Professor Michael R. Carter, founding director of the Resilience+ Innovation Facility, outlines how the Resilience+ framework can help smallholder farmers flourish through better risk management.
Life is constantly changing, and this is especially true for small-scale farmers. Ideally, a farming family’s livelihood will improve over time: they might grow a little more food to be able to sell locally, and then set aside whatever they can to protect themselves in the inevitable next disaster.
While life may change, risk is a reliable constant. One of the primary ways farmers manage their risk of losing crops is to reduce how much they stand to lose in the worst of circumstances. Avoiding investments in inputs like improved seeds or fertilisers can help a farming family to survive a disaster, but it also stunts their ability to improve their circumstances over time. Although a disaster can drive a rural family into poverty, the risk of a disaster can keep them struggling. But does that have to be the end of the story?
At the University of California, Davis, we recently established the Resilience+ Innovation Facility to spark inclusive agricultural transformation among small-scale farmers in sub-Saharan Africa and South Asia.
More than a decade of research shows that it is possible to shift these dynamics with effective and accessible financial tools to manage risk. The most recent advances have made it possible to take the next step with bundled financial tools that respond to a farming family’s changing needs and circumstances over time, helping them to move up the ladder of both protection and possibility.
Resilience+ – a framework to manage risk
Resilience+ is a term we use to describe two ways in which rural families benefit from more effective tools to manage risk. First, a financial instrument that provides support in the wake of a shock can help a family to recover quickly with a lower likelihood of long-term or lasting impacts. Second, when a family knows they will have this protection, they tend to increase their investments in producing more food and income.
In Burkina Faso and Mali, I led a study from UC Davis testing a low-cost form of insurance for small-scale cotton growers. In Mali, a coup d’état forced the project to halt in 2012, but the direct impact on cotton investments was already substantial. Farmer groups who purchased the insurance increased their planting by between 25-40 per cent, which would at harvest increase average income by about US $300.
In Mozambique and Tanzania, we tested a bundle of stress-tolerant maize seeds developed by the International Maize and Wheat Improvement Center (CIMMYT) and a low-cost form of insurance that would trigger seed-replacements after severe drought.
We were surprised to find that farmers who received replacement seeds achieved higher yields than even before the shock. Surveys showed that in addition to planting those seed replacements, farmers also increased their total investments in improved seeds. After experimenting with the bundle, they were able to learn for themselves its benefits.
Tools to generate Resilience+
A number of financial instruments make it possible to build from these and other successes in generating Resilience+. The most well-researched is agricultural index insurance, a form of insurance that by design is low-cost and easily scalable in even the most remote rural communities. Instead of basing payouts on losses that are individually verified, index insurance triggers payouts based on an area’s average conditions that are correlated with losses. However, there is the chance that an index will fail to trigger payments if the estimates of average losses do not reflect a farmer’s actual losses.
Today, we have new indexed financial tools that don’t come with the same level of risk as index insurance. One of these is a kind of savings account that limits withdrawals to pre-defined need, such as after a drought or for investing in agricultural inputs. Another instrument is a contingent loan that functions like insurance but without premiums paid in advance. An evaluation of such a loan designed in partnership with the NGO BRAC in Bangladesh showed that it increased rice planting by about 25 per cent, and households who did not suffer any flood losses produced about 33 per cent more from their crops.
A new approach to an old problem
While each of these instruments moves money through time to a present moment of need, they have different prerequisites. Savings require cash, emergency credit requires creditworthiness, and insurance requires the money to pay premiums as well as trust in the contract and an understanding of how it works.
The benefits of each instrument also vary. With savings, farmers are guaranteed to receive the money that they paid in advance. By contrast, a loan and insurance provide access to money through leverage. Because of its low cost, insurance seems the most viable for households with the least means. However, it is the most potentially dangerous: if payouts do not trigger for actual losses, a farmer is not only without the expected support but is also out the money paid in advance for protection.
The various qualities and mechanisms of these three instruments make them potentially powerful complements as a farmer’s circumstances and opportunities change. But there is a need for research that provides evidence from the field about how this flexible approach can meet the changing needs of small-scale farmers – a cause that helped give rise to the Resilience+ Innovation Facility.
This Resilience+ approach to development is designed to leverage existing networks of local private sector companies to reach small-scale farmers and pastoralists with better tools to manage risk. This approach is critical to ensuring that our successes are self-sustaining and continue to expand opportunities for rural families to achieve stability, prosperity and resilience.
Michael R. Carter is a distinguished professor of agricultural and resource economics at the University of California, Davis and honorary professor of economics at the University of Cape Town. Carter directs the Feed the Future Innovation Lab for Markets, Risk & Resilience and is the founding director of the Resilience+ Innovation Facility.