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Vulnerability, Risk Management, and Agricultural Development

  • Marcel Fafchamps

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.

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Paper provided by Centre for the Study of African Economies, University of Oxford in its series CSAE Working Paper Series with number 2009-11.

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Date of creation: 2009
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Handle: RePEc:csa:wpaper:2009-11
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  2. Shaban, Radwan Ali, 1987. "Testing between Competing Models of Sharecropping," Journal of Political Economy, University of Chicago Press, vol. 95(5), pages 893-920, October.
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  8. Jonathan Conning, 2001. "Of Pirates and Moneylenders: Product Market Competition and the Depth of Lending relationships in a rural market in Chile," Department of Economics Working Papers 2000-08, Department of Economics, Williams College.
  9. Deaton, A., 1989. "Saving And Liquidity Constraints," Papers 153, Princeton, Woodrow Wilson School - Public and International Affairs.
  10. Robert M. Townsend, . "Risk and Insurance in Village India," University of Chicago - Population Research Center 91-3a, Chicago - Population Research Center.
  11. Marcel Fafchamps & Susan Lund, 2000. "Risk-Sharing Networks in Rural Philippines," Economics Series Working Papers 10, University of Oxford, Department of Economics.
  12. Ashraf, Nava & Gine, Xavier & Karlan, Dean, 2008. "Finding Missing Markets (and a Disturbing Epilogue): Evidence from an Export Crop Adoption and Marketing Intervention in Kenya," Working Papers 56, Yale University, Department of Economics.
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  15. Kurosaki, Takashi & Fafchamps, Marcel, 2002. "Insurance market efficiency and crop choices in Pakistan," Journal of Development Economics, Elsevier, vol. 67(2), pages 419-453, April.
  16. Harounan Kazianga & Christopher Udry, 2004. "Consumption Smoothing? Livestock, Insurance and Drought in Rural Burkina Faso," Working Papers 898, Economic Growth Center, Yale University.
  17. de Mel, Suresh & McKenzie, David & Woodruff, Christopher, 2007. "Returns to Capital in Microenterprises: Evidence from a Field Experiment," IZA Discussion Papers 2934, Institute for the Study of Labor (IZA).
  18. H. Peyton Young & Mary A. Burke, 2001. "Competition and Custom in Economic Contracts: A Case Study of Illinois Agriculture," American Economic Review, American Economic Association, vol. 91(3), pages 559-573, June.
  19. Kimball, Miles S, 1990. "Precautionary Saving in the Small and in the Large," Econometrica, Econometric Society, vol. 58(1), pages 53-73, January.
  20. Foster, Andrew D & Rosenzweig, Mark R, 1995. "Learning by Doing and Learning from Others: Human Capital and Technical Change in Agriculture," Journal of Political Economy, University of Chicago Press, vol. 103(6), pages 1176-1209, December.
  21. Edward Miguel & Gerard Roland, 2006. "The Long Run Impact of Bombing Vietnam," NBER Working Papers 11954, National Bureau of Economic Research, Inc.
  22. L. Wade, 1988. "Review," Public Choice, Springer, vol. 58(1), pages 99-100, July.
  23. Amos Tversky & Daniel Kahneman, 1991. "Loss Aversion in Riskless Choice: A Reference-Dependent Model," The Quarterly Journal of Economics, Oxford University Press, vol. 106(4), pages 1039-1061.
  24. Sandmo, Agnar, 1971. "On the Theory of the Competitive Firm under Price Uncertainty," American Economic Review, American Economic Association, vol. 61(1), pages 65-73, March.
  25. Nava Ashraf & Dean Karlan & Wesley Yin, 2006. "Tying Odysseus to the Mast: Evidence From a Commitment Savings Product in the Philippines," The Quarterly Journal of Economics, Oxford University Press, vol. 121(2), pages 635-672.
  26. Griliches, Zvi, 1988. "Productivity Puzzles and R&D: Another Nonexplanation," Journal of Economic Perspectives, American Economic Association, vol. 2(4), pages 9-21, Fall.
  27. Marcel Fafchamps & Bereket Kebede, 2008. "Subjective well-being, disability and adaptation: A case study from rural Ethiopia," Economics Series Working Papers WPS/2008-01, University of Oxford, Department of Economics.
  28. Deaton, A., 1992. "Saving and Income Smoothing in Cote d'Ivoire," Papers 156, Princeton, Woodrow Wilson School - Development Studies.
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