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Microcredit Program Participation and Household Food Security in Rural Bangladesh

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Microcredit Program Participation and Household Food Security in Rural Bangladesh DEPARTMENT OF ECONOMICS ISSN 1441-5429 DISCUSSION PAPER 16/15 Microcredit Program Participation and Household Food Security in Rural Bangladesh# Asadul Islam♦, Chandana Maitra, Debayan Pakrashi. and Russell Smyth* (this version: 20th February, 2015) Abstract: We use a large household level panel dataset collected from rural households in Bangladesh to examine the effects of microcredit program participation on household food security. We examine how microcredit affects different measures of food security; namely, household calorie consumption, dietary diversity indicators and anthropometric status of women of reproductive age (15-49 years) and children under the age of five. We find that microcredit program participation increases calorie consumption both at the intensive and extensive margins, but does not improve dietary diversity and only has mixed effects on the anthropometric measures. We also find that the effect of participation on food security may be non-linear in which participation initially has either no effect on food security or may actually worsen it, before improving it in the long run. Our results may explain why short- term evaluation of microcredit might not show any positive effects. Keywords: microcredit, food security, calorie availability, malnutrition, dietary diversity. JEL Classification Numbers: G21, I3, I14, Q18. # We thank seminar participants at the 10th Annual Conference on Economic Growth and Development 2014 in New Delhi for helpful comments on an earlier version of this paper. Department of Economics, Monash University. Email: [email protected] School of Economics, University of Queensland. Email: [email protected] . School of Economics, University of Queensland. Present Address: Faculty of Economics, Indian Institute of Technology Kanpur, India. Email: [email protected] (corresponding author) Department of Economics, Monash University. Email: [email protected] © 2015 Asadul Islam, Chandana Maitra, Debayan Pakrashi and Russell Smyth All rights reserved. No part of this paper may be reproduced in any form, or stored in a retrieval system, without the prior written permission of the author. monash.edu/ business-economics ABN 12 377 614 012 CRICOS Provider No. 00008C 1 Introduction Bangladesh has witnessed significant reduction in poverty over the last two decades; however, there still remains widespread food insecurity. Out of a total population of 165 million people in Bangladesh, 33 million were classified as lacking food security in 2010 and by 2020 it is estimated that this number will increase to 37 million (USDA 2010). A 2012 survey by the Economist Intelligence Unit of 105 countries ranked Bangladesh 81st in terms of the Global Food Security Index (Economist, 2012). In rural Bangladesh, most of the income of a poor household is derived from the agricultural sector, which exposes households to seasonality in agricultural employment, poverty and consumption. Income from non- agricultural sources could safeguard households against seasonal food insecurity; however, they may lack the resources to diversify into more productive employment opportunities that could assist, particularly during lean seasons. Low income levels, and lack of access to credit, prevents households from accessing food, leaving them susceptible to food deprivation, even when aggregate food supplies are adequate. Microcredit was developed in order to meet an important need not addressed by formal institutions; namely, providing financial capital to landless and assetless rural households, who would otherwise be either ineligible to access credit or be locked into the informal credit system. From the beginning, one of the major forces motivating the development of microcredit was to improve the food security of the rural poor. This objective, for example, is clearly enunciated in Grameen Bank documents (see eg. Yunus, 1994) and is accepted in the extant literature on microcredit (Imai and Azam, 2012). Microcredit seeks to improve food security of the rural poor through various avenues. One avenue is through generating ‘investment-led’ benefits, which result in greater levels of income, consumption and wealth. Another is through ‘insurance-led’ benefits that can protect households against unforeseen risk and seasonality. It is recognised that participation in microcredit institutions (MCI) and access to microcredit provides a safety net that prevents income from falling to such low levels that households are unable to satisfy their basic consumption needs. A number of related studies find that microcredit program participation results in consumption smoothing and asset building (Kaboski and Townsend, 2005), reduces household vulnerability to health and income shocks (Islam and Maitra, 2012), and improves health and nutrition (Pitt et al., 2003). Higher benefits have also been found to accrue from long-term participation in such programs (Islam, 2011). A few studies have directly examined 1 the effect of microcredit on poverty. Proxies for poverty used in the literature include female body mass index (BMI) (Imai and Azam, 2012), food consumption (Imai and Azam, 2012; Islam 2015), a composite index based ranking (Imai et al. 2010), household expenditure (Pitt and Khandker, 1998; Banerjee et al. 2015) and household income (Imai and Azam, 2012). The findings from these studies have been mixed. Some studies have found microcredit to have a positive effect on reducing household poverty (see eg. Imai et al., 2010; Imai and Azam, 2012; Khandker, 2005a; Pitt and Khandker, 1998), but others have found that microcredit has no poverty-reducing effect or no effect on consumption (see eg. Banerjee et al. 2015; Cull et al. 2009). In this study, for the first time, we seek to measure the effect of microcredit along several different dimensions of food security. Our contribution is important because food security is a broader concept than food consumption. In addition to food consumption per se, there is widespread recognition that dietary diversity forms an important component of food security. More generally, the FAO (1996) states that food security exists “when all people, at all times, have physical, social and economic access to sufficient, safe, and nutritious food to meet their dietary needs and food preferences for an active and healthy life”. This definition recognizes availability, access and utilization as the three principal components in the concept of food security. More recently, vulnerability, which captures the extent to which households that are currently food secure may be at risk of future food insecurity, has also been added as a fourth dimension to the measurement of food security. Since, no single indicator can capture all of the above aspects of food security, the use of multiple measures seems appropriate. We use a large household level panel dataset to examine the effect of microcredit on household food insecurity in rural Bangladesh. Our data includes a rich set of information on item-wise food consumption. The study closest to ours in the literature is that of Imai and Azam (2012) who use the same dataset to examine the effect of microcredit on poverty.1 Our contribution differs from their study, however, in that those authors use income, female BMI and food consumption to measure poverty, while we use a much broader set of measures of food security. To measure food security we use absolute level of calorie intake and shortfall from standard cut-offs of calorie norms, dietary diversity of the household and anthropometric indicators for children below five years (stunting, wasting and underweight) 1 Islam (2011); Islam and Maitra (2012) and Islam (2015) also use the same dataset from different rounds to examine the short, medium and long-term effects of microfinance, consumption-smoothing effects in the face of health shocks and effects on consumption expenditure, respectively. 2 and for women of reproductive age (15-49 years), focusing on BMI and mid-upper arm circumference (MUAC). We also differ from the existing literature in examining the effect of microcredit participation on food security both at the intensive (calorie consumption) and extensive (incidence of food poverty) margins. We find that households’ participation in microcredit programs increases their calorie consumption, both at the intensive and extensive margin, particularly for hard-core food poverty. However, microcredit does not increase the diversity of diet. We find that participation in a program has mixed effects on anthropometric measures for children and females of reproductive age. Microcredit participation reduces child stunting, but only has a weak, or no, effect on child wasting and on being underweight. Similarly, microcredit program participation reduces the incidence of women of reproductive age being underweight and being malnourished, but has no effect on their BMI or MUAC. We also find that, on the basis of the duration of participation in a program, the effect of microcredit participation on food security may be non-linear, in which participation in microcredit initially has no effect on food security or may actually worsen it, before improving it in the long run. The results suggest that a long-term evaluation of the microcredit program could offer different conclusions than short-term evaluation. The paper is structured as follows. The next section presents a simple conceptual framework that assists to better understand the pathways through which microcredit affects food security. The
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