Stefan Dercon

Vulnerability, seasonality and poverty in Ethiopia

Most studies examining the dynamics of welfare have found large fluctuations in consumption over relatively short periods, suggesting substantial short‐run movements in and out of poverty. The consequence is that cross‐section poverty research may not be able to identify the poor. In this study, we explore this short‐run variability further. We use a data set on a panel of 1450 households in different communities in rural Ethiopia, surveyed thrice, over 18 months. On average year‐to‐year poverty is very similar. However, we find high variability in consumption and poverty, over the seasons and year‐by‐year. Econometric analysis suggests that consumption is affected by idiosyncratic and common shocks, including rainfall and household‐specific crop failure, while households respond to seasonal incentives related to changing labour demand and prices. The results imply that a larger number of households are vulnerable to shocks than implied by the standard poverty statistics, while some of the non‐poor in these statistics are in fact otherwise poor households temporally boosting their consumption as an optimal response to changing seasonal incentives.

Insurance Against Poverty

Poor people in developing countries are often affected by droughts, floods, illness, crop failure, job loss, and economic downturns. Much of their energy goes into coping with these shocks and into day-to-day survival. While insurance and credit markets, combined with widespread social security, provide an important cushion against poverty in rich countries, the need for immediate survival may lock the poor into persistent poverty in developing countries. The poor in developing countries do have informal mechanisms to cope with risk and misfortune. These are based on income diversification, risk avoidance, self-insurance by saving together with family, and community-based mutual assistance. Nevertheless, the scope of these mechanisms remains limited. Repeated individual-specific shocks such as illness or pests, or covariate risks associated with drought, flood, or recession, undermine the ability of individuals and their families to cope with risk. We now know much more about vulnerability to risk and how poor people cope. Even more importantly, we have learned much about the large long-term consequences of these risks, which condemns many to persistent poverty and excludes them from economic growth. But there is much that can be done. The micro-level studies that underpin this book offer new insights on how effective public action could be more effective in protecting the vulnerable against persistent poverty. Policy should focus on providing a comprehensive menu of ex-ante and post-crisis protection mechanisms, including new forms of insurance, savings, safety nets, and the means to strengthen the poors asset base. Local communities have a big role to play: public funds should not be used to replace indigenous community-based support networks; rather they should be used to build on the strengths of these networks to ensure broader and more effective protection. With numerous thematic chapters and case studies of both best practice and of failure, from a mix of low-income and middle-income countries across the developing world, this book evaluates alternatives in widening insurance and protection provision, and makes an important contribution to the topical field of insurance and risk. Contributors to this volume - Stefan Dercon Jonathan Morduch Abhijit Banerjee Marcel Fafchamps Jyotsna Jalan and Martin Ravallion Stefan Dercon and John Hoddinott Paul Collier Gisele Kamanou and Jonathan Morduch Ethan Ligon Joachim De Weerdt Markus Goldstein, Alain de Janvry and Elisabeth Sadoulet Jean-Philippe Platteau Pedro Albarran and Orazio P. Attanasio Stefan Dercon and Pramila Krishnan Jonathan Conning and Michael Kevane Christopher B. Barrett, Stein Holden and Daniel C. Clay Loic Sadoulet Jerry Skees, Panos Varangis, Donald Larson and Paul Siegel

In Sickness and in Health: Risk Sharing within Households in Rural Ethiopia

Much of the literature on consumption smoothing and on risk sharing has focused on the ability of the household as a unit to protect its consumption. Little is known about the ability of individual members of the household to keep consumption smooth over time or relative to other members of the household. We use data on adult nutrition in Ethiopia to investigate whether individuals are able to smooth their consumption over time and within the household. We find that poorer households are not able to do so. Furthermore, poor southern households do not engage in complete risk sharing; women in these households bear the brunt of adverse shocks. This result implies that the collective model of household organization, which imposes Pareto efficiency on allocations, is rejected for these households. Finally, we obtain estimates of the relative Pareto weights in household allocation. We find that a wifes relative position is better if customary laws on settlements at divorce are favorable or if she comes from a relatively wealthy background and that poor southern women have lower Pareto weights in allocation.

