Doctoral thesis of philosophy the vulnerability and resilience of households in vanuatu and solomon islands to global macroeconomic shocks

THE VULNERABILITY AND RESILIENCE OF HOUSEHOLDS IN VANUATU AND SOLOMON ISLANDS TO GLOBAL MACROECONOMIC SHOCKS A thesis submitted in fulfilment of the requirements of the degree of Doctor of Philosophy (Economics and Finance) by P Lachlan McDonald MIntRel University of Melbourne BEcon (Hons) / BCom Monash University School of Economics, Finance and Marketing College of Business RMIT University March 2014 ii DECLARATION I certify that except where due acknowledgement has been made, the work is that of the author alone; the work has not been submitted previously, in whole or in part, to qualify for any other academic award; the content of the thesis is the result of work which has been carried out since the official commencement date of the approved research program; any editorial work, paid or unpaid, carried out by a third party is acknowledged; and, ethics procedures and guidelines have been followed P Lachlan McDonald 4th March 2014 RMIT University iii ACKNOWLEDGEMENTS So many people have assisted me with this research thesis I’ve been incredibly privileged to have had such a large and supportive group of people around me This research began as an idea between my supervisor Associate Professor Simon Feeny and my former manager at Oxfam, May Miller-Dawkins I thank them for taking a chance on an ex-Central Banker and giving me the opportunity to manage this research project I also need to thank the many people that have been involved in this research in one way or another I received considerable support from the fellow academic researchers and volunteers on the project and from the in-country Oxfam offices in both Port Vila and Honiara Without their assistance I could not have organised the field work I also want to thank the research teams who toiled in the field and tolerated a big-bearded Australian researcher with a vision The teams did a spectacular job in assisting me collect the empirical data This truly is a remarkable one-of-akind data set and without their assistance it could not have happened I would also like to acknowledge the financial support of AusAID The twelve communities surveyed were also incredibly gracious in their hospitality and willingness to participate in this research I sincerely hope that the outputs of this research can improve the lives of these people and their compatriots Importantly, I want to thank my supervisors, Associate Professor Simon Feeny and Dr Alberto Posso I’ve enjoyed working together, travelling together and getting to know both of you better You have also helped me deepen and broaden my knowledge of economics Your guidance over the journey has been enormous Thanks also to my parents, who have been ever-supportive throughout my studies Finally, and most sincerely, I want to thank my wonderful partner, Emma Peppler You have been a pillar of support throughout this journey You’ve been instrumental in almost every facet of the project, from helping with the initial survey design, to being directly involved in numerous field trips and, ultimately, casting your legal-eagle eye over the finished product Thanks for always being there when I’ve needed someone to talk to and thanks for putting up with me when I’ve been much less communicative This truly would not have been the same project without you Lachlan McDonald iv PUBLICATIONS AND AWARDS ORIGINATING FROM THE PRESENT THESIS Authored book chapters: • McDonald, L “Coconut trees in a cyclone: vulnerability and resilience in a Melanesian context”, in S Feeny (ed.) (2014), Household Vulnerability and Resilience to Economic Shocks: Evidence from Melanesia, Ashgate: London • McDonald, L., V Naidu and M Mohanty, “Vulnerability, resilience and dynamism of the customary economy in Melanesia”, in S Feeny (ed.) (2014), Household Vulnerability and Resilience to Economic Shocks: Evidence from Melanesia, Ashgate: London • Clarke, M., S Feeny and L McDonald, “Vulnerability to what? Multidimensional