Production Uncertainty and Agricultural Investment in Sub-Saharan Africa

Selvan Kumar

No 2012-E43, GSIA Working Papers from Carnegie Mellon University, Tepper School of Business

Abstract: Abstract: While many parts of the developing world have experienced “green revolutions”, agricultural productivity growth in sub-Saharan Africa has stagnated for decades. In this paper, I argue that production uncertainty is a major factor inhibiting agricultural investment in the region, and that the negative effects of uncertainty on investment are exacerbated by credit constraints and immature financial markets. To test this theory, I exploit spatiotemporal variation in rainfall patterns as a source of exogenous variation in agricultural productivity uncertainty. Using data on 39 sub-Saharan nations from 1970-2000, I find that a one-standard deviation increase in rainfall volatility is associated with a 6.2-7.6 percent decline in the average agricultural investment rate. I also demonstrate that the negative effects of uncertainty on agricultural investment are heterogeneous with respect to levels of financial development – more financially mature nations are less susceptible to the negative effects of volatility on investment. These results are consistent with predictions from economic theory and prior empirical work, and have immediate implications for development policy in the region.

Date: 2012-12
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