Rainfall Shocks, Livelihood Diversification and Welfare: Evidence from Rural Togo

Abstract Theory suggests that rural farm households exposed to greater risk should diversify their income portfolios to reduce variation in welfare caused by adverse events such as rainfall shocks. Rainfall shocks, however, can also degrade asset stocks and make diversification more costly. Using a panel dataset of small-scale cattle farmers from rural Togo and long-term historical rainfall data, we first examine whether and in what direction rural portfolio diversification is related to historical rainfall shocks. Second, we test whether diversification is associated with stabilised welfare in the face of recent rainfall shocks. Our results show that historical rainfall shock exposure reduces income diversification. In terms of mitigation, we find that diversification is generally not effective in insulating against welfare losses. We conclude that there is a need to stimulate rural diversification as a means of building resilient livelihoods to cope with increasing weather variability by strengthening credit, agricultural and market institutions.