Impact of Climate Risk on Farmers’ Income: The Moderating Role of Digital Inclusive Finance

Abstract

A relatively high share of small-scale farmers in China is living in a precarious environment that limits their productivity. Moreover, small-scale farmers are among the most vulnerable population characterized by the lack of capital, therefore, they face difficulties in coping with the negative effects of climate risk. A good financial system is among the numerous solutions to help farmers to be more resilient to external risks. However, the traditional financial system often excludes the most vulnerable population. Therefore, this study attempts to understand the relationship between climate risk, digital inclusive finance, and the income of the farmers. Specifically, we want to verify if digital inclusive finance mitigates the impact of climate risk, thus increasing the income of farmers. For that, we used panel data from 288 prefecture-level cities in China from 2011 to 2020. We found that climate risk decreases the income of farmers, and the magnitude of the effect of climate risk is higher for middle and low-income farmers, for cities with a relatively low level of agricultural insurance, and in the northern region. Thus, climate risk increases the income gap between farmers and between urban and rural areas. Moreover, we found that digital inclusive finance, the coverage breadth, usage depth, and digitalization level of digital finance mitigate the adverse effect of climate risk on the income of farmers. This paper provides new perspectives for policymakers to mitigate the effect of climate risk on the income of farmers, improve the ability of farmers to adapt to climate change and reduce the income gap between farmers and between urban-rural areas.