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Title: Welfare Implications of Credit Constraints and Climate Change Adaptation Strategies on Ethiopian Farm Households
???metadata.dc.contributor.*???: Pär Sjölander(Prof.)
Hailu, Elias
Keywords: Adaptation strategy;Borrowing behavior;Credit Constraint;Climate change;Household asset;Nural credit market,
Issue Date: Apr-2016
Publisher: A.A.U
Abstract: Agriculture remains a key source of growth to Ethiopia's economy, but it continues to be highly vulnerable to climatic constraints, particularly to rainfall variability and drought shocks. Building a climate resilient agricultural sector requires understanding the adaptation strategies of farm households and the institutional constraints that condition the choice of these strategies. Accordingly, the focus of this PhD dissertation is assessing the role of one such institutional factor-credit access- on the adaptation patterns of farm households and the welfare implications of the same. The dissertation contains eight chapters divided into three sub themes. The first theme consists of background to the dissertation work presented in the first three chapters. These include introduction to the dissertation, research methodology, and review of the literature pertinent to the thesis. The second theme presents four independent but inter-related articles that try to link adaptation to climate change with provision of finance to Ethiopian farm households. Each of the articles correspond to chapters four to seven. The third theme concludes the dissertation and it is presented in chapter eight. All the thesis work is based on two waves of survey data collected from four zones of the Amhara region in northern Ethiopia, linked with monthly rainfall and temperature data of 30 years with the household survey data using the thin plate spline interpolation technique. As the four articles are central to the thesis work, a summary of those is presented in the paragraphs below. The first article identifies the nature and extent of credit constraints and borrowing behavior of farm households by applying the Generalized Linear Latent and mixed model (gllamm). The key findings indicate that the likelihood of borrowing from the formal credit market is negatively impacted by borrowers’ perceived probability of rejection due to strict lending policies and institutional rigidities; the transaction cost of borrowing; and risk aversion behavior of farmers. The second article quantifies the linkage between different forms of credit constraints and choice of climate adaptation strategies using a pseudo fixed effects regression model. A robustness test is also conducted using the Multivariate Probit (MVP) and the seemingly unrelated simultaneous equation (SURE) models. The quantitative analysis points to the fact that the type of credit constraint indeed matters for the choice of adaptation strategies of households. Discouraged borrowers found to have lower probability of participating in off-farm employment and crop diversification. Relatively better credit access seems to have encouraged irrigation, while adaptive capacity of risk rationed farmers has significantly decreased. Similarly, significance of the interaction terms between rainfall variability and credit constraint categories in the choice of adaptation strategies indicates the importance of credit, especially with greater effect of climatic factors. By contrast, soil conservation and tree planting are the least responsive to credit access and this indicates that the severity of credit constraints depends both on the nature of the credit constraint and on the type of adaptation investment. Hence, given the links between credit constraints and climatic factors, increasing awareness about how the credit market works and provision of climate information can help farmers better adapt to climate change. The third article gives empirical evidence on the effect of climatic factors and adaptation strategies on asset holdings under different credit constraint conditions. Using an instrumental variable-fixed effects (IV-FE) regression technique, the results indicate that drought shock and rainfall variability have significant negative effects on household asset holdings in the study area. Compared to unconstrained borrowers, farmers who are discouraged and quantity constrained are found to have significantly lower value of assets in real terms. This figure is even lower when climatic shocks are coupled with credit constraints. The fourth article investigates the effect of different credit constraint conditions on agricultural productivity among smallholder farmers in the study area using the propensity score matching (PSM) method. The results provide evidence for the adverse effects of credit constraints on improving agricultural productivity. As the result suggests, adoption of productivity-enhancing technologies is hampered by credit constraints and this is found to have a direct negative effect on agricultural productivity. The impact estimates indicated that relaxing credit constraints has significant positive impact on agricultural productivity, while higher transaction costs and discouraging credit market policies found to reduce it significantly. These findings suggest the need to work on more innovative lending approaches by giving attention to context-specific factors to build demand-driven, climate-smart, and inclusive rural credit market.
Description: A Dissertation Submitted to The Department of Economics Presented in partial fulfillment of the Requirements for the degree of Doctor of Philosophy in Economics.
Appears in Collections:Thesis - Economics

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