Leung, PingSun Sethboonsarng, Sununtar Stefan, Adam
Year of Publication:
ADB Institute Discussion Papers 90
Poverty is prevalent among small farms in transition economies such as the Lao PDR, where market failures prevail and subsistence production is the norm. Contract farming is emerging as a promising tool to facilitate market linkages and provide the necessary supports that enable small farms to transition to commercial production. Using data from a household survey of 332 contract farmers and 253 non-contract farmers, this study attempts to empirically assess the potential of contract farming as a development tool to increase small farm incomes and reduce rural poverty. Using propensity score matching methodology and an endogenous switching regression model to assess the profitability of contract and non-contract rice farms in the Lao PDR, we found that contract farmers earn significantly higher profits than non-contract farmers. The results also show that contract farming tends to provide the greatest increase in income to farmers with below-average performance. These findings suggest that contract farming can be an effective private-sector-led mechanism to facilitate the transition to commercial agriculture. In addition to bringing foreign direct investment (FDI) into the rural sector, contract farming can be an effective tool to improve the profitability and raise the incomes of small farmers, thereby reducing poverty in rural areas with limited market development.