November 5, 2009
John Perra
John Perra is a free lance journalist
Late last month, Mitiku Kassa, Ethiopia’s agriculture minister, appealed to the international community for $175 million in emergency food aid to feed the 6.2 million people who are in the grip of severe drought there. Since famine killed 1 million Ethiopians 25 years ago, the country has remained in a cycle of drought-driven crises keeping it dependent on foreign aid. The U.S. is no stranger to assisting Ethiopia: It provides nearly 80 percent of food aid delivered to the country and began food shipments in anticipation of the government’s latest request.
But while food aid addresses the immediate need, feeding people after they’re hungry exacerbates dependency and contributes to poverty. It substitutes for preparedness and makes absorbing the next shock less manageable.
Instead, the goal for Ethiopians is self-sustainability, and one way to achieve that is to address food stability on a micro level. The ripple effect of assistance in a crisis year — or even merely a bad growing season — can mean an individual won’t be able to regain productivity easily. A farmer might end up shut off from credit, taking on debt he can’t repay, or selling off equipment and livestock to survive. And that means he can’t produce in the eventuality of a later good or average growing season. Drought potential, too, can scare off investments in farming even when the growing season is good.
To address this problem, crop insurance has been used in India, Malawi and other places where farmers wrestle with unforgiving weather patterns. The insurance typically pays out when crops fail, but it requires adjusters to examine the fields to establish premiums and assess damages, which can in turn drive up costs. Moreover, there is often a disincentive to produce healthy crops when there is a payout for bad ones.
A recent crop index insurance program developed by Columbia University’s International Research Institute for Climate and Society sought to provide a better product. The innovation of the program, which is managed by Oxfam, is that it makes payments based not on crop yields, but on the weather alone: If a rainfall gauge — or, in the case of the pilot program, satellite data of estimated rainfall amounts — falls below a previously determined threshold, the insurance pays out.
As a result, the need for field inspections is eliminated. Farmers purchase the plan at cost or through a work program.
Simply having the insurance opens up lines of credit, giving farmers purchasing power for new seeds and equipment, and creating a more rapid return to food production and stability.
The program launched in the northern Ethiopian highland village of Adi Ha, which, like most of the country and indeed like much of Africa, has an economy dominated by agriculture. According to the U.S. State Department, agriculture makes up 47 percent of Ethiopia’s gross domestic product, 80 percent of its exports, and employs 80 percent of its workforce. The maize and teff farms there rely primarily on rain-fed production, making the IRI’s index insurance an effective financial tool. Two hundred households — about 20 percent of the village — participated in the pilot program. Thirty-eight percent of them came from female-headed households, the poorest of the productive poor.
The plan is not intended to be a comprehensive strategy to the many problems in the area. But according to Dan Osgood, the IRI’s head research scientist for the project, “it is one piece of the puzzle” for addressing poverty in Ethiopia. Initially, there was healthy skepticism from farmers when they were first introduced to the idea. Ultimately, though, their enthusiasm for the pilot product led Adi Ha farmers to spread the word about its advantages to farmers in neighboring villages. That’s just the kind of peer leadership role that the IRI and Oxfam hope to foster.
Up to 10 more villages will next be offered the product more formally. At the Clinton Global Initiative meeting in September, representatives from Oxfam and Swiss Re, which advises on its commercial viability, announced the expansion of the crop index insurance plan across northeastern Ethiopia. The Rockefeller Foundation will be providing additional funding.
For the people of the region, there are few livelihood options outside of farming, and therefore the risk of poverty is intrinsically tied to climate fluctuations. With the crop index insurance plan, however, that link between economy, livelihood and climate change is broken. Farmers can cover the drought years by taking advantage of the good and average growing seasons. And as a financial planning tool, risk management can contribute to building wealth — a way for farmers to transition to other livelihoods.
However, since rainfall data is central to the plan, it could create an imbalance between payout and losses — if, for example, a farm is in drought but the distantly located rain gauge isn’t. Researchers are now considering what part weather simulations and remote sensors could play in designing new contracts.
Still, an effective financial product designed for food stability is a burgeoning need in Ethiopia, as well as in other developing countries, where the impact of climate change is estimated between $30 billion and $70 billion by 2030, according to the Stern Review.
“If people are productive, then in 10 years there will be more food,” says Osgood. “If they’re wealthier, then there is resiliency and investment. And food crises will be less severe.”
Crop index insurance might be just one piece of the puzzle, but it’s a single piece that can bring others into place.
