Droughts Dominate Africa’s Risk Environment

COMMON WISDOM # 12: Droughts dominate Africa’s risk environment

SCORE:  2 - Mythish

FINDINGS

The shocks:

• More than 60 percent of households report sudden losses in income and assets.
• Weather shocks are very common, but price risk is just as prevalent. Death and illness were also frequently reported.
• Health and weather shocks are often repeatedly experienced by the same household. Price risk is by far the most commonly reported covariate shock, much more so than weather shocks.
• Risk is higher in rural areas, particularly risks to income. Rural households are more susceptible to income shocks because agriculture is a risky business.
• Female-headed households are less susceptible to agricultural price risk, but more susceptible to food price risk.

The coping mechanisms:

• Many households have no means to cope with shocks.
• Savings are the most widely used coping mechanism, but have a more limited role for poor and rural households, which, as a result, rely more on their assets.
• Working more (sometimes involving migration) is a common coping strategy in rural areas.
• Government assistance is limited. Social assistance is most often informal and is the most prevalent coping mechanism among households headed by women.

POLICY MESSAGES

• Reducing the risk associated with agricultural livelihoods is an important part of reducing volatility for households in Africa. This can be done by increasing access to irrigation and drought-tolerant crops and by improving the integration of domestic crop markets.
• Strengthening financial markets to provide financial products as buffers in periods of distress should be part of the development strategy, especially for rural areas.
• Improving and strengthening national social protection systems as well as formalizing social transfers would also help the most vulnerable in smoothing the impact of risk.

SUMMARY

The issue:

Everyday life in Sub-Saharan Africa carries considerable risk, which often is linked to extreme weather, such as drought. But households also face price shocks—increases in food prices or input prices, or falls in output prices. Illness or death in the household is also frequently reported by rich and poor households alike. And Africa is changing. Climatic conditions are changing, and so too are markets, asset holdings, and livelihoods.  In dealing with shocks, households commonly rely on informal transfers, reductions in household expenditures, and even asset sales. These mechanisms can be ineffective and costly. This study explores whether drought is indeed still the dominant risk faced by households, and how households cope with shocks today.

The analysis:

The study draws on the World Bank’s Living Standards Measurement Study–Integrated Surveys on Agriculture, which have been fielded in six Sub-Saharan African countries: Uganda, Ethiopia, Nigeria, Niger, Malawi, and Tanzania. These are standard household surveys that include modules on the shocks experienced, negative consequences of the shocks (loss of assets, income, food production, and food stocks), as well as the coping mechanisms that households adopt in the wake of an income shock. Most of the surveys are available for one year (one wave or round) only. For some countries (Uganda and Nigeria), the study was able to utilize pooled data across years.

The results:

The Risks Households Face:

1. Sudden losses in income and assets were reported by the majority of the households surveyed.
2. Weather shocks are very common, but price risk is just as damaging.
3. Death and illness were also frequently reported.
4. Other shocks occur, but less often.
5. Multiple shocks are reported more often than single shocks.
6. Health and weather shocks are often repeatedly experienced by the same household.
7. Price shocks are more likely to hit all households in a community at once. Weather shocks tend to do so as well, but not to the same extent.
8. Shocks are more frequently reported in rural areas, linked to their greater dependence on agriculture.
9. Rural households are more susceptible to income shocks, because agriculture is a risky business.
10. Business- and employment-related shocks are more prevalent among urban households.
11. Theft is as often a feature of the rural landscape as the urban landscape.
12. Wealth reduces and changes the nature of income risk. 

How Households Cope with the Shocks They Experience:

1. Many households do not manage to cope with shocks.
2. Savings are the most widely used coping mechanism, but have a more limited role for poor and rural households.
3. Working more or longer (sometimes with migration) is a common coping strategy for poor households in rural areas.
4. Social assistance is most often informal, with very limited government assistance reported across the continent.
5. Informal assistance is the most prevalent coping mechanism among households headed by women.
6. Government assistance is poorly targeted to poor households.

POLICY IMPLICATIONS

• Reducing the risks associated with agricultural income and helping households transition into less risky livelihoods are essential for establishing more stable income for households in Africa.
• Reducing risk in agriculture requires addressing market risk in addition to climate risk and crop disease
• Strengthening the financial markets in many Sub-Saharan African settings could go a long way, by improving the use of financial products as buffers in periods of economic distress. This is especially important for poor households and in rural areas, where relying on the sales of assets represents the main coping mechanism
• Improving and strengthening the national social protection systems as well as formalizing social transfers could also help the most vulnerable in smoothing the impact of risks.
• More could be done to improve data collection on risks and coping strategies for further policy research—such as adopting uniform recall periods and categories of shocks and coping mechanisms.