The impact of social grants on rural households' incentives to farm, market participation and farm entrepreneurship: evidence from KwaZulu-Natal, South Africa.

Abstract

While there is general consensus on the need to reduce poverty and food insecurity in Africa, considerable debate exists on the effectiveness of transfers, such as social grants, in attaining these goals. The concern is that transfers may affect people’s social and economic behaviour negatively and entrench a culture of dependency and entitlement. This concern is echoed by policy-makers and academics in South Africa, where more than 16 million poor people were social grants beneficiaries in 2014. Even though a wide range of literature has explored many dimensions of the impact of social grants, limited in-depth research has explored the potential linkages between social grants and smallholder farming in South Africa. This is despite the importance of these two interventions, especially in the rural areas where poverty and household food insecurity are concentrated. The objective of the study was to investigate the impact of social grants on: incentives to farm, chemical fertiliser adoption, market participation and farm entrepreneurship in the rural areas of the KwaZulu-Natal (KZN) province. Using a sample of 984 households randomly selected across four districts of the province, different econometric techniques (such as the logit transformation technique, Papke and Wooldridge model, propensity score matching, generalised propensity score method, double-hurdle model and the Bartlett factor score regression) were utilised to analyse the data. The social grants variable was captured in two ways: as a dummy showing whether a household has access to social grants and as a continuous variable indicating the level of household dependency on social grants. The study results indicated that social grants have a wide coverage, benefiting most of the rural households that were interviewed. The study indicated high levels of unemployment among the household members in the rural areas in KZN, implying shortage of economic opportunities in these areas. While this underscores the importance of smallholder farming as a livelihood option, the results indicated low areas of land under cultivation, reduced participation by unemployed household members in smallholder farming activities and low levels of farm entrepreneurship. The question answered in this study pertains to whether these outcomes are a result of the households’ access to, or dependency on, social grants. The study results revealed that the disincentive effects of social grants are not just about access, but about the level of dependency on them. This implies that there is value in introducing the dummy and the continuous variable, as the influence of the two variables varied for some of vi the different outcomes studied. The findings of the study were largely consistent with the disincentive hypothesis, indicating that access to social grants and the level of dependency on them generally had negative effects on individuals’ incentives to take part in smallholder farming activities. However, this result did not apply on all the outcome variables. The econometric results indicated that access to, and level of dependency on, social grants did not influence, either positively or negatively, the proportion of land under cultivation. This result, which was robust across several econometric techniques, suggests that the declining land under cultivation among rural households is not due to social grants. Instead the study identified several other constraints that policy-makers should focus on to improve the proportion of cultivated land area in the rural areas. In terms of the impact of social grants on household members’ participation in farming activities, the results were in line with the disincentive hypothesis. The results indicated that both access to, and increasing levels of dependency on, social grants led to a significant reduction in the number of the household members that participate in smallholder farming activities. The implication of this result is that, although social grants are targeted to the vulnerable household members, they also reach the unintended household members, creating disincentive effects. The increase in household income due to access to social grants increases the reservation wage of the household members and lowers their motivation to participate in farming activities. The increase in the reservation wage means that household members would require smallholder farming to be more remunerative than currently for them to participate in it. The study identified other variables that affect participation in smallholder farming by household members, highlighting the importance of expectations of farming success as a key motivator. Access to, and level of dependency on, social grants were found to have mixed impacts on chemical fertiliser adoption. While the results indicated that access to social grants was associated with higher levels of chemical fertiliser use, increasing levels of dependency on social grants was associated with decreasing intensity of chemical fertiliser use. This implies that, although social grants may relax the financial constraints facing rural farmers amidst imperfect credit markets, high levels of dependency on social grants results in disincentives to invest in farms. In order to promote self-sufficiency and independence among the rural poor, the study highlights the need to find strategies such as introducing subsidies and focussed training, to encourage rural households to invest part of their social grants in smallholder farming activities. In terms of commercialisation incentives, the results found that higher social grant-dependency was associated with decreased probability of market participation. This suggests that the households who depend more on social grants are more likely to be subsistence-oriented as they rely on social grants for income. After the decision to enter the market is made, households with access to social grants sold lower maize volumes compared to those with no access to social grants. The study concluded that social grants had negative effects on the incentives of rural households to commercialise their farming activities. This has negative implications on the government’s drive to increase commercialisation levels of smallholder farmers by helping them graduate from subsistence farming. The results identified a number of factors that significantly influenced household market participation, highlighting the importance of institutional support (e.g., extension, training and information) in reducing transaction costs and increasing market participation. The study results imply that policies aimed at reducing both fixed and variable transaction costs (such as improved road infrastructure and institutional support such as extension, training and organising farmers into groups) should be prioritised to increase both rates and levels of smallholder participation in the maize markets. The study results indicated that the high levels of dependency on social grants inhibit farm entrepreneurship development. This implies that social grants, especially in households where they are more important, have created disincentives that have hindered the entrepreneurial attitudes of rural households. Given that the entrepreneurial competencies can be learned and changed, the study identified the policy variables to enhance farm entrepreneurship. The study recommends that government should prioritise the provision of support services such as training, extension and credit support, in order to establish entrepreneurial rural households. A greater emphasis should be on identifying the gaps in the farmers’ entrepreneurship skills set and then training the farmers according to their needs. To sum up, the study found that rural households who depended more on social grants had fewer of their members participating in smallholder farming; used less chemical fertiliser; were less entrepreneurial and less likely to be market-oriented. Although access to social grants had a positive effect on the level of chemical fertiliser use, it had negative effects on the proportion of household members that engage in smallholder farming activities and market participation levels. The findings imply that social grants are spilling over to unintended household viii members, creating a dependency syndrome among recipient households. Since social grants are important in addressing extreme poverty, the study recommends that their provision should continue, but policy-makers should be particularly cognisant of their possible unintended and adverse consequences on smallholder farming. The study recommends that policy-makers should synchronise the objectives of social grants and smallholder farming so that the disincentive effects are reduced. The study presents policy options to address both the social grants side as well as the smallholder farming side, arguing that dealing with the social grants alone is not enough to ensure the viability and success of smallholder farming. Policy options include increasing smallholders’ assets in order to grow their risk-bearing capacity, addressing imperfections in the rural credit markets, improving the expected profitability of smallholder farming as well as introducing focussed training to motivate rural households to invest part of their social grants in smallholder farming activities.