# **7. Conclusion and Policy Insights**

**This paper applies an innovative approach to estimate the population's vulnerability to poverty in El Salvador and analyzes potential underlying drivers** . We apply  a novel ex-ante approach to vulnerability developed by the World Bank to the context of El Salvador to measure ex-ante vulnerability and its components. In addition, we take advantage of household-level data from 2016 to 2019 to show trends over time. We also analyze the components behind these trends, distinguishing between poverty- and risk-induced vulnerability and idiosyncratic and covariate vulnerability. Our analysis is based on an income measure of welfare.

**Our main results show that ex-ante vulnerability to poverty decreased over time, in parallel to the poverty reduction observed in the country.** This development comes hand in hand with an increase in the importance of risk-factors relative to factors related to assets driving vulnerability. The importance of risks in overall vulnerability increased over time. Although the vulnerability rate decreased since 2016, this might be a hint for shocks playing a more significant role in the overall development path of El Salvador. The analysis at hand finds that risk-induced vulnerability is mainly driven by idiosyncratic (household-level) shocks and not covariate (municipality-level) shocks. Consequently, shocks occurring to individual households (such as crime, unemployment, or illnesses) should receive special attention from policy makers. Still, it is essential to note that covariate shocks (such as a drought or flood at the municipality level) can lead to idiosyncratic shocks (an illness or employment loss of an individual household). While about half of the vulnerable also suffer from poverty, the vulnerable do not coincide entirely with the poor.

**Furthermore, our work reveals that vulnerability rates are higher in rural than urban areas, and risk factors have become relatively more important in rural areas over time.** Our paper demonstrates that, while vulnerability was mainly poverty-induced in rural areas in 2016, this dynamic shifted over the last few years. In 2019, risk factors played a more significant role than poverty assets in overall vulnerability. The relative importance of risk-induced to poverty-induced vulnerability in urban areas also increased since 2016. As vulnerability is higher in rural areas, public policies should pay special attention to rural populations.

**These findings are important from a policy standpoint, given that the design of a flexible and adaptive social protection system depends on the magnitude and type of welfare shocks.** Under a scenario in which vulnerability is mostly poverty-induced,  policies strengthening social assistance and cash transfer programs should be prioritized. In addition, there is a need for improving service delivery, and increasing the human capital accumulation (education and health) of vulnerable populations. Under this scenario, households do not have sufficient financial, physical, or human capital to escape poverty. In these circumstances, disasters caused by climate shocks and other adverse shocks only exacerbate an already difficult situation and can contribute to increasing the depth of poverty. Policies prioritizing the establishment of social assistance programs targeting the chronically poor, such as unconditional or conditional cash transfer programs (such as Comunidades Solidarias and Rurales in El Salvador), are likely to be effective in contributing to the reduction of short-term poverty and the accumulation of financial, physical, and human capital in the medium to longer-term) (Laws, 2016).

**By contrast, when vulnerability is mostly risk induced, as in the case of El Salvador,  policies that increase the availability of social insurance mechanisms should be prioritized.** When vulnerability is predominantly risk-induced, shocks push households below the poverty threshold, as they do not have the ability to protect their consumption or income. Social insurance mechanisms can assist households in coping with and recovering from adverse shocks. Under risk-induced vulnerability, the preferred policy action is the enhancement of access to savings, insurance, credit, and other mechanisms that allow affected households to access resources to better cope and recover faster from negative impacts on their consumption and income. Alderman and Haque (2006) point out that social protection programs can provide an insurance function when their targeting is based on transitory rather than more chronic correlates of poverty, in addition to the need for a flexible implementation strategy for faster

19