Smart Subsidies How Combining Subsidies with Savings Brings

Smart Subsidies: How Combining Subsidies with Savings Brings Expanded Benefits to Rural Households Michael Carter, UC Davis Rachid Laajaj, Universidad de los Andes Dean Yang, University of Michigan Many thanks for funding from:

Millennium Villages Project

Fighting poverty with multiple interventions • Many anti-poverty programs are “bundled”, in that they consist of multiple components • Millennium Villages implements interventions in food, education, environment, health, etc. • Programs to help the “ultrapoor” (Karlan et al 2015) – Resource transfers, skills training, savings, health, etc. • But how do the components interact with one another? Are all necessary? Do components complement one another? • We investigate this in Manica, Mozambique, looking at the interplay between two important types of programs: – Agricultural input subsidies – Formal savings

Input subsidy programs (ISPs) • Perhaps the most significant recent development in agricultural policy in Sub-Saharan Africa • Large-scale subsidization of modern inputs (fertilizer, improved seeds) • Across 10 countries implementing ISPs, 2011 expenditures totaled $1. 05 billion, or 28. 6% of public agricultural spending • Substantial budgetary support by World Bank, other donors – Represents an about-face for many development agencies, which for decades opposed subsidies 4

ISP expenditures in 10 SSA countries, 2011 70% 58, 3% Expenditures as % of public agricultural spending 60% 50% 46, 0% 39, 9% 40% 29, 9% 30% 26, 1% Kenya Nigeria Senegal 18, 1% 20% 10% 25, 7% 8, 4% 10, 4% 0% Burkina Faso Ethiopia Source: Jayne and Rashid (2013) Mali Ghana Zambia Tanzania Malawi 5

Savings • More recently, there has been increased interest in savings interventions in developing countries – Provide formal savings facilities to the poor, to complement informal savings – Savings match programs have been attempted, mostly in developed countries • Experimental studies of savings interventions have not examined their interaction with other programs 6

Testing for complementarity • Consider two interventions whose impacts when offered separately are a and b, and whose impact when offered together is a + b + c – Complementarity represented by c • Complementary: impact of the joint intervention is greater than the sum of impacts when offered separately a+b+c >a+b (c > 0) • Additive: joint impact is equal to the sum of the separate impacts a+b+c =a+b (c = 0) • Substitutes: joint impact is lower than the sum of the separate impacts a+b+c <a+b (c < 0)

Key collaborators • Provincial Government of Manica • Banco Oportunidade de Mocambique (BOM) • Food and Agriculture Organization (FAO) • European Commission (EC) • International Fertilizer Development Corporation 8

The study • ~1, 500 rural maize farmers in 94 localities in Manica province, Mozambique – A locality is a grouping of nearby villages • Study participants are “progressive” farmers willing to use modern agricultural inputs – Lists generated by government agricultural extension workers in each village 9

Randomization of treatments • Each locality randomly assigned to one of three savings treatment groups (control, basic savings, matched savings) – After stratification into groups of 3 nearby localities • Subsidy vouchers assigned by random lottery at participant level within localities prob. 1/3 No savings program (32 localities) prob. 1/2 Subsidy prob. 1/2 No subsidy Basic savings program (30 localities) prob. 1/2 Subsidy prob. 1/2 No subsidy Matched savings program (32 localities) prob. 1/2 Subsidy prob. 1/2 No subsidy 10

Subsidy vouchers • 50% of study participants within each village randomly assigned to voucher receipt • Provides 73% discount on MZN 3, 160 (~US$113) package of fertilizer, improved seeds • Voucher redemption rates: – Lottery winners: 48. 3% – Lottery losers: 12. 1% • Carter, Laajaj, and Yang (2014) examines impact of subsidies alone in no-savings localities – Positive impacts on fertilizer use, output, consumption that persist up to two years after the subsidy – Learning appears to be a channel, leading to persistence of impact 11

BOM’s “Bancomovil” • Savings accounts at Banco Oportunidade de Mocambique (BOM) • Access via 2 branches and scheduled visits by “Bancomovil” units 12

Study localities, by savings treatment Catandica: - Bancomovil (BOM) - Caixa Financeira - BIM Manica: - Bancomovil (BOM) - Barclays Bank - BOM - BIM - BCI Sussundenga: - Bancomovil (BOM) - Barclays Bank Chimoio: - Tchuma - Standard Bank - Barclays Bank - BOM - BIM - BCI - Socremo - Banco Terra

Savings treatments • Both savings treatments began with village-level information sessions on formal savings – Emphasized use of savings for both investment and selfinsurance • Over next two months, one representative per group of 5 study participants receives follow-up training in town, and asked to convey information to group-mates • Participants also encouraged to open accounts at BOM, either at Bancomovil or fixed branch locations 14

Educational material on savings and fertilizer 15

Savings game

Basic vs. matched savings • Accounts offered in “basic savings” treatment were standard savings accounts – Raises 2013 account ownership at BOM by 16 pp • In – – “matched savings” treatment: Match is 50% of minimum balance over match period Matching funds capped at MZN 1500 (~$54) Match period: August 1 – October 31 Designed with agricultural cycle in mind • Match period ends just before next planting season • If save full amount (MZN 3000), savings + match can purchase input package sufficient for 3/4 hectare plot – Two years of match promised: 2011 and 2012 – Raises 2013 account ownership at BOM by 22 pp 17

Surveys • First survey administered Apr-May 2011 • Three follow up surveys, in September of 2011, 2012, and 2013 18

