Dynamics of Household Assets and Income Shocks in the Long-run Process of Economic Development: The Case of Rural Pakistan

In this paper, we analyze the dynamics of assets held by low-income households facing various types of income shocks in pre- and post-independence Pakistan. Focusing on the province of Khyber Pakhtunkhwa (formerly known as the North-West Frontier Province, NWFP), we first investigate the long-run data at the district level beginning from 1902. The results show that the population of livestock, the major asset of rural households, experienced a persistent decline after crop shocks due to droughts, but did not respond much to the Great Depression. In the post-independence period, crop agriculture continued to be vulnerable to natural disasters, although less substantially, while the response of livestock to such shocks was indiscernible from district-level data. To examine microeconomic mechanisms underlying such asset dynamics, we analyze a panel dataset collected from approximately 300 households in three villages in the NWFP during the late 1990s. The results show that the dynamics of household landholding and livestock is associated with a single long-run equilibrium. When human capital is included, the dynamics curve changes its shape but is not sufficiently nonlinear to produce statistically significant multiple equilibriums. The size of livestock holding was reduced in all villages hit by macroeconomic stagnation, while land depletion was reported only in a village with inferior access to markets. The patterns of asset dynamics ascertained from historical and contemporary analyses are consistent with limited but improving access to consumption smoothing measures in the study region over the century.