Microfinance and Vulnerability to Seasonal Famine in a Rural Economy: Evidence from Monga in Bangladesh

Berg, Claudia and Emran, M. Shahe (2017): Microfinance and Vulnerability to Seasonal Famine in a Rural Economy: Evidence from Monga in Bangladesh.

Abstract

This paper takes advantage of a unique data set on 143,000 poor households from northern Bangladesh to analyze the effects of microfinance membership on a household’s ability to cope with seasonal famine known as Monga. We develop an instrumental variables strategy that exploits a jump and a kink at the 10 decimal (0.1 acre) land ownership threshold driven by MFI screening process to ensure repayment by excluding the ultra-poor. Evidence from the local 2SLS estimator (Dong, 2017) shows that microfinance membership improves food security during the hungry season, especially for the poorest households who struggle to survive at the margin of 1 and 2 meals a day. Microfinance membership also reduces the probability of short-term migration for work during Monga, but is ineffective in reducing the incidence of advance sale of labor at low wages. These conclusions are also supported by estimates from minimum-biased IPW estimator of Millimet and Tchernis (2013) that reduces bias without imposing exclusion restrictions.

• Item Type: MPRA Paper
• Language: English
• Keywords: Microfinance, Ultra-Poor, Aggregate Anticipated Shock, Seasonal Famine, Monga, Coping Mechanisms, Food Security, Distress Sale of Labor, Short-term Migration, Local 2SLS.
• Subjects: I - Health, Education, and Welfare > I3 - Welfare, Well-Being, and Poverty; O - Economic Development, Innovation, Technological Change, and Growth > O1 - Economic Development

References

Altonji, Joseph, Todd Elder, and Christopher Taber (2005) “An Evaluation of Instrumental Variable Strategies for Estimating the Effects of Catholic Schooling,” The Journal of Human Resources, 40(4): 791-821.

Angrist, Joshua D. and Jörn-Steffen Pischke (2009), Mostly Harmless Econometrics: An Empiricist’s Companion, Princeton: Princeton University Press.

Armendáriz, Beatriz and Jonathan Morduch (2010), The Economics of Microfinance, Second Edition, The MIT Press, Cambridge, Massachusetts.

Banerjee, Abhijit (2013) “Microcredit under the microscope: What have we learnt in the last two decades, what do we need to know?” Annual Review of Economics, 5: 487-519.

Banerjee, Abhijit and Esther Duflo (2011) Poor Economics, New York: Public Affairs.

Berhane, Guush and Conelis Gardebroek (2011) “Does Microfinance Reduce Rural Poverty? Evidence Based on Household Panel Data from Northern Ethiopia,” American Journal of Agricultural Economics, 93(1): 43-55.

Besley, Timothy (1995), “Nonmarket Institutions for Credit and Risk Sharing in Low-Income Countries,” Journal of Economic Perspectives, 9(3): 115-127.

Black, Dan A. and Jeffrey A. Smith (2004) “How robust is the evidence on the effects of college quality? Evidence from matching,” Journal of Econometrics, 121(1-2): 99-124.

Calel, Raphael and Antoine Dechezleprêtre (2016) “Environmental Policy and Directed Technological Change: Evidence from the European carbon market,” Review of Economics and Statistics, 98(1): 173–191.

Card, David, David Lee, Zhuan Pei, and Andrea Weber (2012) “Nonlinear Policy Rules and the Identification and Estimation of Causal Effects in a Generalized Regression Kink Design,” NBER Working Paper Series.

Carter, Michael R. and Travis J. Lybbert (2012) “Consumption versus asset smoothing: testing the implications of poverty trap theory in Burkina Faso,” Journal of Development Economics 99: 255-264.

Chambers, R. et al (eds) (1981) Seasonal Dimensions to Rural Poverty, London: Frances Pinter, London

Chaudhuri, Shubham and Christina Paxson (2001), “Smoothing consumption under income seasonality: buffer stocks vs. credit markets” Working Paper, Columbia University, Princeton University, and NBER

Chiburis, Richard, Jishnu Das, and Michael Lokshin (2012), “A Practical Comparison of the Bivariate Probit and Linear IV Estimators,” Economic Letters, 117(3): 762-766.

Dercon, Stefan and Pamila Krishnan (2000), “Vulnerability, Seasonality and Poverty in Ethiopia” The Journal of Development Studies, 36(6): 25 – 53.

Devereux, Stephen, Sabates-Wheeler, Rachel, and Longhurst, Richard (eds.) (2012), Seasonality, Rural Livelihoods and Development, New York: Earthscan.

Devereux, Stephen, Bapu Vaitla, and Samuel Hauenstein Swan (2008) Seasons of Hunger, London: Pluto Press. Dong, Yingying (2017) “Jump or Kink? Regression Probability Jump and Kink Design for Treatment Effect Evaluation,” working paper.

Emran, M. Shahe, A K M Morshed, and J. E. Stiglitz (2011), “Microfinance and Missing Markets” Working Paper.

Emran, M. Shahe, Virginia Robano, and Stephen C. Smith, (2014) “Assessing the Frontiers of Ultrapoverty Reduction: Evidence from Challenging the Frontiers of Poverty Reduction/Targeting the Utra-poor, an Innovative Program in Bangladesh,” Economic Development and Cultural Change, 62(2): 339-380.

Gertler, Paul, David I. Levine, and Enrico Moretti (2009), “Do Microfinance Programs Help Families Insure against Illness?” Health Economics, vol. 18(3) pp. 257-73.

Heckman, James and Salvador Navarro-Lozano (2004), “Using Matching, Instrumental Variables, and Control Functions to Estimate Economic Choice Models,” Review of Economics and Statistics, 86(1): 30-57.

