We examine the returns from owning cows and buffaloes in rural India. We estimate that when valuing labor at market wages, households earn large, negative average returns from holding cows and buffaloes, at negative 64% and negative 39% respectively.
…Why do households continue to invest in livestock if economic returns are negative, or are these estimates wrong?
A new, brilliantly named paper from Anagol, Etang and Karlan.
This is a question one can’t help wonder about if you work in rural development. The answers they explore show why so much of the theory and evidence in development economics is useful for designing and testing programs. For example:
Evidence suggests that the poor are often willing to earn negative interest in order to access reliable saving services… If livestock ownership is seen as a form of savings, the observed negative returns to cows and buffalo provide additional evidence of the high demand for savings, and perhaps specifically for illiquid savings in order to avoid temptation spending.
The question then turns to the supply side of savings: what are the constraints on the supply side that make cows and buffalos better savings alternatives than what banks offer? With technological innovations such as mobile money, the transaction costs are plummeting for offering deposit accounts to consumers in developing countries, even in highly rural areas. Thus this is an area where improvements in ability to store cash outside of the home may lead to more efficient allocation of capital, away from risky or low return home investments.
…If indeed, as we find, owning cows yields low or negative returns, this is of critical importance for NGO and government programs that promote investment in cows with an aim of poverty alleviation. In particular, the results here are critical for programs that engage in livestock grants to help households start or expand income generating activity from raising livestock (this is common amongst “graduation” programs, cited earlier, as well as many NGOs, such as Heifer International or other livestock grant programs)
Some of you are thinking “what about the social and cultural aspects? See the full paper for a discussion. I was a little disappointed not to see The Anti-Politics Machine in the references, but it is there partially in spirit. I’d like to read the behavioral economics paper that tackles James Ferguson.
4 Responses
Came across this whilst searching your site for comments on James Ferguson.
Negative returns are stated. I don’t know anything about India and little about Africa but in the latter place if you own few cows, and for that matter, goats, chickens or other animals, you are generally regarded as poor and likely be dependent on the extended family and neighbours, even for ploughing and milk.
But are livestock also an inflation, not to mention hyper inflation, hedge.
This is not that really that earth shattering. In West Africa people having been using Susu savings collector for ages. People pay these trades to keep their savings. Stuart Rutherford have talked about money guards in Bangladesh. Tyler Cower has a great piece in one of the DC based journals. I can’t remember the title. I will cite the exact quote in future.
It is a great packaging of an well know phenomenon–RCTs and all that, I am afraid. I am a big fan of Dean’s work and actually the paper explain the puzzle-if the opportunity cost of home labor is zero, the rate of return turns positive. There is also the behavioral aspect–you don’t have to chop off part of the cow when extended family members want to borrow money. Owning cows is a way of protecting your savings in a face-to-face community. Jean-Marie Baland has a paper published in Economic Development and Cultural Change with great title: Pretending to Be Poor: Borrowing to Escape Forced Solidarity in Cameroon
Sounds like cows are a bit like German bonds but for the rural poor. Sure, they lose money, but where else are going to put it if you want relative safety. Capitalism shouldn’t assume on indefinite and consistent positive interest rates. Negative rate investments are certainly pessimistic but they could well be rational.
So true! Can’t tell you the number of times I’ve heard, “think of the sheep as a bank.” And the implication is that it is a place to keep capital stored until needed in a large(r) amount.