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Consumption-Risk and Poverty in Ethiopia. Abebe Shimeles, Gothenburg University, Sweden. Objective of the paper. It addresses consumption-risk in the measurement of poverty and its determinants in Ethiopia. Household characteristics that increases or mitigate risk were identified.
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Consumption-Risk and Poverty in Ethiopia Abebe Shimeles, Gothenburg University, Sweden
Objective of the paper • It addresses consumption-risk in the measurement of poverty and its determinants in Ethiopia. • Household characteristics that increases or mitigate risk were identified.
Structure of Presentation • Introduction • Methodology • The Data • Empirical Results on the Risk-Adjusted Poverty • Summary and conclusions
Consumption-Risk and Poverty in Ethiopia 1. Introduction • What drives variability in the main welfare-indicator? • How should one take the welfare loss in to account in the analysis of poverty?
Consumption-Risk and Poverty in Ethiopia 2. Methodology used: 2.1 Adjusting poverty for consumption risk • If households are risk-averse, then, they trade-off low consumption growth, with low variability for high growth with high variability. • The extent of trade-off depends on the rate (degree) of risk-aversion.
Contd • One way to adjust for risk is to define a certainty equivalent consumption that households would prefer to avoid risk of variability. • In practice, we can use the Constant Absolute Risk Aversion utility structure or Taylor’s approximation of expected utility for certainty equivalent consumption.
Consumption-Risk and Poverty in Ethiopia 2. Methodology used: 2.2 Household characteristics and consumption Risk • A Mulitivariate analysis of the determinants of mean consumption expenditure and risk-adjusted consumption expenditure over T periods was used • We set up a simultaneous equation structure with the same exogenous variables using Seemingly Unrelated Regression method (SUR) and test for the equvalence of the coefficient of variables in the regression.
Consumption-Risk and Poverty in Ethiopia 3 The Data: • The study was based on a unique panel data set of four waves covering both rural and urban households in the periods 1994-2000 .
Consumption-Risk and Poverty in Ethiopia 4.Emperical Results on the Risk-Adjusted Poverty 4.1 Profile of Poverty adjusted for consumption-risk • How risk –averse Ethiopian Households are and how we measure risk-aversion across households are classified in three rates of risk aversion that have some empirical support in the literature were used. • One is a value of p= 1, which in a recent work in Zimbabwe is considered to be the degree of risk-aversion that may prevail for rural households. • P=2 and P=3 are also used based on a recent work that has shown to be a reasonable approximation for households in rural Ethiopia. • The effects of these rates of risk aversion on poverty are compared with a risk neutral situation, where consumption variability implies no welfare loss.
Consumption-Risk and Poverty in Ethiopia 4.Emperical Results on the Risk-Adjusted Poverty (contd.) 4.2Determinants of consumption Risk • Determinats of consumption risk has two sets of model. • Exogenous variables. • Quasi-endogenous variables.
Consumption-Risk and Poverty in Ethiopia 5. Summary The study looked at the effect of variability in consumption (Consumption-risk)on rural and urban poverty and identified factors that reduce or induce it. • The result indicate that the consumption risk played an important role in the measured level and profile of poverty.
Table 1: Risk-adjusted measure of chronic poverty in rural Ethiopia
Consumption-Risk and Poverty in Ethiopia 6. Conclusion The percentage in poverty increased dramatically when long-term consumption was adjusted for variability:- • The rural headcount ratio more than doubled from 26% without adjusting for risk to 53% with risk accounted for, • While the urban heacount increased respectively from 25% to 42%.
Household size, sex of the head of the household, age, farming systems and town-fixed effects, endowments, parental background, all played strong roles in increasing or decreasing consumption risk. • Access to markets reduced rural consumption-risk, whereas off-farm employment was associated with high-consumption risk.
Conclusion (continued) • The role of primary education was crucial in urban areas. Households with heads and/or wives who had completed primary education did better at reducing consumption-risk. Households where the head was unemployed or most of its members were unemployed suffered from low level of consumption and high variability.
