42 Risk and Vulnerability - uni-hohenheim.de · 2009. 4. 14. · improved management) II: E +, V +...

4.2 Risk and Vulnerability 1

M5124 Zeller Food Security and Nutrition module

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4.2 Risk and Vulnerability

Conceptually, risk management can be brokendown into three components:

The Risk Chain

The risk facing the decision-maker,the risk response by the decision-maker(ex-ante/ex-post),and the outcome of the risk management process.

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Risk RiskResponse

Ex ante Ex post

Preventionstrategies

Mitigationstrategies

Copingstrategies

Outcome

Fig. 4.2.1 The concept of the ‚Risk Chain‘, including risk management strategies.Source: Adapted from Siegel and Alwang (1999) and Webb and Hainarayan(1999).

The Risk Chain


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4.2.1 Risks in developing countries

alternative outcomes exist whose probabilities are known(Knight 1921; Roumasset 1976: 13)and affect the well-being of the decision-maker (Robisonand Barry 1987: 13).

The term risk refers to a situation where…

Regarding the notion of a probability, one can distinguish:Objective probability, i.e., a mathematical concept basedon the infinite limit of relative frequencies.Subjective probability, i.e., „the degree of belief or strengthof conviction an individual has about […] the occurrence of a state“ (Anderson et al. 1977: 18).

Definitions

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Concerning risk management, subjective probabilities arewhat matters, whereby they can be based on ‚objective‘ sources of information, e.g., historical records or expertopinion.If no probability can be assigned to an event (e.g., theoccurrence of war), we talk of uncertainty rather than risk.

Definitions (cont‘d)


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(Continued)

Sources of risk and uncertainty Idiosyncratic: Covariant:

Type of risk Risks affecting an

individual or household

(Micro-level)

Risks affecting groups of households

(Meso-level)

Risks affecting regions or nations

(Macro-level) Natural Landslide

Volcanic eruption Tornado

Drought Flood Earthquake High winds

Health Illness Injury Disability Old age Death

Epidemic

Social Crime Domestic

violence

Terrorism Gang activity

Civil strife War Social upheaval

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Sources of risk and uncertainty (cont‘d)

Source: Adapted from World Bank 2001: 136.

Idiosyncratic: Covariant: Type of risk Micro-level Meso-level Macro-level

Economic Unemployment Resettlement Crop failure Animal disease/death

Price fluctuations Growth collapse Hyperinflation Balance of

payments, financial, or currency crisis

Terms-of-trade shock

Transition costs of economic reforms

Political Riots Political default on social programs

Coup d’état

Environmental Pollution Deforestation

Nuclear desaster


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4.2.2 Assets and risk managementApart from the external economic, social, and politicalframe conditions, a household‘s risk management largelydepends on its asset base; the asset-risk interaction istwofold:1. Sources of risk affect households through their impact

on the value and productivity of their assets, e.g., a drought may lead to crop failure.

2. Households may reallocate their assets in response to risk, e.g., a household may devote a certain share of itscropping area to a drought tolerant crop (ex-ante mitigation strategy) or it may have to sell livestock in order to cope with the drought-induced income shock(ex-post coping strategy).

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Assets and risk management (cont‘d)This reallocation of assets in response to risk not onlyaffects short-term returns and their variability, but also thelonger-term welfare of households through its impact on savings and investments.

Assets can be devided into tangible and intangible assets(Chambers and Conway 1992:10):

Tangible assets refer to material resources.Intangible assets represent claims and access.

The crucial role of intangible assets in risk managementhas received increasing attention by researchers in recentyears (e.g., Moser and Holland 1997; Narayan and Pritchett 1997).


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Overview of types of assetsAsset type Household level Community level Extra-community level

Natural Quantity and quality of private land, pasture, forest fisheries, and water

Quantity and quality of communal land, pasture, forest fisheries, and water

National and global commons, rivers and watersheds, lakes, oceans, air

Human

Household composition and size

Health and nutritional status

Education and skills

Labor pool Labor markets

Physical

Productive assets (e.g. tools, equipment, work animals)

Household assets (e.g. housing, household goods and utensils)

Stocks (e.g. livestock, food, jewelry)

Productive assets (communal and private)

Stocks (e.g. livestock, food)

Productive assets (rental markets)

Stocks (e.g. buffer stocks)

Tang

ible

ass

ets

Financial Cash, savings Access to credit and insurance markets

Cash, savings Access to credit and insurance markets

Finance and insurance systems

Access to international finance

(Continued)

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Overview of types of assets (cont‘d)

Source: Adapted from Siegel and Alwang 1999: 11.

