The Impact of Credit Constraints and Climatic Factors on Choice of Adaptation Strategies: Evidence from Rural Ethiopia

Abstract

Climate adaptation actions, like any other investment, require financial resources, which are likely to be in short supply in the rural sector in developing countries. This paper assesses the role of credit constraints in the choice of adaptation strategies in settings with severe financial market imperfections. Household-level panel data from selected zones in the highland region of Ethiopia, combined with climate information from the adjacent meteorological stations, is employed in the analysis. We quantify the linkage between different forms of credit constraints and choice of climate adaptation strategies, using a multivariate probit regression model. Credit constrained households are significantly less likely to adopt crop diversification and off-farm employment strategies. While credit access encourages irrigation, soil conservation and tree planting are the least responsive to credit access. These results indicate that the severity of credit constraints depends on both the nature of the credit constraint and the type of adaptation investment.