For decades, development economists have waded into the complexity of poverty and resilience to sort out the underlying structures that make and keep households poor. Years of theoretical research and field studies have established key insights on how and why people move in and out of poverty over time.

Michael Carter, director of the Feed the Future Innovation Lab for Assets and Market Access (AMA) and UC Davis economist, and Chris Barrett, Cornell economist, have identified three fundamental and complementary pathways in and out of poverty: assets, capacities and risk. These three pathways also largely determine whether families have the chance to achieve resilience.

In a new AMA Innovation Lab policy brief and the volume The Economics of Poverty Traps (U. of Chicago, 2018), Carter, Barrett and their co-author Jean-Paul Chavas, a University of Wisconsin economist, outline the dynamics of assets, capacities and risk. This Agrilinks post introduces some key ideas on how each can promote poverty escapes and resilience.

Assets

For agricultural households, assets are the cornerstone of their income and livelihood. Assets include land, buildings, livestock, machinery, liquid assets and other forms of physical capital. Households who are able to build up assets over time through savings and other means are effectively improving their future prospects while increasing their resilience to weather-related and other shocks.

How households choose to manage their assets in the event of a shock has serious consequences. Choosing to sell off assets in order to maintain consumption might keep the family fed but at the cost of next year’s opportunities, prolonging hardship. Choosing instead to protect assets by reducing consumption might preserve a family’s opportunity but at the cost of the family’s health and physical abilities and even their children’s growth and development.

Programs that seek to increase assets are different from transfer programs designed to support consumption, such as Kenya’s HSNP program. Other programs do seek to support households to build up their assets. Two prominent examples are Heifer International livestock-transfer interventions and programs from BRAC that provide a significant cash transfer to support households in establishing a business.

In both programs, the organizations provide much more than just the in-kind transfer. They also provide the training and skills families need to build an income from their new assets.

Capacities

Capacities encompass skills but also physical and mental health and a belief in one’s ability to succeed. Whether the discussion is about beliefs and behaviors, attitudes, hope and hopelessness or health, each of these all relate to the varying levels of success different farmers will have if given the same levels of assets, inputs and access to markets.

Recent studies have shown that stress, depression or a deterioration in physical health can affect cognitive function, resulting in hardship that reinforces stress and depression. This kind of self-reinforcing loop—a behavioral poverty trap—means that the experience of poverty itself can influence an individual’s future decisions about productivity.

Data from an AMA Innovation Lab input subsidy and savings field trial in Mozambique showed how a behavioral poverty trap is possible depending on how people manage psychological distress. When people see few prospects for themselves, they may avoid planning for the future to reduce their distress but at the expense of actions that could change those prospects.

A study based on data from the trial in Mozambique shows just how the subsidies shifted these dynamics. Data from 1,546 households showed that subsidies for inputs and savings improved how small-scale agricultural households planned for the future, improving their economic prospects.

“An economic intervention can affect the asset accumulation both through its direct economic impact,” writes the study’s author Rachid Lajjaj, an economist at Universidad de los Andes, “but also through a behavioral impact, which embraces all changes in preference, aspirations or attitudes that will in turn affect the economic decisions.”

Risk

Risks include environmental risks like drought or flood but also health risks and the risk of losing an income due to market changes. Risk has a big impact on a household’s resilience for two main reasons. First, a descent into poverty often starts with a serious shock. However, risk itself—specifically weather-related risk—discourages households from investing in productivity since in a bad year they might lose their whole investment.

Some of the most prominent Interventions address weather-related risk with agricultural insurance, which has the potential to promote resilience in two ways simultaneously. Households who know they are protected from the risk of weather-related losses tend to invest more in productivity, which can increase their income in good years. In bad years, the insurance acts like a safety net that helps families to maintain consumption until the next season.

Field trials and interventions using high-quality agricultural insurance are showing these impacts of promoting investments and providing a safety net. A recent AMA Innovation Lab field trial in Burkina Faso and Mali showed big impacts from insurance, including increased planting in cotton and sesame, both high-value cash crops. Index-based Livestock Insurance in Kenya made households 36 percent less likely than the non-insured to sell livestock as a way to cope and 25 less likely to reduce meals than non-insured households.

Insurance is also not the only way to pull risk out of small-scale agriculture. An AMA Innovation Lab study in Bangladesh tested a BRAC pilot of an emergency loan product designed to trigger in the event of catastrophic floods. Households who knew they were pre-qualified planted about 25 percent more rice than households who were not offered the emergency loan. As a consequence, households who did not suffer any flood losses produced about 33 percent more from their crops.

“From the point of view of the client, farmers don’t always trust insurance,” said Elisabeth Sadoulet, the project’s lead investigator and an economist at UC Berkeley. “And they don’t like to pay every year not knowing when they will receive a payment. On the other hand, they find it perfectly acceptable to repay a loan.”

Leveraging Assets, Capacities and Risk Together to Boost Resilience

The dynamics of assets, capacities and risk mean that for small-scale agricultural households to escape poverty and achieve resilience requires a way to increase their assets and/or capacities while minimizing their risks. Ideally, programs will do all three.

“To facilitate self-reliance and resilience for rural households we must invest in strategies that effectively address all root mechanisms that cause poverty to persist,” says Carter, a development economist at UC Davis. “This is how we might achieve an end to the need for foreign aid.”

The AMA Innovation Lab recently launched a randomized controlled trial (RCT) in northern Kenya to measure the impact of a program that addresses all three of these factors in an effort to boost long-term resilience among women pastoralists. The intervention pairs The BOMA Project’s Rural Entrepreneur Access Project (REAP) poverty graduation program with index-based livestock insurance to help participating women to maintain their gains in the event of drought.

“This project is an exciting step forward,” says Carter, who leads the project, "because it effectively addresses the three main causes of persistent rural poverty in developing economies."