Analysts and policy-makers often focus on poverty statistics in formulating policy. But new research by Professor Ethan Ligon and Laura Schechter of the University of California at Berkeley suggests that they should also place great weight on minimising the displacement and uncertainty generated by big changes in policy. Their analysis of a period of great economic turmoil in Eastern Europe, published in March 2003 the Economic Journal, suggests that vulnerability to future calamity can rival poverty in determining overall human well-being.
Economists have traditionally used estimates of the incidence of poverty to try and measure the well-being of less fortunate members of society. But extensive research confirms the common-sense notion that one”s sense of well-being depends not on current poverty alone, but also on one”s sense of vulnerability to future calamity.
Ligon and Schechter construct a measure of this vulnerability, and use it to evaluate the wellbeing of a sample of households from Bulgaria in 1994. This was a period of great economic turmoil: prices were liberalised, inequality increased and, in the end, the Communists were reelected to power. The research shows that during this period, households” well-being was reduced nearly as much by uncertainty as by poverty.
In particular, during this tumultuous period, vulnerability reduced household well-being by an average of 26%. Of this, 53% was due to poverty, and 47% due to uncertain future prospects. 23% of the uncertainty can be directly attributed to macroeconomic shocks that affected the entire population.
Of course, not everyone was equally vulnerable to these shocks. In particular, education was of key importance in reducing vulnerability, though those who lived in rural areas and owned livestock were less vulnerable than were city-dwellers.
Analysts and policy-makers have often tended to focus on poverty statistics in formulating policy. This research suggests that they should also place great weight on minimising the displacement and uncertainty generated by big changes in policy, as these can rival poverty in determining well-being.
Similarly, various forms of social insurance can help to shield households from uncertainty. While these points may have been appreciated before in a rather general way, this research provides a basis for quantifying the benefits associated with reducing uncertainty.
”Measuring Vulnerability” by Ethan Ligon and Laura Schechter is published in the March 2003 issue of the Economic Journal. The authors are at the University of California, Berkeley.
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