Is There a Rainbow after the Rain? How Do Agricultural Shocks Affect Non‐Farm Enterprises? Evidence from Thailand

Abstract

Increasing weather volatility manifesting itself through extreme rainfall and drought poses a significant threat to the livelihood of rural households in poor countries. Although it is documented how rainfall shocks affect agricultural activities, there is not much evidence on the indirect effects on the rest of the rural economy. Merging household panel data with grid‐level precipitation data, we study the indirect effects of rainfall shocks on non‐farm enterprises in rural Thailand. We not only consider the effects on labor supply to non‐farm enterprises but also focus on the performance of non‐farm enterprises. We find that households increase their labor participation in non‐farm self‐employment in response to excessive rainfall shocks. We do not find such a response for deficit rainfall shocks, which we explain by the increased demand for agricultural labor needed to cope with rainfall shortages. We also find suggestive evidence that rainfall shocks lead to increased input costs for non‐farm enterprises in the food processing industry, to higher input costs for farms, to higher sales revenues for agriculture‐related non‐farm enterprises and to lower expenditures for farm households on food and other consumption items. Overall, our analysis suggests that the costs of agricultural shocks are higher than what much of the literature has suggested so far. Despite limited market integration in poor rural economies, the spillovers are sizable and are transmitted through various channels. One implication is that safety nets targeted at farms may need to consider non‐farm enterprises too.