Policy Research Working Paper 6650 Public Disclosure Authorized

WPS6650 Policy Research Working Paper 6650 Public Disclosure Authorized Up in Smoke? Agricultural Commercialization, Rising Public Disclosure Authorized Food Prices and Stunting in Malawi Benjamin Wood Carl Nelson Talip Kilic Siobhan Murray Public Disclosure Authorized The World Bank Public Disclosure Authorized Development Research Group Poverty and Inequality Team October 2013 Policy Research Working Paper 6650 Abstract Diversification into high-value cash crops among causal effect by comparing impact estimates informed smallholders has been propagated as a strategy to improve by two unique samples of children that differ in their welfare in rural areas. However, the extent to which cash exposure to an exogenous domestic staple food price crop production spurs projected gains remains an under- shock during the early child development window (from researched question, especially in the context of market conception through two years of age). The analysis finds imperfections leading to non-separable production and that household tobacco production in the year of or consumption decisions, and price shocks to staple crops the year after child birth, combined with exposure to that might be displaced on the farm by cash crops. This an exogenous domestic staple food price shock, lowers study is a contribution to the long-standing debate on the child height-for-age z-score by 1.27, implying the links between commercialization and nutrition. It a 70-percent drop in z-score. The negative effect is, uses nationally-representative household survey data however, not statistically significant among children who from Malawi, and estimates the effect of household were not exposed to the same shock. The results put adoption of an export crop, namely tobacco, on child emphasis on the food insecurity and malnutrition risks height-for-age z-scores. Given the endogenous nature materializing at times of high food prices, which might of household tobacco adoption, the analysis relies have disproportionately adverse effects on uninsured cash on instrumental variable regressions, and isolates the crop producers. This paper is a product of the Poverty and Inequality Team, Development Research Group. It is part of a larger effort by the World Bank to provide open access to its research and make a contribution to development policy discussions around the world. Policy Research Working Papers are also posted on the Web at http://econ.worldbank.org. The author may be contacted at [email protected]. The Policy Research Working Paper Series disseminates the findings of work in progress to encourage the exchange of ideas about development issues. An objective of the series is to get the findings out quickly, even if the presentations are less than fully polished. The papers carry the names of the authors and should be cited accordingly. The findings, interpretations, and conclusions expressed in this paper are entirely those of the authors. They do not necessarily represent the views of the International Bank for Reconstruction and Development/World Bank and its affiliated organizations, or those of the Executive Directors of the World Bank or the governments they represent. Produced by the Research Support Team Up in Smoke? Agricultural Commercialization, Rising Food Prices and Stunting in Malawi Benjamin Wood,∗ Carl Nelson,y Talip Kilic,z and Siobhan Murrayx JEL Classifications: C26, I15, O13, Q12 Keywords: Malawi, child nutrition, cash crops, tobacco, food prices Sector Boards: Agriculture and Rural Development (ARD), Health, Nutrition, and Population (HE) ∗Corresponding author: Post-Doctoral Fellow, International Initiative for Impact Evaluation (3ie), Suite 450, 1625 Massachusetts Avenue NW, Washington, DC 20036, USA. bwood(at)3ieimpact.org yAssociate Professor, Department of Agricultural and Consumer Economics, University of Illinois at Urbana-Champaign, USA. zResearch Economist, Poverty and Inequality Group, Development Research Group, The World Bank, Washington, DC, USA. xTechnical Specialist, Computational Tools Group, Development Research Group, The World Bank, Washington, DC, USA. We would like to thank Mary Arends-Kuenning, Kathleen Beegle, Marc Bellemare, Andrew Dillon, Craig Gundersen, Nancy McCarthy, Nick Minot, Lia Nogueira, Raka Banerjee, and the participants at the 2011 Midwest International Economic Development Conference, the 2012 International Conference of Agricultural Economists, and the 2012 International Agricultural Trade Research Consortium for their comments on the earlier drafts of this paper, and the Malawi National Statistical Office and the Malawi Tobacco Control Commission for allowing us access the portions of the data used in the study. The findings, interpretations, and conclusions expressed in this work do not necessarily reflect the views of 3ie, the University of Illinois at Urbana-Champaign, The World Bank, its Board of Executive Directors, or the governments they represent. The World Bank does not guarantee accuracy of the data included in this work. The boundaries, colors, denominations, and other information shown on any map in this work do not imply any judgment on the part of The World Bank concerning the legal status of any territory or the endorsement or acceptance of such boundaries. 