Impact of a Government Subsidy Program for Crop Insurance
Attributes
Medium: Animals, Plants and/or Others
Country: China
Analytical Framework(s): Other
Study Date: 2005
Publication Date: 2006
Major Result(s)
Functional Transfer: Given cultivation practices and the institutional arrangement, the following simultaneous equation system is employed in this research.
y1t = α1yi2t + β1X1t + μ1t,
yi2t = α2y1t + β2X2t + μ2t
, where i = 1, 2, 3;
y1t represents crop insurance purchase, modeled as a dichotomous choice taking the value 1 if the farmers are voluntarily insured, and 0 if the farmer does not purchase insurance;
yi2t represents the ith chemical inputs use, is fertilizer, is pesticide and is agrofilm - all of the dependent variables assumed to be endogenous;
Xt is a vector of exogenous variables relevant to insurance purchases and agrochemical use;
μit are unobserved disturbances that are assumed to be normally distributed with constant variances; and
α1, α2, and β1, β2 are parameter vectors to be estimated.
Study Note: Though still not popular, crop insurance programs have been practiced in China for decades, especially in cotton production in the Xinjiang Uighur Autonomous Region. Due to the fragile nature of the environment in Xinjiang and the whole northwestern China, a thorough study of the relationship between crop insurance and agrochemical usage under current circumstances is essential to encourage the designing of an environmental-friendly insurance policy through a specific subsidy scheme, and for the government to make a better overall policy package in general.
Study Details
Summary: The Chinese agricultural sector is characterized by two factors: 1) China has to feed 22% of the world's population with only 7% of the world's arable land; 2) farmers still account for roughly half of the country's workforce to date. As a result, the average size of a Chinese farm is about 0.6 hectares, and many farmers are working on poor land, facing low and unstable yields and incomes. Integration into the world market brings further pressure on farm prices, making farmers' lives even more difficult and government help more essential. Yet, policy choices are restricted by established bilateral and/or multilateral agreements. In searching for appropriate policy tools, government subsidies for crop insurance have been advocated as a policy alternative to support agricultural growth and farmers' incomes in China since the country joined the World Trade Organization (WTO). The arguments of the advocates are: 1) a crop insurance program will provide more stable incomes to farmers through indemnity payments (compensation) for crop failures; 2) government-subsidized insurance premiums for farmers will expand crop insurance coverage, helping more farmers; and 3) government subsidies for crop insurance are permitted by WTO rules. Therefore, they believe that a government subsidy for crop insurance is a good policy choice to help farmers and the agricultural sector. However, cautions have been raised as a crop insurance program may impact the environment negatively through increases in agrochemical use. This study explores farmers' behaviors with regard to agrochemical use under the current crop insurance scheme in order to identify if and to what extent participation in crop insurance has influenced the application of agrochemicals. The research team collected farm household data from the Manasi Watershed, Xinjiang, where crop insurance has been bought by farmers for nearly two decades, and applied that data to a simultaneous equation system consisting of disaggregated input models. It was found that the decisions on fertilizer, pesticide and agrofilm applications did have different impacts on crop insurance participation, and were influenced by the latter in different ways. While agrofilm application is increased if the farmer purchases crop insurance, the application of pesticides is reduced. The application of chemical fertilizers increases as well, but the increase is not statistically significant. The results imply that a government-subsidized crop insurance program is an acceptable policy alternative. If the government chooses to subsidize crop insurance, the subsidy will reduce the premium payment and hence encourage more farmers to participate in a crop insurance program. Under the current low-premium and low-indemnity policy, a crop insurance program is not likely to induce significant increases in agrochemical use. As a result, the expansion of the program will benefit a larger portion of farmers without costing the environment in any significant way.
Site Characteristics: Its complicated topography, broad expanse, diverse natural environment, inclement weather and low rainfall makes the croplands in Xinjiang Autonomous Region the most threatened region in China. Some observed important indicators of land degradation in the region include loss of vegetation, loss of topsoil, severe droughts during the growing season, and reduction in biodiversity. As such, natural disasters occur frequently here with huge losses to agriculture. The major disasters are droughts, frost and freezing, wind and hail, floods, and snow disasters. The total areas affected by natural disasters range from 189.51 to 366.12 thousand hectares during the 1990-2002 time period, with a peak level of 841.89 thousand hectares in 1999. Droughts, frost, wind and hail, diseases and insect pests are the major types of natural disasters, with drought, wind and hail being the two most severe disasters. As the total areas affected by natural disasters account for about 10% of the total crop land in the whole region of Xinjiang on average, the losses to some individual producers are significant. Therefore, crop insurance is an appropriate measure for risk management. This is why it has been accepted by farmers, especially cotton producers, for almost two decades.
Comments: The empirical research was conducted in the Manasi Watershed, Xinjiang, for practical reasons. Firstly, Xinjiang is one of the most important cotton-producing bases in China, and the Manasi Watershed is one of the three main cotton-producing areas in Xinjiang. Located at the center of Eurasia, the watershed is characterized by insufficient rainfall, drought and high evaporation since it is far away from the ocean. With a large land area, small population and infertile soil, agriculture here relies heavily on chemical fertilizers and other agro-chemicals, and cotton production uses chemicals more intensively compared with other commodity crops. Therefore, increasing attention has been paid to the environmental problems in this watershed. Secondly, farmers have been provided with crop insurance programs for 18 years here. The increased participation rate indicates that farmers are getting familiar with the real costs and benefits of crop insurance and hence are likely to take these into consideration when making production decisions. The data used in this study came from both primary and secondary data sources. The primary data used to determine fertilizer, agrofilm and pesticide use and crop insurance purchases at the individual level were collected from a sample of farm households. The survey was conducted in the Manasi Watershed (Manasi County, Shawan County, and the No. 8 Agro-Division and the No. 6 Agro-Division of the XJPCC). Four hundred and fifty cotton farmers were randomly selected from the Manasi Watershed and 340 effective samples were used in the study. The secondary data came from various official statistical publications and a variety of literature published in China. Information was gathered on agricultural production, utilization of agrochemical inputs, the current environmental situation, and agriculture insurance programs at various administrative levels (village, county, and province).