Hirano, Keisuke and Guido W. Imbens (2001), “Estimation of Causal Effects using Propensity Score Weighting: An Application to Data on Right Heart Catheterization,” Health Services and Outcome Research Methodology, 2(3): 259-278.

Hossain, M and A. Bayes (2009), Rural Economy & Livelihoods: Insights from Bangladesh, A. H. development Publishing, Dhaka, Bangladesh.

Islam, Asadul (2011) “Medium- and Long-Term Participation in Microcredit: An Evaluation Using a New Panel Dataset from Bangladesh,” American Journal of Agricultural Economics, 93(3): 847-866.

Karlan, D and J. Morduch (2009), “Access to Finance,” Handbook of Development Economics, vol. 5. Amsterdam: Elsevier.

Kamkwamba, William and Bryan Mealer (2009) The Boy Who Harnessed the Wind, New York: Harper Collins Publishers.

Khandker, Shahidur R. (2009), “Poverty and Income Seasonality in Bangladesh” World Bank Policy Research Working Paper 4923.

Lee, David S. and Thomas Lemieux (2010) “Regression Discontinuity Designs in Economics,” Journal of Economic Literature, 48: 281-355.

Mahmud, Wahiduddin and S.R. Osmani (2017) The Theory and Practice of Microcredit, New York City: Routledge.

Matin, Imran. (1998). “Mis-targeting by the Grameen Bank: A Possible Explanation.” IDS Bulletin 29, no. 4:51–58.

Matin, Imran, M. Sulaiman, and M. Rabbani. (2008). “Crafting a Graduation Pathway for the Ultra-poor: Lessons and Evidence from a BRAC Programme.” Working paper, Research and Evaluation Division, Building Resources across Countries, Dhaka.

McCrary, Justin (2008) “Manipulation of the running variable in the regression discontinuity design: a density test” Journal of Econometrics, 142(2): 698-714.

Menon, N (2006), “Non-Linearities in Returns to Participation in Grameen Bank Programs.” Journal of Development Studies, 2006, 42(8), 1379-1400.

Millimet, Daniel L. and Rusty Tchernis (2013), “Estimation of Treatment Effects Without an Exclusion Restriction: With an Application to the Analysis of the School Breakfast Program,” Journal of Applied Econometrics, 28(6): 982–1017.

Morduch, Jonathan (1995) “Income Smoothing and Consumption Smoothing,” The Journal of Economic Perspectives, 9(3): 103-114.

Morduch, Jonathan (2011) “Does Microfinance Really Help the Poor? New Evidence on Flagship Programs in Bangladesh,” Chapter 12 in S. R. Osmani and M. A. Baqui Kalily, Readings in Microfinance: Reach and Impact. Dhaka, Bangladesh: University Press Limited, 2011, pp. 323-349. (Publication of an unpublished June 1998 discussion paper).

Morduch, Jonathan and David Roodman (2014), “The Impact of Microcredit on the Poor in Bangladesh: Revisiting the Evidence”, Journal of Development Studies, 50(4): 583-604.

Moretti, Enrico, and P. Kline (2014), Local Economic Development, Agglomeration Economies, and the Big Push: 100 Years of Evidence from the Tennessee Valley Authority, The Quarterly Journal of Economics, 129, issue 1, p. 275-331

Nielsen, Helena Skyt, Torben Sorensen, and Christopher Taber (2010) “Estimating the Effect of Student Aid on College Enrollment,” American Economic Journal: Economic Policy, 2(2): 185-215.

Noor, Marufia, Mamun-ur-Rashid, Abu Muhammad Shihab, and Rezvina Parveen (2004) “Stories of Targeting: Process Documentation of Selecting the Ultra-poor for CFPR/TUP Programme,” BRAC Working Paper no. 1, Building Resources across Countries, Dhaka.

Pitt, Mark M. and Shahidur R. Khandker (1998) “The Impact of Group-Based Credit Programs on Poor Households in Bangladesh: Does the Gender of Participants Matter?” Journal of Political Economy, 106(5): 958-996.

Rabbani, Mehnaz, Vivek A. Prakash, and Munshi Sulaiman (2006) “Impact Assessment of CFPR/TUP: A Descrptive Analysis Based on 2002-2005 Panel Data,” BRAC Working Paper no. 12, Building Resources across Countries, Dhaka.

Rahman, Hossain Zillur (1995), “Mora Kartik: Seasonal Deficits and the Vulnerability of the Rural Poor.” In

Hossain Zillur Rahman and Mahabub Hossain (eds.), Rethinking Rural Poverty: Bangladesh as a Case Study. New Dehli, India: Sage Publications.

Salim, Mir M., (2013), Revealed objective functions of Microfinance Institutions: Evidence from Bangladesh, Journal of Development Economics, 104, issue C, p. 34-55,

Sen, Amartya (1981), “Ingredients of Famine Analysis: Availability and Entitlements,” The Quarterly Journal of Economics, MIT Press, 96(3): 433-64.

Uddin, Jashim (2008), “Programmed Initiatives for Monga Eradication (PRIME): Design and Challenges”, Presented at the National Seminar on Monga, PKSF, Dhaka Bangladesh, January 2-3, 2008.

Udry, Christopher (1990), “Credit Markets in Northern Nigeria: Credit as Insurance in a Rural Economy”, World Bank Economic Review, Oxford University Press, vol. 4(3): 251-69.

Udry, Christopher (1994), “Risk and Insurance in a Rural Credit Market: An Empirical Investigation in Northern Nigeria,” Review of Economic Studies, 61(3): 495-526.

World Bank (2008), “Poverty Assessment for Bangladesh: Creating Opportunities and Bridging the East-West Divide,” Bangladesh Development Series, Paper No. 26.