poverty in Melanesia”, in S Feeny (ed.) (2014), Household Vulnerability and Resilience to Economic Shocks: Evidence from Melanesia, Ashgate: London Conference Papers: • McDonald, L (2013) “Household Vulnerability to Poverty in Vanuatu and the Solomon Islands”, paper presented at the 9th Australasian Development Economics Workshop (ADEW), Australian National University, Canberra, June 2013 • Feeny, S and L McDonald (2013) “Multidimensional Poverty and Vulnerability in the Solomon Islands and Vanuatu”, paper presented at the Oceania Development Network (ODN) Conference on Addressing Inequality and Promoting Inclusive and Sustainable Development, University of the South Pacific, September, Suva, Fiji Working Papers: • Feeny, S., L McDonald, M Miller-Dawkins, J Donahue and A Posso (2013) “Household Vulnerability and Resilience to Shocks: Findings from the Solomon Islands and Vanuatu', SSGM Discussion Paper 2013/2 ANU College of Asia & the Pacific, School of International, Political and Strategic Studies, State, Society and Governance in Melanesia Program • Feeny, S and L McDonald (2013) “Household Vulnerability and Resilience to Economic Shocks: Findings from the Solomon Islands and Vanuatu”, Oxfam Australia, Melbourne Prizes: • 2013 Best Conference Paper by an HDR Candidate Award, School of Economics Finance and Marketing, RMIT University v vi TABLE OF CONTENTS DECLARATION iii ACKNOWLEDGEMENTS iv PUBLICATIONS AND AWARDS ORIGINATING FROM THE PRESENT THESIS .v TABLE OF CONTENTS vii LIST OF FIGURES xii LIST OF TABLES xiii LIST OF ABBREVIATIONS xiv ABSTRACT CHAPTER I – INTRODUCTION AND OVERVIEW 1.1 Introduction 1.2 Vulnerability as a lens 1.2.1 Vulnerability in development economics 1.2.2 The essentiality of resilience .10 1.3 1.3.1 Vanuatu and Solomon Islands – an overview .12 The unique vulnerabilities of Vanuatu and Solomon Islands 16 1.4 The effects of recent global macroeconomic shocks 20 1.5 The vulnerability and resilience of households in Vanuatu and Solomon Islands .24 1.6 An outline of this thesis .26 CHAPTER II – DATA AND METHODOLOGY 29 2.1 Introduction 29 2.2 Data 30 2.2.1 Household survey 30 2.2.2 Other sources of data 34 2.3 Field work and sampling methodology .34 2.4 Details of the communities surveyed 38 2.4.1 Communities in Vanuatu .38 2.4.2 Communities in Solomon Islands 40 vii CHAPTER III - MULTIDIMENSIONAL POVERTY IN VANUATU AND SOLOMON ISLANDS 45 3.1 Introduction 45 3.2 Literature review 46 3.2.1 Poverty measures and their applicability to PICs 46 3.2.2 Alternative measures of poverty in the Pacific context – the role for multidimensional poverty analyses .51 3.2.3 Alternative approaches to poverty measurement: the Multidimensional Poverty Index (MPI) 52 3.3 Multidimensional Poverty Indices for households in Vanuatu and Solomon Islands 58 3.3.1 Calculating a “Melanesian” MPI (MMPI) 59 3.3.2 Analysis of the Multidimensional Poverty Indices in Vanuatu and Solomon Islands 63 3.3.3 The Melanesian Multidimensional Poverty Index (MMPI) 71 3.3.4 Multidimensional poverty and vulnerability .74 3.4 Discussion 75 3.5 Conclusion 78 CHAPTER IV – THE EXPOSURE OF HOUSEHOLDS TO ECONOMIC AND OTHER SHOCKS IN VANUATU AND SOLOMON ISLANDS 81 4.1 Introduction 81 4.2 Literature review 82 4.2.1 Risk, shocks and vulnerability .82 4.2.2 The transmission of global macroeconomic shocks to households in Vanuatu and Solomon Islands 85 4.2.2.1 The role of the dual economy and traditional economic systems 87 4.2.2.2 The role of urbanisation and monetisation 89 4.3 Data and methodology 93 4.4 Cataloguing shock experience .95 4.4.1 Grouping shocks 95 4.4.2 Shock experience by individual communities .97 4.4.2.1 Price shocks 97 4.4.2.2 Non-price shocks .100 4.4.2.3 Positive shocks 103 viii 4.4.2.4 Number of shocks experienced 105 4.4.3 4.5 Shock experience and well-being: dealing with endogeneity 106 A model of household shock experience 107 4.5.1 Econometric results 111 4.5.2 Determinants of exposure to shocks 114 4.6 Discussion 116 4.7 Conclusion 118 CHAPTER V – RESILIENCE IN VANUATU AND SOLOMON ISLANDS: HOUSEHOLDS’ RESPONSES TO GLOBAL MACROECONOMIC SHOCKS 121 5.1 Introduction .121 5.2 Literature review 122 5.2.1 The importance of focusing on household responses to shocks 125 5.2.2 Households’ risk management in Vanuatu and Solomon Islands .129 5.3 The dominant coping mechanisms of households in Vanuatu and Solomon Islands to recent global macroeconomic shocks 131 5.3.1 Use environmental resources (direct production of consumption goods) 132 5.3.2 Increase labour supply .134 5.3.3 Adjust expenditure patterns .136 5.3.4 Use of informal social networks 139 5.3.5 Use of livestock 142 5.3.6 Financial services 143 5.4 The vulnerability and resilience of households to the effects of recent global macroeconomic shocks 144 5.4.1 An ex-post assessment of household vulnerability 144 5.4.2 A test of the effectiveness of household coping responses in providing resilience to recent global macroeconomic shocks 153 5.5 Discussion 156 5.6 Conclusion 160 CHAPTER VI – HOUSEHOLD VULNERABILITY TO POVERTY IN VANUATU AND SOLOMON ISLANDS 163 6.1 Introduction .163 6.2 Literature review 164 6.3 Methodology 173 ix 6.3.1 6.4 A model of household well-being .174 Results .179 6.4.1 Model diagnostics 179 6.4.2 A profile of household vulnerability in Vanuatu and Solomon Islands 182 6.4.3 Aggregate vulnerability and MPI-poverty 186 6.4.4 Vulnerability and MPI-poverty by individual communities 190 6.4.5 Incorporating risk preferences: the depth of expected poverty 193 6.4.6 Vulnerability to poverty using the MMPI 196 6.5 Discussion 198 6.6 Conclusion 201 CHAPTER VII – CONCLUSION AND POLICY RECOMMENDATIONS .203 7.1 Introduction .203 7.2 Summary of findings 205 7.2.1 How should poverty be defined and measured in Vanuatu and Solomon Islands? 205 7.2.2 Which households are most vulnerable to experiencing economic and other shocks? 206 7.2.3 What are the dominant coping mechanisms households in Vanuatu and Solomon Islands use to deal with global macroeconomic shocks and how resilient are they to such shocks? 207 7.2.4 Which households in Vanuatu and Solomon Islands are vulnerable to experiencing poverty in the future? 208 7.2.5 Comparing household vulnerability and resilience in Vanuatu and Solomon Islands 210 7.3 7.3.1 Policy recommendations 211 Increase resilience to price shocks by reducing households’ dependence on imported food and fuel 212 7.3.2 Strengthen access to land and gardens in urban areas .213 7.3.3 Experiment with formal social protection schemes 213 7.3.4 Encourage rural economic development through improved access to markets.215 7.3.5 Improve access to a quality education .216 7.3.6 Greater financial inclusion .217 7.4 Limitations of the study .218 7.5 Areas for further research 219 x Appendix P: Probit estimations – price shocks Total sample, poor households and non-poor households; marginal effects Dependent variable: Wealth Traditional wealth Gender head Number of adults Number of adults squared Dependency ratio Adult education Purchased foods Employed Food peddler Other peddler Cash-crop seller Urban Vanuatu Observations Goodness-of-fit tests H/L statistic (p value) Area under ROC Curve % correctly predicted Real food price shock = Total sample 0.006 0.027 0.048 0.007 -0.002 0.017 -0.103* 0.030 0.004 -0.024 0.048*** -0.005 0.051 -0.034 Real fuel price shock = Total sample Real food price shock = Poor households Real fuel price shock = Poor households Real food price shock = Non-poor households Real fuel price shock = Non-poor households 0.032* 0.024 0.043 -0.024* -0.001 0.003 -0.005 -0.013 -0.020 0.041 0.072*** -0.041 0.100 0.022 0.034 0.026 0.066 -0.121* 0.020** 0.021 -0.087 -0.009 0.028 -0.061 0.064 0.020 0.126** 0.066* 0.007 0.028 0.047 -0.193** 0.024** 0.022 0.179* 0.041 0.113* 0.182 0.120* 0.129 0.228*** 0.139*** 0.014 0.032 0.039 -0.007 -0.001 0.013 -0.088 0.044 -0.006 -0.024 0.039 -0.004 0.012 -0.058 0.047** 0.030 0.050 -0.022 -0.002 -0.002 -0.027 -0.022 -0.065 0.022 0.064** -0.087** 0.060 0.004 935 935 192 192 743 743 0.416 0.591 75.40 0.705 0.601 67.81 0.137 0.779 75.29 0.302 0.726 66.74 0.196 0.584 75.51 0.982 0.619 67.06 *** p