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South African Journal of Economic and Management Sciences

On-line version ISSN 2222-3436
Print version ISSN 1015-8812

S. Afr. j. econ. manag. sci. vol.20 n.1 Pretoria  2017 



The impact of social grant dependency on smallholder maize producers' market participation in South Africa: Application of the double-hurdle model



Sikhulumile SinyoloI; Maxwell MudharaII; Edilegnaw WaleII

IEconomic Performance and Development, Human Sciences Research Council, South Africa
IIDiscipline of Agricultural Economics, University of KwaZulu-Natal, South Africa





BACKGROUND: Social grants have become an increasingly popular means of improving the welfare of poor households in South Africa and beyond. While the goals of these transfers are to alleviate current poverty as well as to improve human capital capacity, they also have unintended effects, positive or negative, on beneficiary households. A question that has not been adequately addressed in the literature is the role that social grants play in the efforts to commercialise smallholder farming.
AIM: The aim of this study was to examine the impact of social grant dependency on the incentives of smallholder maize producers to participate in the market.
SETTING: The study was done in the rural areas of four districts (Harry Gwala, Umzinyathi, Umkhanyakude and Uthukela) in the KwaZulu-Natal province, South Africa.
METHODS: The study adopted a quantitative research design. A total of 984 households were randomly selected from the four districts, of which 774 had planted maize in the previous season. The analysis was done on the 774 farmers who had planted maize. The double-hurdle model was used for statistical analysis.
RESULTS: The results show a negative association between social grant dependency and market participation, suggesting that social grant-dependent households are more subsistent, producing less marketable surplus. Moreover, households with access to social grants sold less quantities of maize in the market, indicating reduced selling incentives.
CONCLUSION: The study indicates that social grants reduce the incentives of smallholder farmers to commercialise their production activities. The results suggest that, while policies aimed at reducing transaction costs would increase smallholder market participation, attention should be paid on how to reduce social grants' dis-incentive effects. To reduce spill over effects to unintended household members, the study recommends offering part of the grant as 'in-kind support', which is specific to the intended individual beneficiary.




There is a general consensus in the literature (e.g. Alene et al. 2008; Barrett & Swallow 2006; Carter & Barrett 2006; De Janvry, Fafchamps & Sadoulet 1991; Von Braun 1995) that promoting smallholder market participation is an important pathway towards poverty reduction, economic growth and development in developing countries. It has been argued that smallholder agriculture would contribute more to rural livelihoods if it breaks out of the subsistence trap into commercial agricultural production (Barrett & Swallow 2006; Hazell et al. 2010). As a result, the transition from semi-subsistence to commercialised agriculture has been a core theme of rural development initiatives for many years across the developing countries (Agwu, Anyanwu & Mendie 2012; Barrett 2008).

This also applies to South Africa, which, on the one hand, is characterised by large-scale producers well connected to markets and, on the other hand, has a smallholder farming sector that is unprofitable and is characterised by weak links to markets (Makhura, Kirsten & Delgado 2001; Ortmann & King 2010; Van der Heijden & Vink 2013). The general view is that smallholder farmers' market participation should be improved to reduce rural poverty and household food insecurity in South Africa (Chikazunga 2013; Khumalo 2013; Senyolo et al. 2009). Moreover, the high unemployment rates and limited prospects for labour absorption in the non-farm sector have led the South African government to prioritise the expansion of the smallholder sector as part of its broader job creation strategy [Aliber & Hall 2012; National Planning Commission (NPC) 2012]. According to Aliber and Hall (2012), an important element of such a strategy is that it should promote the graduation of subsistence producers so that they can earn an income as commercial smallholder producers.

Accordingly, the South African government has identified increased commercialisation of smallholder farming as key in reducing rural poverty as well as stimulating rural economic development [Department of Agriculture, Forestry and Fisheries (DAFF) 2012; NPC 2012]. For example, the New Growth Path sets target of establishing 300 000 additional market-oriented smallholder producers by 2020 [Department of Economic Development (DED) 2011]. In line with these targets, the DAFF has been implementing the Strategic Plan for Smallholder Support (SPSS), aimed at supporting the smallholder farmers to graduate to commercial status (DAFF 2012). Despite the concerted government efforts in the past, smallholder farmers' market participation has not significantly improved in South Africa (Hlongwane, Ledwaba & Belete 2014).