Asset type Household level Community level Extra-community level

Social Household social ties and networks

Intra-household dynamics

Community social ties and networks

Extra-community social ties and networks

Political & insti-tutional

Participation in household decision-making

Participation in community decision-making

Governance Security of person and property

Political stability Political participation Effectiveness of collective action

Governance Human rights and security of person and property

Inta

ngib

le a

sset

s

Location & infra-structure

Proximity and access to Water and sanitation Education Health service Marketplace Storage facilities Roads

Water and sanitation Schools Health centres Marketplace Storage facilities Roads Communication infrastructure

Distance to markets Transportation, communication, and information systems

Health and education infrastructure


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Asset attributesIn order to evaluate the usefulness of a given asset for riskmanagement, the following attributes need to be considered:

1. Security of access, use and transfer of the asset:Many households face insecurity of property rights(Roumasset 1976; Walker and Jodha 1986).

2. Rate of return and stability of returns: Rate of return:= remuneration to investment stated as a proportion orpercentage (Gittinger 1996: 496).

3. Interactions of assets in generating returns: Thevariance and covariance of the returns from variousassets determine the variance of returns of the assetportfolio, which is a widely used measure of risk(Markowitz 1959: 5).

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Asset attributes (cont‘d)4. Store of wealth and basis for claims on other assets and

returns: Since insurance and finance markets are ofteninadequate in developing countries, households tend to hold assets as precautionary savings that should not bevulnerable to ‚storage losses‘, e.g., pests but also inflation. Social and political assets are important because theyprovide claims on other assets (Zeller et al. 1997).

5. Liquidity, lumpiness, and mobility: Liquidity:= readinesswith which an asset can be converted into cash (Gittinger1996: 483). Lumpiness and mobility influence theusefulness of an asset as precautionary savings.

6. Ability of the asset to satisfy basic consumption needs: Valuation of a high degree of food self-sufficiency by poorhouseholds who are poorly integrated into markets.


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Asset attributes (cont‘d)7. Externalities associated with the holding of an asset:

Externalities exist if „an action of one economic agentaffects the utility […] of another in a way that is notreflected in the marketplace“ (Just et al. 1982: 269). Thereare negative externalities, e.g., environmental damagecaused by overgrazing or excessive use of pesticides, butalso positive externalities, e.g., investments in human capital leading to healthy and well-educated citizens tendto benefit the society as a whole (Devereux 1993).

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4.2.3 Risk management objectivesBefore exploring household risk management strategies, theobjectives of risk management need to be clarified; whilenumerous objectives and related decision rules are found in the literature (see, e.g., Roumasset 1976), we will focus on the two most widely accepted and relevant in a developingcountry context:1. Expected utility theorem: If a small number of axioms

holds (von Neumann and Morgenstern 1944, cited byRoumasset 1976: 20-22), a utility function exists for eachindividual that assigns utility values to the contingentoutcomes of alternative actions. The decision rule is to maximize expected utility, constrained by the levels of risk associated with the actions under consideration.


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Risk management objectives (cont‘d)Hereby, the notion of risk is based on „the decision-maker‘s personal strengths of belief about the occurrenceof uncertain events and his personal evaluation of potential consequences“ (Anderson et al. 1977: ix). Hence, utility maximization means that „individuals […] make decisions consistent with their personal objectivesand therefore maximize their personal ‚welfare‘ or‚happiness‘“ (Ellis 1993: 90).

2. ‚Safety-first‘ principle (Roy 1952): The decision rule is to minimize the probability of some objective function to fall below a specified disaster level. This principle of disasteravoidance is likely to be particularly applicable to poorhouseholds in developing countries.

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4.2.4 Mechanisms for managing riskIn general, two broad types of risk management activitiescan be distinguished (see Fig. 4.2.1):

Ex-ante activities: They serve to reduce the probability of the occurrence of a hazard (risk reduction) or to mitigate itspotential negative impact through precautionary measures(risk mitigation).Ex-post activities: They aim at coping with the adverseeffects of a hazard once the decision-maker is alreadyaffected (risk coping).


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Risk management instruments

(Continued)

Informal mechanisms Formal mechanisms Individual and

household Group based Market based Publicly provided

Ris

k re

duct

ion

Preventive health practices

More secure income sources

Migration

Collective action to establish and maintain infra-structure (dikes, terraces etc.)

Common property resource management

Sound macro-economic policy

Environmental policy

Education and training policy

Public health policy

Active labor market policy

Infrastructure (dams, roads)

Div

ersi

ficat

ion Crop and plot

diversification Income source diversification

Investment in physical and human capital

Occupational associations

Savings and credit associations

Savings accounts in financial institutions

Microfinance

Agricultural extension

Liberalized trade Protection of property rights Ex

-ant

e m

easu

res

Ris

k m

itiga

tion

Insu

ranc

e Marriage and extended family

Share tenancy Buffer stocks

Investment in social capital (i.e., networks, associations, rituals, reciprocal gift giving)

Old age annuities Accident, disability, and other insurance

Pension systems Mandated insurance for unemployment, illness, disability, and other risks

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Informal mechanisms Formal mechanisms Individual and

household Group based Market based Publicly provided

Ex-p

ost

mea

sure

s R

isk

copi

ng Reduced

consumption Sale of assets Informal loans from money-lenders etc.