1 1 Introduction Nearly 75 percent of the extreme poor in sub-Saharan Africa reside in rural areas, and over 90 percent of the sub-Saharan African rural extreme poor participate in agriculture as smallholders. In this context, spurring agricultural sector growth is a key target in national development plans across the region, based largely on the premise that aggregate agricultural growth brings disproportionate gains to the poorest in the developing world.1 In policy circles, one strategy that has surfaced to attain this target is increased commercialization of agriculture and diversification into high-value, labor-intensive cash crop production, particularly among smallholders. Proponents of increased commercialization of agriculture assert that resource-poor smallholders have a comparative advantage in labor-intensive cash crops, originating from cost savings that are realized by employing family laborers at below market remuneration. The reliance on household members on the farm is also argued to result in fewer agency problems, hence lower supervision costs.2 Cost-effective production processes on small farms, combined with relatively higher farm gate prices for cash crops, has fostered the expectation among international donors and policy makers that increased commercialization of agriculture could be a viable rural development strategy to improve welfare. However, the extent to which the economic gains of cash crop production result in household and individual welfare improvements remains an under-researched empirical question (Harrigan, 2008; Carletto, Kilic, and Kirk, 2011). The optimism should be balanced in view of (i) price shocks to staple food crops whose production on small farms might be displaced partially or fully by cash crop production, (ii) land, labor and credit market failures, compounded by limited stocks of household physical, financial and human capital, that might constrain the adoption and sustainability of cash crop production, (iii) intra-household dynamics that surround the control of income from cash crop production and that may not necessarily lead to welfare-enhancing expenditure patterns, and (iv) potential risks tied to the production and marketing of cash crops, partly driven, in the context of export-oriented crops, by increased international regulation and competition in international markets. 1Ligon and Sadoulet (2007) document that a 1 percent rise in agricultural gross domestic product results in 6 percent income growth for the lowest income decile of the population. 2Empirical evidence on this claim, however, appears to be limited. 2 In the case of Malawi, where agricultural commercialization has centered on tobacco as the main export, recent governmental policies have emphasized the importance of domestic maize and other food crop production to avoid national food deficits, the effects of volatile food prices, and the risk of long-term aid dependence (Ecker, Breisinger, and Pauw, 2011; Levy, Barahona, and Chinsinga, 2004).3 The emphasis on formulating policies that aim to boost staple crop production often presume, in the context of market failures, a direct link between on-farm production and nutrition outcomes. The presumed link has in turn raised concerns about the nutritional effects of commercialization of staple crops and displacement of staple food production by cash crop production. On one hand, there is evidence that greater food production or economic growth does not necessarily translate into improved nutritional health (Headey, 2011; Pelletier et al., 1995). On the other hand, earlier studies on Malawi had documented the nutritional outcomes of children originating from commercialized vis-à-vis subsistence farming households to be statistically indistinguishable from one another (von Braun, 1995; Kennedy, Bouis, and von Braun, 1992), and more recent empirical work on the country identified a negative correlation between child anthropometric measures and household tobacco adoption (World Bank, 2007). Focusing specifically on tobacco, its production is an inherently risky venture in Malawi given the predominantly rain-fed and unmechanized nature of agriculture, high costs associated with tobacco production, and uncertain returns from tobacco sales at auction floors. Moreover,

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