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Weather and Economic Development

Author(s):
International Monetary Fund. External Relations Dept.
Published Date:
June 1969
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Bernard Oury

FROM THE EARLIEST TIMES, the weather and climate have influenced, if not controlled, the progress of civilization. Yet, in spite of its obvious importance and often dramatic impact, professional economists generally take little interest in the weather as a prime factor in economic development. There are several reasons for their neglect. There are many other claims on their attention. Many of the most able economists lack any appreciation of the natural environment and are not drawn to agriculture. Even the comparatively few specialists in agriculture have found their first attention engaged elsewhere. Conventions have reinforced neglect: in economic theory the weather is treated as a purely external factor which, despite its notorious unreliability, must be taken as given; in econometric studies the weather is generally concealed among unspecified factors; in economic history the emphasis has been, not on the systematic explanation of short-run economic movements, where the weather’s face is most evident, but on broader and longer trends. The occurrence and form and timing of many declivities in the agricultural economy, indeed in the whole economy, are partly explained by the immediately preceding and sometimes anticipated state of the weather.1

“Weather” is a collection of atmospheric phenomena, among which the temperature and precipitation stand out, occurring within a stated period. “Climate,” in this definition, is the average weather. Weather influences in many ways the plants that are cultivated for human and animal foods and agricultural raw materials, the water resources that are harnessed for electric power, all forms of transportation and communications, building and tourist industries, etc.

Economic development is conventionally measured by the average income per capita. In the developing economies, most of the labor force is engaged in agriculture, which is generally the largest component of the gross domestic product (GDP). Employment in other industries is often closely affected by the forces that influence agriculture, for the typical local industry is closely related to it. The entire economy is therefore susceptible to the rhythm of the seasons and to the way this rhythm is heightened or softened by the variations of the weather. Ultimately, the weather affects all the major components of the GDP, wages and salaries, and the rate of inflation.

Although the effects of weather on agriculture are sometimes all too obvious, they may be indirect and not at all easy for a nonspecialist to discern. Paradoxically enough, the immediate result of the various conditions that cause the grass or root crops to fail is often a big increase in livestock marketing. The rearers find themselves short of feedstuff and water and are compelled to sell off some of their animals. But this “liquidation” of livestock soon of itself creates conditions of scarcity. After the initial glut, marketing decreases. The size of the grain harvest, besides having the most obvious and crucial bearing on the purchasing power of the ordinary consumer, influences the output and prices of other industries. However, what is favorable weather for one industry may not be favorable for another, a complexity which introduces endless permutations of shades of differences into the state of the economy.

As complex and serious as weather problems are, developing countries have at least begun to tackle them. Technical advances have already made inroads on the problems of keeping the economy running at times when most activity would have otherwise ceased. In addition, as the developing countries organize themselves on a modern basis, public services are created that are able not only to forecast, prevent, or combat some of the worst excesses of the weather but even to tackle if necessary some of the related problems of welfare, seasonal unemployment, and the distribution of goods. And with improved sources of raw materials, more indirect sources of power, more sheltered working conditions, and better transportation, the output of the manufacturing industries in developing countries is no longer as subject to seasonal and weather induced fluctuations.

Weather and Agricultural Production

Obviously, weather affects the output of individual agricultural crops differently. The study of averages can provide some indication of general trends, but one must remember that in agriculture weather variations both within and between years are major causes of output variations. Consequently, minima and maxima of the quantities of farm products offered on the market provoke rising or declining prices, giving the markets their orientation and providing headaches for governments. It is often said that agriculturists are notorious economic malingerers, and when they discuss their fortunes they are apt to comment only on the most harmful extremes of the weather. This is not to say that there is never justice in the complaints, and a student of these matters must retain a sense of proportion. Thus, the evidence of physical losses of farm crops and animals during bad seasons must not be taken as necessarily occasioning equivalent losses in cash. Agriculture as a whole would be compensated, at least partially, by scarcity prices, although individual farmers whose output had been severely hit by the weather might suffer a serious loss of income. But in years when the damage is widespread and pervades all branches of farm production there may be resort to imports to dampen down a countervailing rise in prices. Then the fall in total farm income will be sharp.

The satellite Nimbus “A” took this picture of the Mediterranean; see footnote 5.