Child labor Temporary migration

Transfers from networks of mutual support

Sale of financial assets

Formal loans from financial institutions

Social assistance Food-for-work programmes

Subsidies Social funds Cash transfers

Risk management instruments (cont‘d)

Source: Adapted from Holzmann and Jorgensen (2000: 17) and World Bank (2001: 141).


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Asset diversificationAsset diversification is frequently cited as the primarystrategy of risk reduction/mitigation applied by farmhouseholds in developing countries, encompassing bothtangible and intangible assets (Walker and Jodha 1986).According to finance theory, diversification entails a tradeoffbetween the expected value of returns of an asset portfolio(E) and risk reduction/mitigation (Markowitz 1959), i.e., higher returns are associated with higher variance of returns(V), as depicted in an E-V frontier (Fig. 4.2.2).However, diversification strategies may not only entailmovements along the E-V frontier (i.e., tradeoff situations), but also outward or inward shifts of the frontier, i.e., higherreturns and lower variance of returns (win-win situation) orlower returns and higher variance of returns (lose-lose situation), respectively.

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Asset diversification: The E-V Frontier

Fig. 4.2.2 The relationship between expected returns and risk reduction in an asset portfolio.Source: Adapted from Anderson et al. 1977: 191.

Risk reduction

Return

E-V frontier


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Asset diversification: Possible outcomes Lower instability of returns (V -) Higher instability of returns (V +)

Higher expected returns

(E +)

I: E +, V – (win-win) Associated with technology adoption (e.g. irrigation)

investments in human assets (e.g. improved management)

II: E +, V + (tradeoff) Associated with technology adoption (e.g. high yielding varieties)

higher input use specialization

Lower expected returns

(E -)

III: E -, V - (tradeoff) Associated with risk spreading activities (e.g. drought tolerant crops)

conservation of natural assets precautionary savings (e.g. holding of easily liquidated assets)

IV: E +, V – (lose-lose) Not by choice, but may result from changes in returns on assets and patterns of fluctuation (e.g. declining prices and changing covariance of prices)

multiple constraints Source: Adapted from Siegel and Alwang 1999: 25.

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Income diversificationThis strategy reduces the risk of an overall income failure bydiluting the impact of failure in any single income source; thelower the covariance between different income sources, thegreater the effectiveness in terms of risk reduction/mitigation.

Within agricultural self-employment, diversification encom-passes (summarized from Andreae 1977; Ruthenberg 1980; Walker and Jodha 1986):

Enterprise diversification, i.e., the expansion of the rangeand combination of different agricultural activities.Spatial diversification, i.e., the use of land of varying bio-climatic conditions.Temporal diversification, e.g., staggered planting.


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Varietal diversification, e.g., the planting of drought-tolerantvarieties.Input diversification, e.g., the use of different levels and/orkinds of inputs on different plots.Market diversification, e.g., the use of alternative sources forpurchasing inputs and selling produce.Vertical integration, i.e., own production of inputs and/orprocessing of outputs.

Income diversification (cont‘d)

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While income diversification may be effective at loweringrisk, it is often associated with lower returns; notably poorhouseholds tend to pursue low risk – low return strategiesthat may lead to a poverty trap (Rosenzweig and Binswanger 1993).

Diversification strategies outside the own farm comprise

engagement in small businesses, both agriculture-relatedand non-agricultural,and off-farm employment both inside and outside agriculture.

Income diversification (cont‘d)


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Investments in assets for self-insuranceIn developing countries, insurance and finance markets areoften malfunctioning; therefore, investments in both tangibleand intangible assets often serve as mechanisms for self-insurance (or co-insurance within a social network):1. Investments in natural assetsLand is the primary means of generating returns.Its usefulness for risk management depends on the securityof property rights and existence of a functioning land market.Land and other natural assets can be depleted or theirreturns-generating potential diminished, e.g., through soilerosion or overgrazing.However, they have the potential to be resilient if invest-ments in their protection, maintenance, and enhancementare undertaken.

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2. Investments in human assetsSame as natural assets, human assets benefit from invest-ments in their protection, maintenance, and enhancement, such as preventive health practices, adequate nutrition and leisure time, as well as education and training.Investments in human assets can change risk preferencesand subjective appraisals of risk.Investments in human assets can increase the flexibility of labor use and lead to higher returns from existing assets, e.g., through improved crop management skills.

Investments in assets for self-insurance (cont‘d)


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3. Investments in physical/financial assetsPhysical assets can be categorized into productive assets(e.g., agr. implements, crops and livestock), householdassets (housing and household utensils), and stocks (e.g., stored food); however, this division is not clear-cut, e.g., therole of cattle both as work animals and store of wealth.With respect to risk management, the holding of stocks, notably livestock and food, plays a crucial role (Rosenzweig and Binswanger 1993; Reardon and Vosti 1995).These assets have the advantage of being easily liquidatedand being able to satisfy basic household consumptionneeds at the same time.


