An Asset-Based Approach to Poverty Dynamics and Safety Nets: Research and Policy Questions

1. An Asset-Based Approach to Poverty Dynamics and Safety Nets: Research and Policy Questions November 7, 2005 Inter-American Development Bank Washington, DC

2. Overview • An Asset-based Perspective on Poverty • Poverty Traps and the Dynamic Asset Poverty Threshold • Empirical Evidence on Poverty Traps—What We Know So Far • Bifurcated Asset Dynamics (South Africa) • Long-term Effects of Short-term Shocks (Honduras) • Asset Smoothing and Its Human Costs (Zimbabwe) • Exclusion from Informal Safety Nets (East Africa) • Cash Transfer Programs & Poverty Traps—What We Don’t Yet Know • Future Directions for Cash Transfer Programs

3. Evolving Views of Poverty Successive generations of poverty analysis 1st: static income/expenditure analysis (headcount, poverty gap, FGT measures) 2nd: dynamic income/expenditure analysis (chronic/transitory poverty distinction) 3rd: static asset poverty analysis (structural/stochastic poverty distinction) 4th : dynamic asset poverty analysis (behaviorally-based poverty lines)

4. Asset-Based View of Poverty Transitions from poverty: 1) Stochastic churning (B to u(A’’)) 2) Structural via accumulation (A’ to A”) 3) Structural via higher returns (u(A’) to C)

5. Poverty Traps and the Dynamic Asset Poverty Threshold • Will structurally poor move ahead over time? Depends on underlying dynamics of asset accumulation. • Lessons from empirical macroeconomics – is growth characterized by unconditional convergence, convergence clubs, or threshold-based multiple equilibria? • Key question: do returns to productive assets (land, labor, etc.) increase locally in wealth? • What causes such dynamics and locally increasing returns? • Increasing returns to scale in income generating process • Minimum investment levels/indivisibilities • Uninsured risk

6. Exclusion from opportunities is key Social exclusion: ethnic/gender barriers Financial exclusion: credit/insurance access Two can be reinforcing (Mogues and Carter 2005)

7. A 4th Generation View Utility L2 U*H Dynamic Asset Poverty Line Income Poverty Line L1 U*L Static Asset Poverty Line Initial Assets A*1 A* AS A A*2 Poverty Trap Dynamic Asset Poverty Line (Micawber Threshold) At=A0 (dynamic equilibrium) Next Period’s Assets

8. Empirical Evidence on Poverty Traps—What We Know So Far • Theory thus suggests circumstances in which poverty traps might exist • But what do we know about their actual existence and importance • Brief review now of various empirical studies that test for different implications of poverty traps

9. Bifurcated Asset Dynamics(South Africa) • South African data, 1993-1998 (KIDS study) • Define and estimate asset index for each household i in each period t, Lt(Ait), such that asset weights (‘prices’) depend on asset mix • Index scaled such that it is measured in “poverty line units” (PLUs)—i.e., the index tells us what fraction of the poverty line a household’s bundle of assets would be expected to generate • Non-parametric estimation of asset dynamics • Key findings: • Divergent dynamics • Repelling ‘Micawber Threshold’ at ~2 PLUs • Poverty trap equilibrium at 0.9 PLUs • Corroboration by later qualitative and quantitative data

10. Bifurcated Asset Dynamics Source: Adato, Carter and May (2006). “Exploring Poverty Traps and Persistent Poverty In South Africa Using Qualitative and Quantitative Data” JDS

11. Estimated South African Asset Dynamics

12. Long-term Effects of Short-term Shocks (Post-Mitch Honduras) Source: Carter et al. (2005). “The Long-term Impacts of Short-Term Shocks: Poverty Traps and Environmental Disasters in Ethiopia and Honduras”

13. Asset Smoothing & Its Human Costs(Zimbabwe)

14. Asset Smoothing & Its Human Costs(Zimbabwe) • Those owning >2 oxen liquidated animals at 3.5-6x rate of those owning 1-2 in response to 1994-95 drought • Drought persistently lowers growth rates of children 12-24 months, temporarily lowers BMI of women, but no effect on men or older pre-schoolers. • The nutritional impact is larger and more persistent in households with lower levels of livestock holdings. Asset portfolio choice – protect human or livestock capital • Temporary shocks, even mild ones, can have long-term consequences Source: Hoddinott (2006). “Shocks and Their Consequences within and between Households,” JDS

