Transitory Income Shocks and Essential Household Consumption Expenditures in Rural Kenya

Abstract

Majority of rural households in developing economies derive their livelihoods from agriculture, a sector that is highly prone to transitory shocks. In the absence of effective coping mechanisms, these households are unable to smoothen consumption and are thus likely to experience fluctuations in consumption expenditures. This study examines the effect of transitory income shocks on different categories of household expenditures, focusing on spending on essential goods and services such as food, health and education in rural Kenya. The study explores the heterogeneity in households and consumption to test the permanent income hypothesis using a sample of 5,828 rural households disaggregated along two distinct agro-ecological zones. Decomposing household income into permanent and transitory components failed to yield distinct estimates of permanent and transitory incomes when applied to this study’s data. We therefore modified the estimation approach to capture the effect of transitory income shocks by introducing a dummy of crop loss in the household expenditure equation. Our results show that in the countrywide sample, households that experienced crop loss had a statistically significant reduction in the aggregate, food and non-food expenditures compared to the ones that did not. For the high and medium potential agro-ecological zones sample, we found that consumption expenditures were not associated with crop loss. In the arid and semi-arid zones sample, aggregate and food expenditures reduced for households affected by crop loss. The findings provide a basis of policy recommendations on the need for the existing government poverty alleviation programmes to focus on drivers of impoverishment such as transitory income shocks.

Keywords: transitory income shocks, consumption expenditure, agro-ecological zones, Kenya

DOI: 10.7176/JESD/10-12-04

Publication date:June 30^th 2019