Description

Abstract: The provision of a functioning and sustainable agricultural insurance system promises economic impacts at multiple levels. At the farm level, insurance should enhance the willingness and capacity of small farmers to carry risk and employ more commercial strategies that promise higher returns on aver age. At a market level, the provision of insurance should make it easier for existing rural micro lenders to expand the agricultural side of their portfolios. In addition, it should facilitate the entrance of new lenders (e.g., banks) that have traditionally avoided agricultural loans because of risk and asymmetric information. Finally, at a political economy level, insura nce should break the logic of post-drought (or other climatic disaster) in which the government solves farm indebtedness problems by canceling debts. While such “financial rescues” have their logic, their unintended consequence is the creation of a financial sector unwilling to lend to agriculture.

In short, insurance promises to remake the fundamental economic and political economic landscapes that heretofore have resulted in a vicious circle of underperforming rural financial markets, lower economic growth and higher rates of rural poverty. The remainder of this memo outlines a scheme for breaking this circle and creating a sustainable scheme of agricultural insurance offered by private sector agents.