When adverse or beneficial effects of the weather stand out conspicuously they are usually net effects; that is, they are the results of an incomplete canceling out of divergent tendencies. The more lasting impact is more often on the pattern of agricultural production than on the volume of total output. The notion of a complete or at least significant canceling process among the effects of the weather is a statistical one.

The over-all effect is reduced but it is characteristic of acts of God that no one can foresee when or where they will fall. Every farmer is in a state of constant uncertainty (some more than others, depending on where they are and what they are doing), and sensible farmers will take measures—which are likely to be costly—to insure his own business against loss. The high costs of a mixed farming system are endured as built-in insurance against the hazards afflicting each individual line of production; simple prudence teaches farmers not to put all their eggs in one basket (though many in fact do so with commercial crops). The disadvantage to the farmer is his foregone opportunity to obtain economies of scale from specializing in his production. Yet even mixed farming is not immune to serious losses from extreme weather!

Meeting Agricultural Risks

While agriculture is a risky enterprise, human ingenuity has not failed to devise ways and means to reduce risks or to mitigate their results. These have been reviewed by experts of the United Nations Food and Agriculture Organization (FAO). The first device that comes to mind is to avoid agricultural risks so far as possible by concentrating agriculture in places that have a favorable climate. But in most countries the scope for such concentration is severely limited and, with a growing population, is progressively further narrowed.

The second and more important way of meeting a risk is to prevent it. This means the reduction of uncertainties. During his centuries-old struggle against the forces of nature, man has developed many techniques to rectify the excesses or deficiencies of nature, irrigation being the oldest and the best known. The greatest agricultural inventions have led to better management of the land itself, and of the plants growing on it. Indeed, since the middle of the eighteenth century there has been a series of far-reaching inventions, with a view not only to eliminating or reducing uncertainties but also of inducing nature to yield more than she would otherwise have done. Research and development of new plant varieties, fertilizers, farm machinery, and new techniques of crop and animal husbandry, as well as progress in education and management, have contributed immensely to transforming agriculture. Nevertheless, farmers all over the world must still teckon with uncertain yields as well as uncertain prices resulting in unexpected income shortfalls.

A third way must therefore be found to meet unavoidable agricultural risks. This lies in assuming the risks. There may even be instances where part of the avoidable risk needs to be assumed, especially where the cost of its assumption is found to be cheaper than that of its avoidance or its prevention. In such instances it would be poor management for society to use up deliberately more capital in attempting to prevent a risk than would in fact be risked.2

As farmers may generally decide how many acres to plant, the uncertainty of the crop yield is the major risk every farmer has to face. In general, crop insurance provides a method by which the farmer can stabilize his income from year to year, eliminating much of the loss of income and protecting his investment in years when crops fail. Often it is important also because it may enable the farmer to obtain credit for the necessary investment in the growing of the crop. Crop insurance means insuring crops against many risks, such as those of weather, diseases, and plagues, rather than only one or two. Insurance against all causes of loss pays indemnity when the yield is small because almost invariably the low yield is due to some insurable cause. This kind of insurance is essentially a minimum-yield guarantee. Thus in years when the crop yield is low the farmer’s income can usually be supplemented by an indemnity.

Crop Insurance and Economic Growth

We have so far been speaking of the income of the farmer as an individual. If in a rural community a large proportion of the farmers are insured, then insurance can become an important feature in stabilizing the income of the community and sustaining economic growth, for it stabilizes not only the farmers’ income but also incomes of business people and others who serve the farmers and who depend on them for their living. Crop damage is often widespread. A drought which affects one farmer in the community may well affect all. Similarly, plagues and diseases tend to damage all the crops in the area. Indemnity for crop losses due to adverse weather and other conditions substitutes for money normally received from the sale of crops. It enables farmers to pay their debts and to buy household as well as farm supplies and other items. The money which circulates in the community with a multiplier effect enables the merchant or other businessman to pay his employees, thus also stabilizing the income of others. To illustrate, the Federal Crop Insurance Corporation, an agency of the U.S. Department of Agriculture, which has paid up to $60 million in indemnities to U.S. farmers in a single year, has on a few occasions paid over $1 million to insured farmers in a single county in a single year of catastrophic losses. Often it has paid as much as one half or one third that amount; such large sums support the whole economy of the rural community. Thus while the primary beneficiary of crop insurance is the farmer, there is secondary benefit to the rural community as a whole, and to the regional economy.3

Stabilization of farm income also helps to establish demand for industrial products and thus enhances industrial development. In addition, since crop insurance guarantees a minimum yield on planted acreage, it might also cover risks related to programs of crop diversification and stimulate adoption of new crops and related technologies.

