Convergence, Shocks and Poverty

Using a unique panel data set for rural households in Zimbabwe we estimate a microeconomic model of growth under uncertainty, a stochastic version of the Ramsey model with livestock as the single asset. We use the estimation results in simulation experiments (over a 20-year period) to quantify the importance of convergence, household fixed effects and shocks. First, we find powerful convergence. In the absence of shocks and without household fixed effects there is rapid growth over the period (5.6% growth p.a. in per capita assets) even though there is no technical progress. The process of adjusting the capital stock (livestock) to its steady state value is - as expected - strongly equalising: the coefficient of variation (across households) of livestock ownership falls from 78% to 6%. Secondly, when we allow for household fixed effects - the case of conditional convergence - the aggregate growth rate is very similar but inequality remains high throughout the period! Finally, we find that shocks have strong and persistent effects. In this model shocks affect aggregate growth both ex ante and ex post. These effects are strong: shocks reduce aggregate growth over the period by a fifth and increase inequality substantially