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Assessing Determinants of Income of Rural Households in Bangladesh: a Regression Analysis

Dayal Talukder
ICL Business School, New Zealand

Abstract/ Executive Summary:

The purpose of this study is to investigate the determinants of income and growth in income of rural households in Bangladesh in the post-liberalization era. Using data mainly from secondary sources, the study applied the ordinary least square (OLS) regression models to assess the determinants. The determinants were justified based on both initial (1985-86) and current (2005) endowments (household characteristics) for comparative analysis. The study used both economic and non-economic characteristics simultaneously for considering their joint effects on household income. The OLS regression models revealed that household size was the only non-economic factor that was a statistically significant and positive determinant of household income in both 1985-86 and 2005. Household size was the largest positive determinant and small farmer dummy was the largest negative determinant of income in 1985-86. Similarly, household size was the largest positive determinant and farm-household dummy variable was the largest negative determinant of income in 2005. Although rice is the staple food in Bangladesh, the shares of income from rice had negative regression coefficients in both 1985-86 and 2005, suggesting that the share of rice income was not a determinant of income. Considering initial endowments, the household land area was the largest positive determinant and share of income from wage-salary was the largest negative determinant of income-growth in 1985-86. Similarly, considering current endowments, the change in share of income from house rent was the largest positive contributor and the share of income from rice was the largest negative contributor to growth in 2005. The share of income from rice was a positive determinant considering the current year endowments and was not statistically significant with the base year endowments. While the share of agriculture income was a positive determinant of household income in both years, the magnitude of it influence was very insignificant in 2005. This study suggests that an increased productivity of rice did not influence in determining income and growth in income of rural households in the post-liberalization era, implying the requirement for government policy interventions to support farm households for maintaining food security and price stability in the economy.

Keywords: Agricultural trade liberalisation, Determinants of income, Growth in income, Rural households, Bangladesh

Location: In Bangladesh

Start Date: 00-00-2005

End Date: 00-00-2005

Program Area: Socio-economic and Policy

Commodity: Socio-economic status, Assessment

Objectives:

To examine the determinants of income and growth in income of rural households in the post-liberalization era with a view to suggesting a policy framework for the government to cope with food security and food production issues in the future.

Methodology:

The study used secondary data on household income mainly from two household surveys of the Bangladesh Bureau of Statistics (BBS) including Household Income and Expenditure Survey(HHIES) 2005 (BBS, 2007), and Household Expenditure Surveys (HHES) 1985-86 (BBS, 1988). It has selected 1985-86 as a the base year because of the availability of data as well as the substantial agricultural trade liberalization in the late 1980s. Similarly, it has selected 2005 as the current year due to the availability of the latest household survey data. Therefore, changes in household income is measured using data of HHES 1985-86 as the base year and data of HHIES 2005 as the current year. The study encountered limitations in the use of secondary data due to a lack of disaggregation. The aggregate data approach uses summaries and thus cuts out much variation, resulting in higher correlations than with disaggregated data. In HHIES 2005, all households were aggregated under 19 income or expenditure groups. For the purpose of regression and poverty analyses, this study overcame this limitation by disaggregating household data into 100 observations using respective household groups’ weight (percentage share) as the basis for disaggregation. For instance, in HHIES 2005, households having income between TK3000 and TK3999 represented 14.87 percent of the total households (BBS, 2007) and they were disaggregated into 15 observations (households) having similar distance of income between two observations. This disaggregation is based on the assumption that keeping the same average income distance between two observations will not change the original characteristics of the data. The study has also conducted a Data Exploratory Analysis to identify outliers. Two outliers were found in the data set of HHES 1985-86 and these outliers were dropped from this data set. However, no outlier was found with the data set of HHIES 2005. The study also used primary data (Household Survey 2010, conducted by the authors) as complementary to secondary data. The study used the income to measure economic welfare, as it captures the means by which households can achieve welfare. In most empirical studies, income is the indicator used for household welfare and resources. This study also used the income to analyse household welfare. The study investigated the changes in the welfare of rural households. Here the changes in welfare were measured through the changes in determinants of income in the post-liberalization era. The study assumed that households were uniform in terms of rational behaviour – they wanted to maximize their welfare subject to their budget and resource constraints. The term ‘welfare’ was treated as the meaning conveyed by the concepts ‘satisfaction’, ‘well-being’ and ‘utility’ that are used in economics and other social sciences. Household welfare is dependent on their real income. The welfare function may differ across the rural households and across circumstances, indicating that the same amount of real income may produce different levels of welfare. Thus, the welfare function depends not only on the real income but in some cases also on age, health status, employment status and other socio-economic factors. Therefore, the study considered both economic and non-economic characteristics of households in determining household welfare. The literature review showed that agricultural trade liberalization could produce diverse welfare impacts across rural households. Some households might have experienced benefits and others might have experienced losses. This is because agricultural trade liberalization affects both goods and factor prices, which in turn affect household welfare in different ways, depending on their different characteristics (Nicita, 2009: 19). All rural household groups were divided into five quintiles on the basis of income: 1. Bottom 20 percent (Quintile 1), 2. Lower middle 20 percent (Quintile 2), 3. Middle 20 percent (Quintile 3), 4. Upper middle 20 percent (Quintile 4), and 5. Top 20 percent (Quintile 5). They were classified into two main groups on the basis of their involvement in farming activities, namely: a. Farm households, and b. Non-farm households. Other classifications included: 1. Farmers, who owned farmland, and 2. Agricultural laborers. Farmers were further divided into three sub-groups based on their farm size (as used by the BBS during the Household Income and Expenditure Survey 2005, and Agricultural Sample Survey 2005): a. Small Farmers (0.05-2.49 acres), b. Medium farmers (2.50-7.49 acres), and c. Large farmers (7.5 acres and above). Finally, households were classified on the basis of their participation in the rice market either as 1. Net buyers or 2. Net sellers. The study applied the Deaton (1989) methodology, as explained earlier, to identify net seller and net buyer households.

