Other unobserved geographic characteristics are controlled for by the inclusion of district (zone) fixed effects.<sup>2</sup> In addition, to date, no study has used the historical distribution of covariate shocks to estimate the distribution of future consumption and poverty. Existing studies rely instead on cross-sectional variation in shocks which does not accurately take into account the welfare volatility that arises from events that vary more across time than space. We combine time-series information on rainfall-induced crop losses at the community level with the estimated impact of rainfall losses on consumption to predict future consumption (in combination with similar estimates of the impact of price shocks and idiosyncratic shocks). Using the estimated probability distribution of future consumption we calculate national estimates of vulnerability to poverty and also illustrate differences in vulnerability to poverty between groups such as urban and rural, or by geographic status (though with caveats around the meaning of ‘vulnerability’ discussed below).

There are four reasons why we may consider Ethiopia a pertinent case study for a focus on vulnerability. First, the Ethiopian economy is still largely comprised of rainfed agriculture in an agroclimatic environment that has been no stranger to extreme drought in recent decades. Vulnerability to weather risk has historically been very high among agricultural subsistence farmers, which describes the majority of Ethiopian rural households. Almost half of rural households in Ethiopia were affected by drought in a five year period from 1999 to 2004 (Dercon et al., 2005). Although drought has been less prevalent in the last decade than the previous two, the underlying climate risk remains unchanged and could worsen with climate change (Robinson et al., 2013).

Second, poverty in Ethiopia has fallen considerably in the last decade as a result of successive years of good harvests and economic growth (World Bank 2015). This positive change has resulted in many individuals with per capita consumption now just above the national poverty line. These now non-poor individuals are likely still exposed to considerable risk, and could be vulnerable to falling back into poverty (Devarajan et al., 2013). However, it is possible that the growth experienced by Ethiopian households has made them both less poor and more resilient, and an empirical assessment is needed to determine the degree of vulnerability to poverty that is present in Ethiopia today.

Third, a large safety-net program was introduced between the two surveys used in the analysis, covering rural areas using geographical targeting. In 2005, the Government of Ethiopia introduced the Productive Safety Net Program (PSNP) in an attempt to transition food insecure households from an emergency food aid system to a more stable and predictable safety net.<sup>3</sup> The program tackles chronic poverty, but also aims to protect beneficiaries and non-beneficiaries against drought. We can assess the impact of shocks on those covered by the program and comment on targeting. Finally, Ethiopia suffered from very high food price inflation during one of the survey years, providing insights to other low income countries with increasing urban populations that have been similarly affected by high food price inflation in recent years.

To preview our findings, we show that shocks do have a significant impact on the

> 2In Ethiopia, the largest administrative units are regions, then divided into 68 zones and 770 woredas.

> 3The program was designed and financed with the support of Development Partners.

3