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3. Investments in physical/financial assets (cont‘d)However, in cases of covariate risks (e.g. drought) massdistress sales tend to lead to low prices (asset priceendogeneity), thus limiting their value as an insurancemechanism (Zeller et al. 1997: 56).Food stocks are low-return assets susceptible to depreciation through storage losses caused by rodents, insects, or fungi. Poor people that lack collateral and access to formal financeand insurance invest in expanding and securing their accessto informal credit or insurance. Two main sources: (1) Moral community (extended self-help network, take and reciprocate help, especially important for food and healthcrisis). (2) Outside the moral community (high-cost accesswith landlords, moneylenders, crop buyers)



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4. Investments in intangible assetsSocial assets, i.e., a household‘s social ties and networks, can have a general welfare enhancing effect by facilitatingthe access to tangible assets (Grootaert 1999).Investments in social capital establish access to inter-household transfers through ‚social contracts‘, comprisinggifts, food and labor sharing, and informal insurance and credit (Moser and Holland 1997; Zeller et al. 1997). The larger and the more heterogeneous (i.e., containingboth farm and non-farm enterprises, spatial spread) the riskpool that a household can draw on, the more effective it is at mitigating the impact of risky events (Hazell 1992).


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4. Investments in intangible assets (cont‘d)However, the effective size of a household‘s risk pooldepends on the nature of the risk (idiosyncratic versuscovariate risks) and the transaction costs associated withdrawing on the pool (e.g., hurricane may wipe out all of one‘s informal risk pool).In general, this kind of informal insurance is more effective at mitigating idiosyncratic risks than covariate risks that maysimultaneously affect several or all members of the risk pool(e.g., drought).Political and institutional capital are closely related to socialcapital; investments in these forms of assets include politicalaction and participation in decision-making, whereby such investments are clearly not only driven by risk managementconsiderations.



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Access to informal / formal insuranceand financeInformal instruments of managing risk have actual and opportunity costs and are usually adopted due to a lack of (adequate) formal insurance and finance markets in developing countries. Access to credit and insurance can improve a household‘srisk management capacity by enabling investments and thepurchase of inputs (including food to enhance laborcapacity!) that increase returns while decreasing thevariability of returns (i.e., outward shift of the E-V frontier, win-win situation).

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Coping with shocksCoping measures are attempts to relieve income shocks dueto risky events after they have occurred (i.e., ex-post).Both ex-ante and ex-post mechanisms of risk managementaim at consumption smoothing during the time thehousehold is affected by a hazard (Morduch 1995).Income variability entails consumption variability only ifhouseholds do not apply ex-post mechanisms to insulateconsumption from the income fluctuations; these include:

- cashing in formal and/or informal insurance arrangements,- using formal and/or informal credit,- drawing down savings,- changing the mix of income generating activities (e.g.,

accepting low-wage labor),


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Coping with shocks (cont‘d)

Many coping measures entail high long-term costs for a short-term benefit, e.g., asset depletion and/or indebtednessmay lead into a poverty trap (World Bank 2001: 142).Coping strategies often place heavier burdens on womenand children (Siegel and Alwang 1999: 20), e.g. food intakediscrimination against children, elderly, women with lowerearnings potential in case of food shortages, see also theliterature on ‚missing women‘ in South Asia.Poor households may be left with no alternative but to engage in illegal/harmful practices, e.g., theft, prostitution(World Bank 2001: 145).

- depleting natural and human assets (e.g., overgrazing, depleting soil fertility, undernutrition, malnutrition).

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4.2.5 The outcome of risk managementRegarding the outcome of risk management, the termsvulnerability, susceptibility, and resilience are key concepts:

1. Vulnerability to poverty: This is a dynamic conceptembodying both a household‘s position relative to thepoverty line and its probability of falling below it(Morduch 1994). The poverty line can be caloric-based(i.e. food requirements only) or include all basic needs.

Non-poor households can therefore be vulnerable if theyface a substantial risk of falling into a state of destitution.The application of this concept based on survey data isvery demanding since it requires detailed consumption and expenditure data to assess a household‘s position relative to the poverty line.


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The outcome of risk management (cont‘d)Moreover, the construction of any poverty line involvessome arbitrariness with regard to the threshold income orconsumption required for a household to be considered‚non-poor‘ (Deaton 1997: 141).Furthermore, problems are likely to arise when home-produced foods are to be valued for which marketinformation is lacking, and irregular weights and measuresmake the fixing of quantities difficult (Henry et al. 2003: 170).

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The outcome of risk management (cont‘d)2. Susceptibility: This concept is not related to the poverty

line; it reflects the probability that a household will experience a welfare loss from a given event (Siegel and Alwang 1999: 5).A relatively wealthy farm household may thus be suscept-ible to drought, but it may not necessarily be vulnerablebecause it is unlikely to fall below the poverty line.

