Impact of Credit Constraints on Agricultural Productivity in the face of Climate Variability: Panel Data Evidence from Rural Ethiopia

Ethiopian Economics Association (EEA)
Hailu Elias


Increasing agricultural productivity is a major step towards transforming the
rural economy and ensuring food security. This paper uses household level panel
data linked with climate data to examine the impact of different credit constraint
conditions on agricultural productivity under changing climatic conditions. A
propensity score matching (PSM) and a difference-in-differences (diff-in-diff)
methods were employed to provide unbiased estimates of the production impacts
of credit constraints on crop productivity. After controlling for potential selection
bias, it found that relaxing credit constraints increases agricultural productivity
by Ethiopian Birr 169 per hectare, while the real crop revenue for discouraged
and quantity constrained farmers declined by Ethiopian Birr 443 and 275 per
hectare respectively. These results suggest that relaxing credit constraints by
improving performance of the rural credit market could significantly increase
agricultural productivity in rural Ethiopia.