Because expenditures incurred in producing crops continue to increase as the economy grows into a market economy, and because usually much of the increase is financed by credit, the ever-present element of risk in farming is a major financial consideration in agricultural development. And for many lending institutions it is a financial problem. Insurance on most crops guarantees farmers returns equal to a specified number of bushels or pounds an acre, enough to cover the approximate costs of production. If the crop falls short of the guarantee, indemnities are paid to make up the difference. The amount of indemnity per bushel is selected by the farmer at the time he applies for protection and is an element in determining the premium he pays. The farmer may choose, from certain options, the price a bushel or pound at which any loss will be paid to him, the premium varying proportionately with the price options available. Just as guaranteed yields vary from area to area and crop to crop, so does the premium cost of crop insurance, reflecting an actuarial difference in risks. The insuring of many crops in many geographical areas brings diversification of risks. Crop and livestock insurance can increase agricultural credit and also improve the stability of agricultural institutions.

What happens in regard to shortfalls in farmers’ incomes happens ultimately with fluctuations in export earnings of countries where agricultural primary commodities make up the largest export share. The stabilization of export earnings of less developed countries has indeed been one of the major concerns of both the World Bank and of the International Monetary Fund, the latter having established in 1963 a scheme for the compensatory financing of deficits in the balance of payments arising out of export shortfalls of a short-term character and largely attributable to circumstances beyond the control of the member country.

National and International Efforts

The insurance of crop yields against all or multiple hazards is based on the idea that the evaluation of risks is not beyond the range of statistical estimates. An actuarial study can proceed only on the basis of data on actual or estimated physical losses in relation to total exposure. This method has been adopted in all the countries which are today practicing crop insurance, notably in the United States, Japan, Ceylon, India, and Mexico. Most interesting is the case of Japan, where crop insurance was initiated in 1939. It was made compulsory for major crops, with the Government subsidizing the cost of premiums to individual farmers. In Japan, a country with a low land to population ratio, the need for increased food supplies may justify subsidizing the high risk areas in order to encourage production. The problems of implementing crop insurance schemes in developing countries are not equally serious in all countries. Large countries may, of course, go it alone, as they have the advantage of a broad geographical basis for the distribution of risks. It is different for small countries. For example, it is difficult to imagine in the United States a crop insurance corporation restricted to, say, Kansas; premium rates would be forbiddingly high. And even so, such a corporation would go bankrupt following a severe drought. The U.S. Federal Crop Insurance Corporation can successfully assume high risks because it operates in all the 50 states of the Union.

This at least indicates the possibility that an international crop insurance corporation might be established to stand behind local or national schemes through reinsurance techniques, and which would be open to all countries. This would provide a close coupling of international action with domestic action and permit lower premium rates through a world-wide distribution of risks. Regional crop insurance corporations might also be conceivable, for instance, an Inter-American Farm Insurance Corporation. This was actually proposed in 1963 at the Second Annual Meeting of the Inter-American Economic and Social Council in São Paulo; no action has yet been taken on the proposal, except for the Rowe report submitted in 1966.4 The operation of such regional schemes might, however, be hampered considerably by regional antagonisms and conflicts of interests and in some instances by lack of resources in relation to high risks. Accordingly, regional organizations might form part of an international system. Where difficulties impede the creation of regional organizations, countries could turn directly to the international crop insurance corporation.

With such a system of international insurance, or reinsurance (total or partial), crop insurance schemes could play a major role in the stabilization of domestic economies and national currencies. They could offer a partial solution to balance of payments problems through payment of compensation and might be linked to other international schemes aimed at preventing or compensating export shortfalls. Other advantages of crop insurance schemes are the mobilization of savings at the local level in less developed countries and the possibility through a system of international insurance, or reinsurance, of varying the relative burden of losses on the individual farmer, on the national institution and on the international institution.

