Comprehending the effects of the world’s largest workfare program

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As the world’s largest workfare program, India’s Mahatma Gandhi National Rural Employment Assure Scheme (NREGS) has attracted much atten­tion. Yet its impacts on agriculture have been relatively neglected. The re­cent paper by Deininger, Nagarajan, and Singh addresses this distance by fo­cusing on the program’s effects on ag­ricultural productivity as well as labor market outcomes.

The program offers unskilled em­ployment, for up to 100 days a year for each household, in projects to provide nearby productivity-enhancing infrastructure. Wages are fixed by statute, at rates which are equal for men and women and, it is hoped, not attractive enough to pre­vent effective self-targeting.

Workfare programs like NREGS can affect agricultural productivity by means of several channels. By using labor, they can affect wage rates and employment levels in the short term and produc­ers’ choice of technology and the capital intensity of creation in the medium to long term. By giving implicit insurance against downside risk, in the form of predictable wage payments, they might allow poor farm­ers to increase expense or adopt crop portfolios with higher risk-return profiles. And by building or im­proving local infrastructure, they might increase agricultural productivity and thus improve returns to land and labour, the main assets of small farmers and the rural poor.

The authors use unique panel data covering the exact same households in 1999/2000 (before the program) and 2007/08 (after a few had received the program), complemented by informa­tion on the program’s implementa­tion in a subset of villages. Providing a few data and a robust method, they will assess the program’s short-term im­pacts on rural wages, labor demand, plus agricultural production struc­tures. They discover that in the short term NREGS led to a marked increase in agricultural wages and higher levels of nonfarm casual work and on-farm self-employment. The program trig­gered a lot more intensive use of irrigation and greater diversification of crop portfolios, specifically by small farmers. It also increased productivity, largely by alleviating liquidity constraints and improving access to insurance policy.

Outcomes suggest that the program increased the income significantly with­out crowding out personal employment. Most of this increase could be attrib­uted to higher wages in agriculture, which affected men and women about equally. Women also experienced an increase within nonagricultural wages.

Analysis of the extent to which wage changes affected labor portion points to insignificant impacts upon ag­ricultural wage work in the aggregate. While a significant increase in nonfarm informal work may be attributed to the aggregation of NREGS and other work, there is also evidence of a program-induced increase in on-farm self-employment. But while men increased their labor supply to the agricultural sector, women shifted away from plantation to nonfarm employment and to some degree salaried work.

Increases in labor provide to the nonfarm sector were concentrated among landless and small to medium-size farmers, suggesting effective self-targeting. Increases in labor sup­ply to agricultural self-employment emerged only for small and, to some degree, medium-size farmers, possi­bly because some NREGS investment can be executed on farms. There is also some evidence of a reduction in nonfarm self-employment and an in­crease in salaried work by largest landowners.

Results indicate that the system had a significant impact on agricultural efficiency, in part by supporting di­versification. Evidence suggests that the program led to greater use of ma­chinery and fertilizers, a shift beyond rice and wheat toward riskier crops not covered by government-imposed floor prices, and an increase in the intensity of cultivation (the number of seasons in which crops are grown during a year). Some of these effects may be ex­plained by the program’s effects in in­creasing farmers’ liquidity. In addition , the rehabilitation of infrastructure and construction of new small-scale water conservation structures might have helped support more intensive property use, particularly the planting of a second or third crop beyond wheat or paddy.

Evidence on how workfare impacts agricultural productivity matters not only for any better understanding of the NREGS intervention. It also has im­plications for the wider debate on the comparative merits of this type of approach. Workfare programs rely on work requirements as a screening gadget based on the assumption that such verification makes these programs a more budget-friendly tool for social protection than, say, unconditional cash transfers. But such programs would be less desired if they dis­placed existing workers instead of generating new jobs, if supply-side constraints were to reduce the ef­fectiveness of self-targeting, or if the work completed had no productive value. Problems have been raised about NREGS in each of these areas. While further study of the extent to which such effects persist in the longer term is needed, the particular authors’ findings sug­gest that the possible productivity benefits of workfare could be an im­portant aspect to take into account in evaluating the impact or desirability of such programs.

*This blog is featured began this morning a series of posts higlighting articles from 2017 Spring issue of the World Bank Research Digest available at: http://econ.worldbank.org/research_digest

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