Safety Nets or Social Insurance in the Presence of Poverty Traps? Evidence from Southern Ethiopia

Abstract

Recent empirical work finds evidence of highly nonlinear wealth dynamics among the Boran pastoralists of southern Ethiopia, consistent with the hypothesis of poverty traps. We ask two critical, logically subsequent questions: (1) Do Boran pastoralists understand these dynamics? (2) If they do, what are the consequences for informal interhousehold transfers arrangements (gifts and loans of cattle)? We address these questions using original primary data collected among the same population to establish (i) pastoralists' expectations of herd dynamics and (ii) the structure of social transfers networks. Our results suggest that Borana pastoralists perceive the nonlinear dynamics that characterize livestock wealth in the region and that these result from adverse weather shocks affecting primarily households of intermediate herding ability, underscoring the criticality of methods for protecting assets in the face of unanticipated shocks. This has consequences on the design of transfer arrangements. In particular, we find that transfers of cattle respond to recipients' cattle losses, but only so long as he does not fall too far below the critical asset threshold at which herd dynamics bifurcate. Those who are persistently poor or who become destitute disappear from social networks and do not receive transfers in response to shocks. The resulting social transfers networks are highly asymmetric. These results suggest that asset transfers through social networks are better conceptualized as part of a safety net (with the objective of not letting a household falling into an asset poverty trap) than as informal mutual insurance (with the objective of providing proportional compensation for losses).