Yale University Professor of Economics Christopher Udry ’81 returned to Swarthmore on Tuesday to deliver the Bernie Saffran lecture titled, “Risk, Credit, Constraints, and Farmers’ Investments in Ghana.” Specializing in development economics, Professor Udry shared his research results on the role of capital and insurance in Sub-Saharan African farming.
In an effort to “understand how risk and credit constraints interact and affect the way farmers work in Ghana,” Urdy conducted a randomized experiment in Northern Ghana where he provided farmers with rainfall insurance and/or capital. Ultimately, his research team found that fear of risk and lack of money limit agricultural productivity and output in Northern Ghana.
Udry started the lecture by demonstrating the current state of agriculture in Sub-Saharan Africa. Contrasting Sub-Saharan Africa agriculture with the Green Revolution in Asia, Urdy illustrated that while Asia has experienced dramatic growth in the crop yields per acre of land, Africa has only seen a small increase in output and eventual stagnation.
On growth rate of productivity-per-person, Sub-Saharan Africa has only grown 1 percent a year in the past decades. Udry elaborates, “Everyone is producing at the same rate as 20, 30 years ago…because they are not using any inputs, such as irrigation, improved variety of cereals, and fertilizer.”
Looking at this phenomenon, Udry investigated questions such as “how farmers operate on their farms, how they get income, and how that can change in the process of development.” Seeking to answer those questions, Udry’s team conducted randomized field experiments in Northern Ghana, where farmers heavily rely on the annual rainy season and where agricultural output is particularly low.
Udry remarked on the cost and risk barriers that farmers face in accessing hybrids and fertilizers; his experiment addressed “capital constraints” and “risk aversion” with cash grants and rainfall insurance. Starting in early 2009, Udry had four experimental groups. One was a control, the second was provided capital, the third rainfall insurance, and the fourth both. The cash grants provided 350 Ghanaian cedis (approximately 300 USD at the time); the rainfall insurance protected farmers for when they experience too little or too much rain.
At the end of his one-year study, Udry and his team presented results, which had agricultural and public policy implications. Udry found that the group that received both insurance and capital significantly changed and expanded their farming habits. While farmers with only capital or insurance spent little money, if any, on fertilizer, farmers with both “vastly expanded the intensity of their production and increased it almost by 50 percent,” said Udry.
Moreover, the ‘both’ experimental group increased hired labor, had fewer household members who missed meals, and increased the number of total cultivated acres. Udry emphasized, “Farmers expanded more and invested more in the risky activity…similar to shifting more of their portfolio into the risky activity.”
Udry’s experiment presented “striking implications for understanding farmer decision making.” He concluded that capital constraints and risk aversion are two major market imperfections that matter and restrain farmers’ decisions. Udry’s experiment also helped explain the role of insurance and how these “insurance mechanisms alleviate worries about risk.”
Udry has expanded his experiment into a second year. While his fieldwork in Ghana is ongoing, his research has already caught the attention of the Ministry of Agriculture in Ghana for its potential to improve agricultural productivity in the nation. Udry emphasized that “Risk matters a lot: a little fluctuation can lead to dramatic consequences for your life [as a farmer].” Rainfall insurance, he argued, is an important mechanism to ease risk, expand agricultural output and ultimately, improve the lives of these rural farmers.