1. 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:

2. Millennium Villages Project

3. 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 Fighting poverty with multiple interventions

4. 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) 4 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

5. ISP expenditures in 10 SSA countries, 2011 5 Source: Jayne and Rashid (2013)

6. 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

7. 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) Testing for complementarity

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

9. 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

10. 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 10 No savings program (32 localities) Basic savings program (30 localities) Matched savings program (32 localities) Subsidy No subsidy prob. 1/2 prob. 1/3 prob. 1/2 Subsidy No subsidy Subsidy No subsidy

11. 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 11 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

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

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

14. Savings treatments Both savings treatments began with village-level information sessions on formal savings – Emphasized use of savings for both investment and self- insurance 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

15. Educational material on savings and fertilizer 15

16. Savings game

17. 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

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

19. Impact on fertilizer use (2012-13) Significance levels: 1%***, 5%**, and 10%*. Control group has fertilizer use of MZN 1,242. **

20. Impact on formal savings (2012-13) * *** Significance levels: 1%***, 5%**, and 10%*. Control group has formal savings of MZN 1,439.

21. The majority of savings increases are not at BOM, but at other banks (BIM in particular) Impact on formal savings: BOM vs. other

22. 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 Daily consumption per capita

23. ** Impact of treatments on consumption Significance levels: 1%***, 5%**, and 10%*. Per capita daily consumption in control group is MZN 72.

24. ** Impact of treatments on consumption Significance levels: 1%***, 5%**, and 10%*. Per capita daily consumption in control group is MZN 72.

25. ** Impact of treatments on consumption Significance levels: 1%***, 5%**, and 10%*. Per capita daily consumption in control group is MZN 72.

26. ** Impact of treatments on consumption ** Cannot reject that all treatment effects are equal For no pair of treatment effects can we reject equality Significance levels: 1%***, 5%**, and 10%*. Per capita daily consumption in control group is MZN 72.

27. 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? Substitutes, not complements

28. 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 The dual role of savings

29. 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 Additional evidence

30. Significance levels: 1%***, 5%**, and 10%*. Consumption variance in control group is 0.45. Impact of treatments on consumption variance *** *

31. Impact of treatments on consumption variance *** * Significance levels: 1%***, 5%**, and 10%*. Consumption variance in control group is 0.45.

32. Impact of treatments on consumption variance *** * Significance levels: 1%***, 5%**, and 10%*. Consumption variance in control group is 0.45.

33. PDFs of log consumption

34. 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 Savings helps cope with bad shocks

35. 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 In sum

36. ** Heterogeneous effect of subsidies ** Within-village impact of subsidies varies with exposure to savings intervention Impact of subsidies in no- savings villages Impact of subsidy in basic savings villages Impact of subsidy in matched savings villages

37. 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 Other takeaways