participation are therefore mostly two different issues for smallholder farmers and factors that affect these decisions can affect them separately and in different directions. Finally, this thesis presents further evidence on the productivity impact of soil fertility and crop management by assessing the impact of a relatively new practice, namely Integrated Soil Fertility Management (ISFM). This evidence strengthens the case for an integrated approach to crop management within ecological contexts.
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