Impact on fertilizer use (2012 -13) 70% 60, 5% ** 60% 59, 6% ** 53, 9% ** % impact on fertilizer use 50% 46, 5% 40% 30% 20% 10% 7, 4% 0% Voucher Basic savings + voucher Significance levels: 1%***, 5%**, and 10%*. Control group has fertilizer use of MZN 1, 242. Matched savings + voucher

Impact on formal savings (2012 -13) 2 500 2 020 *** 1 948 *** Impact on formal savings (MZN) 2 000 1 639 *** 1 500 1 032 * 1 000 712 500 0 Voucher Basic savings + voucher Significance levels: 1%***, 5%**, and 10%*. Control group has formal savings of MZN 1, 439. Matched savings + voucher

Impact on formal savings: BOM vs. other 2 500 • The majority of savings increases are not at BOM, but at other banks (BIM in particular) Impact on formal savings (MZN) 2 000 1 500 1450 1523 1 000 944 874 500 753 207 0 1 Voucher BOM 353 Basic savings + voucher Other 467 527 Matched savings + voucher

Daily consumption per capita • Summary measure of well-being: daily consumption per capita, average across 2012 -13 • Total value of consumption in household, divided by number of household members, converted to daily frequency • Consumption items reported in survey, converted to money values – Detailed food items – Personal items – Transport – Utilities – Household items – Health – Education – Personal expenditures – Taxes – Other

Impact of treatments on consumption 12% 9, 90% ** 10% 9, 10% ** 8, 80%** 8, 40% ** % impact on consumption 8% 6% 3, 70% 4% 2% 0% Voucher Basic savings + Matched savings voucher + voucher Significance levels: 1%***, 5%**, and 10%*. Per capita daily consumption in control group is MZN 72.

Impact of treatments on consumption 12% 9, 90% ** 10% 9, 10% ** 8, 80%** 8, 40% ** ** % impact on consumption 8% 6% 3, 70% 4% 2% 0% Voucher Basic savings + Matched savings voucher + voucher Significance levels: 1%***, 5%**, and 10%*. Per capita daily consumption in control group is MZN 72.

Impact of treatments on consumption • • 12% Cannot reject that all treatment effects are equal For no pair of treatment effects can we reject equality 9, 90% ** 10% 9, 10% ** 8, 80%** 8, 40% ** % impact on consumption 8% 6% 3, 70% 4% 2% 0% Voucher Basic savings + Matched savings voucher + voucher Significance levels: 1%***, 5%**, and 10%*. Per capita daily consumption in control group is MZN 72.

Substitutes, not complements • It appears that subsidies and savings are substitutes, rather than complements … at least from the standpoint of raising consumption levels • Offering subsidy alone has as much impact as offering savings alone • And offering both has no additional impact • Why might this be the case?

The dual role of savings • Savings can serve two roles – Investment: funds accumulated and then used productively – Risk-management: holding buffer stocks to cope with shocks (self-insurance) • Use of savings may depend on whether household receives subsidy or not • When not receiving subsidy, households use savings for investment as well as risk-management • On the other hand, subsidy recipients may use savings for risk-management alone, and not for additional investment

Additional evidence • This seems to be what is going on • Consumption variance is lower in savings treatment groups • Savings treatment groups appear better at coping with shocks

Impact of treatments on consumption variance 0, 1 0, 092 *** Impact on standard deviation of log consumption 0, 08 0, 06 0, 050 * 0, 04 0, 036 0, 027 0, 02 0 Voucher Basic savings + voucher -0, 02 Significance levels: 1%***, 5%**, and 10%*. Consumption variance in control group is 0. 45. -0, 006 Matched savings + voucher

PDFs of log consumption

Savings helps cope with bad shocks • Savings also help households cope with negative agricultural shocks • In each survey, respondents report whether the last agricultural season was a “bad year” • Subsidy-only treatment makes household consumption more sensitive to bad years • By contrast, in savings treatments, consumption does not fall in bad years

In sum • From standpoint of raising consumption, subsidies and savings appear to be substitutes, rather than complements – Either treatment on its own has similar positive impact, but providing both treatments has no additional impact • Savings are used for either investment or risk-management – Households receiving both subsidies and savings treatments seem to focus on risk management – Households receiving only savings treatments may be using savings for both purposes • Underlines how financial services can help households offset increased risk from new economic opportunities • Complementarities between development programs may show up in risk management rather than in higher mean returns

Heterogeneous effect of subsidies • 0, 12 Impact of subsidies in nosavings villages Within-village impact of subsidies varies with exposure to savings intervention 0, 099 ** 0, 1 Impact on index of consumption and assets 0, 091 ** 0, 088 ** 0, 084 ** Impact of subsidy in matched savings villages 0, 08 Impact of subsidy in basic savings villages 0, 06 0, 037 0, 04 0, 02 0 Voucher Basic savings + Matched savings voucher + voucher

Other takeaways • Estimating impacts of subsidies: – Estimated impact of subsidies, within locality, varies according to presence of savings program in locality • In no-savings villages, subsidy impacts are large • But in savings villages, subsidy impacts disappear – Because savings is a substitute for subsidies, from the standpoint of consumption/asset maximization – May help explain differences in estimated subsidy impacts across studies (e. g. , Duflo et al 2011, Carter et al 2014, Harou et al 2014) • Benefit-cost analyses: – Basic savings does just as well as relatively costly subsidy and matched savings programs at raising consumption and assets • Case for subsidy and matched savings programs – on top of basic savings – hinges on valuation of risk-reduction benefits