Differential Household Responses in a Poor Agricultural Economy: Implications for Agricultural Policy Analysis

There is increasing interest in differential impacts of and responses to different domestic and global policy and market changes in poor agrarian economies. Conventional analysis, even where it disaggregates between producers and consumers with different resource bundles, tends to apply uniform production and demand functions to these households without examining differences in their underlying behaviour. However, differences in resource access between households, coupled with market failures (or at least large price wedges), are likely to be associated with differential household production responses that do not conform to either standard production functions or uniform supply elasticities (with for example variability in non-separability between different households). This paper examines the extent and implications of such differential responses in Malawi. A non-linear programming model of farm-household behaviour is applied to households with different resource endowments. Model results describe differences in production responses and household welfare for households with different resource endowments. Some dramatic differences are observed in responses to changes in wages and in staple food prices where, over critical price ranges, seasonal cash constraints may lead to perverse (backward sloping) supply responses for very poor households while over the same price range less poor households show a positive supply response. While the perverse supply responses found for some households in this study may represent an extreme situation, highly inelastic supply responses are likely to be much more common, given widespread agricultural finance market failures, liquidity constraints facing poor households, and competition between household consumption and seasonal crop investments for scarce working capital. Analysis of impacts of change in national and international policy and trade conditions therefore need to explicitly take account of these issues and of their interactions with household consumption and welfare, with different farm and non-farm activities, and with institutional changes affecting different producers’ access to and needs for seasonal capital.