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The Effect of Non-agricultural Self-employment Credit on Contractual Relations and Employment in Agriculture: the Case of Microcredit Programmes in Bangladesh.

Mark M. Pitt
Professor of Economics
Brown University, USA

Abstract/ Executive Summary:

This paper examines the effect of group-based credit for the poor in Bangladesh, by gender of participant, on participating household's mix of agricultural contracts (quantities of land sharecropped and rented), and the supply of agricultural labor which takes the form of own- cultivation as opposed to agricultural wage labour. The group-based micro credit program examined provide production credit for non-agricultural activities to essentially landless and asset less rural households. Landless cultivators are more likely to have their contractual choices shaped by credit market constraints than others. On a priori grounds it is important to distinguish credit effects by gender of participant. Male program credit, if properly monitored, should induce men to substitute away from supplying agricultural labour and contracting for agricultural land to supplying the non-agricultural labour required by the non-agricultural self-employment activity financed by the micro credit program. Program participation by women, who are otherwise much less involved in income -generating activities, diversifies the sources of household income not merely by the type of activity undertaken but also across individuals within the household. These outcomes that permit households to choose higher return but riskier agricultural contracts. Econometric analysis of a 1991/92 household survey provides strong evidence that participation in these group-based micro credit programs substantially alters the mix of agricultural contracts chosen by participating households. In particular, both female and male participation induces a significant increase in own- cultivation through sharecropping, coupled with a complementary increase in male hours in field crop self-employment and a reduction in male hours in the wage agricultural labour market, consistent with its presumed effects in diversifying income and smoothing consumption. Female credit effects are larger than male credit effects in increasing sharecropping and in reducing male wage labour and increasing agricultural self-employment, as predicted.

Keywords: Non-agricultural, Self-employment,Credit,Employment in agriculture,Microcredit programmes

Location:

Start Date: 00-00-1991

End Date: 00-00-1992

Program Area: Socio-economic and Policy

Non-commodity: Credit

Objectives:

To examines the effect of group-based credit for the poor in Bangladesh on the household's mix of agricultural contracts and the supply of agricultural labour.

Methodology:

This paper estimates the impact of participation in three group-based microfinance programmes (Grameen Bank, Bangladesh Rural Advancement Committee (BRAC), and Bangladesh Rural Development Board's (BRDB) Rural Development RD-12 programme), by gender of participant, on the mix of agricultural contracts, measured as male hours of wage labour, male hours of self- employment in agriculture, and the area of land sharecropped and rented in.

Data and Estimation Method

The econometric methods used in the analysis are essentially the same as that presented in Pitt and Khandker (1998) and hence only an abbreviated version of it here. This paper estimates the conditional demands for a set of household behaviours, conditioned on the household's programme participation as measured by the quantity of credit borrowed.A multi-purpose quasi-experimental household survey was conducted in 87 villages of 29 thanas in rural Bangladesh during 1991/92. The sample consists of 29 thanas (sub-districts) randomly drawn from 391 thanas in Bangladesh, of which 24 had one (or more) of the three credit programmes under study in operation, while 5 thanas had none of them. Three villages in each programme thana were then randomly selected from a list of villages, supplied by the programme's local office, in which the programme had been in operation at least three years. Three villages in each non-programme thana were randomly drawn from the village census of the Government of Bangladesh. A households census was conducted in each village to classify households as target (i.e. those who qualify to join a programme) or non-target households, as well as to identify programme participating and non-participating households among the target households. A stratified random sampling technique was used to over- sample households participating in one of the credit programmes and target non-participating households. Of the 1,798 households sampled, 1,538 were target households and 260 non-target households. Among the target households, 905 households (59 per cent) were credit programme participants.

Source of Information: The Bangladesh Development Studies,Vol. 26, No. 2/3, MICROFINANCE AND DEVELOPMENT: EMERGING ISSUES (June-Sept. 2000), pp. 15-48

Article Link (Online Journal):

Funding Source:

Total Budget (Tk.) :

Achievement/Findings:

The strong evidence is found that participation in these group-based micro credit program substantially alters the mix of agricultural contracts chosen by participating households. In particular, there is a significant increase in own-cultivation through sharecropping coupled with a complementary increase in male hours in field crop self-employment and a reduction in male hours in the wage agricultural labor market. We find no strong effect of program credit on the fixed rental of land, a type of contractual relationship that is not common among the landless poor in Bangladesh. Female credit effects are larger than male credit effects in increasing sharecropping. In addition, female credit acts to increase sharecropping relatively more in the slack [Aus) season than in the peak [Aman) season. Female credit also reduces male agricultural wage hours in every season. Male credit reduces it in every season except the peak [Aman) season. Female and male credit in every season increase self-employment in every season. Thus, it would appear that both female and male credit induce a substitution of male agricultural activity from the wage labor market to own-cultivation, consistent with its effect in diversifying income and smoothing consumption, outcomes that permit households to choose higher return but riskier agricultural contracts.

Knowledge Management: Journal