As per capita income of households increase, the share of expenditure on food declines as do expenditures on staples. Further, as incomes rise in the face of increasing urbanization, factor intensities of consumption patterns tend to shift from labor intensive rurally produced commodities to foreign exchange, capital intensive imported commodities. Using a nationally representative survey data and a social accounting matrix, this paper discusses locational and consumption linkages across aggregated commodity groups. It further analyzes the interdependencies between activities, households and factors by providing income multipliers in a general equilibrium framework. Results generally indicate that marginal propensities to consume for most food commodities are falling as incomes while some luxurious food groups such as spices and beverages are rising. Associated income and price multiplier effects show that output, demand, GDP and household incomes will increase by a factor of two cumulatively. However, increased output will not be sufficient to offset demand and as such imports will grow by a factor of four. Generally, changes in consumption spending behavior result in positive growth but prioritized growth is more appropriate.

1. Agricultural growth and multiplier effects of
consumption spending in rural and urban Malawi
Henry Kankwamba (LUANAR)
Chinsinsi Esther Mtuluma (LUANAR)
John Mazunda (IFPRI)

2. Outline
• Introduction
• Methods
• Results
• Conclusion

3. Introduction
• In the process of economic development, consumption
plays an important role in shaping patterns of
structural transformation.
• Income growth drives urbanization and that in turn
influences consumption patterns (Dolislager &
Tschirley, 2014).
• Income growth is expected to result in a decline in the
share of expenditure allocated to food items (Norton,
2004; Ecker & Qaim, 2010).

4. Introduction
• As incomes rise in the face of increasing urbanization,
factor intensities of consumption patterns tend to shift
from labour intensive rurally produced commodities to
foreign exchange, capital intensive imported commodities.
• Verduzco-Gallo et al. (2014) found that despite income
growth in Malawi, the share of expenditure allocated to
food seems to be increasing.
• Dolislager & Tschirley (2014) argue that this phenomenon
might continue for some time in the initial stages of
structural transformation but will eventually converge into
Engel’s law.

5. Introduction
• Verduzco-Gallo et al. (2014) demonstrates that the share of
expenditure allocated to starchy staples is declining while
the share on meat products is increasing.
• King & Byerlee (1978) argued that lower income
households tend to consume products that require less
scarce factors such as capital, foreign exchange and in turn
consume commodities that are produced using the factor
that is in abundance, in this case, labour.
• Dolislager & Tschirley (2014) hypothesize that as
disposable income increase, individuals start spending on
more processed commodities than unprocessed.

6. Introduction
• Factor intensities of consumption play a big role in
income distribution since they would trigger an
increase in employment which would in turn lead to
increases in incomes.
• Increases in incomes of the poor have positive
distribution, equality (King & Byerlee; 1979), equity
and food security effects on the poor (Benson et al.
2013).

7. Objectives
• The study examines whether consumption of rurally
produced food commodities, which require more
labor, would trigger growth in the sectors that produce
those commodities.
• Second, the study estimates income transmission in
the concerned sectors in order to isolate sector
dependencies and multipliers.

8. Methods
• Marginal propensities to consume provide a base to
analyze factor intensities and rural-urban linkages.
• Marginal propensities to consume were estimated
econometrically using a ratio semi-log inverse function
(RSLI).
• The relationship between consumption and income
was carefully considered to ensure conformity to
economic theory.

9. Methods
• Total consumption expenditure on good i by household
j after accounting for zero expenditures and using per
capita consumption expenditure yields
• 2SLS were used to correct for endogeneity.
• Huber-White standard errors were used.

10. Methods
• After estimating the equation, the marginal propensity
to consume is derived as
• and the expenditure elasticity is derived as

11. Methods
• Taking factors under consideration as labour, capital, and foreign
exchange, the marginal factor intensity Fjk for factor j, is the
quantity of the factor required to produce a bundle of goods
found in a marginal unit of consumption expenditure at income
level k (King & Byerlee, 1978).
Algebraically,

12. SAM based model
• In order to measure inter-industry linkages and income
multiplier effects, a SAM-based multiplier model is
given.
• A SAM draws data from various sources such as
national accounts namely GDP at factor cost, GDP at
market prices, government budget and balance of
payments data.
• Data on households is drawn from household surveys,
in this case the IHS3. Data on activities and
commodities is taken from input-output tables.

13. Methods
• A SAM-based income model is derived by
distinguishing endogenous and exogenous accounts
and assuming that prices and costs are fixed while
incomes vary.
• The assumption that warrants this is that there is an
excess capacity condition, generalized homogeneity
and fixed coefficients in activities (Roland-Holst &
Sancho, 1995).

