Managing risks: what Russian households do to smooth consumption?

Notten, Geranda and Neubourg, Chris de (2007): Managing risks: what Russian households do to smooth consumption?

Abstract

The increasing availability of rich (panel) data provides many opportunities to test theories on consumption smoothing behaviour. At the same time, the informational requirements in terms of data and modelling are high and very context specific, thus requiring a filtering of essential explanatory ingredients. In this paper we show how conceptual and exploratory empirical analysis can contribute to this filtering process. We develop a conceptual framework to analyze possible smoothing arrangements of households distinguishing between various smoothing mechanisms, institutional smoothing partners and required assets. Subsequently, we apply this framework to Russian survey data to explore how Russian households may smooth consumption. We select and analyze a broad set of indicators from household survey data to study what actions Russian households take and how these actions reflect the existence and prevalence of particular smoothing channels. The results can be used to formulate hypotheses on household smoothing behaviour and to delineate the features of a more rigorous analysis. The picture that emerges is one in which financial markets play a limited role as a smoothing channel in Russia, regardless of the smoothing mechanism used (saving, lending, insurance). Instead, households seem to use internal strategies, their family, social networks and the state to smooth consumption through capital accumulation, gift giving, the provision of loans and (pension) benefits. Furthermore, we find some evidence that old age pensions may be used for intergenerational risk-sharing within families while other findings point towards the use of household food production as an income smoothing strategy as opposed to a shock-response strategy.

• Item Type: MPRA Paper
• Institution: Maastricht Graduate School of Governance, Maastricht University
• Language: English
• Keywords: Keywords: consumption smoothing; poverty; social risk management; Russia
• Subjects: H - Public Economics > H5 - National Government Expenditures and Related Policies > H55 - Social Security and Public Pensions; D - Microeconomics > D3 - Distribution > D31 - Personal Income, Wealth, and Their Distributions; D - Microeconomics > D1 - Household Behavior and Family Economics > D12 - Consumer Economics: Empirical Analysis; D - Microeconomics > D1 - Household Behavior and Family Economics > D13 - Household Production and Intrahousehold Allocation; H - Public Economics > H5 - National Government Expenditures and Related Policies > H53 - Government Expenditures and Welfare Programs

