characteristics, agriculture, consumption expenditures, healthcare, education, and social programs. They provide data on household spending, as well as other elements of living standard of population such as housing, durable goods consumption, agriculture and landholding, access to social services and others. The two year panel data contain observations on over 2540 sampled households from throughout Serbia. Of these observations, about 1120 of them are rural. The two year panel survey data are augmented with district level time-series rain fall and topography information to enable an in depth analysis of determinants of agricultural productivity, rural poverty and vulnerability in rural Serbia.

# **Rural Poverty Dynamics in Serbia**

A close look at the level of rural poverty in Serbia in 2002 and 2003 shows a remarkable dynamics, even in a single year. Although overall increase in rural poverty appears small (see Table 2 above), a closer look at the households falling into or moving out of poverty and those remaining permanently poor reveals a more complex picture. While 53 percent of the poor in 2002 (about 8.3 percent of rural population) moved above the poverty line, about 10 percent of the non-poor in 2002 became poor in a span of one year (Table 3). Poverty persisted among 7.3 percent of the rural population (i.e., 47 percent of the poor in 2002), which may be explained by structural problems that prohibit income mobility to jump above the poverty threshold.

**Table** **<u>3</u>** <u>. There are significant movements in and out of poverty in rural Serbia</u>

||**Poor in 2003**|**Non-poor in 2003**|**Total**|
|---|---|---|---|
|Poor in 2002|7.3|8.3|**15.6**|
|Non-poor in 2002|9.9|75.5|**84.4**|
|Total|**16.2**|**83.8**|**100**|

Source: Serbian Living Standard Surveys (SLS) 2002 and 2003.

Several short- and long-term factors may have been responsible for observed increase in rural poverty and vulnerability. First, the drought of 2003 had led to declines in agricultural productivity, which directly affected rural areas. Agricultural production declined by 5.7% in 2003 due to unfavorable weather conditions. Second, the existing policy environment may have had an adverse and countercyclical effect on rural incomes. For instance, an appreciating real exchange rate and price controls may have kept agricultural product prices artificially low even during the drought year, thus protecting the purchasing power of net consumers of agricultural products (mostly urban) at the expense of net producers of agricultural products (mostly rural). Third, the recent enterprise restructuring may have also affected the employment opportunities in the manufacturing sectors, with direct and indirect negative impact on the rural population in an economy characterized by strong forward and backward linkages between farming and manufacturing. And finally, the lingering effects of the Kosovo conflict may have also aggravated rural deprivation due to influx of migrants, particularly in border regions.

# **2. Vulnerability—Conceptual Framework**

Chambers (1983) eloquently expressed that poor people are not only concerned about the current low levels of income or consumption, but also the likelihood of experiencing stressful declines in these levels in the future. Vulnerability, the insecurity of well-being of the 3