Consumption-Risk and Poverty in Ethiopia Abebe Shimeles, Gothenburg University, Sweden

Objective of the paper It addresses consumption-risk in the measurement of poverty and its determinants in Ethiopia. Household characteristics that increases or mitigate risk were identified.

Structure of Presentation Introduction Methodology The Data Empirical Results on the Risk- Adjusted Poverty Summary and conclusions

Consumption-Risk and Poverty in Ethiopia 1. Introduction What drives variability in the main welfare-indicator? How should one take the welfare loss in to account in the analysis of poverty?

Consumption-Risk and Poverty in Ethiopia 2. Methodology used: 2.1 Adjusting poverty for consumption risk If households are risk-averse, then, they trade-off low consumption growth, with low variability for high growth with high variability. The extent of trade-off depends on the rate (degree) of risk-aversion.

Contd One way to adjust for risk is to define a certainty equivalent consumption that households would prefer to avoid risk of variability. In practice, we can use the Constant Absolute Risk Aversion utility structure or Taylor’s approximation of expected utility for certainty equivalent consumption.

Consumption-Risk and Poverty in Ethiopia 2. Methodology used : 2.2 Household characteristics and consumption Risk A Mulitivariate analysis of the determinants of mean consumption expenditure and risk- adjusted consumption expenditure over T periods was used We set up a simultaneous equation structure with the same exogenous variables using Seemingly Unrelated Regression method (SUR) and test for the equvalence of the coefficient of variables in the regression.

Consumption-Risk and Poverty in Ethiopia 3 The Data : The study was based on a unique panel data set of four waves covering both rural and urban households in the periods

Consumption-Risk and Poverty in Ethiopia 4.Emperical Results on the Risk-Adjusted Poverty 4.1 Profile of Poverty adjusted for consumption- risk How risk –averse Ethiopian Households are and how we measure risk-aversion across households are classified in three rates of risk aversion that have some empirical support in the literature were used. 1)One is a value of p= 1, which in a recent work in Zimbabwe is considered to be the degree of risk- aversion that may prevail for rural households. 2)P=2 and P=3 are also used based on a recent work that has shown to be a reasonable approximation for households in rural Ethiopia. The effects of these rates of risk aversion on poverty are compared with a risk neutral situation, where consumption variability implies no welfare loss.

Consumption-Risk and Poverty in Ethiopia 4.Emperical Results on the Risk-Adjusted Poverty (contd.) 4.2Determinants of consumption Risk Determinats of consumption risk has two sets of model. 1)Exogenous variables. 2)Quasi-endogenous variables.

Consumption-Risk and Poverty in Ethiopia 5. Summary The study looked at the effect of variability in consumption (Consumption-risk)on rural and urban poverty and identified factors that reduce or induce it. The result indicate that the consumption risk played an important role in the measured level and profile of poverty.

Table 1: Risk-adjusted measure of chronic poverty in rural Ethiopia

Table 2: Risk-adjusted poverty in urban areas

Consumption-Risk and Poverty in Ethiopia 6. Conclusion The percentage in poverty increased dramatically when long-term consumption was adjusted for variability:- The rural headcount ratio more than doubled from 26% without adjusting for risk to 53% with risk accounted for, While the urban heacount increased respectively from 25% to 42%.

Household size, sex of the head of the household, age, farming systems and town-fixed effects, endowments, parental background, all played strong roles in increasing or decreasing consumption risk. Access to markets reduced rural consumption-risk, whereas off-farm employment was associated with high- consumption risk.

Conclusion (continued) The role of primary education was crucial in urban areas. Households with heads and/or wives who had completed primary education did better at reducing consumption-risk. Households where the head was unemployed or most of its members were unemployed suffered from low level of consumption and high variability.

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