be signals of an improvement since the last recorded poverty rate from 2012 was 22.2 percent. Furthermore, most of those Mexicans who have escaped poverty did not enter the middle class, but rather moved into the group vulnerable to fall back into poverty ($4 to $10 a day). Data from the longitudinal MxFLS described in section 2.2 shows that from those households that moved out of poverty by 2005 more than a third turned into vulnerable (Table 1) Indeed, despite recent social progress in Mexico, about 43 percent of Mexicans remain vulnerable to fall into poverty by 2012 (see Figure 2 above).

**Table 1. Transition matrix of socioeconomic groups; Mexico 2002-2005** _<u>(Percentage of households)</u>_

|**2002**|**Poor (<4)**|**Vulnerable**<br>**(4-10)**|**2005**<br>**Middle class**<br>**(10-50)**|**Upper class**<br>**(>50)**|**Total**|
|---|---|---|---|---|---|
|**Poor (<4)**|52.6|36.9|10.0|0.6|**100**|
|**Vulnerable (4-10)**|23.2|50.0|25.6|1.3|**100**|
|**Middle class (10-50)**|15.9|5.5|72.8|5.9|**100**|
|**Upper class(>50)**|12.9|0.0|12.9|74.2|**100**|
|**Total**|**31.7**|**34.2**|**31.2**|**2.9**|**100**|

_Source_ : Author’s calculations based on data from MxFLS panel database.

Such vulnerability levels could potentially turn into poverty as a result of shocks.<sup>6</sup> As Table 1 above shows, about 23 percent of the vulnerable households in 2002 turned into poverty in 2005. A probit model analysis suggests that not having insurance and the occurrence of shocks increases in 11% and 10%, respectively, the probability of transiting from vulnerability to poverty between 2002 and 2005 —both significant at the 90% confidence level.<sup>7</sup> Successive minor shocks, on one hand, can run down the coping capacity of many non-poor households to the extent of being pushed into poverty. On the other hand, highly catastrophic shocks like the Tequila crisis in 1994-95 or the flu outbreak (H1N1) in 2009 and the latest 3F crises—financial, , food and fuel crisis—reasserted concerns about the need to assist households that, as a result of the crises, may have transited to a worse situation. For instance, the recent global crisis of 2008-09 caused the Mexican economy to fall

> 6 The research agenda on vulnerability has been extended, but still faces practical and conceptual constraints. Most studies have concentrated on the effects of macroeconomic crises, taking advantage of panel datasets on employment (Cunningham and Maloney, 2000), as well as national level cross-sectional income and expenditure surveys (Mckenzie, 2003; Rubio and Soloaga, 2004; Narayan and Sánchez-Páramo, 2012). By contrast, and only recently, a few micro-level studies of rural areas had explored vulnerability, either quantitatively (Skoufias, 2006, 2007) or qualitatively (Latapí and González de la Rocha, 2002, 2004), but even these micro-studies have been unable to establish a clear connection between risk, poverty and social policies. Hence, despite reported progress in the study of vulnerability, important gaps remain to be filled.

> 7 Other significant explanatory variables are related to the occupational status of the household head (e.g., being an unskilled worker or a self-employed involved in sales increase the probability of transiting from vulnerability to poverty in almost 20% vis-á-vis being a farmer). The geographical location, as well as positive changes in the household size, is also related to significant increases in the probability of falling into poverty. For instance, living in rural areas increases the probability in 13% compared to living in urban areas.

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