IDEAS home Printed from https://ideas.repec.org/p/ags/aaea16/235720.html
   My bibliography  Save this paper

Getting ahead or falling behind? – The importance of households’ ability to manage idiosyncratic risk in rural Ghana

Author

Listed:
  • Naschold, Felix

Abstract

A better understanding of why some households get ahead while others fall behind is crucial for achieving further worldwide poverty reduction in future. Who moves in and out of poverty over time has been the focus of a growing literature on household level poverty dynamics. A central theme in this literature has been the role of shocks and their impact on households’ risk management strategies. Risk and uncertainty diminish the current level of households’ economic well-being as well as their prospects for the future. This is particularly true when livelihood-generating activities are highly stochastic, as they are for many rural households in developing countries, and when mechanisms to insure against risk are either non-existent or insufficient. Moreover, the ability to manage risk is becoming more important as economic factors that are key to the poor, e.g., food prices, have become more volatile. Households face two distinct sources of risk: First, covariate risk such as drought, rainfall, pests or civil war affect the entire population. These types of risks have been the focus of much of the existing literature on welfare dynamics. Second, idiosyncratic or household-specific risk such as medical expenses or crop and livestock losses. Evidence suggests that such idiosyncratic risk often dominates covariate risk and that the latter requires different strategies to mitigate. This paper examines the importance of idiosyncratic risk for households in rural Ghana and the effectiveness of various ex ante and ex post risk management strategies in mitigating this risk, including support from social networks, self-insurance in the form of savings, accessing credit and diversifying livelihood activities. This paper uses an unusually rich set of panel data from rural Ghana covering the period between 1997 and 2009 and containing information on a large variety of formal and informal insurance mechanism, including on access to social networks, self-insurance, income diversification and asset sales. It quantifies the impact of different types of idiosyncratic shocks on households’ ability to get ahead, examines the individual and joint effect of households’ access to different types of insurance mechanisms and assesses the relative effectiveness of different risk management strategies on households’ ability to bounce back from negative shocks and to escape poverty. This paper makes three main contributions. First, it examines the impact of idiosyncratic risk on household level welfare dynamics, focusing on how idiosyncratic shocks affect welfare dynamics paths and whether those effects are mitigated differentially by different risk management strategies. Facing uninsured risk ex ante and coping with consequences of risk ex post households employ a range of strategies to minimize their exposure to risk and to smooth their consumption over time. These include mechanism such as self-insurance through savings (and precautionary savings), formal and informal insurance and credit, social networks, and labor market access and income diversification. Existing studies typically only have data for one of these insurance mechanisms. The second contribution of this paper is examine each of these risk management strategies individually as well as jointly. The unique panel data makes it possible to both assess the relative importance of these mechanisms as well as identify complementarities between them. This extension beyond a single risk management mechanism allows a more appropriate modeling of the behavior of households that face risk as when one or more risk management mechanisms are unavailable households resort to other mechanisms. A corollary question addressed is whether there are critical thresholds that establish some minimum effective scale of such risk management strategies. Existing studies impose strong assumptions on the low-order polynomial relationship between risk management strategies and welfare dynamics. This paper’s approach allows for such potentially highly non-linear threshold effects by using innovative semi-parametric panel data estimators. The paper also explores the interaction, substitution and complementarities between different risk management strategies. Third, this paper contributes to the emerging literature on household level welfare dynamics in Subsaharan Africa by providing a case study from rural Ghana. The results suggest varying degrees of effectiveness for the different mechanisms households use to reduce and mitigate risk. Having own savings and being able to draw on larger social networks offers a statistically significantly better chance of overcoming the consequences of negative shocks. Credit access also seems to help though the evidence is less strong. A greater diversity of income sources is associated with greater gains in expenditure but income diversification does not seem to help in overcoming shocks. This could be a reflection of many households diversifying into low-return activities that are positively correlated. Overall the results suggest some effectiveness of these formal and informal insurance mechanisms. However, even in their combination they are not sufficient in helping households overcome negative shocks and to ensure sustained improvement in well-being over time. Thus, while idiosyncratic risks can be partly ensured at the local level, there is a need for policy to supplement these mechanisms through social policy.

