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Exploring the Interplay Between Climate Shocks and Household Welfare in Ethiopia

Kitessa Delessa (PhD Fellow in Economics), Department of Economics, Addis Ababa University


The fragile economy and agriculture-based livelihoods of many developing countries are highly natural resource dependent. The rapid and dynamic change of the world environment puts pressure on the lives of the general public in such countries in innumerable ways. This susceptibility of an economy and the livelihoods to such environmental perils manifested itself in multifarious ways, including economic shocks, natural disasters, and conflict-related losses which cause an annual economic loss of more than USD 250 billion, according to the 2017 Sustainable Development Goals (SDGs)(Gershon et al., 2020). Climate change manifests in African countries as both “gradual decline in the length of rainy seasons, frequent droughts, floods, heatwaves and dust storms” and also extreme weather shocks such as floods, droughts, rainfall variability, rainfall precipitation, high temperatures, and more (Asmare, 2018). Such climate impacts have severe effects on the welfare of household (Zanhouo & Acma, n.d.;Thanh et al., 2020;Shiferaw et al.,2014))


In the face of these pressures, apart from the usual traditional government responses and insufficient initiatives, there are no strong institutions or preventive actions that would help to minimize the impacts of climate shock on the life of the poor or to help them cope with these changes (Federman et al., 2014). Agriculture is the dominant sector for the economy of many developing countries in general and Sub-Saharan Africa (SSA) in particular. Ethiopia, the focus of this paper, has such an agriculture based economy, with the sector remaining the main activity and contributing the lions share in GDP, employment creation and exports (Solomon et al., 2021). Rainfed agriculture represents the largest proportions, meaning that good agriculture seasons are conditioned by good rainfall and ideal temperature. Due to this, climate change poses a threat to the agricultural sector and agriculture-based livelihoods (Birthal & Hazrana, 2019). Rainfall variability, driven at least in part by climate change, is among the dominant factors affecting the productivity and production of agriculture and the livelihood of the poor and their economies (Birthal & Hazrana, 2019).


Climate change has particular effects on developing countries with greater dependence on rainfall agriculture with small landholdings, low agricultural productivity, slow economic growth and persistent poverty (Lottering et al., 2021). Drought leading to decreased crop yields and livestock production accounts for about 25% of the natural disaster of the continent (Shiferaw et al., 2014). Such drought has been increasing in frequency, intensity and duration with climate change. The situation is especially critical as dozens of millions of people as still food-insecure and children are at risk of acute malnutrition (Mare et al., 2018). Climate shock both directly and indirectly negatively impacts agricultural production, causing loss of life, deterioration of health, loss of livelihoods and the like. These all work towards the reduced effects of the household welfare (Zimmerman & Carter, 2003).


The effects are not evenly distributed. Climate change impacts are mediated through “several factors such as population, technology, policy, social behavior, land use patterns, water use, economic development, and diversity of economic base and cultural composition” (Naumann et al., 2014). Further, Amartya Sen also argued that drought leads to famine and loss of livelihoods to the extent that there is capability failure which in turn depend on market access and people’s social, economic and political entitlements (Singer, 1982; Koo & Martin, 2021; Kinda, 2016).The effect of climate change is higher in threatening the life of the rural poor households than the urban and non-farm households. Drought regions are more prone to the climate change shocks than other areas (Solomon et al., 2021). Deforestation, soil erosion and land degradation all contribute to the food security status and welfare status of households. Thus, the issue of climate change needs critical intervention on ways to minimize its impact so that the burden of poverty will be lessened and the welfare aspects of the households will be improved.


Unfortunately, different studies come up with inconclusive results. The effect of climate change is significant with some of them and inconclusive with others. Household characteristic variables play an important role in this regard. Thus, the present study aims to comprehend the heterogeneous effects of the climate shock on household welfare using the socioeconomic survey data from Ethiopia’s Central Statistical Authority (CSA), wave 4 (2018/19). The study builds by integrating the dominant aspects of climate vulnerability shocks typically drought, rainfall variability and temperature variations. The novel contribution of this study is providing a comprehensive assessment the effects of climate shock by developing the augmented variable by the interaction of the climate shock variable with the household characteristic variable. The study used instrumental variable approach.



Other scholars have handled the inquiry hypothesis in distinct manners: the portfolio asset bifurcation (Zimmerman & Carter, 2003); poverty trap hypothesis (Barrett et al., 2016); the poverty dynamics breaks out the household and individual level that is disaggregate the impact of shocks by asset holding, the individual level effects and the permanent consequences of shocks (Hoddinott, 2006); the livelihood diversification approaches (Ellis, 2000). This study used an instrumental variable method to capture the heterogeneous effects of the economy wide impact of climate change on household welfare. Along with the key indicators of climate change such as drought, flood, rainfall variability, temperature and the like, they study also took into account the effect of other control variables influencing the household welfare.


Data from climate shocks and the welfare effects were taken from wave 4 (2018/19) of the Ethiopian socioeconomic survey by the Central Statistical Authority. This is publicly available data. The empirical strategy follows the works of (Vijay, 2000) based on the permanent income and full insurance models of consumption dynamics. According to this approach the mitigation of adverse impacts of shocks and consumption smoothing is done by resorting to different coping mechanisms. The two major shocks were identified based on the cross-sectional variations of the idiosyncratic shocks which are unique to households, and covariate shocks where many households experience the shock together. Major shocks considered here are: temperature variation, rainfall variability, drought, and market shocks (price volatility).


The following hypotheses need to be evaluated when taking into account such viewpoints on how shocks affect the wellbeing of households:

H1: The effects of climate shocks matter in influencing the decomposed household welfare.

H2: The heterogonous effects of climate shocks matter in influencing the household welfare.

H3: The market shock matters in influencing the household welfare.

The empirical analysis is commenced by providing the conceptual framework of the study that frames the econometric model to be applied. The major shocks are identified and the direction of movement from each shock to the multiple well-being effects of each shock is also set.

Note: Figure 1: The diagrammatic representation of the climate shock induced welfare analysis. The conceptual framework of the study. By the author, 2022

The econometric model used to estimate the effects, the heterogenous impacts of shocks on dependent variable (household welfare outcome) follows the following specification:

Y_i=f(〖CS〗_i,〖OS〗_i,X_ij )-------------(1)


Where  represent the dependent (outcome) variable showing the welfare indicator of household (food consumption here), ICS is the vector of the climate shock variables (drought, temperature variation and rainfall variability), OS represents vector of other shock variables, here the economic (market) shock variables, and X represents vector of household characteristics.

The econometric challenge handled through the instrumental variable regression approach. 〖Y_i〗^j=φ_i+β_j 〖〖CS〗_i〗^j+β_k 〖〖OS〗_i〗^k+δ_l 〖X_i〗^l+ε_i-----------(2) The instrumental variable approach is used to estimate the welfare outcome j for household i. The dependent variable (〖Y_i〗^j) is a continuous variable taking positive values and it is regressed on the j climate shock variables of household i (〖〖CS〗_i〗^j) ,  on the k other shock variables of household  i (〖〖OS〗_i〗^k) and on the l  vector of explanatory variables of household i (〖X_i〗^l). The specification control for vector of explanatory variable incudes the demographic characteristics of households and the social features. This measure considers: financial capital (access to credit), natural capital (land ownership), household size, sex of the household head, religion of the household head and marital status. The last term is error term (ε_i). This study's primary focus is on examining the coefficient of shock variables in general and the coefficient of climate shock factors in particular. Additionally, Table 1 below provides detailed explanations of the variables employed in the study.

Table here: (38-42 pages)

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