3. Resilience: This term is defined to be the ability of a household to withstand a welfare loss caused by a givenevent (Moser and Holland 1997: 17).


37Source: von Braun, J. et al. (2003). Improving food security of the poor: Concept, policy, and

programs. IFPRI, Washington, D.C. to be downloaded at www.ifpri.org

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References1. Recommended reading (available at http://www.uni-hohenheim.de/i490b , link: teaching)

2. Other references

Siegel P.B., Alwang J. (1999) 'An asset-based approach to social risk management: A conceptual framework.' Social Protection Discussion Paper No. 9926. The World Bank, Washington, D.C.Zeller M., Schrieder G., von Braun J., Heidhues F. (1997) 'Rural finance for food security for the poor: Implications for policy and research.' International Food Policy Research Institute (IFPRI), Washington, D.C.

Anderson J.R., Dillon J.L., Hardaker B. (1977) 'Agricultural decision analysis.' Iowa State University Press, Ames, Iowa, USA.Andreae B. (1977) 'Agrargeographie - Strukturzonen und Betriebsformen in der Weltlandwirtschaft.' Walter de Gruyter, Berlin, Germany.Binswanger H.P. (1986) Risk aversion, collateral requirements, and the markets for credit and insurance in rural areas. In: P. Hazell, C. Pomareda and A. Valdés (eds.) 'Crop insurance for agricultural development', pp. 67-86. Johns Hopkins University Press, Baltimore, USA. Chambers R., Conway G. (1992) 'Sustainable rural livelihoods: Practical concepts for the 21st century.' IDS Discussion Paper No. 296. Institute of Development Studies, University of Sussex, Brighton, UK.Deaton A. (1997) 'The analysis of household surveys: A microeconometric approach to development policy.' The Johns Hopkins University Press, Baltimore, USA.Devereux S. (1993) 'Goats before ploughs: Dilemma of household response sequencing during food shortages.' IDS Bulletin, Vol. 24, No. 4, pp. 52-59. Institute of Development Studies, University of Sussex, Brighton, UK.Ellis F. (1993) 'Peasant economics. Farm households and agrarian development.' 2nd Edition. Cambridge University Press, Cambridge, UK.


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Grootaert C. (1999) 'Social capital, household welfare and poverty in Indonesia.' The World Bank, Washington, D.C..Hazell P. (1992) The appropriate role of agricultural insurance in developing countries. Journal of International Development 4 (6), 567-581.Henry C., Sharma M., Lapenu C., Zeller M. (2003) 'Microfinance Poverty Assessment Tool.' Technical Tools Series No. 5, Consultative Group to Assist the Poor (CGAP), The World Bank, Washington, D.C.Holzmann R., Jorgensen S.L. (2000) 'Social Risk Management: A new conceptual framework for Social Protection and beyond.' Social Protection Discussion Paper No. 0006. The World Bank, Washington, D.C.Just R.E., Hueth D.L., Schmitz A. (1982) 'Applied welfare economics and public policy.' Prentice-Hall, Englewood Cliffs, NJ, USA.Keil A. (2004) ‘The socio-economic impact of ENSO-related drought on farm households in Central Sulawesi, Indonesia.’ Shaker Verlag, Aachen, Germany (ISBN 3-8322-3541-8).http://www.shaker.de/Online-GesamtkatalogKnight F.H. (1921) 'Risk, uncertainty and profit.' University of Chicago Press, Chicago, USA.Markowitz H.M. (1959) 'Portfolio selection: Efficient diversification of investments.' John Wiley & Sons, New York.Morduch J. (1994) Poverty and vulnerability. American Economic Review 84 (2), 221-225.Morduch J. (1995) Income smoothing and consumption smoothing. Journal of Economic Perspectives 9 (3), 103-114.Moser C., Holland J. (1997) 'Household responses to poverty and vulnerability. Volume 4: Confronting crisis in Cawama, Lusaka, Zambia.' Urban Management Programme, Report No. 24. The World Bank, Washington, D.C.Narayan D., Pritchett L. (1997) 'Cents and sociability: Household income and social capital in Tanzania.' World Bank Policy Research Working Paper No. 1796. The World Bank, Washington, D.C.

