# **3.1.Measuring Vulnerability**<sup>**16**</sup>

# **_Asset Based Approach_**

There are several arguments in favour of an asset-based approach to vulnerability. Firstly, since vulnerability is a dynamic concept, we can consider that consumption-poverty or income-poverty measurements, because they are static, are of limited use in capturing complex external factors affecting the poor as well as their response to economic difficulty (Moser, 1998). Secondly, owning assets reduces the risk for households to fall into poverty as a result of macroeconomic volatility (de Ferranti et al., 2000). Hence, accumulating assets―be they liquid or not (e.g., durable goods and housing), material or not (by fostering education, health, family and social networks)―helps people to insure themselves against falling into poverty and to cope with risks and shocks. Asset accumulation should thus be considered as a major factor in risk management.

Nevertheless, though an asset index can be a good proxy for living standards in order to measure poverty<sup>17</sup> , two problems arise when using household wealth as an indicator of well-being in order to measure vulnerability to poverty. On the one hand, if assets are used for consumption-smoothing, then an asset-based approach overestimates vulnerability since assets can fluctuate whereas consumption does not. On the other hand, if assets are not used to smooth consumption, the approach would underestimate vulnerability. So, knowing whether an asset-based approach deviates from a more standard consumption-based approach is mainly an empirical question.<sup>18</sup> Besides, we could ask whether, in some circumstances, an asset-based approach is not preferable when it comes to measuring vulnerability. Indeed, let us consider the most interesting and realistic case where productive assets contribute towards the income generation process and can also serve as buffer-stock in order to face a non-anticipated drop in income (Deaton, 1991, Carroll, 1992). Empirically though, many studies find little evidence supporting the buffer-stock hypothesis in developing countries.<sup>19</sup> For instance, Dercon (1998) shows that, given subsistence constraints and agent heterogeneity, rich households will accumulate assets more quickly than poor ones who will pursue low-risk, low-return activities. Interestingly enough, the evidence suggests that households with lower endowments are less likely to own cattle and returns to their endowments are lower. So, in presence of imperfect markets for credit and insurance, few households are able to smooth their consumption. What is more, when assets are mainly made up of productive assets, selling these assets would induce a permanent loss in income for the household who

> 16 See Echevin (2010a) for a more complete version of this section and application to other countries.

> 17 Sahn and Stifel (2003) show that an asset index obtained from a factor analysis on household assets using multipurpose surveys from several developing countries is a valid predictor of child health and nutrition and, thus, long term poverty.

> 18 Echevin (2010a) provides such empirical evidence using Ghana Living Standard Surveys.

> 19 See, among others, Rosenzweig and Wolpin (1993), Morduch (1995), Fafchamps et al. (1998), Kazianga and Udry (2006), and Hoddinott (2006).

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