Changes in Consumption and Saving Behavior Before and After Economic Shocks: Evidence from Zimbabwe

Households in most developing countries face substantial risk from factors such as highly erratic rain, unexpected changes in price policies, and macroeconomic instability. Zimbabwe is a good example of adaptation to such risks. The major shocks to the economy in the 1990s included drought and macroeconomic adjustments. Evidence shows that poverty has increased substantially during the 1990s, and vulnerability has also grown. This paper analyses the changes in household consumption and savings behavior before and after these shocks. The results show that:

• Pre-drought and structural adjustment households consumed the majority of their permanent income, saved the majority of their transitory income and depended less on remittances;
• The higher marginal propensity to save out of transitory income by households before the droughts and structural adjustments implies that they use savings to smooth consumption;
• Post-drought and structural adjustments households consumed the majority of both permanent and transitory incomes, and depended heavily on remittances;
• Household consumption and savings post-drought and post-structural change did not respond to income variability as well;
• Households were forced away from risk management and prudence to that of high dependence on transitory income and remittances for consumption;
• The prolonged period of drought and macroeconomic changes of the early 1990s has limited households' long-term ability to mitigate risk;
• Household risk management strategies are unable to successfully address covariant risks such as drought and economy wide structural changes.