References (cont‘d)

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Reardon T., Vosti S.A. (1995) Links between rural poverty and the environment in developing countries: Asset categories and investment poverty. World Development 23 (9), 1495-1506.Robison L.J., Barry P.J. (1987) 'The competitive firm's response to risk.' Macmillan Publishing Company, New York.Rosenzweig M.R., Binswanger H.P. (1993) Wealth, weather risk and the composition and profitability of agricultural investments. The Economic Journal 103, 56-78.Roumasset J.A. (1976) 'Rice and risk: Decision making among low-income farmers.' North-Holland Publishing Company, Amsterdam, The Netherlands.Roy A.D. (1952) Safety first and the holding of assets. Econometrica 20 (3), 431-449.Ruthenberg H. (1980) 'Farming systems in the tropics.' Clarendon Press, Oxford, UK.von Neumann J., Morgenstern O. (1944) 'Theory of games and economic behavior.' Princeton University Press, Princeton, NJ, USA.Skoufias, E., and A. Quisumbing (2003). Consumption insurance and vulnerability to poverty: A synthesis of the evidence from Bangladesh, Ethiopia, Mali, Mexico and Russia. IFPRI, Food Consumption and NutritionDivision, Discussion Paper No. 155.Tobin J. (1958) Estimation of relationships for limited dependent variables. Econometrica 26, 24-36.Walker T.S., Jodha N.S. (1986) How small farm households adapt to risk. In: P. Hazell, C. Pomareda and A. Valdés (eds.) 'Crop insurance for agricultural development', pp. 17-34. Johns Hopkins University Press. Webb P., Harinarayan A. (1999) A measure of uncertainty: The nature of vulnerability and its relationship to malnutrition. Disasters 23 (4), 292-305.World Bank (2001) 'World Development Report 2000/01. Attacking Poverty.' Published for the World Bank, Oxford University Press, New York.Zeller M. (1994) Determinants of credit rationing: A study of informal lenders and formal credit groupsin Madagascar. World Development 22 (12), 1895-1907.Zeller, Manfred, and Manohar Sharma. 2000. Many borrow, more save, and all insure: Implications for food and microfinance policy. Food Policy, Vol. 25, pp. 143-167, February 2000.

References (cont‘d)


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4.2.6 Case Study: Measuring the droughtresilience of farm households in Central

Sulawesi, IndonesiaThis part of the lecture is based on Keil 2004.

Research objectives1. Explore the incidence of El Niño-related drought in a

rainforest margin area in Indonesia.2. Investigate drought response strategies of local farm

households.3. Measure household drought resilience.4. Identify influencing factors of drought resilience.

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Definition of key termsDrought:

Period of insufficient water supply to agriculturalcrops, given the present land use systems.

Drought Resilience:Capability to withstand a loss in welfare due to a drought.


43

Data requirements

The research objectives ask for household-level data.Survey of a random sample of farm households.Household:= „Social unit defined by the sharing of thesame abode or hearth“ (Ellis 1993: 14).Farm household „derives its livelihood mainly fromagriculture“ (Ellis 1993: 13).

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Sampling procedure (1)

Research area is defined in terms of a watershedcontaining 53 villages.

Prerequisite: Topographical map showing all villagesto identify the boundaries of the watershed.

Topography of the research area leads to a strongrainfall gradient, i.e., higher elevations receive muchmore rain than low-lying areas.

This spatial climate variability should be captured in the sample of farm households.Two-stage cluster sampling procedure:Stage I: Randomly select 8 villages, stratified byelevation above sea level.


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Procedure: (1) Identify elevation strata containing 1/8th of the total population each. (2) Randomly select onevillage per elevation stratum.Prerequisite: Information on the population of eachvillage must be available. Stage II: Randomly select 30 farm households (HHs) in each selected village (due to organizational/ budgetaryreasons the sub-samples varied between 22 and 33 HHs).Prerequisite: A complete list of resident householdsmust be available at the village level, includinginformation on the main occupation of each household.

Sampling procedure (2)

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Two-stage procedure:Data collection

1. Rapid Rural Appraisal in each village:

2. Survey of 228 randomly selected farm households:

They served to obtain an overview of the research topic (e.g.: Is drought really a problem? Who is most seriously affected? Which mitigation/coping strategies are generally applied?...).Group discussions, ranking and rating techniques, visualizationof results.This information fed into questionnaire design.

Structured interviews using a detailed questionnaire.Careful design and testing of the questionnaire are crucial in order to reach the research objectives!


47

Conceptual Framework

Risk(Drought)

RiskResponse

Ex ante Ex post



Copingstrategies

→ Not applicableat the HH level

Outcome(Resilience)


48

The impact of El Niño on crop yields

63,8 62,2 61,7 61,244,7

36,8

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Irrigated rice(n = 123)

Coconut (n = 19)

Cocoa (n = 69)

Coffee (n = 43)

Banana (n = 10)

Maize (n = 24)

Perc

enta

ge o

f 'no

rmal

' yie

ld

The production of 188 out of 228 sample households (82%) has ever been negatively affected by drought:

Fig. 4.2.3 Yield decline of the most important crops due to ENSO-relateddrought in Central Sulawesi.


