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Technical Efficiency Changes at the Farm-level: a Panel Data Analysis of Rice Farms in Bangladesh

Mohammad Jahangir Alam
Department of Agribusiness and Marketing, Bangladesh Agricultural University, Mymensingh-2202, Bangladesh.

Guido Van Huylenbroeck
Department of Agricultural Economics, Ghent University, 653 Coupure Links, 9000 Ghent, Belgium.

Jeroen Buysse
Department of Agricultural Economics, Ghent University, 653 Coupure Links, 9000 Ghent, Belgium.

Ismat Ara Begum
Department of Agricultural Economics, Bangladesh Agricultural University, Mymensingh-2202, Bangladesh.

Sanzidur Rahman
School of Geography, Earth and Environmental Sciences, the University of Plymouth, Plymouth, PL4 8AA, UK.

Abstract/ Executive Summary:

This paper examines technical efficiency changes at the farm-level for rice farms in Bangladesh over a 17 year period (1987 to 2004) using nationally representative panel data. Results from the stochastic production frontier analysis indicate that technical efficiency of the rice farmers has declined from 83% to 60% over this period due to a host of farm as well as socio-economic factors. Age, education, tenure status and involvement in off-farm work are factor negatively influencing technical efficiency while the relationship with farm size is positive. Under the current production technology and input use, 40% higher production could be reached by removing technical efficiency which is substantial. Policy recommendations include consolidation of land and strengthening of extension services.

Keywords: Technical efficiency, Rice farms, Efficiency elasticity, Panel data, Bangladesh.

Location: Bangladesh

Start Date: 00-00-1987

End Date: 00-00-2004

Program Area: Socio-economic and Policy

Non-commodity: Efficiency

Objectives:

Over time in production performance at the farm-level. The main objective of this paper is thus to identify the changes in farm-level technical efficiency over time for rice farms in Bangladesh,which is the key sector to sustain agricultural growth of the economy. Next it also examines the factors that affect farm-level technical efficiency. In this paper we apply a stochastic frontier production function model, in which the technical efficiencies of farms are allowed to vary over time.

Methodology:

THEORETICAL STOCHASTIC FRONTIER MODEL The stochastic frontier approach (SFA) was for the first time independently proposed by Aigner et al.(1977) and Meeusen and Van den Broeck (1977). SFA has contributed significantly to the literature by using econometric modeling of production and technical efficiency of farms both in a static or a dynamic framework. SFA involves two random components, one associated with the presence of technical inefficiency and the other being a conventional random error. The advantage of the SFA is its capability to measure the efficiency in the presence of statistical noise. Applications of frontier functions have involved both cross-sectional and panel data. In our study we use a panel data set as it is more informative and is able to capture dynamic behavior (Baltagi and Song, 2006). Specifically there are some advantages in using panel data instead of a cross section or time-series data (Hsiao, 2003 and Baltagi, 2005). These are: (1) Panel data have more variability and less collinearity among variables, (2) panel data controls individual heterogeneity and, therefore, able to get unbiased estimates and (3) able to identify and estimate effects which are not detectable in a cross-section or a time-series data. The SFA approach can effectively handle statistical noise in panel data but is adversely affected by measurement error when applied to cross-sectional data. Furthermore, Sickles (2005) and Gong and Sickles (1992) showed that the panel data version of the stochastic frontier model works well. This is because the panel data model incorporates additional information from the times-series nature of the data as well as the distributional assumptions, which allow estimation via the method of maximum likelihood (ML). A panel data stochastic frontier model also has advantages over DEA (data envelopment analysis), which typically relies on cross-sectional data to estimate efficiency (Ruggiero, 2007). Therefore, we choose to apply SFA with a simple exponential specification of time-varying farm effects using a balanced panel of 73 farms over T (1987, 2000 and 2004) periods to estimate efficiency.

Source of Information: African Journal of Business Management Vol. 5(14), pp. 5559-5566, 18 July, 2011 Available online at http://www.academicjournals.org/AJBM DOI: 10.5897/AJBM11.329 ISSN 1993-8233 ©2011 Academic Journals

Article Link (Online Journal):

Funding Source:

1.

Budget:

Total Budget (Tk.) :

Achievement/Findings:

The paper used the stochastic frontier production function with time varying farm effects model to examine the changes in technical efficiency at the farm-level for rice farms in Bangladesh using a balanced panel data for a cohort of 73 farms over a 17 year period (1987 to 2004). Our results indicate that the technological progress increased and has contributed to output significantly but that technical efficiency has declined over the study period. It was 60% in 2004 whereas it was 74 and 83% in 2000 and 1987 respectively. These numbers indicate that rice farmers are not fully efficient in Bangladesh and that the level of technical efficiency is decreasing over time at the farm-level. Thus, there remains considerable scope to increase production by improving efficiency of Bangladeshi rice farmers. The farm-specific variables are used to explain technical inefficiencies and indicate that those farmers who are young and have larger farms and do less off-farm work tend to be more efficient. Owner operators are clearly more efficient than the tenants. Extension services have a positive but not significant influence in increasing efficiency in rice farming showing their poor performance. Since the technical efficiency has declined over time, it is of utmost importance to design appropriate policies to improve efficiency at the farm level. From policy point of view, consolidation of land ownership can improve the technical efficiency level of rice farms. However, consolidation is a long term process. In short time inefficiency in rice farming can be reduced significantly by strengthening extension services and to increase their performance. We therefore, recommend paying more attention on this aspect in attempt to increase efficiency and to contribute to increased factor productivity and output growth.

Knowledge Management: Journal