Choice and uncertainty in a semi-subsistence economy : a study of decision making in a Philippine village

This study deals with the response of Philippine rice farmers to uncertainties and associated risks in the production environment. Farmers' risk behaviour is analyzed within the context of land use intensification through the adoption and utilization of the socalled 'modern seed-fertilizer' technology. This technology has been criticized for its capital intensity and high riskiness compared to existing technology. Among others, farmers' aversion to take risks has been suggested as a possible factor explaining slow adoption rates of poor farmers. In order to investigate the impact of risk on decision making, a distinction should be made between (1) farmers' attitudes towards risk taking, i.e., the possibility that they are unwilling to take risks and to invest in risky but profitable technology causing an overall underinvestment in agricultural inputs and misallocation of resources and/or; (2) the farmers' inability to invest in risky technology because of a limited risk taking capacity leading to an unequal distribution of benefits derived from new technology among the rich and poor strata of the rural economy.Conceptual issues and practical problems in analyzing the influence of risk and uncertainty on farm-household decision making are discussed in Chapter 3. A critical review is presented of various theories concerning risky decision making. The general conclusion is that none of these theories have yet been tested to the extent that they can be used as an adequate framework for examining the occurrence of farmers' risk aversion and assessing the impact of risk on decisions.Chapter 4 describes the historical process of land use intensification in relation to population growth. It shows that the introduction of the 'modern' IRRI-released rice varieties (IR-varieties) and double rice cropping is just a new phase in a continuous process of land use intensification that started in the mid 1940s with the closing of the land frontier in the rice lowland area. Compared to their predecessor BE-3 - now considered a traditional rice variety - the adoption of IR-varieties has been relatively quick. However, adoption at an appreciable scale did not take place until farmers themselves - through various cultural adaptations - had augmented the attractiveness of growing IR- varieties under rainfed conditions.The new rice technology allowed a more effective use of family labour resources, and augmented the income of individual farmhouseholds. However, due to changes in the labour utilization pattern induced by this technology and the introduction of labour saving technology (rice threshers), job opportunities in the village did not increase, whereas income sharing between the poor and somewhat wealthier households declined and the economic position of women deteriorated. In the process of land use intensification, the overall risk that farm-households face has increased. The present land utilization pattern is characterized by intensive cropping systems on relatively small farm areas that have become strongly dependent on external inputs. The capacity of risk spreading between agricultural activities has become limited, whereas the overall financial risk of crop production has increased.The majority of development programmes imposed upon the village community during the 1970s, did not contribute much to farmers' efforts to intensify rice crop production. Instead, they created an atmosphere of uncertainty and were counterproductive to the needs and economic development of households.In order to investigate the effect of risk on the household's ability to take advantage of the new crop technology, farmhouseholds were classified according to their sensitivity to income risks (Chapter 5). Two classification variables were employed: (1) the subsistence coverage factor indicating the household's capacity to generate a surplus income above basic subsistence requirements through crop activities, and (2) the family life cycle stage which among others determines family labour availability and the capacity to timely control crop production risks.Patterns of farm resource utilization, household income formation and consumption expenditures are analyzed in Chapter 6. Household categories differ substantially with respect to their ability to improve upon living conditions and risk taking capacity. In sharp contrast with surplus households, for non-surplus households there is hardly any room to cut back on household expenditures or create reserves. Forced by short-term subsistence pressures during the lean month period, young non-surplus households have to employ their scarce family labour resources on activities that provide immediate income affecting labour investments in self-employed agriculture. With a higher worker to consumer ratio, middle-aged non-surplus households are able to devote much more family labour to self-employed agricultural activities while at the same time providing for short-term income requirements through wage labour activities. In fact, these households face serious problems in finding remunerative employment for all their family labour resources. The possibility of increasing labour input in individual rice crops is economically marginal, whereas off-farm employment opportunities are limited.Compared to surplus households, non-surplus households show low productivities per labour hour mainly due to a lower level of cash input investments. The necessity to use credit to sustain subsistence and education expenses affects the capacity of nonsurplus households to invest in productive activities and induces