Heterogeneous Wealth Dynamics: on the roles of risk and ability'

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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

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• 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

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Poverty traps in S. Ethiopia
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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)

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Are poverty traps understood by Boran
pastoralists?

• We asked about expectations of herd size one year
  ahead, given rainfall conditions.

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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

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Are poverty traps understood by Boran
pastoralists?
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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

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The role of ability.
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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

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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

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Why care?

• Exploring the consequences of nonlinear dynamics

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Why care?

• The consequences are dramatically different
• from negative net gains to gains that double
• the initial transfer.

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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.

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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