Agricultural growth and multiplier effects of consumption spending in

rural and urban Malawi

Henry Kankwamba (LUANAR)Chinsinsi Esther Mtuluma (LUANAR)

John Mazunda (IFPRI)

Outline• Introduction• Methods• Results• Conclusion

Introduction• In the process of economic development, consumption

plays an important role in shaping patterns of structural transformation. • Income growth drives urbanization and that in turn

influences consumption patterns (Dolislager & Tschirley, 2014). • Income growth is expected to result in a decline in the

share of expenditure allocated to food items (Norton, 2004; Ecker & Qaim, 2010).

Introduction• As incomes rise in the face of increasing urbanization, factor

intensities of consumption patterns tend to shift from labour intensive rurally produced commodities to foreign exchange, capital intensive imported commodities. • Verduzco-Gallo et al. (2014) found that despite income

growth in Malawi, the share of expenditure allocated to food seems to be increasing. • Dolislager & Tschirley (2014) argue that this phenomenon

might continue for some time in the initial stages of structural transformation but will eventually converge into Engel’s law.

Introduction • Verduzco-Gallo et al. (2014) demonstrates that the share of

expenditure allocated to starchy staples is declining while the share on meat products is increasing. • King & Byerlee (1978) argued that lower income households

tend to consume products that require less scarce factors such as capital, foreign exchange and in turn consume commodities that are produced using the factor that is in abundance, in this case, labour. • Dolislager & Tschirley (2014) hypothesize that as disposable

income increase, individuals start spending on more processed commodities than unprocessed.

Introduction • Factor intensities of consumption play a big role in

income distribution since they would trigger an increase in employment which would in turn lead to increases in incomes. • Increases in incomes of the poor have positive

distribution, equality (King & Byerlee; 1979), equity and food security effects on the poor (Benson et al. 2013).

Objectives• The study examines whether consumption of rurally

produced food commodities, which require more labor, would trigger growth in the sectors that produce those commodities. • Second, the study estimates income transmission in

the concerned sectors in order to isolate sector dependencies and multipliers.

Methods• Marginal propensities to consume provide a base to

analyze factor intensities and rural-urban linkages.• Marginal propensities to consume were estimated

econometrically using a ratio semi-log inverse function (RSLI). • The relationship between consumption and income

was carefully considered to ensure conformity to economic theory.

Methods • Total consumption expenditure on good i by household

j after accounting for zero expenditures and using per capita consumption expenditure yields

• 2SLS were used to correct for endogeneity. • Huber-White standard errors were used.

Methods • After estimating the equation, the marginal propensity

to consume is derived as

• and the expenditure elasticity is derived as

Methods • Taking factors under consideration as labour, capital, and foreign

exchange, the marginal factor intensity Fjk for factor j, is the quantity of the factor required to produce a bundle of goods found in a marginal unit of consumption expenditure at income level k (King & Byerlee, 1978). Algebraically,

SAM based model• In order to measure inter-industry linkages and income

multiplier effects, a SAM-based multiplier model is given. • A SAM draws data from various sources such as

national accounts namely GDP at factor cost, GDP at market prices, government budget and balance of payments data. • Data on households is drawn from household surveys,

in this case the IHS3. Data on activities and commodities is taken from input-output tables.

Methods • A SAM-based income model is derived by

distinguishing endogenous and exogenous accounts and assuming that prices and costs are fixed while incomes vary. • The assumption that warrants this is that there is an

excess capacity condition, generalized homogeneity and fixed coefficients in activities (Roland-Holst & Sancho, 1995).

A SAM based model

• Algebraically,

• where vi is a row vector of exogenous costs and

• Is the Leontief inter-industry inverse known as the multiplier matrix.

Data sources• The third Integrated Household survey data from NSO

was used.• A 2007 Social Accounting Matrix for Malawi was also

used (Duillet et al. 2007)

Results• Staples, fruits, legumes,

meat, and vegetables shares of expenditure decline.• Fats share of

expenditure increases as income increases.

Implications of MPCs • The results from MPCs support the Keynesian

hypothesis that saving is a luxury for rural households as they devout most of their incomes to consumption.• APC told a similar story.

Expenditure elasticities

• In general, poor rural households expenditure elasticities are less than unitary for staples, legumes, meat products, and salt and spices. However, they are elastic for fats and beverages.

Implications of growing incomes: A multiplier perspective• Growing incomes imply increased expenditure for

households since propensities to consume for most commodities increase. • Increase in expenditure also implies growing demand

for commodities. • If commodities are produced domestically, it means

increased activity levels which demand factors. • Hence, more jobs. However, if the activities are

produced elsewhere, it means more imports.

Labor output & Capital output ratios in agriculture

Unskilled labor

Medium skilled labor

High skilled labor

land

Capital

Rural poor 0.095 0.059 0.000 0.062 0.041

Rural-non-poor 0.159 0.308 0.035 0.176 0.093

urban-poor 0.002 0.003 0.000 0.001 0.000

urban-non poor 0.013 0.149 0.109 0.024 0.006

Marginal factor intensities of consumption

Rural Non Poor

Rural Poor Urban Non poor Urban poor

Staples 723.39 65.42 380.29 1.71

Legumes 166.47 13.61 86.88 0.32

Vegetables 141.23 13.28 74.47 0.36

Meat 557.10 53.30 294.15 1.47

Fruits 49.43 5.08 26.25 0.15

Fats 53.42 8.13 29.53 0.29

Spices 14.17 2.71 8.07 0.10

Beverages 143.58 14.41 76.11 0.41

Multiplier effects of consumption spending under agriculture growth scenarios

Factor multipliers under different expansion scenarios

Price and cost implications of consumption spending

• A modest increase will result from the growth.

Income multipliers

Conclusions• Marginal propensities to consume for most food

commodities are falling as incomes while some luxurious food groups such as spices and beverages are rising. • Associated income and price multiplier effects show that

output, demand, GDP and household incomes will increase by a factor of two cumulatively. • However, increased output will not be sufficient to offset

demand and as such imports will grow by a factor of four.• Generally, changes in consumption spending behaviour

result in positive growth but prioritized growth is more appropriate.