15. Exclusion from Informal Insurance There might be holes in informal safety nets: • Santos and Barrett (2005) on Ethiopian pastoralists’ social invisibility within the poverty trap: • Logit estimates suggest that transfers flow in response to shocks, but only to those who have not collapsed into the poverty trap. • Those in the trap are significantly less frequently known – smaller networks. Estimated 39% have no effective social insurance network. • Implication: transfers to persistently poor have negligible crowding out effects. • Lybbert et al. (2004), Lentz and Barrett (2005) and McPeak (2006): meager interhousehold transfers among east African pastoralists, no “crowding out” effects

16. Cash Transfer Programs & Poverty Traps—What We Don’t Yet Know • While the empirical is still thin and imperfect, hopefully it is sufficient to encourage a deeper look at poverty traps and what they might mean for programs like Progressa • To introduce these ideas and implications, I would like to criticize my own study of a South African (unconditional) cash transfer scheme, the Child Support Grant (CSG)

17. Cash Transfers & Poverty Traps Source: Agüero, Carter and Woolard (2005). “From Flows to Stocks: The Impact of Unconditional Cash Transfers on Human Capital”

18. Cash Transfers & Poverty Traps • So what is long-term value of this human capital asset? • Assume that: • Maintain z-score gain  2.1 cm gain in adult height • Adopt Thomas-Strauss wage-height elasticity estimate of 2.4-3.3 • Implies adult monthly wage gain of R190-R262 • Wage gain accrues from 25-65 years old with 50\% unemployment • Results • Present value at birth of expected wage gain: R6500-7500 • Program cost: R3400 (plus administration costs) • Benefit-Cost: 1.6-2.3 • But two critical questions to ask of this simple analysis: • Sufficient to surmount threshold? • Sustainability of human capital gains given probability of shocks?

19. Future Directions for Cash Transfer Programs • Progressa/Opportunidades compelling because targets well-being of current generation & inter-generational transmission of poverty • Yet we would seem to know relatively little about whether the flows and stocks of Progressa create basis for sustained accumulation for some or all beneficiaries • Researchable question, but also one worthy of further experimentation: • Levels of support • Basic asset grant • Remedy exclusion (leverage transfer flows) • Protection against shocks (perhaps only common shocks for incentive compatibility purposes)

20. Implications for Policy & Policy Experiments • In summary, shocks in the presence of poverty traps imply: • Long run micro (macro?) growth effects • Costly chronic poverty • Costly avoidance of persistent poverty (asset smoothing) • Social protection policy built around this behavioral poverty line would appear to be: • Cost-effective • Imply unpleasant triage? • Would also seem to imply that ex ante insurance/ credible safety nets have behavioral/growth implications

21. References • Theory and Concepts • Carter and Barrett (2006). “The Economics of Poverty Traps and Persistent Poverty: An Asset-based Approach,” JDS • Bifurcated Asset Dynamics • Adato, Carter and May (2006). “Exploring Poverty Traps and Persistent Poverty In South Africa Using Qualitative and Quantitative Data” JDS • Lybbert, Barrett, Desta and Coppock (2004), “Stochastic Wealth Dynamics and Risk Management Among A Poor Population,” EJ • Barrett, Marenya, McPeak, Minten, Murithi, Oluoch-Kosura, Place, Randrianarisoa, Rasambainarivo and Wangila (2006), “Welfare Dynamics in Rural Kenya and Madagascar,” JDS • Long-term Effects of Shocks • Carter, Little, Mogues and Negatu (2006). “The Long-term Impacts of Short-Term Shocks: Poverty Traps and Environmental Disasters in Ethiopia and Honduras,” WD • Lybbert et al. (2004), EJ • Asset smoothing/Consumption destabilization • Hoddinott (2006) “Shocks and Their Consequences within and between Households,” JDS. • Zimmerman and Carter (2003), “Asset smoothing, consumption smoothing and the reproduction of inequality under risk and subsistence constraints “ JDE • Barrett et al. (2006), JDS • Exclusion from Informal Insurance • Santos and Barrett (2005), “Poverty traps and informal insurance: Evidence from southern Ethiopia” Cornell working paper. • Lentz and Barrett (2005), “Food Aid Targeting, Shocks and Private Transfers Among East African Pastoralists,” Cornell working paper. • Lybbert et al. (2004) EJ • McPeak (2006), "Confronting the Risk of Asset Loss:  What role do livestock transfers in northern Kenya play?" JDE

22. Thank you!