Risk, Shocks, Growth, Aid and Poverty

Much micro-level evidence has highlighted the role of risk and shocks on poverty and low growth at the household level. However, its implications for overall growth are not well documented, let alone how it affects poverty. The first objective of this work is to investigate the impact on growth of the presence of integrate various sources of risk into a more standard cross-section growth regressions framework with an emphasis on risk relevant for the rural sector: commodity prices and weather risk. Indeed, high vulnerability to adverse shocks is strongly correlated by economies not able to have made the transition from an agriculture-dependent economy. For a sample of the poorest African and Asian economies, we ask whether the underlying risk as well as particular shocks have persistent growth effects, beyond transitory effects. Next, we ask whether the poverty-growth elasticity in the economy (the rate at which growth translates into poverty reduction) is affected if an economy is more vulnerable to adverse shocks. There are good theoretical grounds to suspect that economies with more risk and growth volatility may transmit growth less readily in poverty reduction than others. If so, it may argue strongly for institutional designs of growth and development strategies that pay more attention to risk-reduction and mitigation (such as via forms of social protection policies). However, macro-instruments, via aid, may also help to reduce the underlying volatility in growth. In ongoing work, we are also investigating whether the adverse effects of commodity price volatility can be cushioned by aid. Using co-integration techniques we find that adverse price shocks lower the growth of exporters but that this adverse effect is itself significantly reduced the higher are prior flows of aid. An implication is that vulnerability to adverse shocks might be an additional criterion in aid allocation.