Poverty targeting, resource degradation and heterogeneous endowments—a micro‐simulation analysis of a less‐favored Ethiopian village

Persistent and widespread poverty in less‐favored areas (LFAs) is attributed to fragile natural resources and poor markets. Limited assets may keep households outside the reach of poverty policies targeted at LFAs. We explored in a stylized manner the role of heterogeneous household assets for (1) policies aimed at poverty reduction; (2) within‐village income inequality; and (3) soil erosion. With a farm‐household micro‐simulation model we analyzed for each household in a remote Ethiopian village three sets of policies: technology improvement, infrastructure investment, and off‐farm employment through migration or cash for work (CFW) programs. Combating poverty with a single policy, migratory off‐farm employment reduces the poverty headcount most. Because of self‐selection, CFW programs performed best in terms of reaching the poorest of the poor. CFW also reduced within‐village income inequality most, while a price band reduction increased income inequality. Only technology improvements resulted in a trade‐off between poverty and soil erosion. Price band and off‐farm employment policies reduced erosion while outperforming technology improvements in terms of poverty reduction. We found that combining two policies was most helpful in assisting poorer households to overcome the limitations of their asset endowments. A CFW program combined with reduced price bands yielded most in terms of poverty reduction and income inequality. This policy complementarity is, however, less important for better‐endowed households. Reducing the reliance of households on agriculture offered a win‐win situation of reducing poverty and maintaining natural resources. Combining policies helped to overcome asset limitations, to target policies to the poorest households and to reduce income inequalities.