Center for Effective Global Action

The high prevalence of risks in low income economies implies that people’s ability to manage uncertainty is critical for both productivity and their mere survival. This paper analyses seasonal changes in per capita consumption and saving behaviour of farm households in response to health and weather shocks. The notion that people save most of there transitory income, as postulated by the permanent income hypothesis, and precautionary saving motives are tested using a sample of 196 households examined over three consecutive cropping seasons in Central Kenya. The results show that, while people exhibit some level of prudence, the marginal propensity to save out of transitory income is about 33 percent — about a third of what the permanent income hypothesis postulates. This proportion saved is an indication of the extent of incompleteness of credit and insurance markets in the study area. This shows substantial scope for remedial public action in social protection programmes. Seasonality was found to impact on propensity to save with more stressful seasons adversely affecting both savings and consumption. There were differentiated propensities to smooth consumption between the rich and the poor, with the latter group exhibiting stronger precautionary motives. However, the wealth effect becomes insignificant as the seasons worsen pointing to a vulnerable asset base. Unlike weather uncertainty, consumption rise and savings decline in response to health stress associated with HIV/AIDS. The desire to smooth the health (asset) stock seems to outweigh the desire or ability to smooth future consumption through savings. The consequence is more volatile consumption for HIV/AIDS affected households.