Shocks as a Source of Vulnerability: An Empirical Investigation from Pakistan (Poverty and Social Dynamics Paper Series PSDPS : 6)

A growing body of literature points to the role of risks, shocks and * vulnerability in perpetuating poverty because poor households are relatively more negatively affected by uninsured shocks, as they are likely to lack the necessary human and physical capital to recover from them [Del Ninno and Marini (2005)]. Vulnerability as expected poverty can be defined as the ex-ante risk that a household if currently non-poor will fall below poverty line, or if currently poor, will remain in poverty in the future. The sources of vulnerability depend on the level of underlying shock, the ability to cope with shock management strategies, and long-term income generating capacity [Chaudhuri (2003)]. Some of these shocks can have long-lasting effects in perpetuating and increasing poverty and resulting in adverse human development outcomes [Foster (1995); Jacoby and Skoufias (1997)]. In developing countries where financial and insurance markets are incomplete or even absent, poor households are exposed to a variety of risks resulting in high income volatility [Baulch and Hoddinott (2000); Dercon (2002); Paxson (1992)]. Households protect their livelihood by employing risk management strategies in order to reduce the likelihood of shock occurrence ex-ante and to mitigate and cope with the impact of a shock ex-post [World Bank (2001)].