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The Pennsylvania State University The Graduate School College of Agricultural Sciences POVERTY DYNAMICS AND HOUSEHOLD RESPONSE: DISASTER SHOCKS IN RURAL BANGLADESH A Thesis in Agricultural, Environmental and Regional Economics and Demography by Anuja Jayaraman © 2006 Anuja Jayaraman Submitted in Partial Fulfillment of the Requirements for the Degree of Doctor of Philosophy August 2006 The thesis of Anuja Jayaraman was received and approved* by the following Jill. L. Findeis Professor of Agricultural, Environmental and Regional Economics and Demography Thesis Advisor Chair of Committee Carolyn E. Sachs Professor of Rural Sociology and Women’s Studies Gretchen T. Cornwell Research Associate and Assistant Professor of Rural Sociology and Demography Bee-Yan Roberts Professor of Economics Stephen M. Smith Professor of Agricultural and Regional Economics Committee Member and Head of Department of Agricultural Economics and Rural Sociology * Signatures are on file in the Graduate School. Abstract South Asia has the largest concentration of the world’s poor, with over half a billion people surviving on less than a dollar a day. One of the Millennium Development Goals (MDG) aims to halve the proportion of the world’s people whose income is less than one dollar a day and the proportion of people who suffer from hunger by the year 2015. The success of poverty alleviation programs in South Asia is critical if this MDG is to be met. Within South Asia, Bangladesh has the highest incidence of poverty and only India and China have larger numbers of poor people. It is estimated that nearly half of Bangladesh’s population of 135 million people live below the poverty line. The Human Poverty Index reported by the Human Development Report places Bangladesh at the 86th position among 103 developing countries. Apart from high poverty levels and low gender empowerment rates, the country also faces yearly natural disasters in the form of floods. In this dissertation, we first analyze issues relating to chronic and transient poverty following a major catastrophic event using a short panel of household data from Bangladesh. Bangladesh experienced the largest floods of the century in 1998. Increase in private borrowing was one of the medium-term impacts of the floods. The International Food Policy Research Institute’s Food Management and Research Support Project (IFPRI-FMRSP) household survey of rural Bangladesh for the years 1998-99 is used for the analysis. The dissertation attempts to identify the characteristics that distinguish between those who are able to eventually escape poverty following the flood (the transient poor) versus those unable to leave poverty (chronic poor). The study uses cost-of-basic-needs (CBN) poverty lines calculated by the World Bank for Bangladesh for the year 2000. We use multinomial logit models to asses the determinants of chronic iii and transient poverty, comparing them to Bangladeshi households that were never poor. We also use Censored Quantile Regression models to identify the correlates of each kind of poverty. We find that household size, dependency ratio, number of working members, land ownership, location, social assistance and education characterize the chronically poor. Ownership of physical and human capital make households less likely to be chronically poor. Larger household size and dependents in the household push families towards chronic poverty. Increase in number of working members in the family bring in more income and reduce the chances of households being chronically poor. Given that Bangladesh is an agrarian society and faces yearly floods, it is not surprising that households with heads employed in the trade and self-employment sectors are less likely to be chronically poor compared to those in the agricultural sector. Long term investments in human and physical assets clearly help households out of chronic poverty. Apart from household size, dependency ratio, number of working members, and land ownership, the transient poor are characterized by their access to credit. Credit access and remittances explain transient poverty better. Our models are not able to characterize the transient poor as well as the chronically poor. After having studied the poor and their characteristics, we seek to study how individuals interact and operate within a family or household. We asses intra-household dynamics (e.g., variations in household bargaining behaviors) with a focus on the household’s expenditure patterns. Receipt of credit is taken as the measure of bargaining between the head and the spouse. Food and non-food share equations were individually estimated using random effect OLS and Tobit models to test if participation in credit iv markets influences food and non-food expenditure shares. Endogeneity corrections were incorporated whenever tests indicated an endogenous relationship between total household consumption and a particular expenditure share. 