Determinants of Consumption Expenditure and Poverty Dynamics in Urban Ethiopia: Evidence from Panel Data

Abstract

This study applies the fixed effect model to investigate determinants of consumption expenditure and the MNL model to identify determinants of chronic and transient poverty in urban Ethiopia using panel data. Descriptive results show that while a large number of households frequently moved in and out of poverty between the panel periods, many did not move far above the poverty line and remained vulnerable to falling back into poverty. The Spells approach decomposition indicates that around 7 % of the households appeared to be trapped in chronic poverty while 61 % were affected by transient poverty. Fixed effect estimations confirmed that family size, dependency ratio, and head’s completion of secondary and tertiary schooling impacted consumption expenditures significantly. MNL’s results reveal that completion of secondary and tertiary schooling by the head and remittances significantly reduced both chronic and transient poverty. Family size, dependency ratio, and female headed and casual employment activities significantly aggravated both poverty categories. Policies that aim at reducing family size, dependency ratio, and improving access to education will exert a positive effect on consumption expenditure and in reducing poverty. Because demographic, human capital, and socioeconomic characteristics are important determinants of poverty categories, poverty reduction strategies and targeting will be more effective if these households’ characteristics are taken into consideration while supporting the poor to tackle poverty.

The author would like to thank Professor ALMAS HESHMATI for his invaluable comments and advice that enabled him to improve the earlier versions of the manuscript. This paper would not have been possible without his kind support.

This paper was presented at the 1st Annual Eastern African Business and Economics Watch (EABEW) international conference, organized by Jönköping International Business School (JIBS) of the University of Jönköping (Sweden) in conjunction with University of Rwanda, College of Business and Economics (UR-CBE) on May 5–6, 2015 in Kigali, Rwanda.

The author gratefully acknowledges financial support from Jönköping International Business School (JIBS)-SIDA, which covered all costs to participate in the conference.