Conclusion

The rapid expansion of contract farming in the Lao PDR necessitates the empirical verification of its impacts on farmers. As we cannot compare the same farmer both under contract and outside the contract, we must estimate the average impact of contract farming by comparing groups of contract and non-contract farmers. As contract farmers may be different, however, from non-contract farmers in many ways and the decision to join the contract is voluntary, these unobservable factors may lead to selection and self-selection biases. Controlling for these biases is generally the most difficult part of an impact assessment study.

To account for the possible occurrence of selection bias and disentangle the effects of contract farming, this study employed propensity score matching comparison methodology. The findings of the PSM comparison confirm the results of the initial assessment and verify that the higher revenue and profitability of contract farms are the result of joining contract farming, rather than systematic differences between contract and non-contract farms.

To control for potential hidden self-selection biases affecting their decisions to join the contract, farmers' performance with and without the contract was evaluated using an endogenous switching regression model. The results of the switching regression provide evidence that contract farming tends to be more profitable than non-contract farming, and suggests that the higher profitability of contract farms is not the result of farms with higher profit potential joining the contract. In fact, the counterfactual simulations indicate that contract farmers would have lower profits than non-contract farms if they operated outside of the contract. In other words, contract farming is particularly attractive to farmers with relatively poor performance. This finding has strong development implications as it implies that better-off farmers may have better access to information on production and markets and therefore choose to produce independently rather than taking on the burden of fulfilling the requirements of a contract. In this context, the contract farming arrangement is an attractive development tool as it effectively targets relatively poor-performing farmers, who require the most support.

The results of the empirical analysis support the claim that contract farming is an effective tool to increase the incomes of smallholder farmers in rural areas where market failure is prevalent. The findings show that the sampled contract rice farmers cultivated higheryielding, improved rice varieties and earned higher incomes than non-contract rice farmers under similar agro-ecosystem and socioeconomic conditions. The sampled contract farmers have better access to inputs and credit and an assured market for their produce, which enables them to earn higher profits. The evidence also suggests that contract farmers are more likely to diversify production into other commercial crops or livestock, leading to increased incomes and more secure livelihoods. The contract arrangement thus appears to be effective in facilitating the transition of small farmers from subsistence to commercial production.

The role of extending new technology to improve the productivity of the agricultural sector is traditionally performed by the public sector. Moving the vast number of subsistence farmers toward commercial production, however, requires enormous public sector resources that are generally unavailable in transition economies such as the Lao PDR. This study shows that promoting contract farming arrangements to draw FDI into the rural sector has been a policy in the right direction.

Through contract farming, the private sector effectively extends new production technology and facilitates access to modern inputs and remote markets offering higher prices. This translates into improved incomes and an effective transformation from subsistence to commercial production with no financial burden to the public sector. Contract farming appears to be particularly appropriate for rural areas where transport infrastructure has recently been established and in transition economies where institutions to facilitate market exchange are in an early stage of development.

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1. Axelle Boulay
   (posted 22 September 2008 / 01:44:23 PM)
   
   Thank you very much for this publication that analyzes in-depth the impacts of contracts on adopters' livelihoods.
   
   You write: "contract farmers would have lower profits than non-contract farmers if they operated outside of the contract." and you deduce from this finding that "better-off farmers choose to produce independently rather than taking on the burden of fulfilling the requirements of a contract." I think it is important to mention that this deduction is only valid in the context of contract arrangements that include a provision of credit to contract farmers.
   
   In the context of my PhD, I conducted a study of contract farming for eucalyptus in Thailand. Contracting companies, which are using eucalyptus wood for pulp and paper production, do not provide credit to contract tree farmers. Based on an household survey of 450 eucalyptus tree farmers, I found that better-off farmers are more likely to adopt a contract because they have the financial capacity to comply with the terms of the contract (such as a minimum rotation length).
   
   Axelle Boulay, PhD scholar
   Australian National University