Vulnerability to Drought and Food Price Shocks : Evidence from Ethiopia

Abstract

Although the measurement and
 determinants of poverty have been widely studied,
 vulnerability, or the threat of future poverty, has been
 more difficult to investigate due to data paucity. This
 paper combines nationally representative household data with
 objective drought and price information to quantify the
 causes of vulnerability to poverty in Ethiopia. Previous
 estimates have relied on self-reported shocks and variation
 in outcomes within a survey, which is inadequate for shocks
 such as weather and prices that vary more across time than
 space. Historical distributions of climate and price shocks
 in each district were used to simulate the probable
 distribution of future consumption for individual
 households; these were then used to quantify vulnerability
 to poverty. The analysis shows that many Ethiopians are
 unable to protect their consumption against lack of rainfall
 and sudden increases in food prices. A moderate drought
 causes a 9 percent reduction in consumption for many rural
 households, and high inflation causes a 14 percent reduction
 in the consumption of uneducated households in urban areas.
 Vulnerability of rural households is considerably higher
 than that of urban households, despite realized poverty
 rates being fairly similar. This finding reflects that the
 household survey in 2011 was conducted during a year of good
 rainfall but rapid food price inflation. The results
 highlight the need for caution in using a snapshot of
 poverty to target programs, as underlying rates of
 vulnerability can be quite different from the poverty rate
 captured at one point in time. The results also suggest that
 significant welfare gains can be made from risk management
 in both rural and urban areas.