Consumption Vulnerability and Dynamic Poverty in the North-West Frontier Province, Pakistan

This paper quantitatively investigates vulnerability to risk as a characteristic of dynamic poverty in low income countries. A household is defined as vulnerable to consumption risk if it has to drastically reduce its consumption level when hit by a negative income shock. To empirically operationalize the definition, descriptive analyses based on transition matrix are combined with regression models with consumption change as a dependent variable. The paper employs a two-period panel dataset collected from the North-West Frontier Province, Pakistan. To minimize possible biases due to measurement errors and endogeneity, which are likely to be severe in that kind of datasets, qualitative information on households’ subjective assessment on risk is utilized to instrumentalize observed consumption and income changes. Empirical results show that, first, sample households are subject to high transient poverty in terms of income but the income variability is transferred to consumption variability only partially due to ex post risk-coping mechanisms; second, several households, who are excluded from these mechanisms, are prone to high risk of a substantial fall in consumption and a drastic cut in children’s school enrollment; third, households are more vulnerable to consumption poverty when they are hit by shocks in outside employment than by shocks in selfemployment; fourth, the dynamically vulnerable group includes households led by the aged, with less land, and without regular remittance receipt.