Forest commons, vertical integration and smallholder’s saving and investment responses: Evidence from a quasi-experiment

As the result of prohibitively high transaction costs, smallholder farmers are only partly integrated into agricultural and forest commodity markets, a situation that may leave them in a lower level of development equilibrium (i.e., a poverty trap). For the most part, many users of forest commons extract forest products, typically non-timber products, for subsistence use or safety net purposes. To overcome this problem, in recent years, collective vertical integration (VI) of forest product marketing cooperative structures have been promoted and, in some cases, adopted by users of forest commons. Although this type of program has been observed to raise smallholder incomes, there is little evidence available on saving/investment responses to such income gains. This paper investigates precautionary saving and investment responses to collective forest product marketing programs among users of forest commons in Ethiopian villages. To identify the causal effects of the program, I applied propensity score matching, difference-in-difference (DID) and change-in-change (CIC) estimators to household survey data collected from randomly selected households in the Gimbo district (south-western Ethiopia). I find strong evidence that participation in the program reduces savings in the form of livestock holdings and that effect is limited to non-poor households. When interpreted in terms of the Permanent Income Hypothesis (PIH), the results imply that participants felt the current income gains to be non-transient, which led to reduced precautionary savings and to a gain in consumption/welfare. Moreover, I found that the program has spurred investment in child education and participation in off-farm self-employment. These results point to the importance of the safety net/insurance channel of the program. Overall, the findings underscore the program’s potential to raise the standard of living via ancillary mechanisms beyond directly raising income outcome.

Working paper 828
1 August 2020

World Development
1 August 2020

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