Poverty dynamics in Ethiopia: state dependence

Abstract

This paper focuses on the persistency of poverty in rural and urban households in Ethiopia by estimating dynamic probit models. Unobserved heterogeneity, first order state dependence and serially correlated error component are allowed for. The empirical results for both rural and urban areas show that each of these components is statistically significant in characterising the dynamics of poverty in Ethiopia. Furthermore, risk of poverty increases with the number of household’s size. Moreover, land size is highly correlated (negatively) with that risk of poverty and the most important two cash crops (Coffee and Chat) has significant role in the alleviation of poverty in Ethiopia. Finally, the effect of true state dependence and transitory shocks in poverty persistency appears to be stronger among urban households than rural households.