Consumption, Vulnerability and Shocks in rural Ethiopia, 1999- 2004

Improving our understanding of risk and vulnerability is an issue of increasing importance for Ethiopia as it is for much of Africa. A small, but growing, body of evidence, points to the role that risk, shocks and vulnerability in perpetuating poverty. Specifically, uninsured shocks – adverse events that are costly to individuals and households in terms of lost income, reduced consumption, or the sale of destruction of assets – are a cause of poverty, Further, the threat of such events may cause households and individuals to take actions that, while providing some additional protection against shocks, come at the cost of income gains. The paper examines who is vulnerable to different types of shocks in rural Ethiopia. Using the two most recent rounds of the Ethiopian Rural Household Survey, it will characterize the nature, frequency, and severity of climatic, economic, health and other shocks faced by rural Ethiopian households. It will assess the impact of these on levels and changes in measures of household well-being such as food consumption, total consumption, asset holdings and poverty status between 1999 and 2004. To do so, it will draw on conditional convergence models of growth, but applied here at a micro level. The modeling framework will take changes in these outcomes as a function of the lagged outcome and other covariates, a model of conditional convergence. In such models, endogeneity of these lagged outcomes is a real concern. Our data from earlier rounds of the ERHS as well as shocks information on the period prior to 1999 will provide us with instruments and we will test for the validity of these used standard techniques. Further, the paper will explore the differential effects of these initial conditions and shocks by sub-groups based on location, demographic, and wealth characteristics. Doing so will indicate whether the speed of convergence is effected by transitory shocks and will illustrate what types of households are most vulnerable to different types of shocks.