them to credit rationing. Interest payments on loans acquired in poor production years usurp a substantial part of the income above basic subsistence needs realized in good production years. The middle-aged non-surplus households have to use income for the education of children in order to safeguard long-term security.In Chapter 7 the relationship between the household's risk sensitivity and the adoption of double rice cropping is investigated. Households differ with respect to the perceived risks of double rice cropping due to differences in risk control capacity resulting from differences in family labour availability and financial position. They also differ with respect to the need to intensify rice crop production. The importance of the family life cycle - a variable commonly lacking in adoption studies - on adoption behaviour is indicated. This factor may cause cyclical dynamics in technology utilization patterns, i.e., households may gradually change management orientation and pattern when moving from one life cycle to another. The adoption process shows that experimentation is a major tool of farmers to reduce uncertainty and that - in contrast with a commonly held belief experimentation with new crop technology is not a prerogative of wealthy farmers.Farmers' decisions with respect to the use of fertilizer in rice crop production are discussed in Chapter 8. An attempt is made to quantitatively assess the relative importance of resource-induced risk aversion as opposed to the farmers' risk taking willingness, and farmers' fertilizer response perceptions as opposed to risk aversion. Difficulties encountered in quantifying the various parameters playing a role in such an analysis are discussed. Fertilizer response under farmers' conditions are estimated and the risk of fertilizer application is empirically assessed. The farmer's perception of fertilizer response turns out to be strikingly similar to empirical estimates. In contrast with response perception and risk taking willingness, resource-induced risk aversion appears to be an important variable explaining differences in fertilizer application levels among household categories. However, perceptions and risk taking willingness are important in explaining differences between individual households.A summary of the salient features of the farmer's choice processes and a synthesis of major findings concerning farmers' risk behaviour is presented in Chapter 9. The study arrives at the overall conclusion that it is dangerous to base risk analyses on superficial observations and generalize about small farmers' risk behaviour. First, many farmers' production strategies and practices - often erroneously identified as resulting from risk averse behaviour - serve the dual purpose of reducing risk and attaining best economic results. Such strategies result from (1) cautious optimization over a certain period of time based on adaptation to changes in internal household conditions and external circumstances, search for improvements, and experimentation and; (2) sequential choice procedures and risk control within years based on adaptation to chance constraints and opportunities as they evolve in the course of a production cycle. They allow for an optimum use of environmental resources and are thus sound economic practice.Second, risk is not a well defined concept. It describes various types of uncertainty (e.g. yield vs. financial risk), whereas the degree of riskiness of activities depends on the risk taking capacity of households, comprising both the ability to timely control crop production risks through labour investments and the capacity to bear financial risks. Hence, crop production risks are not the same for different types of households, whereas financial risk is likely to differ between time periods. Within an apparently homogeneous group of small farm-households, differences in financial risk taking capacity and resource composition are such that households perceive different production risks as well as financial risks to similar activities, and thus show a different response to risks in agricultural production. Moreover, for the same household there may exist a conflict of interest between risk reduction in the short and medium term and in the medium and long term. Thus, without specifying the type of risk as well as the period and conditions under which decisions are made, it cannot be evaluated whether risk deters investments in inputs or adoption of technology more for one category of households than another. From a production point of view, farmers simply cannot be classified as risk seekers or risk averters. In fact, the same farmer may fit both categories.Farm-households are used to risk taking in agriculture. They are generally not much interested in stabilizing agricultural output if such implies an even moderate reduction in perceived income. It is not so much the perceived production risks in agricultural that influence choice behaviour of poor households, it is the need to opt for particular income earning activities that secure immediate subsistence needs and limit the impact of financial risks on subsistence security. In order to keep financial risk at a manageable level, households have to ration credit use and limit financial investments in agriculture. When risk-induced underinvestment occurs, it is caused by the limited capacity of poor households to take financial risks rather than by their risk averse attitudes. Given the continuous indebtedness of non-surplus households, perceived financial risk may constitute a serious cause for underinvestment in agriculture and widening income disparities between poor and wealthy households