the way in which these price<sup>changes impactupon poverty can give valuableinsight into</sup> the poverty effectiveness of<sup>behind-the-bordertrade interventions.</sup> Closely related to the issue<sup>of poverty dynamicsand theimpact of shocks is the issue of</sup> risk and uncertainty. Sometimes<sup>economicpolicy analysisignoresthesubstantial risk</sup> aversion of poor households.<sup>However,providing security is a central pillar of the WDR</sup> 2001 approach to poverty<sup>reduction. Thereason is quiteclear;poor households notonly</sup> have less - they are much<sup>more vulnerableto being in poverty in any given year.They</sup> consequently make great<sup>effortsto minimizethis vulnerabilityand these effortscan</sup> undermine their ability to benefit<sup>from reformsand their long-rungrowth.For example,</sup> poor households sometimes<sup>plantlower yielding but more drought resistant cropsdespite</sup> the fact that they could substantially<sup>increase their incomes with higher yielding cropsif</sup> they had an effective means<sup>of dealing with the risk of crop failure. Thustackling issues</sup> of risk and vulnerability<sup>in the analysisof structural reformand poverty helpsto link such</sup> reforms more closely to<sup>the social protectionpolicies whichforma key part of many</sup> PRSPs.

There are a number of ways<sup>in which an analysis of risk may be undertaken.Firstly, in</sup> many cases surveys record<sup>both consumptionand income.In cases where there is just</sup> one survey it is useful to<sup>look at how much narrowerthe cross-sectionalconsumption</sup> distribution is than the income<sup>distribution.22</sup> Where a panel (or pseudo-panel)<sup>is</sup> available it is possible to<sup>calculate the extentof consumption smoothing as wellas the</sup> degree of persistence in both<sup>consumption and income.Studies which have done this</sup> have shown that the poor<sup>are,unsurprisingly, ratherless well insuredthan the betteroff</sup> (Jalan and Ravallion, 1999).<sup>However,this begsthe interesting policyquestion- what</sup> sorts of interventions are<sup>likely to affectthe vulnerability of households to poverty, given</sup> that domestic institutions<sup>can be importantindirect providersof social protection(e.g.</sup> boards<sup>which provideguaranteed prices, or enterprisesproviding</sup> agricultural marketing transfers to existing and former<sup>employees).In order toanswer this questionit is</sup> necessary to have a measure<sup>of vulnerability. Several people have constructed</sup> vulnerability measures (see<sup>Christiaensenand Boisvert 2000;Pritchett,Suryhadiet al.</sup> 2000; McCulloch and Calandrino<sup>2002) andthen attempted to understandthe</sup> determinants of vulnerability.<sup>An analysisof how reformsaffectvulnerabilitycould</sup> therefore enrich the analytical<sup>frameworkused above.</sup> A second, more comprehensive<sup>approachto incorporatingrisk into our analysis,would be</sup> to incorporate a stochastic<sup>elementintothe household modelingapproach discussed</sup> above. Household models<sup>provide solutionsfor the optimal allocationby householdsof</sup> the productive factors at<sup>their disposal.Including riskin suchmodels wouldallow one to</sup> capture the idea that households<sup>tend to allocateresources in order to maximize the return</sup> to and minimize the risk<sup>from theirentire "portfolio"of activities.23Such a model would</sup>

> **22** Although the difference<sup>will bea mixtureof consumption smoothingand differences in measurement</sup> error variances between consumption<sup>and income.</sup>

> **23** More precisely one might<sup>modelthem as maxirnizing theirexpected utilitytaking into account their risk</sup> aversion.

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