Rural Poverty, Risk and Development

Rural Poverty, Risk and Development

Marcel Fafchamps

This book investigates the relationships between rural poverty, risk, and development. Building upon the author’s work in the area, it summarises the contributions of recent theoretical and empirical work to our understanding of how risk affects rural poverty levels in developing countries. In particular the book examines what we do and do not know about risk coping strategies among today’s poor rural societies. Ways in which these strategies may be re-examined and improved by governments and international organisations are proposed.

Chapter 5: Risk and Inequality

Marcel Fafchamps

Subjects: development studies, development economics, economics and finance, development economics


The purpose of this chapter is to provide a semi-rigorous treatment of the relationship between risk and inequality over time. There has been a lot of interest in the risk coping strategies of the poor in the recent literature but little work on the relationship between these strategies and inequality (Fafchamps 1999b). Some have begun to suspect that certain risk coping strategies further impoverish the poor (for example Sen 1981, Dasgupta 1993). Labour bonding and debt peonage are examples that we have discussed earlier (for example de Janvry 1981, Srinivasan 1989). Patronage, that is, the protection of the poor by the rich in exchange for labour and services, is also suspected of perpetuating poverty (for example Platteau 1995a, Platteau 1995b). The purpose of this chapter is to clarify the relationship between inequality and risk. Our objective is to understand how wealth accumulation and risk sharing affect the evolution of inequality over time. We ignore possible feedback effects between inequality and social choices (Benabou 2000). Mookherjee and Ray (2000) have shown that, in a generic model with human capital accumulation, persistent inequality can arise. Multiplicity of steady states may also occur if human capital is indivisible. A similar result is obtained in Durlauf (1996) in a model where wealth feeds back into educational investment through the finance of local public schools. Here we abstract from human capital issues. The persistence of inequality is studied in detail for the US in Arrow et al. (2000). We focus, here on poor...

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