Poverty Targeting with Heterogeneous Endowments Ruerd Ruben & Marijke Kuiper

Key Issues Focus on within village income inequality Policy simulation Poverty Targeting with Heterogeneous Endowments Key Issues Focus on within village income inequality Policy simulation Potential impact of different policy instruments on poverty, income distribution and soil erosion Micro-simulation Policy responses of 200 farm households Aggregate village-level effects Asset poverty Poverty traps due to limited endowments Search for policy complementarities (to overcome asset thresholds) Motivation of work and focus of study

Why looking at heterogeneous endowments? Poverty Targeting with Heterogeneous Endowments Why looking at heterogeneous endowments? 40 % of chronic poor live in LFAs Large within village differences in income and endowments Define poverty in terms of assets, not only income Most poverty in LFAs is asset poverty Assets affect household activity choices Poor households are trapped in low-return activities Biased policies if assets reinforce income inequality Income inequality may affect future growth Poverty reduction may be at expense of fragile natural resources Motivation of work and focus of study

Poverty Targeting with Heterogeneous Endowments Objectives & focus Explore the role of heterogeneous household endowments for: Policies aimed at poverty reduction Within-village income inequality Soil erosion 3 Types of Policies: Technology (fertilizer, non-fertilizer, all technologies) Price band reduction (agricultural inputs, consumption goods, all goods Off-farm employment (migration, cash for work) Single and Combined Policies complementarities Three different criteria for comparing policies Three sets of policies commonly put forward

Model outline Standard farm household model: Poverty Targeting with Heterogeneous Endowments Model outline Standard farm household model: Maximize utility subject to constraints on production, commodity balance and cash constraint Model is solved for each of 200 households in a less favoured Ethiopian village: Households can rent land and oxen but prices are fixed (no village market clearance in the model) Data from census (endowments), technical coefficient generator (production) and literature (consumption) Stylized application No data on asset development Micro-simulation to get cross section view at importance of assets

Income by quintile & assets (base run) Poverty Targeting with Heterogeneous Endowments Income by quintile & assets (base run) X Poverty is key: RDA suggested 74% poor = 2 $ a day poverty line Link assets – income = Only clear relation for oxen and livestock; no relation land/labor (land reforms?) Oxen 0.0 0.0 0.3 0.9 1.1 Livestock 0.2 0.9 1.8 2.6 2.8 Land/labor 0.1 0.2 0.2 0.1 0.2

Single policies – improved technologies Poverty Targeting with Heterogeneous Endowments Single policies – improved technologies Single policies: we start by doing one policy at a time Key point: no major improvements Only effect on poverty because of flat area around poverty line = be careful with poverty indicators!

Single policies – price band reductions Poverty Targeting with Heterogeneous Endowments Single policies – price band reductions Fertilizer – little effect and only for richer households Consumption goods: stronger effect and especially so for richer households  Market access is especially helpful if you are buying and selling

Single policies – migration Poverty Targeting with Heterogeneous Endowments Single policies – migration Seems like an Earth quake; look at separate effects Migration: helps a lot IF you have access CFW helps more for poor households  Appear interaction effects for some households, not just transfer of income; may take closer look at changes

Single policies – cash for work Poverty Targeting with Heterogeneous Endowments Single policies – cash for work Seems like an Earth quake; look at separate effects Migration: helps a lot IF you have access CFW helps more for poor households  Appear interaction effects for some households, not just transfer of income; may take closer look at changes

Reductions in poverty and income inequality Poverty Targeting with Heterogeneous Endowments Reductions in poverty and income inequality Poverty Severity of Distribution Erosion headcount poverty Gini ratio (% points) (% points) (points) (% change) Technology 6 2 -0.01 -14 ~+3 Price-band 8 4 +0.01 -17 Migration 10 4 -0.01 -28 CFW 4 6 -0.04 -18

Effects of single policies Poverty Targeting with Heterogeneous Endowments Effects of single policies Poverty: Improved technologies have limited impact Migration reduces number of poor most Cash for work (CFW) reaches poorest of poor Income inequality: Increases by a reduction in price band consumption goods Decreases most with CFW Soil erosion: Increases with improved non-fertilizer technologies Decreases with all other policies Main conclusions regarding single policies= one policy at a time

Interaction effects of combined policies Poverty Targeting with Heterogeneous Endowments Interaction effects of combined policies Assets were important for initial income and effects of policies Maybe combining policies helps: - fertilizer policies only helps richer farmers with cash; technologies and cash for work can put fertilizer technologies within the reach of poor households Assess by computing interaction effects: or does the combination of two policies yield more than the sum of separate policies? This holds especially for the poor: - all positive - all large

Effects of combined policies Poverty Targeting with Heterogeneous Endowments Effects of combined policies Poverty & income inequality: Complementary policies target the poorest households by helping to overcome asset limitations Combining CFW with price band yields best effect Erosion: Combining policies in most cases leads to similar erosion as (sum of) separate policies Exception: a change in technology choice due to price changes (more erosion)

Poverty Targeting with Heterogeneous Endowments Conclusions Oxen play a central role in households’ income earning capacities Poverty/income inequality Technology improvements yield little Price band reductions increase income inequality Off farm income (migration / CFW) reduces poverty most Erosion: No trade-off between poverty and erosion  win-win Combining policies helps targeting the poorest households Key finding is that because of the importance of assets, combining policies such that asset limitations are overcome helps in targeting the poor households

Thanks for your attention! Poverty Targeting with Heterogeneous Endowments Thanks for your attention!