Suggested Citation

  • Naschold, Felix, 2016. "Getting ahead or falling behind? – The importance of households’ ability to manage idiosyncratic risk in rural Ghana," 2016 Annual Meeting, July 31-August 2, Boston, Massachusetts 235720, Agricultural and Applied Economics Association.
  • Handle: RePEc:ags:aaea16:235720
    DOI: 10.22004/ag.econ.235720
    as

    Download full text from publisher

    File URL: https://ageconsearch.umn.edu/record/235720/files/Getting%20ahead%20or%20falling%20behind%20May%202016%20AAEA.pdf
    Download Restriction: no

    File URL: https://libkey.io/10.22004/ag.econ.235720?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    References listed on IDEAS

    as
    1. Harold Alderman & John Hoddinott & Bill Kinsey, 2006. "Long term consequences of early childhood malnutrition," Oxford Economic Papers, Oxford University Press, vol. 58(3), pages 450-474, July.
    2. Youngjae Lim & Robert Townsend, 1998. "General Equilibrium Models of Financial Systems: Theory and Measurement in Village Economies," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 1(1), pages 59-118, January.
    3. Kimball, Miles S, 1990. "Precautionary Saving in the Small and in the Large," Econometrica, Econometric Society, vol. 58(1), pages 53-73, January.
    4. Rosenzweig, Mark R, 1988. "Risk, Implicit Contracts and the Family in Rural Areas of Low-income Countries," Economic Journal, Royal Economic Society, vol. 98(393), pages 1148-1170, December.
    5. Townsend, Robert M, 1994. "Risk and Insurance in Village India," Econometrica, Econometric Society, vol. 62(3), pages 539-591, May.
    6. Rosenzweig, Mark R & Wolpin, Kenneth I, 1993. "Credit Market Constraints, Consumption Smoothing, and the Accumulation of Durable Production Assets in Low-Income Countries: Investment in Bullocks in India," Journal of Political Economy, University of Chicago Press, vol. 101(2), pages 223-244, April.
    7. Felix Naschold & Christopher B. Barrett, 2011. "Do Short‐Term Observed Income Changes Overstate Structural Economic Mobility?," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 73(5), pages 705-717, October.
    8. Dercon, Stefan, 2004. "Growth and shocks: evidence from rural Ethiopia," Journal of Development Economics, Elsevier, vol. 74(2), pages 309-329, August.
    9. David Newhouse, 2005. "The Persistence of Income Shocks: Evidence from Rural Indonesia," Review of Development Economics, Wiley Blackwell, vol. 9(3), pages 415-433, August.
    10. Timothy G. Conley & Christopher R. Udry, 2010. "Learning about a New Technology: Pineapple in Ghana," American Economic Review, American Economic Association, vol. 100(1), pages 35-69, March.
    11. Behrman, Jere R. & Foster, Andrew D. & Rosenzweig, Mark R., 1997. "The dynamics of agricultural production and the calorie-income relationship: Evidence from Pakistan," Journal of Econometrics, Elsevier, vol. 77(1), pages 187-207, March.
    12. Kazianga, Harounan & Udry, Christopher, 2006. "Consumption smoothing? Livestock, insurance and drought in rural Burkina Faso," Journal of Development Economics, Elsevier, vol. 79(2), pages 413-446, April.
    13. Hoddinott, John & Kinsey, Bill, 2001. "Child Growth in the Time of Drought," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 63(4), pages 409-436, September.
    14. Travis J. Lybbert & Christopher B. Barrett & Solomon Desta & D. Layne Coppock, 2004. "Stochastic wealth dynamics and risk management among a poor population," Economic Journal, Royal Economic Society, vol. 114(498), pages 750-777, October.
    15. Dercon, Stefan, 1998. "Wealth, risk and activity choice: cattle in Western Tanzania," Journal of Development Economics, Elsevier, vol. 55(1), pages 1-42, February.
    16. Christopher D. Carroll & Andrew A. Samwick, 1998. "How Important Is Precautionary Saving?," The Review of Economics and Statistics, MIT Press, vol. 80(3), pages 410-419, August.
    17. Jacqueline Vanderpuye-Orgle & Christopher Barrett, 2009. "Risk Management and Social Visibility in Ghana," African Development Review, African Development Bank, vol. 21(1), pages 5-35.
    18. John Hoddinott, 2006. "Shocks and their consequences across and within households in Rural Zimbabwe," Journal of Development Studies, Taylor & Francis Journals, vol. 42(2), pages 301-321.
    19. John Hoddinott & Bill Kinsey, 2001. "Child Growth in the Time of Drought," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 63(4), pages 409-436, September.
    20. John McPeak, 2004. "Contrasting income shocks with asset shocks: livestock sales in northern Kenya," Oxford Economic Papers, Oxford University Press, vol. 56(2), pages 263-284, April.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Naschold, Felix & Walker, Thomas F. & Barrett, Christopher B. & Osei, Robert, 2011. "Idiosyncratic shocks, risk management and welfare dynamics in rural Ghana," 2011 Annual Meeting, July 24-26, 2011, Pittsburgh, Pennsylvania 109646, Agricultural and Applied Economics Association.
