# **4 of weather and on Impact prices consumption**

In this section we present results on the impact of weather and price shocks on consumption.

We estimate equation 1 pooling observations for 2005 and 2011, including zone and year fixed effects and allowing for clustering of the standard errors within zones. _X_ includes education (of the household head, as well as highest education level of the household), assets, indicators of employment, age, dependency ratio, disability, gender and woreda characteristics such as livelihood zone, access to market, probability of drought occurrence in the past, and urban/rural location (which proxies for exposure to price risk). A subset of _X_ is interacted with the shock variables. For drought _X_ includes dummies that capture whether a household lives in a drought prone area, cultivates a large or small amount of land, and, for those with little land, is a safety net beneficiary. As the safety net was introduced after the first survey, those that became beneficiaries after 2005 are not counted as beneficiaries in 2005. For price shocks, _X_ includes dummies that capture whether a household lives in urban areas, is educated and is female headed. Death and job-loss shocks are interacted with the same dummies. Table 3 shows the impact of shocks on consumption. In table 6 in the annex we show separately the results from the same model, for the “fixed” elements of households and communities.

Each increase in crop losses of 10 percent is correlated with a 3 percent fall in consumption for households not receiving the PSNP, cultivating few plots and living in drought-prone areas. The same 3 percent loss in consumption is also observed for households in drought prone areas that cultivate on a larger scale. Rainfall-induced crop losses have no significant impact on consumption for other households. Interestingly, land does not mitigate the impact of the drought, though the safety-net appears to (noting that drought was not so severe in 2011 when the PSNP was in operation). In a moderate drought crop-losses are about 30 percent suggesting that a moderate drought causes a drop in consumption of 9 percent for many households in drought prone areas.

To investigate the impact on poverty of an extreme weather shock we estimate the poverty rate were the weather conditions experienced in 2002–the worst drought recorded in the LEAP database–to be experienced again. In this simulation the headcount poverty rate would increase from 30% to 36%, almost reversing all of the gains in poverty reduction recorded from 2005 to 2011.

Each 1 percentage point increase in the monthly inflation rate resulted in a 2 percent reduction in consumption for rural households, a 2.5 percent reduction for urban households with an educated household head and a 3.5-3.8 percent reduction in consumption for urban households with uneducated heads (female and male respectively). The impact of the food price shock in 2011 was therefore substantial, reducing consumption by 14 percentage points among households with uneducated heads given that the average monthly inflation was 3.87 percent from July 2010 to June 2011 (the start and end month of the survey).<sup>14</sup>

> 14In robustness checks we defines food price shock using the dummy self-report. The shock was associated with reduction in consumption by 10-13% for those affected in households with an uneducated female household head in an urban area. Educated households in urban areas, and rural households

13