Poverty targeting with heterogeneous endowments: a micro-simulation analysis of a less-favourded Ethiopian village

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Spatially-targeted programs for poverty reduction in less-favoured areas are typically constrained by a large heterogeneity amongst households in terms of the quantity and quality of available resources. The objective of this paper is to explore in a stylized manner the role of heterogeneous household endowments for (1) policies aimed at poverty reduction; (2) within-village income inequality; (3) resource degradation. Using a micro-simulation model we analyze for each household in a remote Ethiopian village three sets of policies commonly put forward to reduce poverty: technology improvement, infrastructure investment, and off-farm employment through migration or cash for work programs. Analyzing single policies, migration was found to lead the largest decrease in poverty headcount. Because of self-selection, cash for work programs 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 a trade-off between poverty reduction and soil erosion was found. Price band and non-farm policies however lead to (sometimes strong) reductions in erosion while also having a better performance in terms of poverty reduction than technology improvements. Analyzing the relation between assets and income, ownership of oxen was found to be crucial: households with no oxen are below the 1 dollar a day poverty line, households above the 2 dollar a 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 thus needed to escape poverty. Analyzing combinations of policies we find that combining policies helps poorer households to 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 cash-for-work program 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 affects the choice of technology such that erosion levels increase as opposed to decreasing as one would expect based on the impact of single policies.
Original languageEnglish
Number of pages26
Publication statusPublished - 2005
Duration: 8 Dec 20059 Dec 2005




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