An investigation of the persistent effects of big shocks – such as the famine of 1984-85 in Ethiopia – on long-term growth and welfare levels

 

Research in this area has been focusing on the long-term implications of uninsured risk. The fact that households may well respond ex-ante to risk by reducing risky activities and reducing the risk in their asset portfolios, has implications for the long run for the average incomes households will earn. Furthermore, the shocks due to uninsured risk can have long-term implications, from the destruction of physical assets to the reduction of human capital, such as poor health or lower learning ability. In a number of draft papers, the evidence was investigated further. A paper by Stefan Dercon and John Hoddinott focused on the long-term health implications of shocks. Especially for children, we find persistent effects of drought, leading to lower height and lower educational outcomes, all resulting in lower lifetime earnings. In another paper, a review of the poverty entrapment arguments and evidence related to risk and shocks is presented. While there is suggestive evidence from many sources, persistent effects have rarely been identified in the empirical literature, and presents a major research question for the future. We started some of this work by investigating the persistent effects of big shocks – such as the famine of 1984-85 in Ethiopia – on long-term growth and welfare levels using panel data in rural Ethiopia.

We find long-lasting effects from droughts, although in the long run, households may recover. Asset data suggest however that this may take a long time: in our panel data survey in Ethiopia, it took until the mid-1990s until livestock levels had recovered to the levels before the famine in 1984.