Factor Misallocation in Malawi: Sources and Implications

Analyzing the Restuccia et al. working paper regarding the household level behavior of farmers in Malawi.

By Matt O’Lone

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Introduction

Why are some countries rich, and some incredibly poor? This is a challenging and multi-dimensional question that economists have been trying to explain for ages. In search of an explanation, this piece will take you on a journey to what is known in its native language as the, “Warm Heart of Africa.” Malawi is a small, landlocked country located in Southeast Africa. High prevalence of HIV/AIDS, high infant mortality, high income inequality, and low life expectancy all characterize Malawi as one of the poorest and most underdeveloped countries in the world. As one of the most underdeveloped countries in the world, Malawi attracts a great deal of attention from economists and researchers around the world who try to explain what contributes to Malawi’s situation.

From the National Bureau of Economic Research, a working paper written by Diego Restuccio and Raul Santaeulalia-Llopis explains how labor and capital misallocation in Malawi can account for the differences in productivity and output in the household level of the Malawian economy. The paper, titled, “Land Misallocation and Productivity” uses data collected from a survey conducted by the World Bank, called the Malawi Integrated Survey of Agriculture. The authors used this survey, which has excruciatingly specific data from over 12,000 households, to measure the total factor productivity (TFP) and agricultural output of each household.  Total factor productivity, as we’ve learned in class, measures how changes in inputs (land and capital) effect changes in output. The authors compare the TFP of households to their amount of land and capital to see if there is a relationship.

Productivity and Output Gain

TFP is derived by measuring the residuals of the farm-level production function. The production function solves for the amount of output produced by each individual farm, and is a function of the amount of land they operate, the amount of capital and intermediate inputs used, the quality of the farmland, and transitory shocks. In Malawi, the most influential transitory shock in agriculture is rain, so to strengthen the model and reduce confounding variables, the amount of rain received by each individual farm is taken into account.

After deriving TFP and comparing it to the farm size and capital used, the results showed almost no correlation between having more capital and land and the TFP of a household. This result poses many questions. Why are larger farms and farmers with more capital not more productive? The answer is explained by factor misallocation. After seeing that low productivity levels cannot be explained by lack of land and capital, the authors reason that misallocation of resources is what causes the hindered productivity and output of these households.  To test this, the authors calculate the output gain by farmers if their resources were efficiently allocated versus what they are currently.

To find the efficient allocation of resources, the authors construct an equation which maximizes production subject to the constraints of land and capital in the entire economy.

After comparing efficient allocation to current allocation, the output gain is very significant. If farmers and the overall economy of Malawi were able to allocate their resources, namely capital and land, more efficiently, there would be an output gain of roughly 3.6 fold. This enormous gain suggests that their current allocation is even worse than expected, and that many farmers are not allocating their resources appropriately to become more productive. One potential fountain of this misallocation issue is thought to be the structure of the land market in Malawi.

Structural Impacts

As mentioned earlier, Malawi is a very agricultural country, and although so many people have farmland, the market for buying, selling or renting land is severely underdeveloped. Typically, land is inherited from generation to generation, or land is granted to farmers by a village Chief. All disputes and issues about land ownership are also settled by the village chief. To see if poor land markets are a cause of the misallocation of resources, the authors compare the expected output gains for each class of farmland: non-marketed land (inherited/granted by Chief), some marketed land (inherited some, bought/rent some), or entirely marketed land (purchased land).

According to the survey, 83.4% of farmers had land which was never marketed; it was inherited or granted to them. 16.6% had some land which was marketed, and of that 16.6%, 10.4% of farmers had land which was entirely purchased through a land market. As stated earlier, the average output gain across all farmers was 3.6 fold. However, when breaking it down by land class, there was a 4.6 fold gain in non-marketed land, a 2 fold gain and a 1.6 fold gain for farmers with some, or all marketed land, respectfully. Given that farmers in the first group, who inherited or were granted land, had a much higher output gain we can conclude that not having access to developed land markets is what is contributing to the misallocation of resources.

These farmers who inherit or are granted land have a larger output gain because it is likely they have less incentive to be productive because they incurred no cost of acquiring the land. It’s likely that farmers who are able to purchase at least some of their land most likely have access to other markets as well, such as credit markets. This allows them to better command and manage their inputs and ultimately produce more, which is why their output gain is not as extreme. It is also shown that farmers with marketed land are more educated, fewer of them live in rural areas, and they are more likely to invest in technology and intermediate inputs to improve production.

If Malawi eventually reaches the point where they are able to efficiently allocate land and capital across individual farmers, there are many implications that their economy will change as well as inequality within the country. Having a more developed land market will allow more productive farmers to acquire more land and capital and scale their farms more quickly. As farms become more and more productive, there will be less of a demand for farmers. Rather than having almost the whole country work in agriculture, only the most productive farms will scale and control the agricultural industry, and as a result employment in agriculture would fall drastically. In fact, a 3.6 fold increase is predicted to result in a 16 fold decrease in agricultural employment. Granted, this change of allocating resources efficiently won’t happen overnight, however over time the face of the Malawian economy could change significantly. Overall, misallocation of land and capital across the farming population of Malawi is argued to be the biggest factor in why farmers struggle to produce output and be productive. It will be interesting to see what policymakers and those sending aid to Malawi will do to help correct this pattern, and even more interesting how these potential changes will affect the health of the nation.

 

References

Park, M. (2014, January 06). 5 reasons Malawi is Africa’s next go-to destination. Retrieved April 25, 2017, from http://www.cnn.com/2014/01/06/travel/five-things-malawi/

Restuccia, D., & Santaeulalia-Llopis, R. (2017). Land Misallocation and Productivity. National Bureau of Economic Research. Retrieved April 25, 2017, from http://www.nber.org/papers/w23128.pdf

1 thought on “Factor Misallocation in Malawi: Sources and Implications”

  1. I enjoyed reading your post and thinking about the economic concepts at play! Several small notes/comments stick out to me. First, I appreciate how you discuss transitory shocks such as the weather, as it relates the theory we have learned in ECON416 to concerns that developing communities face in real life. The weather is something that I do not often think about in classical economics, but as we learned, can substantially affect the decision-making of risk averse farmers (which we might presume are the majority of them). Second, your conclusion (“not having access to developed land markets is what is contributing to the misallocation of resources”) appears slightly over-confident. Causal statements seem best approached with caution, unless all potential confounders are controlled for or it is a randomized controlled trial. Neither appear to be the case for this paper – though I may be wrong about this. Therefore, though they certainly seem to exhibit a strong relationship, I am not sure if access contributes to the misallocation of resources or is just likely to contribute.

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