technologies to manage risk and assure the nutritional benefits of agricultural development

Technologies to Manage Risk and Assure theNutritional Benefits of Agricultural Development

Michael R Carter

University of California, Davis & National Bureau of Economic ResearchBASIS Assets & Market Access Innovation Lab &

I4 Index Insurance Innovation Initiativehttp://basis.ucdavis.edu

7 October 2014

MR Carter Technologies to Manage Risk and Assure the Nutritional Benefits of Agricultural Development

Outline

1 Food consumption declines with incomes in the wake ofclimatic shocks, especially for poorer households

2 Such consumption declines have irreversible consequences foryoungest household members

3 Financial & agronomic technologies to manage risk are vital ifwe are to successfully link agriculture & nutrition

4 Evidence shows that these risk reduction technologies can bothstabilize consumption & crowd-in productive investment (riskreduction dividend)

5 Looking forward, need to explore these two risk managementtools as strategic complements


Food Consumption Tracks Short-term Income Fluctuations

Accompanying these income drops are decreases in adult bodymass, reflecting decreased food intakeFemale BMI falls more than male, but subsequently recovers

Source: Hoddinott, J. and B. Kinsey (2001), “Child growth in the time of drought,”Oxford Bulletin of Economics and Statistics.


Food Consumption Tracks Short-term Income Fluctuations,which can have irreversible consequences for the youngest & most vulnerable

This drop in consumption significantly reduces growth ofyoungest children4 years later no evidence of subsequent catch-up orcompensatory growth


Food Consumption Tracks Short-term Income Fluctuations,which can have irreversible consequences for the youngest & most vulnerable,especially for the least well-off households

Average impacts disguise significant heterogeneityGrowth consequences for asset poor households double that ofchildren in better-off householdsThese results hold even if focus in on below medianhouseholds who have significant assets (1-2 oxen)


Consumption Smoothing or Asset Protection?

Consumption tracking short-term income stands at odds with(economists’) time-honored idea that consumption followslong-run average, or permanent income, not transitory incomeWhy this surprising behavior?

Proximate explanation is that poor households cannot borrowagainst future higher incomes to protect current consumptionAnd yet households can also accumulate private savings(assets) to defend consumption against short-term incomeshocksStill, amongst the poorest we see significant consumptiondrops long before assets and savings are exhaustedTheories of poverty trap provide a coherent explanation

Label this (understandable) behavior as asset protection–butnote that protecting the assets of the current generation cancome out the direct cost of the human capital (health &capabilities) of the next generationInter-generational asset shifting might be a better term


Consumption Smoothing or Asset Protection?Evidence from Zimbabwe


Consumption Smoothing or Asset Protection?Evidence from Burkina Faso

Source: Carter, M.R. & T Lybbert (2012). “Consumption versus asset smoothing:testing the implications of poverty trap theory in Burkina Faso,” J of Dev Econ


Technologies to Manage Risk

While the logic of asset protection that drives down foodconsumption is clear, so too are its long-term deleteriousconsequences and its role in the inter-generational transmissionof povertyWhat then is to be done if we want to realize nutritional andhuman development gains of increased average income andfood availability?Two realms of promising innovation that aim to stabilizeincomes of rural, food producing households:

Financial instruments, specifically agricultural micro-insuranceStress resistant technologies that fluctuate less (e.g., droughttolerant maize; flood tolerant rice)

While these might appear as substitute mechanisms, emergingevidence suggests they may best be seen as complementsLet’s look at each of these innovations in turn


Financial Technologies to Manage RiskIndex-based Livestock Insurance in Northern Kenya

Drought insurance for pastoralists in Kenya launched in 2010Index based on satellite measure of forage availability (NDVI)

Insurance had payout in October 2011 after a prolongeddrought that sparked 30-40% livestock mortalityOctober 2011 survey asked insured and uninsured householdshow they had been coping with the drought prior to thepayout/survey & how they anticipated coping after thepayout/survey

Source: Janzen & Carter (2014) “After the Drought: The Impact of Microinsuranceon Consumption Smoothing and Asset Protection,” NBER Working Paper No. 19702.


