This paper presents experimental evidence on a one-year pilot programme in rural Nicaragua aimed at improving households’ risk-management through income diversification. The programme took place between November 2005 and December 2006 in the aftermath of a severe drought in the northwest of the country. The intervention targeted agricultural households exposed to weather shocks related to changes in rainfall and temperature patterns; it combined a conditional cash transfer (CCT) with vocational training or a productive investment grant. The results discussed in the paper come primarily from a follow-up survey done between August 2008 and May 2009, two years after the end of the programme.
The paper identifies the relative impact of each complementary package based on randomised assignment, and analyses how impacts vary by exposure to exogenous drought shocks. The results show that both complementary interventions provide full protection against drought shocks two years after the end of the intervention. Households that received the productive investment grant also had higher average consumption levels. The complementary interventions led to diversification of economic activities and better protection from shocks compared to beneficiaries of the basic conditional cash transfer and control households. These results show that combining safety nets with productive interventions can help households manage future weather risks and promote longer-term programme impacts.
Key Findings:
- Both complementary interventions (vocational training and productive investment grants) reduce the variability of consumption and income. Being eligible for training or for the productive investment grant offset the negative impact of drought shocks. These results differ significantly from those of households only receiving the basic CCT, indicating that the protection against shocks stems from the complementary interventions.
- The complementary interventions allowed households to diversify economic activities, which increased non-agricultural and livestock activities on the intensive and the extensive margins. Households eligible for the productive investment grant are 13 % more likely to be self-employed in non-agricultural activities and have higher profits from non-agricultural self-employment. The magnitude of the impact on returns is large, amounting to a 15-20% annual return on the initial investment of US $200, two years after the programme ended.
- Risk management is facilitated by households with non-agricultural activities selling products or services to households from other communities less affected by shocks. This might have allowed drought-affected households to maintain positive returns to their non-agricultural activities.
Recommendations:
- Combining short-term social safety nets with productive interventions can promote sustainability of programme impacts and help households manage risk before future shocks occur.
- This not only can lead to smoother overall consumption, but also protects food consumption, even if the shock directly affected the main food crops. Hence, adaptation through changes in non-agricultural activities does not have to come at the cost of higher food insecurity.
- Productive transfers should not be seen as a substitute for the need of social safety nets when low-probability shocks with very large welfare effects occur.
