# **Introduction**

On average, agricultural productivity in Africa is lower than in other regions and available technologies that show great promise in field studies are not widely adopted. Consequently, the gains in rural income and the reduction in rural poverty that characterized Asia’s Green Revolution have not reached Africa. Several reasons are given for the slow pace of productivity growth in African agriculture, but many researchers and policy makers view the limited take up of fertilizers as a key proximate cause. At present, most productive technologies depend on abundant soil nutrients. In Africa, soils are depleted in many places and practices aimed at boosting soil fertility, including the application of chemical and organic fertilizers, are not commonplace. Moreover, studies suggest that because of this, nutrients are continually extracted from African soils to feed current crops.<sup>1</sup> For these reasons, the under-utilization of fertilizers is viewed as a hurdle to the adoption of more productive and sustainable agricultural techniques.

Several arguments are advanced to explain why fertilizer use is low in Africa, including some that suggest failed markets. In turn, this has prompted calls for African governments to take a more active role in fertilizer markets and to offer targeted subsidies that promote the use of fertilizers, high-yielding seeds and other components of more productive techniques.<sup>2</sup> In this paper, we investigate the role incomplete markets play in determining the use of chemical fertilizers among Ethiopian farmers with the aim of identifying policies that would encourage the adoption of profitable and sustainable agricultural practices. We use panel data to estimate a selection model and this allows us to distinguish empirically between determinants that condition the use of fertilizer and those that affect the conditional quantities of fertilizer that farmers demand. The panel data that we employ is well suited to our purpose since it contains a relatively even mix of farmers that use fertilizers and those that do not. The survey also contains information that we use to proxy the effects of incomplete credit and insurance markets, and information hurdles that are related to how well fertilizer markets work. The survey also contains information about characteristics that potentially help households cope with poorly functioning markets.

Empirical results from the panel selection model suggest that a variety of factors stand in the way of the widespread adoption of fertilizer-using production technologies in Ethiopia. Chief among these are high transport costs, illiteracy, adverse local climates, and limitation in risk and credit markets. Households that are wealthier, better educated, or have greater political authority are better able to overcome obstacles to adoption; however, this, in turn, suggests a reinforcing effect on rural poverty as less-advantaged households

> 1 Henao and Baanate (2006), reported in Morris et al. (2007), estimate that 85 percent of African farmland suffer soil nutrient loses at a rate of 30 kg per year or greater.

> 2 See, for example, the Abuja Declaration (2006), issued during the 2006 Africa Fertilizer Summit.

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