The world-wide promotion and implementation of crop insurance for the major crops, including the creation of an international crop insurance corporation to help in assuming unavoidable crop risks, would certainly be timely; the United Nations is being urged to coordinate international efforts to stave off natural disasters and to concentrate on the prevention of such catastrophes as famine. Such an international effort could make use of all the most advanced techniques available. One may conceive of an international pool for the storage, high-speed retrieval, and processing of major crop and weather data and for the definition and estimation of consistent actuarial bases, including the assessment of “normal” weather conditions and “normal” crop yields for each area covered by the schemes, and able through the use of some indicators to trace the “profile” of the weather over the crop year as well as from year to year in any of the areas concerned. This would help in the assessment of premiums and indemnities and assist experts in their judgment.

To be sure, crop forecasting is still uncertain, and crop yield records as well as cadastral surveys (a government’s survey of land ownership) and records of the distribution of cultivated land between different crops are often poor or missing in many developing countries. However, considerable progress has already been made and the obstacles can be overcome as time passes. Aerial photographs, for instance, could be used to help to improve cadastral surveys and record crop acreage. And generally, crop insurance schemes would create effective new incentives for governments to do a better job, especially if they had some financial stake in the scheme and assumed some risk. There is a wealth of weather data records since the turn of the century to be unearthed all over the world on which actuarial computations of risks could be based. In addition, weather satellites have already made major contributions to meteorology. A global meteorological satellite system is already in operation, and the world weather is now photographed, on a routine basis, several times a day. In the United States the National Aeronautic and Space Administration (NASA) hopes that its Earth Resources satellites will permit orbital soil surveys, assess crop practices and range conditions, and help predict crop yields.5

The World Meteorological Organization (WMO) which is currently developing a World Weather Watch System, would obviously have a major role in connection with the operation of crop insurance schemes—national, regional, or international. It has already made an important contribution to development through its technical commissions. The skill, experience, and advice of the members of this organization are extremely valuable for any agricultural work that involves assessment of the weather factor. As with the weather, so with climate; the organization makes available the knowledge of the world’s climate which is so essential for future allocation of resources. The WMO’s Commission for Agricultural Meteorology deals with such matters as prevention of unfavorable influences of weather and climate on agriculture, the protection and storage of harvested agricultural products, and weather forecasts and warnings for agricultural purposes—all of great and direct importance to agricultural development.

The major question on the agenda of the World Meteorological Conference held in Geneva in April 1967 was the dependence of agriculture upon meteorological conditions. The conference was for the first time attended by the Secretary-General of the United Nations, the Administrator of the United Nations Development Program, and the Director-General of the FAO, reflecting these officials’ awareness of the major importance of the weather as a prime factor in economic development. What would now appear needed is a comprehensive international approach to these problems which significantly affect the economic performance of most countries from the point of view both of their domestic economic situation and of their balance of payments.

We must, of course, remain realistic and not raise undue expectations, nor underestimate difficulties. Nevertheless, an international crop insurance system would help protect agricultural investments and encourage production in areas where people are underfed. A first step might include a survey of existing national schemes, assessing failures and successes in order to draw lessons from experience. A second step might include a study of crops to be covered, countries which might qualify for participation, insurance criteria and techniques, the size of the reserve fund the international scheme would require, especially at the start, and how it would have to be provided, and perhaps of the possible role of surplus commodities. A well-conceived scheme would distribute its benefits throughout the world—right down to the grass roots—and contribute to the stabilization of the economy of the countries concerned. It could be a major contribution to help to promote the economic growth of the developing world.

Here and elsewhere, I am indebted to E.L. Jones, Seasons and Prices, The Role of Weather in English Agricultural History, George Allen and Unwin Ltd. (London), 1964.

P.K. Ray, Agricultural Insurance, Principles and Organization and Application to Developing Countries, Pergamon Press (London), 1967.

W.H. Rowe, Considerations on Establishing Crop Insurance in Latin America, Organization of American States (Washington, D.C), 1966.

W.H. Rowe, op. cit.

The astronauts of Apollo 9 photographed farms while in orbit in March, 1969 to see if orbital photography can detect signs of drought and disease in time for farmers to save their crops. See Gemini IV photos on the back cover.

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