1. 1 Heterogeneous Wealth Dynamics: on the roles of risk and ability. Paulo Santos and Christopher Barrett Cornell University Conference on Pastoralism and Poverty Reduction in East Africa Nairobi, 27-28 June 2006

2. 2  Poverty traps are common in policy discussions – but do they exist?  If they do – why?  We build on recent evidence of nonlinear herd dynamics in Southern Ethiopia to answer these questions

3. 3 Poverty traps in S. Ethiopia

4. 4 Our conclusions  Poverty traps are understood by Boran pastoralists  Risk is the source of nonlinear herd dynamics  Ability plays a role: unique, low-level equilibrium for herders of low ability  Consequences for policy (restocking)

5. 5 Are poverty traps understood by Boran pastoralists?  We asked about expectations of herd size one year ahead, given rainfall conditions.

6. 6 Are poverty traps understood by Boran pastoralists?  Under good conditions, everyone expects to accumulate: structure of negative shocks determines nonlinearities in herd dynamics. “Insurance” is important in this context  What are the long run (10 years ahead) dynamics? Use Simulation

7. 7 Are poverty traps understood by Boran pastoralists?

8. 8 The role of ability.  Is everyone expected to follow these dynamics? Or does ability play a role?  Problem: ability is not directly observable Our solution: estimate efficiency in herd growth frontier Divide sample by ability categories Re-run simulation

9. 9 The role of ability.

10. 10 The role of ability.  Are these results confirmed by herd history data (data collected by Desta)? Yes!  Use same approach Divide sample using regression trees

11. 11 Why care?  Policy consequences – Ex: restocking  3 Scenarios (1) Give to the poor (below 5 cattle but not stockless) (2) Give to those near the threshold (3) Give to those near the threshold and of high ability

12. 12 Why care? Exploring the consequences of nonlinear dynamics:

13. 13 Why care? ScenarioNumber beneficiaries Average transfer Average herd size Net Gains (10 years ahead) (1)172.122.88-0.77 (2)132.6912.540.46 (3)94.0013.224.89 The consequences are dramatically different: from negative net gains to gains that double the initial transfer.

14. 14 Why care? Conclusion: 1) No policy can fit all – possibly, restocking cannot address situations of extreme poverty. 2) Insurance matters – changing the dynamics (water points, supplemental feeding,…) may help changing the underlying dynamics.

15. 15 Acknowledgements Research underlying this presentation was made possible through the generous support of: - PARIMA/GL-CRSP - Social Science Research Council - The Pew Charitable Trust - Cornell University - ILRI -Action for Development, Yabello