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Production Uncertainty and Agricultural Investment in Sub-Saharan Africa

  • Selvan Kumar
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    Abstract: While many parts of the developing world have experienced “green revolutions”, agricultural productivity growth in sub-Saharan Africa has stagnated for decades. In this paper, I argue that production uncertainty is a major factor inhibiting agricultural investment in the region, and that the negative effects of uncertainty on investment are exacerbated by credit constraints and immature financial markets. To test this theory, I exploit spatiotemporal variation in rainfall patterns as a source of exogenous variation in agricultural productivity uncertainty. Using data on 39 sub-Saharan nations from 1970-2000, I find that a one-standard deviation increase in rainfall volatility is associated with a 6.2-7.6 percent decline in the average agricultural investment rate. I also demonstrate that the negative effects of uncertainty on agricultural investment are heterogeneous with respect to levels of financial development – more financially mature nations are less susceptible to the negative effects of volatility on investment. These results are consistent with predictions from economic theory and prior empirical work, and have immediate implications for development policy in the region.

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    File URL: https://student-3k.tepper.cmu.edu/gsiadoc/wp/2012-E43.pdf
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    Paper provided by Carnegie Mellon University, Tepper School of Business in its series GSIA Working Papers with number 2012-E43.

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    Date of creation: Dec 2012
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    Handle: RePEc:cmu:gsiawp:422213697
    Contact details of provider: Postal: Tepper School of Business, Carnegie Mellon University, 5000 Forbes Avenue, Pittsburgh, PA 15213-3890
    Web page: http://www.tepper.cmu.edu/

    Order Information: Web: http://student-3k.tepper.cmu.edu/gsiadoc/GSIA_WP.asp

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