A range of constraints and barriers reducing smallholder producers' market participation levels have been identified, with most of the studies highlighting the negative impact of transaction costs in this regard (Biénabe & Vermeulen 2011; Hlongwane et al. 2014; Jari & Fraser 2013; Makhura 2001; Van der Heijden & Vink 2013). However, the question that has not been adequately addressed is the impact of social grants on the incentives of smallholder farmers to commercialise their production activities. South Africa has social grants that benefited an average of over 16 million of the poor each month in 2014 (South Africa Social Security Agency 2014). Most smallholder farming households are beneficiaries of at least one of the different social grants. Even though the social grants are targeted to specific vulnerable groups such as the young, old or chronically sick among poor households, they generally benefit households as a whole (Abel 2013; Klasen & Woolard 2008).

On the one hand, social grants can be an important complement to the smallholders' commercialisation agenda, as the extra income may relieve the credit and liquidity constraints of farm households, enabling them to overcome the transaction costs they face (Barrientos 2012; Bezu & Holden 2008; Boone et al. 2013; Tirivayi, Knowles & Davis 2016). On the other hand, the economic theory predicts that social grants may induce negative behavioural changes and entrench a culture of dependency and entitlement, undermining the incentives of farmers to commercialise their production activities (Barrett 2006; Devereux 2001; Gibson 2015; Lentz, Barrett & Hoddinott 2005). The theoretical rationale is that increased household income because of unearned income like social grants, reduces the marginal benefit that households obtain from undertaking further income-generating activities such as farming (Binger & Hoffman 1998).

Descriptive statistics and anecdotal evidence from several studies in South Africa (e.g. Aliber & Hall 2012; Aliber & Hart 2009; Tshuma 2012; White & Killick 2001) have highlighted the potential negative effect of social grants on smallholder farming activities. Tshuma (2012) reported that many smallholder farmers are reducing the area under cultivation, even for subsistence purposes, as they depend more on social grants for their income. This has resulted in social grants becoming the greatest source of income for the majority of rural households in South Africa, surpassing that of smallholder agriculture by far (Tshuma 2012). However, the understanding of the linkages between smallholder market participation and social grants has not been based on in-depth empirical analyses. Recent reviews of empirical literature on the potential linkages between social cash transfers and smallholder agriculture (e.g. Bastagli et al. 2016; Tirivayi et al. 2016) have indicated that the research on the issue is currently thin and the results are of a mixed nature. Most of the studies (Boone et al. 2013; Covarrubias, Davis & Winters 2012; Radel et al. 2016; Todd, Winters & Hertz 2010), mainly in Latin American and sub-Saharan African (SSA) countries, evaluated the direct and indirect impact of social transfers on agriculture and focussed on agricultural outcomes such as asset accumulation, input use, output and labour allocation. While literature generally showed the positive role of social transfers in improving the productive capacity of beneficiaries, little is known about whether social cash transfers have positive or negative effects on the smallholder market participation.

Understanding the linkages between social transfers and smallholder commercialisation is important to improve the policy coherence between social protection and smallholder agriculture, as called upon in recent literature (e.g. Boone et al. 2013; FAO 2016; Tirivayi et al. 2016). Increased policy coherence would ensure that social cash transfers do not reduce the incentives for the poor to work themselves out of poverty through smallholder farming, which is the main income-generating activity in rural areas (Gibson 2015; Maluccio 2010). Few studies, if any, have explicitly and systematically articulated the theoretical linkage and examined the empirical relationship between the two variables in South Africa and beyond. This study, therefore, seeks to address this pertinent question by focussing on smallholder maize producers' market participation. Maize was chosen because it is the most important grain crop in South Africa, and is the main crop grown by smallholder farmers (Akpalu, Hassan & Ringler 2010; Biénabe & Vermeulen 2011; D'Haese et al. 2013).

The remainder of this article is organised into three sections. The next section presents the research methodology, introducing the theoretical framework, the study area, the sampling techniques adopted and the empirical models employed. The penultimate section presents results and their discussions, while the conclusions and implications for policies are contained in the final section.


Research methodology

Survey design and data

The sample was randomly drawn from four purposively chosen districts across the KwaZulu-Natal (KZN) province: Harry Gwala, Umzinyathi, Umkhanyakude and Uthukela. These districts have a significant number of rural communities engaged in farming activities and are among the poorest in terms of average household incomes (Stats SA 2012). The KZN province is characterised by high poverty levels and lack of economic opportunities, particularly in rural areas. Social grants and smallholder farming play important roles in the livelihoods of the rural dwellers.

The lists of farmers were obtained from the extension offices of the respective districts, which also helped direct the enumerators to the selected farmers' homesteads. A total of 984 households were randomly selected from the four districts, of which 774 had planted maize in the previous season. The analysis was done on the 774 farmers who had planted maize in the last season. Data were collected between June and November 2014 using a pretested structured questionnaire. The questionnaire was administered by trained and experienced enumerators who had good knowledge of the rural farming systems and who could speak the local isiZulu language.

