Poverty Targeting with Heterogeneous Endowments: a Micro-simulation Analysis of a Less-favoured Ethipian Village

Spatially targeted programmes for poverty reduction in less-favoured areas (LFAs) are typically constrained by a large heterogeneity amongst households in terms of the quantity and quality of available resources. The objective of this chapter is to explore, in a stylized manner, the role of heterogeneous household endowments for: (i) policies aimed at poverty reduction; (ii) within-village income inequality; and (iii) resource degradation. Using a micro-simulation model, we analyse for each household in a remote Ethiopian village three sets of policies commonly put forward to reduce poverty: technology improvement, infrastructure investment (assumed to reduce the price band) and off-farm employment through migration or cash for work programmes. In the analysis of single policies, migration was found to produce the largest decrease in poverty headcount. Because of self-selection, cash-for-work (CFW) programmes performed best in terms of reaching the poorest of the poor. This policy also results in the largest reduction of within-village income inequality, while a reduction in price band increases income inequality. Richer households buy more consumer goods and thus benefit more from reduced consumption good prices. Only in the case of technology improvements was a trade-off between poverty reduction and soil erosion found. Price band and non-farm policies, however, lead to (sometimes considerable) reductions in erosion, while also having a better performance in terms of poverty reduction than technology improvements. Analysing the relation between assets and income, ownership of oxen was found to be crucial: households with no oxen are below the US$1/day poverty line, households above the US$2/day poverty line own oxen. Oxen ownership does not fully determine income: in addition to oxen, sufficient land (in terms of quantity and quality) is needed to escape poverty. Analysing combinations of policies, we find that combining policies helps poorer households overcome the limitations of their asset endowments. This complementarity of policies is less important for better-endowed households. As a result, combining complementary policies helps in targeting the poorest households, reducing income inequalities. Combining a CFW programme with a reduction in price bands yields most in terms of poverty reduction and income inequality. In terms of the effect on soil erosion, the combination of a reduction in fertilizer prices with improved technologies yielded unexpected interaction effects. Changed relative prices of inputs affect the choice of technology such that erosion levels increase, as opposed to decrease, as was expected based on the impact of single policies.