Child growth in the time of drought

It is well known that households in developing countries often experience weather-related and other shocks that drastically affect incomes. A large and growing literature explores the ef®cacy of ex ante and ex post responses to these events. One strand examines how households respond to these shocks. Three studies that exemplify work in this area are Udry (1990) on credit as insurance, Fafchamps, Udry and Czukas (1998) on the role of livestock as a means of smoothing consumption, and Kochnar (1999) who examines the role of labour market activity as an ex post response to income shocks. A second strand looks at the effectiveness of these strategies in reducing ̄uctuations in consumption. The principal result that emerges, as summarized in Morduch (1995, 1999) and Townsend (1995), is that some, but not all households can smooth consumption. In particular, households facing liquidity constraints have limited smoothing ability. For these households, therefore, income ̄uctuations will generate a welfare loss. This paper contributes to this literature, but differs from the studies listed OXFORD BULLETIN OF ECONOMICS AND STATISTICS, 63, 4 (2001) 0305-9049