Effect of climate shocks on rural household welfare dynamics in Ethiopia: evidence from panel data

Abstract

Climate shocks have been shown to reduce agricultural output and cause production fluctuations in developing countries. When livelihoods depend on rain-fed agriculture, like in Ethiopia, climate shocks will translate into consumption shocks. Despite significant improvements in household consumption in Ethiopia, shocks caused by climate and other factors are negatively affecting household consumption dynamics. Therefore, examining household consumption dynamics in the context of climate-induced shocks helps to guide resilience capacity and establish appropriate programs and interventions. The study used a three-round panel dataset based on the Ethiopian socioeconomic survey and spatial rainfall data. The results of the linear dynamic panel model show that lagged consumption values, market shocks, and changes in rainfall positively affect consumption dynamics. In contrast, production, temperature, and rainfall shocks have an inverse relationship. Strategies for mitigating climate shocks and consumption aftershocks help stabilize consumption over time. Support to strengthen household coping strategies may involve restoring existing livelihoods and forms of production or reducing household vulnerability. Therefore, government intervention is required for asset accumulation programs to support household coping strategies and responses to shocks. In addition, the dynamic link between consumption and essential socioeconomic and institutional factors must be considered to minimize the impact of climate shocks on consumption dynamics.