14. A SAM based model
• Algebraically,
• where vi is a row vector of exogenous costs and
• Is the Leontief inter-industry inverse known as the
multiplier matrix.

15. Data sources
• The third Integrated Household survey data from NSO
was used.
• A 2007 Social Accounting Matrix for Malawi was also
used (Duillet et al. 2007)

16. Results
• Staples, fruits, legumes,
meat, and vegetables
shares of expenditure
decline.
• Fats share of
expenditure increases as
income increases.

17. Implications of MPCs
• The results from MPCs support the Keynesian
hypothesis that saving is a luxury for rural households
as they devout most of their incomes to consumption.
• APC told a similar story.

18. Expenditure elasticities
• In general, poor rural households expenditure elasticities are
less than unitary for staples, legumes, meat products, and salt
and spices. However, they are elastic for fats and beverages.

19. Implications of growing incomes: A
multiplier perspective
• Growing incomes imply increased expenditure for
households since propensities to consume for most
commodities increase.
• Increase in expenditure also implies growing demand
for commodities.
• If commodities are produced domestically, it means
increased activity levels which demand factors.
• Hence, more jobs. However, if the activities are
produced elsewhere, it means more imports.

20. Labor output & Capital output ratios in agriculture
Unskilled
labor
Medium
skilled labor
High skilled
labor land Capital
Rural poor 0.095 0.059 0.000 0.062 0.041
Rural-non-poor 0.159 0.308 0.035 0.176 0.093
urban-poor 0.002 0.003 0.000 0.001 0.000
urban-non poor 0.013 0.149 0.109 0.024 0.006

21. Marginal factor intensities of
consumption
Rural Non
Poor
Rural Poor Urban Non poor Urban poor
Staples 723.39 65.42 380.29 1.71
Legumes 166.47 13.61 86.88 0.32
Vegetables 141.23 13.28 74.47 0.36
Meat 557.10 53.30 294.15 1.47
Fruits 49.43 5.08 26.25 0.15
Fats 53.42 8.13 29.53 0.29
Spices 14.17 2.71 8.07 0.10
Beverages 143.58 14.41 76.11 0.41

22. Multiplier effects of consumption spending under
agriculture growth scenarios
Scenario 1 Scenario 2 Scenario 3 Scenario 4
Increase in
cereal
demand
Increase in
horticultural
crops demand
Increase in
traditional
crops demand
Increase in
livestock, forestry
& fishing demand
Agriculture 18.40% 18.30% 17.44% 18.96%
Industry 14.21% 18.16% 16.23% 17.86%
Labor 4.44% 6.38% 4.90% 9.17%
Agricultural land 4.10% 5.26% 2.77% 1.65%
Capital 5.45% 5.57% 5.08% 5.43%
Households 13.90% 17.12% 12.67% 16.15%
Government 1.28% 1.46% 1.36% 1.57%
Savings & Investment 0.01% 0.01% 0.01% 0.01%
Rest of the World 4.31% 4.03% 4.53% 4.03%

23. Factor multipliers under different expansion
scenarios
Scenario 1 Scenario 2 Scenario 3 Scenario 4
Increase in
cereal
demand
Increase in
horticultural
crops
demand
Increase in
traditional
crops
demand
Increase in
livestock,
forestry &
fishing
demand
Unskilled labor 1.72% 2.78% 1.82% 4.41%
Medium-skilled labor 2.24% 3.01% 2.54% 3.97%
High-skilled labor 0.48% 0.59% 0.54% 0.78%
Agricultural land 4.10% 5.26% 2.77% 1.65%
Capital stock 5.45% 5.57% 5.08% 5.43%

24. Price and cost implications of consumption
spending
Producer
Price
Index
Consumer
Price
Index
Wages
rents &
Capital
Scenario 1 Cereal price 2.00% 2.00% 0.89%
Scenario 2 Field crops & horticulture 2.88% 2.88% 1.63%
Scenario 3 Export crops 1.66% 1.66% 0.62%
Scenario 4 Livestock, forestry & fishing 1.82% 1.82% 0.76%
• A modest increase will result from the growth.

25. Income multipliers

26. Conclusions
• Marginal propensities to consume for most food
commodities are falling as incomes while some luxurious
food groups such as spices and beverages are rising.
• Associated income and price multiplier effects show that
output, demand, GDP and household incomes will increase
by a factor of two cumulatively.
• However, increased output will not be sufficient to offset
demand and as such imports will grow by a factor of four.
• Generally, changes in consumption spending behaviour
result in positive growth but prioritized growth is more
appropriate.