Vulnerability to Shocks: Evidence from Ethiopia

Vulnerability to poverty – the risk of falling into poverty in the future – remains a challenge in developing countries for researchers and policymakers alike. While reducing populations’ vulnerability to shocks that could drive them into poverty is clearly an important step in improving well-being, measuring and quantifying vulnerability is complex and is often further complicated by a lack of accurate data. A recent paper published in World Development seeks to quantify and investigate the causes of vulnerability to poverty in Ethiopia, looking specifically at climate and price shocks. By understanding populations’ vulnerability to such shocks, policymakers may be better able to implement and target appropriate policies to reduce that vulnerability.

Ethiopia provides a good case study for a focus on vulnerability. The Ethiopian economy is still largely comprised of rainfed agriculture, and vulnerability to weather shocks remains quite high.  Although drought has been less prevalent over the past ten years than in previous decades, Ethiopia’s underlying climate risk remains unchanged and could worsen with climate change, according to the study’s authors. 

In addition, while Ethiopia’s poverty level has dropped over the last decade due to good harvests and positive economic growth, many Ethiopians who now live just above the poverty level are vulnerable to falling back into poverty if conditions change (namely, in the face of drought or food price inflation). The country has also suffered from inflated food prices in recent years, which the authors suggest can provide insights for other low-income countries with an increasing urban population similarly affected by high food prices and inflation.

The methodology used in the study combines several new ideas for estimating the impact of rainfall and price shocks on welfare. The study specifically uses cross-sectional data and combines those estimates with long-run data on rainfall and food prices to generate estimates of household vulnerability in both rural and urban areas. The authors used nationally representative data with climate and price data to estimate the impact of climate and price shocks on household consumption.

The paper quantifies the welfare impact of drought and price inflation at the national level. According to the authors, a one-year snapshot of poverty, such as that provided in national consumption surveys, is not reflective of the relative vulnerability of different groups in the population. Thus, taking covariate shocks into account results in a different understanding of welfare differences across groups than poverty measurements at just one point in time. This can help when designing poverty-targeted programs at the national level.

Another consideration to be taken into account when measuring welfare impacts is that drought and inflation do not always coincide. The study shows that poverty vulnerability in rural areas (42 percent) is much higher than overall poverty rates in those same areas (30 percent). In urban areas, vulnerability to poverty is 5 percent lower than actual poverty levels. The explanation for this, according to the authors, is that at the time the data were collected, rural areas were experiencing a good agricultural season with no drought, while urban areas were seeing high(er) food price inflation rates.

The findings show that shocks do have a significant impact on household consumption in Ethiopia, with decreased rainfall and elevated food prices being the most important factors. Uneducated urban households are most affected by food price inflation, while rural families not covered by the country’s Productive Safety Net Programme (PSNP) suffer the most from rainfall losses.

Although many rural households at the poverty level benefit from targeted programs such as the PSNP, those who are vulnerable to poverty when shocks hit are often not eligible for such programs since they normally live above the poverty level. This highlights the importance of looking at other risk management tools for rural populations, such as agricultural insurance (already being piloted in a number of sites in Ethiopia). The authors also call for additional research into urban safety nets in order to help urban households protect themselves against food price shocks.

The results of the study highlight the need for caution in using a snapshot of poverty to target government programs, as underlying rates of vulnerability can be different from the poverty rate captured at one point in time and for only a certain sector of the population. More frequent collection of poverty data and the use of vulnerability analysis can help address these concerns and could help lead to more robust national policies to address poverty and poverty vulnerability.

By: Jenn Campus

Photo credit:Ryan Kilpatrick