49

Table 4.2.1 Average reduction of the total annual income of farm house-holds due to ENSO-related drought in Central Sulawesi

The impact of El Niño on the income of farm households

Value during

‘normal’ period (IDR1)

Value during drought period

(IDR)

Valuedrought/Valuenormal (%)

GM2 irrigated rice 2,399,173 1,329,487 55.4 GM cocoa 9,331,396 5,504,885 59.0 GM coffee 2,890,933 1,767,089 60.9 GM maize 1,612,420 478,979 26.5 Annual income from agricultural self-employment

3,650,030 1,850,565 50.7

Annual income from other sources 1,348,777 1,348,777 100.0

Total annual household income 4,998,807 3,199,342 64.0 1 Indonesian Rupiah. 1 US$ = 8,900 IDR (February 2003). 2 Gross Margin on a per-hectare basis. The values for cocoa and coffee refer to one year, the

values for rice and maize refer to one cropping season. Usually, two harvests of the latter crops are obtained within one year.

50


Risk(Drought)

RiskResponse

Ex ante Ex post



Copingstrategies


Outcome(Resilience)



51

Coping Strategies

Fig. 4.2.4 Ex-post strategies applied to cope with adverse effects of drought in Central Sulawesi.

2,7

4,3

6,4

8,0

15,4

16,0

20,7

42,6

0 5 10 15 20 25 30 35 40 45

Involve children in income generation

Cultivate land which is usually not used

Sell assets

Grow particularly drought tolerant crops

Change amount of inputs applied to crops

Change area shares of annual crops

Borrow money

Utilize additonal sources of income

Percentage of households (N=188)

52


Risk(Drought)

RiskResponse

Ex ante Ex post



Copingstrategies


Outcome(Resilience)



53

Measuring Drought Resilience (1)

Risk management aims at consumption smoothing(Morduch 1995).Resilience is measured as the observed degree to which a household is able to maintain the ‚normal‘ levelof consumption.Use of indicators of food consumption and expenditures for other basic necessities.Collection of data on the difference between the‚normal‘ and the drought situation.

54

Measuring Drought Resilience (2)Examples of corresponding questionnaire questions (1):

F5. Because of the drought in … (mention year), did your household reduce cash expenditures or economize on food consumption during/after that period of time?

Yes 1 No 0 → skip to F6. F5.1 If Yes to F5.: What did you do to reduce cash expenditures or economize on food consumption?

Read out the options below, and ask about other means practised to reduce expenditures! Was this practised?

If applicable: What share of your expenditures in a normal situation did you spend on

this item during the drought? (Item expend. normal year = 100%)

Reduced the number of meals eaten per day 1 Yes 0 No Ate less expensive food 1 Yes 0 No

Reduced use of agricultural inputs (check F4.!) 1 Yes 0 No Took child (children) out of school 1 Yes 0 No Reduced clothing expenditures 1 Yes 0 No Reduced health expenditures 1 Yes 0 No Reduced expenditures for maintaining the house 1 Yes 0 No Reduced expenditures for social/family events 1 Yes 0 No Other (specify):


55

Measuring Drought Resilience (3)Examples of corresponding questionnaire questions (2):

F5.3 How often are/were the following food items served in your household… …in a normal situation? …during this drought event?

times per day week month times per day week month

Rice (unmixed) 1 2 3 1 2 3 Maize (unmixed) 1 2 3 1 2 3 Rice mixed with maize 1 2 3 1 2 3 Cassava (unmixed) 1 2 3 1 2 3 Rice mixed with cassava 1 2 3 1 2 3 Vegetables 1 2 3 1 2 3 Fish (from the sea) 1 2 3 1 2 3 Fish (from the river/lake) 1 2 3 1 2 3 Chicken 1 2 3 1 2 3 Beef 1 2 3 1 2 3

56Fig. 4.2.5 Reduction of expenditures for basic necessities due to ENSO-

related drought in Central Sulawesi.

41,4

55,2

78,4

82,8

85,3

54,7

53,0

24,5

41,5

64,3

0 20 40 60 80 100

Health

Social events

Housing

Clothing

Food

Percentage of households and expenditures

0 20 40 60 80 100

Percentage of households who reduced expenditures (N=116)

Mean percentage of expenditures relative to 'normal' situation in households that reduced therespective category

Measuring Drought Resilience (4)116 out of 188 drought-affected sample households (62%) were not capable of smoothing consumption:


57


Food consumption-related indicators:Difference in number of times rice is served per month, -

Difference in number of times rice mixed with maize is served per month, +

Difference in number of times chicken is served per month, -

Difference in number of times beef is served per month, -

Expenditure-related indicators:Share of food expenditures (‚normal‘ = 100%), +

Share of clothing expenditures (‚normal‘ = 100%), +

Share of health expenditures (‚normal‘ = 100%), +

Share of maintenance expenditures (‚normal‘ = 100%), +

Share of expenditures for social events (‚normal‘ = 100%), +

Use of Principal Component Analysis (PCA) to construct aDrought Resilience Index (DRI). Indicators used, and their correlation with DRI:

58

PCA produces the weights assigned to the individualindicators within DRI:


Table 4.2.2 Hypothesized sign of relationship of the indicators used to construct a ‘Drought Resilience Index’ (DRI) for farm households in Central Sulawesi, and weights assigned by Principal Component Analysis

Variable Hypothesized sign of relationship with

DRI

Component loading Weight within DRI

foodsh + 0.844 0.418 clothsh + 0.837 0.414 maintsh + 0.786 0.389 socialsh + 0.744 0.368 healthsh + 0.582 0.288 ricedif - - 0.703 - 0.348 maizedif + 0.549 0.272 beefdif - - 0.438 - 0.217 chickdif - - 0.412 - 0.204


59

Statistical characteristics of DRI:

Fig. 4.2.6 Cumulative Distribution Function of theDrought Resilience Index.


