Please Rain on My Parade: Rainfall Shocks and Coping Mechanisms For Rural Ethiopian Farmers

Abstract

For many developing countries, agriculture serves as the backbone of the economy and the primary employer of the population. However, agricultural infrastructure is generally undeveloped. Consequently, farmers in these nations must engage in rainfed agriculture and are thus subjected to the whims of erratic weather conditions. Prior research indicates that rainfall shocks in particular may have an adverse effect on household welfare if there are inadequate coping mechanisms. In this study, I hypothesize that households will use a variety of income smoothing and consumption smoothing strategies in order to protect welfare, as indicated by consumption. Those households who choose to smooth income in addition to smoothing consumption will have better welfare outcomes than households who only smooth consumption. I hypothesize that this differences arises from the nature of rainfall shocks and their effect on the availability of ex post mechanisms. I use data collected from my interviews in Ethiopia from January 2013 and from the 1994, 1995, 1997, 1999, and 2004 Ethiopian Rural Household Surveys (ERHS) to test these hypotheses. My analysis was in the form of anecdotal evidence and fixed effects regression models. The anecdotal evidence details the type of income smoothing and consumption smoothing strategies, used by households and their efficacy. The empirical analysis estimates the effects monthly rainfall deviation on consumption. I do this by linking rainfall data from the Ethiopian National Meterological Association (ENMA) to the households from the Ethiopian Rural Households Surveys (ERHS). The closest meteorological station to the household was selected. My anecdotal findings indicate that shocks matter. Rainfall shocks lead to depressed agricultural income, which consequently results in depressed consumption because of inadequate coping mechanisms. These coping mechanisms are inadequate not just because of their inherent characteristics, but also because of the nature of rainfall shocks. Because rainfall shocks are covariant with those of others in the community, households are unable to access the coping strategies they would readily employ for other types of shocks. The empirical results largely support the anecdotal findings. Rainfall shocks do affect consumption. In the model, the months that correspond to Ethiopia’s meher and belg planting seasons had significant effects, which is indicative that households are unable to completely protect their consumption. Because rainfall shocks are erratic, relatively frequent, and costly, I suggest that microfinance institutions (MFI) sell index-based weather insurance to idirs (an Ethiopian informal association). Using insurance to protect household consumption, while selling through the idir allows MFIs to rid themselves of informational risks while offering households a product that protects against different states of the world.