Source of Information: Journal of Applied Economics and Business Research, JAEBR, 4(2): 80-106 (2014)

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Achievement/Findings:

The above findings and analyses suggest that household size was the only non-economic factor that was a statistically significant and positive determinant of household income in both 1985-86 and 2005. Household size was the largest positive determinant and small farmer dummy was the largest negative determinant of income of rural households in 1985-86. Similarly, household size was the largest positive determinant and farm-household dummy variable was the largest negative determinant of income in 2005. Although rice is the staple food in Bangladesh, the shares of income from rice had negative regression coefficients in both 1985-86 and 2005, suggesting that share of rice income was not a determinant of household income. Considering initial endowments, the household land area was the largest positive determinant and share of income from wage-salary was the largest negative determinant of growth in household income in 1985-86. Similarly, considering current endowments, change in the share of income from house rent was the largest positive contributor and the share of income from rice was the largest negative contributor to income growth in 2005. The share of income from rice was a positive determinant considering the current year endowments but was not statistically significant with the base year endowments. While the share of agriculture income was a positive determinant of income in both years, the magnitude of it influence was very insignificant in 2005. This study argues that while the share of rice income was a negative determinant of household income in both 1985-86 and 2005, the magnitude of its negative influence increased in 2005. Although the share of agriculture income was a positive determinant of income in both 1985-86 and 2005, the magnitude of it influence was very insignificant (almost zero) in 2005. The study suggests that while agricultural trade liberalization positively impacted on rice production, resulting from technological transformation and leading to a substantial decrease in both producer and consumer prices of rice, farm households experienced a relatively small gain compared to non-farm households due to a greater decrease in the producer price than that in the consumer price. Farm households constitute the majority of rural communities and contribute much to the rural economy. Based on the findings, this study argues that some farmers may shift from rice to other agricultural or non-farm activities, thus jeopardizing the country’s food security and self-sufficiency efforts in food-grain production. Therefore, it is crucial to formulate government policies to support farm households by means of income transfer such as tax reduction and production subsidy in order to avoid food security and macroeconomic instability as a result of high food prices due to a shortage of rice production. The government should avoid a high food price shock that could adversely affect the performance of economic growth, price stability and unemployment – the three major objectives of the government.

Knowledge Management: Journal