Essays on Poverty, Risk and Consumption Dynamics in Ethiopia

Abstract: Paper 1. This paper analysed the state of poverty and income distribution in rural and urban Ethiopia during 1994-2000. Poverty declined from 1994 to 1997, and then increased to 2000. This finding is consistent with major events that took place in the country: peace and stability, reform and economic recovery during 1994-1997, then, drought, war with Eritrea and political instability during 1997-2000. To examine the robustness of these results, we used stochastic dominance criteria and model based decompositions of poverty and inequality. Poverty trends were unchanged regardless of where one sets the poverty line. Decomposition of inequality revealed that in rural areas 65% of overall inequality was due to location differences, access to market, size of land, dependency ratio in the household, and age of the household. In urban areas, 49% of inequality was attributed to differences in education, occupational categories, and household durables. The results therefore imply that inequality is caused mainly by structural factors with the possibility that it may persist over time before significant decline can be observed. Paper 2. Based on a rural and urban data set from Ethiopia, exiting from or re-entering poverty was found to depend on the time spent in or out of poverty. In comparison to urban areas, it was easier to exit or re-enter rural poverty. However, exiting poverty was more difficult the longer households were in that state, even more in urban than rural areas. In addition, the average time spent in poverty following a poverty spell is quite long for a typical household. Time-varying and other household characteristics were examined in the context of exiting and re-entering into poverty. Features of chronic poverty and vulnerability were also analysed and the policy implications discussed. Paper 3. This paper looked at the effect of variability in consumption (or consumption-risk) on rural and urban poverty and identified factors that reduce or induce it. The results indicate that consumption risk played an important role in the measured level and profile of poverty. Overall, the percentage in poverty increased dramatically when long-term consumption was adjusted for variability. Household size, sex of the head of the household, age, farming systems and town-fixed effects, endowments, parental background, all played significant roles in increasing or decreasing consumption risk. Paper 4. This paper looked at the dynamics of consumption within an inter-temporal utility-maximization framework. Its main objective was to investigate whether or not consumption had exemplified a martingale-process, that is, whether or not the life-cycle/permanent-income hypothesis would be confirmed. In that case, current consumption expenditure would not have been influenced by information available to the consumer with regard to income-earnings or wealth. Thus, transitory changes in income would not affect consumption. Results showed that current consumption responded to one-period lagged values of income and wealth, including consumption itself. This implies that consumption smoothing was constrained by transitory income and consumption shocks that could persist over time. A non-linear model of consumption dynamics was estimated and the solution for steady state consumption indicated no poverty traps.