    2. Barnett, Barry J. & Barrett, Christopher B. & Skees, Jerry R., 2008. "Poverty Traps and Index-Based Risk Transfer Products," World Development, Elsevier, vol. 36(10), pages 1766-1785, October.
    3. Santos, Paulo & Barrett, Christopher B., 2011. "Persistent poverty and informal credit," Journal of Development Economics, Elsevier, vol. 96(2), pages 337-347, November.
    4. Carter, Michael R. & Lybbert, Travis J., 2012. "Consumption versus asset smoothing: testing the implications of poverty trap theory in Burkina Faso," Journal of Development Economics, Elsevier, vol. 99(2), pages 255-264.
    5. Berloffa, Gabriella & Modena, Francesca, 2013. "Income shocks, coping strategies, and consumption smoothing: An application to Indonesian data," Journal of Asian Economics, Elsevier, vol. 24(C), pages 158-171.
    6. Santos, Paulo & Barrett, Christopher B., 2006. "Informal Insurance in the Presence of Poverty Traps: Evidence from Southern Ethiopia," 2006 Annual Meeting, August 12-18, 2006, Queensland, Australia 25487, International Association of Agricultural Economists.
    7. Letta, Marco & Montalbano, Pierluigi & Tol, Richard S.J., 2018. "Temperature shocks, short-term growth and poverty thresholds: Evidence from rural Tanzania," World Development, Elsevier, vol. 112(C), pages 13-32.
    8. Echevin, Damien, 2011. "Vulnerability to asset-poverty in Sub-Saharan Africa," MPRA Paper 35660, University Library of Munich, Germany.
    9. Lybbert, Travis J. & McPeak, John, 2012. "Risk and intertemporal substitution: Livestock portfolios and off-take among Kenyan pastoralists," Journal of Development Economics, Elsevier, vol. 97(2), pages 415-426.
    10. Tesfaye, Wondimagegn & Tirivayi, Nyasha, 2020. "Crop diversity, household welfare and consumption smoothing under risk: Evidence from rural Uganda," World Development, Elsevier, vol. 125(C).
    11. Renata Baborska & Emilio Hernandez & Emiliano Magrini & Cristian Morales-Opazo, 2020. "The impact of financial inclusion on rural food security experience: A perspective from low-and middle-income countries," Review of Development Finance Journal, Chartered Institute of Development Finance, vol. 10(2), pages 1-18.
    12. Quentin Stoeffler & Michael Carter & Catherine Guirkinger & Wouter Gelade, 2022. "The Spillover Impact of Index Insurance on Agricultural Investment by Cotton Farmers in Burkina Faso," The World Bank Economic Review, World Bank Group, vol. 36(1), pages 114-140.
    13. Morduch, Jonathan, 1999. "Between the State and the Market: Can Informal Insurance Patch the Safety Net?," The World Bank Research Observer, World Bank Group, vol. 14(2), pages 187-207, August.
    14. Belhaj, Mohamed & Deroïan, Frédéric, 2012. "Risk taking under heterogenous revenue sharing," Journal of Development Economics, Elsevier, vol. 98(2), pages 192-202.
    15. Rie Muraoka & Tomoya Matsumoto & Songqing Jin & Keijiro Otsuka, 2016. "On the Possibility of a Maize Green Revolution in the Highlands of Kenya: An Assessment of Emerging Intensive Farming Systems," Natural Resource Management and Policy, in: Keijiro Otsuka & Donald F. Larson (ed.), In Pursuit of an African Green Revolution, edition 1, chapter 0, pages 145-164, Springer.
    16. Jeffrey A. Flory, 2011. "Micro-Savings & Informal Insurance in Villages: How Financial Deepening Affects Safety Nets of the Poor, A Natural Field Experiment," Working Papers 2011-008, Becker Friedman Institute for Research In Economics.
    17. Yamauchi, Futoshi & Higuchi, Katsuhiko & Suhaeti, Rita Nur, 2009. "Impacts of prenatal and environmental factors on child growth: Evidence from Indonesia," IFPRI discussion papers 933, International Food Policy Research Institute (IFPRI).
    18. Haider, Hamza, "undated". "Asset Management & Coping Strategies in Burkina Faso," 2017 Annual Meeting, July 30-August 1, Chicago, Illinois 259956, Agricultural and Applied Economics Association.
    19. Futoshi Yamauchi, 2012. "Prenatal Seasonality, Child Growth, and Schooling Investments: Evidence from Rural Indonesia," Journal of Development Studies, Taylor & Francis Journals, vol. 48(9), pages 1323-1341, September.
    20. Verpoorten, Marijke, 2009. "Household coping in war- and peacetime: Cattle sales in Rwanda, 1991-2001," Journal of Development Economics, Elsevier, vol. 88(1), pages 67-86, January.

    More about this item

    Keywords

    International Development; Risk and Uncertainty;

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:ags:aaea16:235720. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: AgEcon Search (email available below). General contact details of provider: https://edirc.repec.org/data/aaeaaea.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.