Financial Technologies to Manage RiskKenyan pastoralists reduce dependence on costly coping strategies

Without insurance, upwards of 80% of poor households hadcut meals to twice per-day or less to manage droughtWhat Impacts does insurance have in this context:

Initially better off households (expected to be consumptionsmoothers) show:

Before Payout: No impact on consumption reduction nor onasset sales prior to payoutAfter Payout: 65 %-point reduction in asset sales after payout

Initially worse off households (expected to be asset smoothers)show:

Before Payout: 30 %-point reduction in “meals reduced” priorto payout; No impact on asset salesAfter Payout: 43 %-point reduction in “meals reduced” afterpayout; No impact on asset sales


Financial Technologies to Manage RiskRisk reduction dividend

Financial technologies that protect households against theworst consequences of droughts and other disasters should alsoalter the logic of savings and investment strategies (portfoliosof the poor)A ’risk reduction dividend’ will take place if insurance changeshousehold behavior in these realms, crowding in additionalinvestment in profitable, but risky activitiesIf this happens, microinsurance is a win-win, reducingdamaging fluctuations while increasing mean incomeWhat does the evidence say about these behavioral changes?


Financial Technologies to Manage RiskRisk reduction dividend: Maize producers in Ghana invest more when insured

Randomly offered some farmers insurance at variable pricesOther farmers offered a capital grant for purchasing inputsFound that farmers offered insurance:

Expand area cultivated by 15%Increase input use by 40%

Capital grants by themselves have little impactSource: Karlan et al. (2014). “Agricultural Decisions after Relaxing Risk & CreditConstraints,” Quarterly J of Econ.


Financial Technologies to Manage RiskRisk reduction dividend: Cotton producers in Mali invest more when insured

Designed a dual-scale index contract with radically lower basisriskInsurance offered to a random subset of villages–find that ininsured villages:

Area planted to cotton increases by 40%Matching increases in input investment & incomes (latter largebut not statistically significant)

Currently scaling up in Burkina Faso

Source: Elabed & Carter (2014) “Ex-ante Impacts of Agricultural Insurance: Evidencefrom a Field Experiment in Mali,” Working Paper


Seed Technologies to Manage Risk

An alternative approach to the risk problem is to breed cropvarieties that are less sensitive to droughts & otherenvironmental shocksRecently released submergence tolerant rice is a good exampleof this kind of risk reduction technology (variety survivesflooding for up to 18 days)Recent impact evaluation in Bihar, Odisha and West Bengalreveals that:

Protected yields in severely flooded fields (25% higher)Spilled over and led to higher investment and yields overallMore entrepreneurial savings & investment strategy

Similar logic underlies the Drought Tolerant Maize for Africa(DTMA) breeding effortsImpact evaluation soon underway (hopefully!)


Optimal Risk Management Bundles to Realize theNutritional Benefits of Agricultural Growth

Evidence shows that removing risk from agriculturalproduction systems can pay multiple dividends

1 Technology adoption & income growth2 Stabilize food demand and avoid costly coping strategies

Yet each of the risk management strategies has its limitations:1 Microinsurance is relatively expensive2 Stress tolerant varieties fail in extreme conditions (floods

greater than 18 days, or severe drought)

This observation suggests that dual approach may be optimal


Complementary TechnologiesDrought tolerant Maize & Index Insurance


Conclusion

Risk has long been known to make and keep people poorRecent innovations suggest solutions to this risk problemBest solutions may be a combination package of financial &agronomic technologiesSolving this problem suggests that agricultural can realize itspotential to improve nutrition & break the inter-generationaltransmission of poverty in the natural disaster-prone areas ofAfrica and South AsiaTo quote my former Wisconsin dean Molly Jahn, we must dobetter than offer technologies that offer “more tomatoes, mostof the time”


Thank you!


technologies to manage risk and assure the nutritional benefits of agricultural development

Government & Nonprofit