Poverty is more than just a mere number that locates a quantity of people under a threshold of minimal attributes like consumption, education or health. Being poor represents the incapacity to sort the most basic problems in life, like food, clothing and shelter. We can also say that living without the minimal conditions to survive, diminishes human freedom, as well as the natural capabilities to achieve basic educational, economic or cultural outcomes (See Sen, 2000). Furthermore, poverty is not only a matter of one generation, it can transcend from one generation to the next one.
Nonetheless, despite the fact that poverty represents an obstacle for economic and human development, it should not be the only reality that developing economists and policy makers should contend with urgency. There is another consideration that could be as important as poverty; the idea of vulnerability. The economic vulnerability is faced upfront by many people in developing countries who have the potential to fall into poverty and into persistent poverty "traps".
Hence, being vulnerable can be translated into insecurity and risks faced by those who are just over the threshold of poverty. Most of them recluctant to take advantage of more profitable activities involving uncertainty. Thus, the higher the amount of vulnerable people who is more risk averse towards more profitable economical activities, the costlier it could be for the economy. In this regard, a high share of vulnerable people in an economy could be even more harmful in terms of economic development, compared to transient poverty. Vulnerability alone has the potential to continuously affect the overall investment in the economy of a country.
In this sense, Vulnerability is clearly defined as the magnitude of the threat of future poverty. However, it is important to remark that this conception is not only about insufficient command on resources. Vulnerability is also about the exposure to insecurity, risks and uncertainty, and the effects they have on people’s aversion to invest in activities that can actually help them to improve their socioeconomic conditions.
Since vulnerable people is just over the threshold of poverty, they can easily fall into poverty affected by exogenous shocks that diminish their level of income or their capacity to maintain their levels of consumption (i.e due to unemployment, droughts or illness). While the evidence has shown that even in the presence of credit constraints, shocks are coped through different strategies like mutual support networks group-based in clans, or neighborhoods associations; yet, in the face of co-variate uninsured shocks -and in their persistence- the copping strategies are not enough to avoid poverty.
In view of this limited incapacity to smooth consumption, households may drift occasionally under some socially acceptable level of wealth, possibly bounce back up and drift back in a resulting fluctuation in and out of poverty. Indeed, this is what has been found in the analysis of the relevant data. In regard to this, Dercon (2005), using data from the National Rural Household Survey of 2004 in the US and the poverty line of 1994[1], shows through a simulation how shocks contributes to the increase in the number of poor people, finding a difference of 179 base points between the actual level of poverty in the country (47.3%) and the predicted poverty without shocks (29.2%).
These numbers mean that the existence of safety nets, credit, or insurance, would have let the people smooth-up their consumption levels, and poverty would have been lessened by almost 50%. Furthermore, the author found that droughts that happened two years before the analysis, were still highly correlated with lower consumption in the present. This accounts for the low recovery in consumption levels among transient poor after the presence of a shock in the economy.
Another component of poverty closely linked to those with vulnerability and risk, surge up when people, due to the absence of insurance, credit or group-based support, have to sell their assets when faced with such shocks, in order to maintain their consumption levels. This loss on the basis of their assets can push them into poverty. But in this case, the lost of assets can put them into a situation or point of no return to their previous levels of consumption. This might also happen when their ability to generate future incomes or their human capital, is affected, for example, due to death or illness. The overall effect of this: the economical shock and the loss of assets, has the potential to generate poverty traps.
Therefore, vulnerability and the risk it causes not only is reflected into transient poverty but also into poverty traps and thus, leads to chronic poverty. In this respect, Dercon (2005) shows how the shocks confronted in rural Ethiopia between 1999 and 2001 were still affecting consumption levels similarly as those faced between 2002 and 2004, which reflects the slow recovery in consumption that rural population in this country faced.
Although it can be recalled that “the threat of poverty is experienced in very different ways by each household, according to its own human and physical stock as well as the type of risks it faces. For instance, the future of wage-earning farmers might be more promising and less uncertain than that of subsistence farmers, but in a scenario of floods, their exposure to severe destitution and food prices is greater than the subsistence farmers, making the first more vulnerable than the latter. This is why vulnerability can be related with “ defenselessness” referring to a different states of the world.
Therefore, vulnerability and the types of risk it causes, may not only operate as an ex-ante condition that facilitates exogenous shocks to increase poverty, be this transient or chronic, it also makes people more averse to undertake more profitable activities. Vulnerability is not only “low expected welfare”, the term clearly relates to danger or threat. Living in this condition makes household take into account, ex-ante, their decisions to invest before any shock happens. Most of the time they diversify the risk through different activities and assets in order to spread the threat of falling into poverty.
Unfortunately, these activities, as they involve less uncertainty, they also mean less profits and returns. Indeed, we observe rural and urban households in developing countries usually engaged in a variety of crops, with low risks but low mean returns, keeping different small and larger livestock, being involve in a multitude of petty business activities. This means, that vulnerability can be the cause of low income and relative poverty to avoid uncertainty.
Therefore, we see that vulnerability is an important issue to be measured, analyzed and thwarted through the impulse of policies that could generate mechanism of insurance, credit and safety nets. Notwithstanding, poverty rather than vulnerability has been treated for decades as the most challenging threat by economists, policy makers and politicians. This might be explained for the lack of empirical evidence in respect to vulnerability, all along with the challenges faced to create a reliable measure.
Much of the specialized literature in vulnerability has tried to measure it through one index similar to those applied in the analysis of poverty, even including their axioms. It is known that there exists a certain level of consumption that is not enough to reach the defined poverty line. Conversely, vulnerability needs to be measured ex-ante and to include different states of the world and perceptions of risk.
These problems make it less feasible to create a vulnerability index. Up to now, the small empirical evidence that have tried to measure it have used past information in order to predict different future scenarios and levels of consumption. This technique affronts some difficulties, the lack of time series or data panels in most of the developing countries is an important issue, as well as the fact that they are based on predictions, which is uncertain.
However, identifying the vulnerable people in order to create the right policies to take them out of risk, remains important.[3] Still, the measure of vulnerability still depends on past information. One option is to advance in the way to make meaningful quantitative measures through the generation of new and more reliable data-base in developing countries.
[1] Poverty line is defined as the consumption level needed to reach some minimal basket of basic needs.
[3] Some of the policies that could be applied are: a) insurance products, b) promoting more self insurance via savings and micro-credit; c) targeted transfers; and d) promoting modern inputs adoption by vulnerable people.
