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
renaissance 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.