Climate change, contracts and technology adoption: Evidence from Ethiopia

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There is a growing concern about the adverse impacts climate change would have on the short term and long term welfare of societies both in developed and developing economies. The most recent report by the Intergovernmental Panel on Climate Change (IPCC)[1] warns of “severe, pervasive, and irreversible” impacts of global warming, particularly on poor communities who are ill-equipped to adapt to and mitigate the effects of climate change. Regardless of whether these changes are mainly attributed to anthropogenic or natural causes, weather shocks frequently put the lives of millions of farmers in poor countries at risk from crop failure. This is no more evident than in Ethiopia where even as recent as 2013 an estimated 2.7 million people faced acute food insecurity (USAID).[2]

In this research, we link studies of climate change with economic growth theories to argue that one of the most important channels through which climate change affects overall agricultural productivity and economy-wide structural transformation is by influencing farmers’ choice of technology. More specifically, the proposed study has the following two major objectives: (1) explore how climate change influences technology adoption by farmers in the presence of credit and insurance market imperfections; and (2) assess the welfare impacts of climate change by measuring its impact on agricultural productivity directly and indirectly by influencing farmers’ choice of technology.

We contend that, apart from the direct impact that weather shocks have on farmers’ choice of crops and technology, an important mechanism through which climate change influences technology adoption is by altering the optimal labor and land contracts farmers enter into. To empirically examine this, we use spatial data from Ethiopia to link long term rainfall variability with farmers’ choice of labor and land contracts, and explore how the choice of these contracts in turn influences the types of technology farmers adopt. Next, we will tie the choice of technology with agricultural productivity to empirically assess the welfare impacts of climate change.

We employ nationally representative household panel data from Ethiopia collected by the World Bank and the Ethiopian Economic Association to test these propositions. We will link this household survey with the long term rainfall data from the National Meteorology Agency using the geographic coordinates of the locations of farmers. Finally, we conduct Focus Group Discussions with selected farmers in the regional states of Tigray, Amhara and Oromia to understand the impact that frequent weather shocks have on their choices of technology and its implications on agricultural productivity.

The proposed study presents evidence linking climate change, technology choice and agricultural productivity, and improves upon existing studies on three major fronts: (1) it identifies a specific mechanism (i.e., contract choice) through which climate change influences technology adoption and overall productivity; (2) it rigorously explores how imperfections in the credit and insurance markets influences agrarian contractual structure in developing economies; and (3) it disentangles the direct impact of climate change on technology adoption from the indirect impact on agricultural productivity through its influence on optimal labor and land contracts.

The study highlights how policies aimed at addressing insurance and credit market imperfections help mitigate the adverse impacts climate change has on agricultural productivity and overall structural transformation in the Ethiopian economy.