Asset Smoothing and Consumption Smoothing: Disaster‐coping Strategies in Noncontiguous and Contiguous Destitute Areas

• Published date: 01 March 2023
• Author: Li Zhou,Jie Sun,Wuyang Hu,Yu Zhang
• Date: 01 March 2023
• DOI: http://doi.org/10.1111/cwe.12475

China & World Economy / 223–250, Vol. 31, No. 2, 2023 223

Legal statement - This is an open access article under the terms of the Creative Commons Attribution License, which permits

use, distribution and reproduction in any medium, provided the original work is properly cited.

© 2023 The Authors. China & World Economy published by John Wiley & Sons Australia,

Ltd on behalf of Institute of World Economics and Politics, Chinese Academy of Social Sciences.

*Li Zhou, Professor, College of Economics and Management, Nanjing Agricultural University, China. Email:

zhouli@njau.edu.cn; Jie Sun, Post-doctoral Researcher, College of Public Administration, Nanjing Agricultural

University, China. Email: sun51jie@126.com; Wuyang Hu (corresponding author), Professor, College of

Food, Agricultural, and Environmental Sciences, the Ohio State University, US. Email: Hu.1851@osu.edu;

Yu Zhang, Assistant Professor, School of Insurance and Economics, University of International Business and

Economics, China. Email: zhangy2119@uibe.edu.cn. This research was supported fi nancially by the Major

Research Plan of National Social Science Foundation of China (No. 19ZDA117), the National Natural Science

Foundation of China (No. 72141011), and the Project of Philosophy and Social Science Research in Colleges

and Universities in Jiangsu Province (No. 2022SJYB0050).

Asset Smoothing and Consumption Smoothing:

Disaster-coping Strategies in Noncontiguous and

Contiguous Destitute Areas

Li Zhou, Jie Sun, Wuyang Hu, Yu Zhang*

Abstract

Do households sell assets in order to smooth consumption? The empirical evidence

is mixed. Using household- and village-level data in the context of China’s poverty

alleviation policy, we analyze the relationship between climate shocks and household

coping behaviors from the perspective of whether coping strategies to deal with weather

shocks are sensitive to the contiguity of destitute areas. Our results indicate that, unlike

households living in noncontiguous destitute areas, households struck by weather shocks

in contiguous destitute areas tended not to reduce or liquidate assets. To overcome

weather shocks, households in contiguous destitute areas instead reduced household

consumption, such as food consumption and increased nonfarm working hours. Our

fi ndings point to the possibility that the implicit assumption of consumption smoothing

coupled with a failure to incorporate explicitly the factor of contiguous regions has led

to seemingly divergent fi ndings in the literature regarding consumption smoothing.

Keywords: asset dynamics, coping methods, poverty alleviation, weather shocks

JEL codes: I32, I38, O15

I. Introduction

In many parts of the developing world, rural households frequently face enormous

fluctuations in their income streams (Carter and Lybbert, 2012). According to the

Li Zhou et al. / 223–250, Vol. 31, No. 2, 2023

224

Legal statement - This is an open access article under the terms of the Creative Commons Attribution License, which permits

use, distribution and reproduction in any medium, provided the original work is properly cited.

© 2023 The Authors. China & World Economy published by John Wiley & Sons Australia,

Ltd on behalf of Institute of World Economics and Politics, Chinese Academy of Social Sciences.

conventional asset-based poverty trap hypothesis, selling assets to smooth consumption

is the primary strategy to cope with shocks caused by natural or unnatural disasters

(Kazianga and Udry, 2006; Carter et al., 2007). Based on an assumption of concave

utility, Zimmerman and Carter (2003) suggested that such asset-management strategies

could help households maximize their utility.

Despite the theoretical expectation, empirical evidence for this behavior among the

poor is mixed. Several studies have supported the consumption-smoothing hypothesis

(Rosenzweig and Wolpin, 1993; Ghosh and Ostry, 1995). In contrast, many researchers

have provided evidence of asset smoothing,1 for example, the Burkina Faso study

by Kazianga and Udry (2006) and Carter and Lybbert (2012). Disaster avoidance

is the primary reason for adopting asset smoothing (Zimmerman and Carter, 2003).

Households are motivated by a desire to protect their asset base and ensure they can

generate a livelihood in the future (Ersado et al., 2003).

We do not repeat earlier studies that only tested for the existence of consumption

smoothing using a different dataset. Instead, we approach this issue from a new

perspective by analyzing the possible impact of the contiguity of poverty regions on

households’ choice of coping methods. Specifically, when the impoverished area is

contiguous, which means that all communities in a relatively large region live in poverty,

liquidating assets will likely neither attract enough buyers nor produce any substantial

return. This is because the contiguous poverty region is poor throughout or may be

subject to covariate risk (e.g., drought or fl ood); thus, no other households will be able to

aff ord to purchase the assets put up for liquidation. Platteau (1991) also suggested that,

for areas with widespread poverty or high covariance of income, selling assets cannot

be used as a means of coping with a major shock. The relatively poor infrastructure,

high transport costs, and costly spatial transmission of information mean that asset

markets are thin in contiguous destitute areas (CDAs, which refers to Lianpian Tekun

Diqu). This in turn further restricts the eff ectiveness of the sale of assets to cope with

risks (Binswanger and Rosenzweig, 1986; Zimmerman and Carter, 2003). In this case,

reducing consumption, such as food intake, may be the main disaster-coping strategy.

In this study, we show that, without properly considering the eff ect of the contiguous

region, one may reach a misleading conclusion regarding whether households may adopt

consumption smoothing. The implicit assumption of consumption smoothing coupled

with a failure to incorporate the factor of contiguous regions explicitly has led to the

seemingly divergent literature in terms of the fi ndings on consumption smoothing.

1Asset changes caused by disasters manifest in many ways, such as land loss (e.g., damage due to soil erosion

or to fl ooding by a diverted river), damage to residences and personal belongings or property, and animal

deaths (Carter et al., 2007). The poor may use other means (e.g., reducing consumption) to smooth assets.