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Agricultural growth and multiplier effects of consumption spending in rural and urban Malawi by Henry Kankwamba,

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Agricultural growth and multiplier effects of consumption spending in rural and urban Malawi by Henry Kankwamba,

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As per capita income of households increase, the share of expenditure on food declines as do expenditures on staples. Further, as incomes rise in the face of increasing urbanization, factor intensities of consumption patterns tend to shift from labor intensive rurally produced commodities to foreign exchange, capital intensive imported commodities. Using a nationally representative survey data and a social accounting matrix, this paper discusses locational and consumption linkages across aggregated commodity groups. It further analyzes the interdependencies between activities, households and factors by providing income multipliers in a general equilibrium framework. Results generally indicate that marginal propensities to consume for most food commodities are falling as incomes while some luxurious food groups such as spices and beverages are rising. Associated income and price multiplier effects show that output, demand, GDP and household incomes will increase by a factor of two cumulatively. However, increased output will not be sufficient to offset demand and as such imports will grow by a factor of four. Generally, changes in consumption spending behavior result in positive growth but prioritized growth is more appropriate.

As per capita income of households increase, the share of expenditure on food declines as do expenditures on staples. Further, as incomes rise in the face of increasing urbanization, factor intensities of consumption patterns tend to shift from labor intensive rurally produced commodities to foreign exchange, capital intensive imported commodities. Using a nationally representative survey data and a social accounting matrix, this paper discusses locational and consumption linkages across aggregated commodity groups. It further analyzes the interdependencies between activities, households and factors by providing income multipliers in a general equilibrium framework. Results generally indicate that marginal propensities to consume for most food commodities are falling as incomes while some luxurious food groups such as spices and beverages are rising. Associated income and price multiplier effects show that output, demand, GDP and household incomes will increase by a factor of two cumulatively. However, increased output will not be sufficient to offset demand and as such imports will grow by a factor of four. Generally, changes in consumption spending behavior result in positive growth but prioritized growth is more appropriate.

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Agricultural growth and multiplier effects of consumption spending in rural and urban Malawi by Henry Kankwamba,