References

Alessi, R., & Lusardi, A. (1997). Saving and income smoothing: Evidence from panel data. European Economic Review, 41, 1251-1297. Deaton, A. (1992). Understanding consumption. Oxford; New York; Toronto and Melbourne: Oxford University Press; Clarendon Press. Dercon, S. (1998). Wealth, risk and activity choice: Cattle in western Tanzania. Journal of Development Economics, 55, pp. 1-42. Dubois, B., Jullien, B., & Magnac, T. (December 2006). Formal and informal risk sharing in LDC’s: Theory and empirical evidence. University of Toulouse, Toulouse. Eswaran, M., & Kotwal, A. (1989). Credit as insurance in agrarian economies. Journal of Development Economics, 31, pp. 37-53. Foley, M., & Pyle, W. (September 2005). Household savings in Russia during the transition. Middlebury College Economics Discussion Paper, 05-22, Department of Economics, Middlebury College. Fuchs, M. (2002). Building trust: Developing the Russian financial sector. Washington, DC.: The World Bank. Gassmann, F. (2000). On the verge of poverty: Welfare and economic transition in Latvia. Department of Economics, Maastricht University, Maastricht. Gronau, R. (June 2006). Home Production and the Macro Economy – Some Lessons from Pollak and Wachter and from Transition Russia. NBER Working Paper, 12287, National Bureau of Economic Research, Cambridge. Guariglia, A., & Kim, B. (2003). Wage arrrears, uncertainty and precautionary saving in Russia. Economics of Transition, 11(3), pp. 493-512. Heeringa, G. H. (1997). Russia Longitudinal Monitoring Survey (RLMS); Sample attrition, replenishment, and weighting in rounds V-VII: MI 48106-1248, Survey Design and Analysis Unit, Institute for Social Research, University of Michigan, Ann Arbor. Holzman, R., & Jorgensen, S. ( February 2000). Social Risk Management: A new conceptual framework for social protection and beyond. Social Protection Discussion Paper, 6, The World Bank Hoogeveen, H. (2001). Evidence on informal insurance in rural Zimbabwe. Tinbergen Institute Discussion Paper, TI 2001-001/2, Tinbergen Institute. IAAC. (October 2006). Analysis of parameters and status of the pension system: Demographic, macroeconomic and pension aspects. Contract No. 2003/071-225, Progress report, as part of the International Technical Assistance Project “Pension System – Russian Federation”, Moscow. Kazianga, H. (2006). Motives for household private transfers in Burkina Faso. Journal of Development Economics, 79, pp. 73-117. Kobaladze, K. (November 2002). Non-farm livelihood activities in three villages in different regions of Georgia. 2736, NRI Report, National Resources Institute. Kochar, A. (2004). Ill-health, savings and portfolio choices in developing economies. Journal of Development Economics, 73, pp. 257-285. Ligon, E. (1998). Risk sharing and information in village economies. Review of Economic Studies, 65, pp. 847-864. Lokshin, M., & Ravallion, M. (2000). Welfare impacts of the 1998 financial crisis in Russia and the response of the public safety net. Economics of Transition, 8(2), pp. 269-295. Lokshin, M., & Yemtsov, R. (February 2001). Household strategies for coping with poverty and social exclusion in post-crisis Russia. Policy Research Working Paper, 2556, The World Bank. McKenzie, D. (2003). How do households cope with aggregate shocks? Evidence from the Mexican Peso crisis. World Development, 31(7), pp. 1179-1199. MGSoG. (2006). Assessment of the labor market impact of the pension reform: Final report: Maastricht Graduate School of Governance and Arcadis Moscow, funded by European Commission under Project number 2003/071-225. Morduch, J. (1995). Income smoothing and consumption smoothing. The Journal of Economic Perspectives, 9(3), pp. 103-114. Mroz, T., Henderson, L., Bontch-Osmolovsii, M., & Popkin, B. M. (April 2004). Monitoring economic conditions in the Russian Federation: The Russia Longitudinal Monitoring Survey 1992-2003. Report submitted to the U.S. Agency for International Development. Neubourg de, C. (2002). The welfare pentagon and the social management of risks. In R. Sigg & C. Behrendt (Eds.), Social security in the global village (Vol. 8, pp. pp. 313-331). New Brunswick: Transaction publishers. Neubourg de, C., & Weigand, C. (2000). Social policy as social risk management. Innovation: The European Journal of Social Sciences, 13(4), pp. 401-412. Notten, G., & Crombrugghe de, D. (2006). Poverty and Consumption Insurance in Russia. MGSoG Working Paper, 2006/004, Maastricht Graduate School of Governance, Maastricht University, Maastricht. Notten, G., & Gassmann, F. (2006). Size matters: poverty reduction effects of means-tested and universal child benefits in Russia. MGSoG Working Paper, 2006/001, Maastricht Graduate School of Governance, Maatricht University, Maastricht. OECD. (2001a). Financial market trends (Vol. 70). Paris: Organization of Economic Co-operation and Development. OECD. (2001b). The investment environment in the Russian Federation: Laws, policies and institutions. Paris: Organization of Economic Co-operation and Development. OECD. (2002). OECD economic surveys 2001-2002: Russian Federation (Vol. 2002/5 February). Paris: Organization of Economic Co-operation and Development. Rosenzweig, M. (1988). Risk, implicit contracts and the family in rural areas of low-income countries. The Economic Journal, 98, pp. 1148-1170. Rosenzweig, M., & Wolpin, K. (1993). Credit market constraints, consumption smoothing, and the accumulation of durable production assets in low-income countries: Investments in bullocks in India. The Journal of Political Economy, 101(2), pp. 223-244. Skoufias, E. (2003). Consumption smoothing in Russia: Evidence from the RLMS. Economics of Transition, 11(1), pp. 67-91. Udry, C. (1994). Risk and insurance in a rural credit market: An empirical investigation in northern Nigeria. Review of Economic Studies, 61, pp. 494-526. Udry, C. (1995). Risk and saving in northern Nigeria. The American Economic Review, 85, pp. 1287-1300. World Bank. (2003). The Russian labour market: Moving from crisis to recovery [Electronic Version], The World Bank, Washington D.C. Retrieved December 2004 from http://www.worldbank.org.ru/ECA/Russia.nsf/ECADocByLink/91E880C04CBEC533C3256E27004B1C11. World Bank. (May 1999). Consultations with the poor, national synthesis report: Russia. The World Bank, Washington D.C. World Bank. (October 2003). Developing residential mortgage markets in the Russian Federation: Infrastructure and Energy Department, Europe and Central Asia Region, The World Bank. Zimmerman, F., & Carter, M. (2003). Asset smoothing, consumption smoothing and the reproduction of inequality under risk and subsistence constraints. Journal of Development Economics, 71, pp. 233-260.