Agricultural productivity in Latin America and the Caribbean in the presence of unobserved heterogeneity and climatic effects

Total factor productivity (TFP) analysis has been the focus of a large number of methodological and empirical studies over the past several decades. One remarkable gap in this literature is the omission of climatic variables as regressors in the models used to derive TFP measures. The purpose of this paper is to narrow this gap by developing climate-adjusted (CA) TFP measures. We combine information from the Climatic Research Unit with Food and Agriculture Organization data for 28 Latin American and Caribbean countries over a 52-year period (1961–2012) to estimate random parameter stochastic production frontier (SPF) models. The goal is to investigate the impact of climatic variability on TFP. The estimated coefficients from the SPF models are used to construct a climatic effects index across countries and over time. The average annual variation in climatic conditions is stronger at the end of the 2000s compared to earlier periods. Climatic variability has a negative effect on production in 20 of the 28 LAC countries analyzed, and this is more severe over Central America and the Caribbean. The average reduction in output across the region attributable to climatic variables is between 0.02 and 22.7% over the last decade compared to the period 1961–1999. The estimated average annual growth rate of CATFP (0.69%) is consistently lower than TFP (1.08%), confirming the adverse impact of climatic variability on agricultural output and productivity in LAC. The results show considerable variability across countries, and this points to the importance of accounting for climatic effects in analyzing TFP.