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.