0

0,1

0,2

0,3

0,4

0,5

0,6

0,7

0,8

0,9

1

0 0,2 0,4 0,6 0,8 1

Drought Resilience Index

Prob

abili

ty

38% of HHs were fully resilientcensored observationsTobit regression model!

62% of HHs reducedconsumption to varyingdegrees

60

Determinants of Drought Resilience (1)

DRI serves as the dependent variable in a regressionmodel to identify determinants of drought resilience.

Use of a Tobit regression model because of censoredobservations (Tobin 1958):

iji

k

jji xy εββ ++= ∑

=10

*

( )1,min *ii yDRI =

(1)

(2)

y* = Latent dependent variable ‘Drought Resilience’i = Household index (i = 1,…, N)xj = Vector of explanatory variables (j = 1,…, k)β = Vector of parameters to be estimatedε = N (0, σ2) distributed random error termDRI = Observed dependent variable ‘Drought Resilience Index’


61


Application of an asset-based conceptual framework(compare Siegel and Alwang 1999) to identifypotential determinants of drought resilience, i.e., independent variables (xj) in equation (1):

DRI = f (H, RM) (3)whereH = HazardRM = Risk management

H = f (Prob, Press, Pred) (4)whereProb = Probability of occurrence of a shockPress = Pressure exerted by the shock, i.e., the intensity of impactPred = Predictability of the shock, i.e., the degree of warning available

Ex-post approach: Prob excluded!

62


RM = f (AB, RA) (5)whereAB = Asset baseRA = Risk attitude

Risk attitude largely influenced by asset base: RA excluded!

Combined structural equation of the model to beestimated:

DRI = f (Press, Pred, NC, EFC, HC, SC) (6)whereNC = Natural capitalEFC = Economic and financial capitalHC = Human capitalSC = Social capital


63

Economic/financial capital

Social capital

Human capital

DroughtResilience

• Liquid assets (+)• Access to credit (+)

• Labor capacity (+)• Educational status (+)• Technical efficiency in

agr. production (+)

• Participation in villageorganisations (+)

• Yield level duringdrought (+)

• Forced fallow (-)• Prior information on

drought (+)

Natural capital

• Low elevation (-)• Soil fertility status (+)

Hazard pressure


64

Economic/financial capital

Social capital

Human capital

DroughtResilience

• Liquid assets (+)***• Access to credit (+)**

• Labor capacity (+)**• Educational status (+)• Technical efficiency in

agr. production (+)***

• Participation in villageorganisations (+)*

• Yield level duringdrought (+)***

• Forced fallow (-)***• Prior information on

drought (+)

Natural capital

• Low elevation (-)*• Soil fertility status (+)

Hazard pressure


*(**)[***] Statistically significant at the 10% (5%) [1%] level of error probability.


65

Conclusions (1)

Despite the location in a rainforest margin area, farmers in Central Sulawesi generally face a substantial risk of drought.

Preparedness for the case of drought is poor. Risk manage-ment is mostly confined to ex-post coping measures.

Coping measures include illegal activities and strategieswhich may threaten future welfare.

Despite mitigation and coping measures which may beemployed, the majority of drought affected households is notcapable of smoothing consumption.

Expenditures in all domains of basic needs have to bereduced, including drastic cuts in food expenditures.

66

Conclusions (2)

The possession of easily liquidated assets and access to credit enhance drought resilience, i.e., wealthierhouseholds are more resilient than poorer households.

The aggregated household labor capacity and cropmanagement skills enhance drought resilience.

Investments in social networks enhance droughtresilience.


67

Vulnerabilitytowards

drought periods

Unsustainable copingmeasures

Deterioration of theasset base

Poverty

Lack of access to ENSO forecasts

Lack of droughtmitigation measures

Vicious cycle of vulnerability and povertyCreate formal financial institutions at the village level

Conduct environmental education measures

Conduct education measures on adequate nutrition at low cost

Improve reliability of forecasts

Improve information transfer to the village level

Investigate agronomic and marketing potential of drought tolerant crops

Increase agricultural income through improved crop management

Improve maintenance of irrigation infrastructure

Improve irrigation management

Create formal financial institutions at the village level

42 Risk and Vulnerability - uni-hohenheim.de · 2009. 4. 14. · improved management) II: E +, V +...

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