Impact of Weather Index Insurance on Household Demand for Fertilizer in Tigray Region

Abstract

Agriculture is a risky business. And Ethiopia is one of the few countries in the world that has been ravaged by extreme drought for a number of years and stared its renaissace and development recently. According  to Wondifraw Zerihun et al. 2014 on their document regarding African Economic Outlook, in 2012/13 fiscal  year, Ethiopia’s economy grew by 9.7%, the tenth year in a row of robust growth. In 2012, Ethiopia was the twelfth fastest growing economy in the world. Average annual real GDP growth rate for the last decade was 10.9%. Agriculture, which accounts for 42.7% of GDP, grew by 7.1, in order to accelerate  this economic growth and minimize the weather related agricultural shocks index insurance program is  being developed in Ethiopia. Hence the study aimed to investigate the impact of index insurance on farmers demand for fertilizer by using panel data of HARITA project of 2010/11 household survey in Tigray region. The study hypothesized that index insurance provision induces farmers to increase fertilizer  demand which is profitable, but risky. To achieve the objectives of the study both descriptive and  econometric techniques were used. The study employed random effects model with difference- in-  difference estimator to see the impact of index insurance on fertilizer demand. Amount of fertilizer used was the dependent variable. Results of the random effect model showed that weather index insurance has positive significance (at 10% level) impact on fertilizer demand. The sign of the variable indicates that  insurance purchaser’s fertilizer demand is more than that of non-purchasers. And purchasing index insurance leads to increase demand for fertilizer by 33 percent. Therefore, the estimated coefficient of the variable was positive sign as expected. Based on the result, the study recommends that weather index insurance program should expand in all the drought prone areas of this region, then they will become  confident to adopt or increase fertilizer use, through this productive capacity and living standard, the rural  society will improve over time. Finally, this study is left open for further research as index insurance is at its early stage in the study area, so there should be continuous follow up and research on this area.

Keywords: difference-in-difference, Fertilizer, HARITA, Random effect, Weather index insurance