  1. 1. Agricultural growth and multiplier effects of consumption spending in rural and urban Malawi Henry Kankwamba (LUANAR) Chinsinsi Esther Mtuluma (LUANAR) John Mazunda (IFPRI)
  2. 2. Outline • Introduction • Methods • Results • Conclusion
  3. 3. Introduction • In the process of economic development, consumption plays an important role in shaping patterns of structural transformation. • Income growth drives urbanization and that in turn influences consumption patterns (Dolislager & Tschirley, 2014). • Income growth is expected to result in a decline in the share of expenditure allocated to food items (Norton, 2004; Ecker & Qaim, 2010).
  4. 4. Introduction • As incomes rise in the face of increasing urbanization, factor intensities of consumption patterns tend to shift from labour intensive rurally produced commodities to foreign exchange, capital intensive imported commodities. • Verduzco-Gallo et al. (2014) found that despite income growth in Malawi, the share of expenditure allocated to food seems to be increasing. • Dolislager & Tschirley (2014) argue that this phenomenon might continue for some time in the initial stages of structural transformation but will eventually converge into Engel’s law.
  5. 5. Introduction • Verduzco-Gallo et al. (2014) demonstrates that the share of expenditure allocated to starchy staples is declining while the share on meat products is increasing. • King & Byerlee (1978) argued that lower income households tend to consume products that require less scarce factors such as capital, foreign exchange and in turn consume commodities that are produced using the factor that is in abundance, in this case, labour. • Dolislager & Tschirley (2014) hypothesize that as disposable income increase, individuals start spending on more processed commodities than unprocessed.
  6. 6. Introduction • Factor intensities of consumption play a big role in income distribution since they would trigger an increase in employment which would in turn lead to increases in incomes. • Increases in incomes of the poor have positive distribution, equality (King & Byerlee; 1979), equity and food security effects on the poor (Benson et al. 2013).
  7. 7. Objectives • The study examines whether consumption of rurally produced food commodities, which require more labor, would trigger growth in the sectors that produce those commodities. • Second, the study estimates income transmission in the concerned sectors in order to isolate sector dependencies and multipliers.
  8. 8. Methods • Marginal propensities to consume provide a base to analyze factor intensities and rural-urban linkages. • Marginal propensities to consume were estimated econometrically using a ratio semi-log inverse function (RSLI). • The relationship between consumption and income was carefully considered to ensure conformity to economic theory.
  9. 9. Methods • Total consumption expenditure on good i by household j after accounting for zero expenditures and using per capita consumption expenditure yields • 2SLS were used to correct for endogeneity. • Huber-White standard errors were used.
  10. 10. Methods • After estimating the equation, the marginal propensity to consume is derived as • and the expenditure elasticity is derived as
  11. 11. Methods • Taking factors under consideration as labour, capital, and foreign exchange, the marginal factor intensity Fjk for factor j, is the quantity of the factor required to produce a bundle of goods found in a marginal unit of consumption expenditure at income level k (King & Byerlee, 1978). Algebraically,
  12. 12. SAM based model • In order to measure inter-industry linkages and income multiplier effects, a SAM-based multiplier model is given. • A SAM draws data from various sources such as national accounts namely GDP at factor cost, GDP at market prices, government budget and balance of payments data. • Data on households is drawn from household surveys, in this case the IHS3. Data on activities and commodities is taken from input-output tables.
  13. 13. Methods • A SAM-based income model is derived by distinguishing endogenous and exogenous accounts and assuming that prices and costs are fixed while incomes vary. • The assumption that warrants this is that there is an excess capacity condition, generalized homogeneity and fixed coefficients in activities (Roland-Holst & Sancho, 1995).
  14. 14. A SAM based model • Algebraically, • where vi is a row vector of exogenous costs and • Is the Leontief inter-industry inverse known as the multiplier matrix.
  15. 15. Data sources • The third Integrated Household survey data from NSO was used. • A 2007 Social Accounting Matrix for Malawi was also used (Duillet et al. 2007)
  16. 16. Results • Staples, fruits, legumes, meat, and vegetables shares of expenditure decline. • Fats share of expenditure increases as income increases.
  17. 17. Implications of MPCs • The results from MPCs support the Keynesian hypothesis that saving is a luxury for rural households as they devout most of their incomes to consumption. • APC told a similar story.
  18. 18. Expenditure elasticities • In general, poor rural households expenditure elasticities are less than unitary for staples, legumes, meat products, and salt and spices. However, they are elastic for fats and beverages.
  19. 19. Implications of growing incomes: A multiplier perspective • Growing incomes imply increased expenditure for households since propensities to consume for most commodities increase. • Increase in expenditure also implies growing demand for commodities. • If commodities are produced domestically, it means increased activity levels which demand factors. • Hence, more jobs. However, if the activities are produced elsewhere, it means more imports.
  20. 20. Labor output & Capital output ratios in agriculture Unskilled labor Medium skilled labor High skilled labor land Capital Rural poor 0.095 0.059 0.000 0.062 0.041 Rural-non-poor 0.159 0.308 0.035 0.176 0.093 urban-poor 0.002 0.003 0.000 0.001 0.000 urban-non poor 0.013 0.149 0.109 0.024 0.006
  21. 21. Marginal factor intensities of consumption Rural Non Poor Rural Poor Urban Non poor Urban poor Staples 723.39 65.42 380.29 1.71 Legumes 166.47 13.61 86.88 0.32 Vegetables 141.23 13.28 74.47 0.36 Meat 557.10 53.30 294.15 1.47 Fruits 49.43 5.08 26.25 0.15 Fats 53.42 8.13 29.53 0.29 Spices 14.17 2.71 8.07 0.10 Beverages 143.58 14.41 76.11 0.41
  22. 22. Multiplier effects of consumption spending under agriculture growth scenarios Scenario 1 Scenario 2 Scenario 3 Scenario 4 Increase in cereal demand Increase in horticultural crops demand Increase in traditional crops demand Increase in livestock, forestry & fishing demand Agriculture 18.40% 18.30% 17.44% 18.96% Industry 14.21% 18.16% 16.23% 17.86% Labor 4.44% 6.38% 4.90% 9.17% Agricultural land 4.10% 5.26% 2.77% 1.65% Capital 5.45% 5.57% 5.08% 5.43% Households 13.90% 17.12% 12.67% 16.15% Government 1.28% 1.46% 1.36% 1.57% Savings & Investment 0.01% 0.01% 0.01% 0.01% Rest of the World 4.31% 4.03% 4.53% 4.03%
  23. 23. Factor multipliers under different expansion scenarios Scenario 1 Scenario 2 Scenario 3 Scenario 4 Increase in cereal demand Increase in horticultural crops demand Increase in traditional crops demand Increase in livestock, forestry & fishing demand Unskilled labor 1.72% 2.78% 1.82% 4.41% Medium-skilled labor 2.24% 3.01% 2.54% 3.97% High-skilled labor 0.48% 0.59% 0.54% 0.78% Agricultural land 4.10% 5.26% 2.77% 1.65% Capital stock 5.45% 5.57% 5.08% 5.43%
  24. 24. Price and cost implications of consumption spending Producer Price Index Consumer Price Index Wages rents & Capital Scenario 1 Cereal price 2.00% 2.00% 0.89% Scenario 2 Field crops & horticulture 2.88% 2.88% 1.63% Scenario 3 Export crops 1.66% 1.66% 0.62% Scenario 4 Livestock, forestry & fishing 1.82% 1.82% 0.76% • A modest increase will result from the growth.
  25. 25. Income multipliers
  26. 26. Conclusions • Marginal propensities to consume for most food commodities are falling as incomes while some luxurious food groups such as spices and beverages are rising. • Associated income and price multiplier effects show that output, demand, GDP and household incomes will increase by a factor of two cumulatively. • However, increased output will not be sufficient to offset demand and as such imports will grow by a factor of four. • Generally, changes in consumption spending behaviour result in positive growth but prioritized growth is more appropriate.

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