2SLS models and simultaneous Tobit models were used to correct for endogeneity between the expenditure shares and total expenditure. Our results indicate that more men compared to women participate in the credit market. As is typical of any rural-developing economy, household expenditure share is highest for food. Amount borrowed by the household head has effects on food expenditure, adult goods and education expenditure. Amount of credit taken by the household head negatively affects food expenditure and positively affects share spent on adult goods. The negative effect on food expenditure has policy implications related to nutritional intake of children in the household. Women and girls in the household may also suffer from resultant nutritional deficiencies. Women’s use of credit has a positive impact on expenditure on children’s goods, durable goods, education and housing. Results show that resources in the hands of women have implications for improvement in child outcomes, especially educational outcomes. The positive and significant impact of spouse’s credit on housing share indicates that resources in the hands of women also go towards improvement in household and related outcomes. We also find that households are more likely to spend in round 2 and round 3 than in round 1 on food, education and personal care and more likely to spend on adult goods, children’s goods, durable goods, fuel, health and housing in round 1 than in round 2 or 3. v Table of Contents List of Tables viii List of Figures ix Acknowledgements x 1 Chapter 1: Research Problem 1 1.1 Introduction 1 1.2 Poverty and Vulnerability to Shocks 3 1.3 Shocks in Bangladesh 7 1.4 Poverty in Bangladesh 8 1.5 Consumption Smoothing 11 1.6 Gender and Poverty 13 1.7 Study Objectives 14 1.8 Organization of the Dissertation 16 2 Chapter 2: Literature Review and Theoretical Framework 17 2.1 Introduction 17 2.2 Poverty Dynamics 18 2.2.1 Definition of Chronic and Transient Poverty 19 2.2.2 Measuring Chronic and Transient Poverty 20 2.2.3 Empirical Studies 22 2.2.4 Characteristics of the Chronically Poor 25 2.2.5 Characteristics of the Transient Poor 26 2.3 Intrahousehold Resource Allocation Models 27 2.3.1 Unitary Household Model 27 2.3.2 Agricultural Household Models 30 2.3.3 Collective Models 33 2.3.4 Cooperative Model 33 2.3.5 Cooperative Bargaining Models 36 2.3.6 Non-Cooperative Model 42 3 Chapter 3: Data and Descriptions 44 3.1 Country of Study: Bangladesh 44 3.2 Data Characteristics 50 3.2.1 Sampling Procedure 53 3.3 Research Trip to Bangladesh, February 2005 54 3.4 Data Description 57 3.4.1 Regional Variations 61 4 Chapter 4: Methods 66 4.1 Poverty Dynamics 66 4.2 Measurement of Transient and Chronic Poverty 67 4.2.1 Approach I 67 4.2.1.1 Estimation Technique 68 4.2.2 Approach II 69 vi 4.2.2.1 Estimation Technique 70 4.2.3 Distinguishing Between Approaches 73 4.3 Poverty Lines 74 4.4 Household Expenditure and Credit 75 4.4.1 Fixed Versus Random Effects 76 4.4.2 Empirical Framework 77 4.4.3 Econometric Issues 79 5 Chapter 5: Poverty Dynamics Results 83 5.1 Introduction 83 5.2 Descriptive Analysis 84 5.2.1 Incidence of Poverty 84 5.2.2. Time-Specific Profile of Poverty 86 5.3 Stochastic Dominance (First-order) Test 90 5.4 Receiver Operating Characteristic (ROC) Analysis 91 5.5 Econometric Analysis: Poverty Dynamics 95 5.5.1 Methodology I 95 5.5.1.2 Results from Multivariate Analysis 102 5.5.2 Methodology II: Censored Quantile Regression 107 5.6 Conclusion 110 6 Chapter 6: Household Expenditure and Credit as Bargaining Measure 111 6.1 Introduction 111 6.2 Credit Availability 112 6.3 Results 114 6.3.1 Descriptive Statistics 115 6.3.2 Credit and Household Expenditure 122 6.3.3 Amount of Credit and Household Expenditure 123 6.3.4 Credit Participation and Household Expenditure 130 7 Chapter 7: Conclusions 135 7.1 Introduction 135 7.2 Policy Implications 141 7.3 Future Research 142 Reference 144 vii List of Tables Table 1.1 Types of risks faced by the households 4 Table 1.2 Policy instruments for risk reduction 5 Table 1.3 Trends in poverty and inequality in the 1990s in Bangladesh 10 Table 2.1 Five-tier classification of the poor 21 Table 2.2 Studies decomposing the poor into relevant categories 24 Table 3.1 Country profile 44 Table 3.2 Division profile 48 Table 3.3 Timing of the rounds 50 Table 3.4 Summary of the content of the household and community-level 52 questionnaire Table 3.5 Selected Thanas 53 Table 3.6 Demographic characteristics of sample of households in rural 59 Bangladesh, 1998-99 Table 3.7 Financial Asset ownership of sample households in rural Bangladesh, 60 1998-99 Table 3.8 Amount