The Impact of Uncertainty in Agriculture

Income uncertainty in the rural economy is widely considered an important impediment to growth in poor countries. This paper uses a rich dataset on productivity, land use, and output for 17 different crops across 500,000 plots of land in 87 countries to study the impact of uncertainty in the agricultural sector. The analysis relies on historical variability in crop productivity driven by local climatic conditions to estimate the impact of uncertainty on farmers’ land allocation. Applying a standard portfolio framework, we estimate that the incentive to diversify led to large losses in agricultural revenue. We adopt a spatial regression discontinuity approach that compares how national institutions affected agricultural outcomes near the borders of former British and French colonies in Africa. We find that farmers in former British colonies, which tended to adopt pro-private sector policies, adopted more advanced input technologies and achieved higher crop-specific returns. In contrast, farmers in former French colonies, which tended to devote more public resources to the agricultural sector, tolerated higher levels of uncertainty and adopted more specialized crop portfolios. These offsetting effects suggest that both a well-functioning market system along with public investments that reduce risk may be necessary to foster rural economic development.