The questionnaire included information on basic household head characteristics, measures of household wealth endowment (such as household assets, livestock and land) and household income sources or amounts. The questionnaire also captured the crop production and marketing behaviour of the households, asking questions about types of crops the household planted in the previous season, quantities harvested and sold. Furthermore, the questionnaire captured farmers' membership to associations as well as their access to institutional support such as market access, social grants, credit and extension.

Conceptual framework and variables

The households' decision on whether or not to participate in the maize market was considered under the random utility framework (McFadden 1974) and the theory of farm household decision-making under imperfect markets (De Janvry et al. 1991). The random utility framework postulates that the smallholder maize farmers will decide to participate in the market if the perceived utility or net benefit from participation is greater than in the case without participation. The theory of farm household decision-making under imperfect markets indicates that a household's market participation is mainly a function of market transaction costs. According to De Janvry et al. (1991), market failure is household specific, not commodity-specific. This is because households who participate in the market are those with market gains that are higher than the transaction costs, while those with market gains less than the transaction costs will not participate.

Even though in some cases markets do not even exist (missing markets), the majority of the cases of market failure in developing countries are because of high transaction costs (Alene et al. 2008; De Janvry et al. 1991; Goetz 1992; Key, Sadoulet & De Janvry 2000; Omamo 1998). In South Africa, these transaction costs are because the smallholder farmers are located in rural areas which are remote and far away from major consumers of farm products. Moreover, the rural areas are characterised by poor infrastructure, inadequate information and thin credit markets. As explained in De Janvry et al. (1991) and other recent studies (e.g. Alene et al. 2008; Mather, Boughton & Jayne 2013), the household's market participation is influenced by its economic position and institutional environment. The model estimated in this study included proxies for transaction costs, wealth endowment and human capital. Table 1 shows the variables that were considered and their descriptions.



The table presents the household head demographics (age, gender and household size), wealth endowment (farm size, asset values, livestock size, etc.), human capital (education level and farming experience), social capital (farmer groups membership) and farmer support services (access to extension, agricultural training, credit and markets) that were included in the model. District dummies were also included to capture the district-specific attributes that result in spatial variations in the political, social and agro-climatic environment of these districts which impact market participation. The quantities of maize produce harvested and sold as well as prices were based on the recall by the farmers. Even though the individual prices the households faced were collected, the average ward price was used as an explanatory variable in the model, following previous studies such as Alene et al. (2008) and Komarek (2010). This is because if household specific prices were used, those households with zero sales would have been excluded from the analysis. Total household income included the incomes that the household received from different sources, such as employment, remittances, social grants, farming, micro-businesses, and arts and culture.

It was also hypothesised that access to social grants will have a negative effect on the smallholder market participation. This is because increased income from social grants may entrench a culture of dependency and entitlement among beneficiary households (Abel 2013; Bertrand, Mullainathan & Miller 2003; Samson et al. 2004), reducing incentives by households to engage in income-generating activities. The influence of social grants was captured using two variables: a dummy variable showing whether or not a household has access to social grants and a proportional variable showing the contribution of social grants to total household income. The proportion variable captured the level of household dependency on social grants.

The double-hurdle model

The maize output marketing decision was modelled as a two-step decision process: (1) the household decides whether or not to participate in the market and (2) the household decides on the volume of transactions. The double-hurdle model (Cragg 1971) was used to model this two-step decision process, following several other market studies (e.g. Holloway, Barrett & Ehui 2005; Komarek 2010; Mabuza, Ortmann & Wale 2014; Mather et al. 2013; Ndoro, Mudhara & Chimonyo 2014). This model was chosen over the Heckman sample selection model, which has been used by many studies (e.g. Alene et al. 2008; Bwalya, Mugisha & Hyuha 2013; Geoffrey et al. 2013; Goetz 1992; Sebatta et al. 2014). The Heckman approach addresses the statistical challenge posed by cases in which market sales equal zero as a missing data problem. However, the issue of zero market sales does not represent missing values as a zero amount of maize output sold is a valid economic choice to be explained (Mather et al. 2013). The double-hurdle model produces more superior estimates than the Heckman model when one is dealing with true zeros (Dow & Norton 2003).

According to the double-hurdle model, a farmer faces two hurdles while deciding on maize market participation: whether or not to participate in the market and how much maize to sell in the market. This approach distinguishes between fixed transaction costs, which influence only the first decision of participation, and variable transaction costs, which can influence both decisions (Key et al. 2000). For example, distance to the market was considered in both decision stages because farmers nearer to the market incur less information cost, thus reducing fixed costs, and they also incur lower transpo