Weather and income: effect on household saving and well-being in South Africa

In countries where rain-fed agriculture constitutes a significant portion of household livelihood, increased weather variability represents a source of vulnerability to stable consumption, food security and household well-being. Weather induced income changes affect household consumption and saving decisions. We evaluate saving and consumption responses to weather variation in South Africa, leveraging a newly available panel of nationally representative households covering the period from 2008 to 2014 and long term climate data. We test our data against predictions of the standard rational consumption model and some of its main extensions (i.e., precautionary saving and myopic consumption), and compare differences among households engaged in agriculture activities versus those that do not. Furthermore, we evaluate the impact of saving on household life satisfaction and health behavior. In accordance with previous literature, we find that households save in response to both transitory and permanent income change, although the proportion saved from transitory income is significantly higher. We find signs of precautionary saving driven by non-agriculture households, while we find stronger evidences of myopic consumption for agriculture households. In addition, we show that a one-unit increase in log-saving from transitory income increases the odds of a unit increase in self-reported life satisfaction of the household head by 14%, and a one unit increase in log-saving from permanent income leads to a 6% increase in hazard ratio of having taken an HIV test. This latter result may indicate that preventative health behavior such as HIV testing requires a stronger inducement than a transitory injection of income. Further research is needed to identify the mechanisms by which saving affect life satisfaction and health seeking behavior in developing countries.