Robustness checks

In the FRD design, the non-parametric regression approach is used to estimate the local average treatment effect (LATE) choosing a small neighbourhood (bandwidth) on both sides of the cut-off point. In addition, this design uses the data within the bandwidths to estimate the ratio of two differences between the treated group and the non-treated group at that cut-off point for both the outcome and treatment regressions (Imbens and Lemieux, 2008). The ratio of the two discontinuities can be estimated as

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βRDD =

E(Yi\¯l ≥ Li >¯l−ψ)−E(Yi\¯l < Li ≤¯l+ψ)

E(Ti\¯l ≥ Li >¯l−ψ)−E(Ti\¯l < Li ≤¯l+ψ)

(3.7) Where Y is the output variable (rice output), T is the treatment variable (credit per acre), Li is the total holding land size of an individual household, and l is

the rating variable or the land size (10 acres) at the cut-off point. According to Lee and Lemieux (2010), the results of the sensitivity of IV estimation allow for the changes in the interval of assigned land size because different bandwidth might show the different estimates. Following Lee and Lemieux for the FRD with varying interval, Table A7 in Appendices displays the results of IV-2SLS regressions including the covariates. Meng (2013) explained that the instrumental variable should produce insignificant 2SLS estimates between the treated group and non-treated group if there were no differential trends around the cut-off point. In this study, the robustness checks are estimated with different intervals of land size with (±0.5 acre, ±0.1 acre and±1.5 acre), specifically, the IV estimates of land size for 9.5-10.5, 9-11, and 8.5-11.5 by de- termining with covariates. The covariates used in the robustness checks are the same variables of the main specification model. The specifications for different intervals of acre for (±0.5 acre, ±0.1 acre and±1.5 acre) are shown in columns 2, 3 and 4 in Table A7 respectively. None of those coefficients ofβ with band- widths between 8.5 and 11.5 are statistically significant, suggesting that there is no difference in farm households with holdings land size around the cut-off point.

3.7

Conclusion

In an attempt to promote the development of agricultural sector and rural areas in Myanmar, the MADB is the main financial institution providing agricultural loans throughout the country. Due to the lack of sufficient capital, there are some limitations on loans provided by the MADB. In recent years, the MADB bi-annually has lent 100,000 Kyat per acre for paddy for a maximum of 10 acres at an interest rate of 8.5 per cent per year. Under this framework, farm households with holdings of up to 10 acres can benefit from the policy as they receive an amount of credit in accordance with their landholding size. In other words, the MADB mainly supports smallholder farmers compared to farmers with medium or large holdings. Large farm holders, therefore, can receive only loan amounts for up to 10 acres of their land. In order to address the impact of credit on rice production, this study has investigated how the credit program

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might help increase rice production in the selected households.

Since the provision of credit is based on the landholding size of a farm household, a fuzzy regression discontinuity (FRD) approach has been applied to investigate the effect of credit policy on rice production in this study. The graphs clearly present the discontinuity points between rice output and land size, as well as between credit per acre and land size. Findings show that farmers who have a maximum 10 acres of land are likely to have comparable baseline characteristics with farmers who have more than 10 acres. Furthermore, the results of robustness checks confirm the validity of regression discontinuity. The status of land size is constructed as an instrumental variable to estimate its effect on the amount of credit per acre. The results for full sample do not show any impact on credit per acre on rice output and rice income.

This study takes the symmetric intervals around the thresholds, especially 8-12 acres, 5-15 acres and 0-20 acres of land to analyse the impact of credit on rice production. The results from the first stage regression for landholding size of 5-15 acres is significant at the 5 per cent level, and 0-20 acres and 8-12 acres are significant at 1 per cent levels, suggesting that the status of land size seems to be appropriate to use as an instrumental variable in this research. the result for an interval of 8-12 acres of land show no statistically significant the effect of MADB on rice output, rice income and total income with or without con- trol for agricultural extension services, irrigation, and regional characteristics. Nonetheless, there is an impact of the program on total household income for landholding sizes of 0-20 and 5-15 acres with and without control covariates, suggesting its positive spillover effects on other farm income activities.

Although different methodologies were used to analyse the impact of credit on rice productivity, the result of this study was contrary to those found by Aktaruzzaman (2013) and Nan Wutyi et al. (2013) who found evidence of the impact of credit on the small farm size group. All in all, this study finds little evidence of MADB credit impacts on rice output and rice income in the selected regions. On the other hand, a production cost of approximately 150,000 Kyat (USD 150) to 400,000 Kyat (USD 400) per acre in this study confirms that the current availability for loans provided by MADB covers half of the production cost per acre. Due to an insufficient amount of credit for production cost per acre, farmers cannot use quality seeds and the required amount of fertilizers, and many of them decided to borrow money from local money lenders at much higher interest rates. As a result, farmers cannot improve rice productivity or

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increase their income. The MADB, therefore, should take into account the cost of production and provision of the amount of loans to help increase productivity, reduce poverty and develop rural areas.

Based on insights from this paper, the MADB should take full responsibility of the process for credit screening and loan-making decisions. Importantly, the MADB should provide agricultural loans without limits on land size and encourage large farm holders to improve their productivity. For farmers who have more than 10 acres of agricultural land size should receive more credit with respect to their landholding size to cover the cost of rice production. Under the limited farm size policy of the MADB results in having burden to get more lenders who charge 5 to 20 per cent interest per month for loans. With regards to the repayment of loans, the MADB should reconsider the loan collection period as the full repayment is expected during harvest time.

According to the current repayment rule, farmers are not able to keep and sell the rice output until the price of rice increases. The income of farmers may increase if they can sell their product at higher prices. The longer the farm households can hold rice output, the higher the income and the more profit they have. On the other hand, the government should allow the MADB to have some relief from the rule that the MADB has to transfer 75 per cent of its profits to the state, and help raise sustainable capital for the MADB. In doing so, the MADB is likely to release its constraints, such as provision of loans for limited crops, the amount of credit per acre and land size in the near future. More importantly, the government should re-establish village banks that might help farmers to save travelling time and transportation costs for access to credit. However, there are some limitations in this study that should be accounted for future research. Although the status of land size is used as an instrument variable to investigate the effect of credit programs, there is a need for the analysis of effects of regional characteristics. By understanding the role of credit in rice production, therefore, the estimates of performance of firms in different regions should be separately considered for achieving higher levels of rice production in the selected regions.