Determinants of Poverty in Rural Ethiopia: A Household Level Analysis

Abstract: This paper investigates the dynamics of poverty in rural Ethiopia during the period from 1994 to 2009. In order to explore factors that decisively affect the possibility of falling into and exiting out of poverty, the paper uses six rounds of data and employs alternative dynamic probit model which handles the problem of serial correlation, unobserved individual heterogeneity, state dependence and the initial conditions problem. The estimation result shows that the likelihood of falling in to poverty in any round is a direct function of previous experience in poverty suggesting strong evidence for the existence of true state dependence. Socioeconomic variables like land size, oxen and other tropical livestock units have tremendous role in reducing the probability of falling into poverty. Additionally, while demographic characteristics and drought has significant effect in the northern part, cash crop production plays a vital role for households in southern Ethiopia. Finally, the paper draws important policy implications that can be helpful for policy making and enlighten appropriate intervention areas.