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.
ENDS
Notes for Editors: ‘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.
For Further Information: contact Ethan Ligon on +1-510-643-5411 (email:
ligon@are.berkeley.edu); or RES Media Consultant Romesh Vaitilingam on 0117-983-9770
or 07768-661095 (email: romesh@compuserve.com).