Vulnerability, Risk Management, and Agricultural Development

Vulnerability to risk is a dominant feature of the poor's livelihood. This is particularly true for small farmers in developing countries. Shocks affects welfare through the shocks it induces on income, assets, and health. For many poor farmers in developing countries, risk remains a serious cause of poverty and ruin — and in still too many instances a matter of life and death. Households' desire to protect themselves against shocks is thought to affect their production and savings decisions. This applies in particular to the adoption of agricultural technology. Choosing among crops and techniques of production is like choosing between lotteries, each with its own distribution of anticipated earnings. Farmers who are fearful of future loss of earnings may be reluctant to adopt technological innovations with a variable or unknown return. This observation forms the basis of much thinking about technology adoption by small farmers in developing countries. Reluctance to adopt new agricultural technology for fear of risk is often seen as a key contributor to the persistence of rural poverty: poor people fear the risk associated with innovation, and this keeps them poor. While the argument is intellectually convincing, what remains unclear is how relevant it is in practice. The purpose of this paper is to revisit the literature on the risk management and technology adoption practices of rural households in the developing world. The interaction between risk and poverty has received much attention in the development literature over the last three decades. I have summarized much of it in my 2003 book entitled Risk, Poverty, and Rural Development. Here I focus on a number of issues that do not receive much coverage in the book but have emerged as active research areas in recent years. I start by taking stock of what we know and do not know regarding the behavior of farmers with respect to shocks. I then examine what we know about how risk affects behavior, with a particular emphasis on the behavior of farmers in developing countries. I then turn to the recent literature on technology adoption, with a special focus on findings from field experiments.