The Effect of Shocks on Household Consumption in Rural Nigeria

Farm households in rural areas of Nigeria are naturally prone to various forms of idiosyncratic and covariate shocks. The frequent occurrence of shocks among the households coupled with lack of effective shock coping mechanisms in the region has made the households vulnerable to poverty. Idiosyncratic shocks affects only an individual household, for example illness or death of a household member. On the other hand, covariate shocks impinge an impact on a larger group of population in the same area at the same time, for instance adverse weather condition. In the absence of functioning formal coping mechanisms, the households resort to borrowing, adjustment in food intake, sale of goods or removing children from formal school. However, little is known about the impact of shocks on household consumption. To contribute to literature, this paper used the nationally representative survey data of rural farm household in Nigeria to empirically examine the effect of both idiosyncratic and covariate shocks on their consumption expenditure, using ordinary least square method. The least square method deemed to be appropriate for the analysis because of the exogeneity nature of shocks to consumption. In contrast to the existing works, the study measures shock as a continuous variable and also disaggregated the sample into and non-poor households on the basis of world poverty line of $ 1.20 per day with a view to recommend possible social protection measures to cope with adverse effect of shocks on household consumption. The framework of the study was developed from Permanent income hypothesis which postulates that any transitory changes in income will not have no any effect on permanent income and hence on actual consumption. The result of the ordinary least square regression used in the analysis revealed that whilst idiosyncratic and climatic shocks have no significant effect on household consumption, price shock is having a significant negative impact on household consumption. Further, the result of disaggregated sample suggests that that the non-poor households are able to adequately insure against the effect of idiosyncratic shocks as well as the climatic shock on their consumption while the poorer ones had not been able to insure against the effect of shocks related to death, livestock loss, climate change and price changes on their consumption. This implies that both poor and non-poor farm households should be provided with an adequate and effective social protection measures that would mitigate the effect of shocks on their consumption and welfare.