# **1.  Introduction**

Natural and policy-induced risks such as ill health, weather shocks and economic policy changes are common facts of life for many households all over the developing world. The likely impacts of these risks are exacerbated by notoriously weak, often times nonexistent, insurance and credit markets. A number of studies that have explored risk management strategies in such settings attest that households and communities, anticipating or facing conditions of adversity, engage in various own and informal risk management strategies—some mainly risk-reducing and others simply coping devices to protect consumption once a shock has taken place (Deaton 1991; Paxson 1992; Udry 1990, 1994 and 1995; Zimmerman and Carter 1996). Such strategies typically involve maintaining a diversified portfolio of livelihood activities and social support capabilities to shelter oneself from or cope with shocks. Income diversification is one of the most common components of such strategy undertaken to manage risk and sustain a livelihood (Ellis, 1998; Reardon et al. 1992).

Zimbabwe presents a distinctive example of households experiencing conditions of risk and uncertainty and coping with adverse shocks. In the early 1990s, Zimbabwe suffered two sets of shocks. First there were the droughts of the early 1990s. The 1991/2 drought was one of the most severe in recent memory, and affected all of southern Africa (Scoones et. al. 1996). The drought of 1994/5 was less severe per se, but its effects were magnified by the earlier drought. On top of this natural shock, a policy shock was imposed. In 1991 the country began an attempt to implement an Economic and Structural Adjustment Program (ESAP). Indicators of wellbeing, income and non-income, fell dramatically in the 1990s (Alwang et al. 1999, 2001). The impact of these changes on the livelihood strategies of rural and urban households is largely unknown.

The objective of this paper is to examine income and activity diversification in urban and rural Zimbabwe in response to the adverse effects of the above shocks. It looks at the degree of income and activity diversification and factors influencing it ex ante and ex post the shocks, and analyzes the role of diversification on consumption patterns. We use, along with time-series rainfall data, two nationally representative household survey datasets straddling the shocks. The household data come from Zimbabwe national income, expenditure and consumption surveys in 1990/91 and 1995/96, which were conducted using similar methodologies and near-identical questionnaires.

The paper is organized as follows. Section 2 provides a brief review of the nature and impact of Zimbabwe’s economic policy reform program and the droughts of early 1990s on its urban and rural households. Section 3 overviews the literature on income diversification and its role in mitigating shocks. Section 4 introduces indices for measuring income diversification that are suitable for urban-rural comparison. Data and descriptive statistics are in section 5. Section 6 presents the empirical model. Section 7 discusses the results of multivariate analysis of the determinants of income diversification and its impact on welfare ex ante and ex post shocks. Finally section 8 concludes the paper.