Consumption Risk, Technology Adoption and Poverty Traps: Evidence From Ethiopia

Much has been written on the determinants of input and technology adoption in agriculture, with issues such as input availability, knowledge and education, risk preferences, profitability, and credit constraints receiving much attention. This paper focuses on a factor that has been less well documented: the differential ability of households to take on risky production technologies for fear of the welfare consequences if shocks result in poor harvests. Building on an explicit model, this is explored in panel data for Ethiopia. Historical rainfall distributions are used to identify the counterfactual consumption risk. Controlling for unobserved household and time-varying village characteristics, it emerges that not just exante credit constraints, but also the possibly low consumption outcomes when harvests fail, discourage the application of fertiliser. The lack of insurance causes inefficiency in production choices.

Wealth, risk and activity choice: cattle in Western Tanzania

Imperfect credit markets force households to use their own savings for investment. Profitable activities often require lumpy investments making it harder for poorer households to enter such activities, resulting in increasing welfare differences. In mixed-farming systems in Tanzania, cattle are a profitable but lumpy investment and a liquid asset for consumption-smoothing. Richer households own substantial cattle herds, while poorer households specialize more in low return, low risk activities A dynamic programming model and numerical simulations are presented to analyze entry into asset accumulation under income risk. The empirical evidence suggests that households with lower endowments find it harder to start up cattle-rearing and returns to their endowments are lower than for cattle owners.

Risk, Crop Choice, and Savings: Evidence from Tanzania

Rural households engaged in agricultural activities face considerable risks in their income process. These income risks are especially important if they result in consumption fluctuations. This is likely if insurance and credit markets are absent. One possible strategy for household is to take up low-risk activities, even if they imply lower returns. Such response cannot be viewed independently from the other options available to households to reduce consumption fluctuations. This paper focuses on the importance of liquid asset formation for risk-taking behaviour by households. An intertemporal model of consumption under liquidity constraints is developed in which households can choose between income activities with different returns and riskiness. It shows that if liquid asset holdings are large, providing a buffer for consumption shortfalls, then households will be more willing to take up high risk activities. Evidence based on survey data from Shinyanga District, Tanzania is presented, consistent with this prediction.

Income portfolios in rural Ethiopia and Tanzania: Choices and constraints

The paper analyzes the different income portfolios of households using survey data from rural Ethiopia and rural Tanzania. It suggests that the different portfolios held by households cannot be explained by their behaviour towards risk as is usually suggested. It is better explained by differences in ability, location, and in access to credit. A logit analysis of households with different income portfolios, controlling for the effects of location, suggests that entry into high-return activities is determined by investment in particular skills or by access to capital.

Do African Manufacturing Firms Learn from Exporting

We use firm-level panel data for the manufacturing sector in four African countries to investigate whether exporting impacts on efficiency, and whether efficient firms self-select into the export market. Based on simultaneous estimation of a production function and an export regression, our preferred results indicate significant efficiency gains from exporting, which can be interpreted as learning by exporting. We show that modelling unobserved heterogeneity by a flexible approach is important for deriving this conclusion. A policy implication of our results is that Africa would gain from orientating its manufacturing sector towards exporting.

Migration and Economic Mobility in Tanzania: Evidence from a Tracking Survey

This study explores to what extent migration has contributed to improved living standards of individuals in Tanzania. Using a thirteen-year panel survey, we find that migration between 1991 and 2004 added 36 percentage points to consumption growth. Although moving out of agriculture resulted in much higher growth than staying in agriculture, growth was always greater in any sector if the individual physically moved. As to why more people do not move given the high returns to geographical mobility, analysis finds evidence consistent with models in which exit barriers set by home communities prevent the migration of some categories of people.

On Market Integration and Liberalisation: Method and Application to Ethiopia

The article suggests further improvements in the methodology to analyse market integration. It provides corrections to and methodological extensions of recent work in this journal. It also presents a way of applying market integration techniques to the analysis of shocks such as market liberalisation and war. The method is applied to the effects of liberalisation and the end of the civil war on food markets in Ethiopia. The conclusion is that liberalisation had important effects on the long‐run and short‐run integration of food markets.