Smooth Sailing or Rough Waters? Shocks, Consumption and Welfare

This thesis empirically analyzes the concept of consumption smoothing and the role of private and social insurance in the midst of macroeconomic shocks and the subsequent welfare consequences. Chapter 1 assesses the degree of risk sharing amongst differentiated households (by employment sector and residence), in the presence of a large exchange rate shock in Malawi. The study initially tests the hypothesis of full consumption insurance which is not rejected. Next, a difference-in-differences approach is used to test for any heterogeneous effects across the population. The evidence shows that although an
exchange rate shock may not have large re-distributional consequences it may impact resource allocations and the structural transformation process. Chapter 2 uses the "sufficient statistic" approach to evaluate the Mtukula Pakhomo social insurance program in Malawi. The approach combines a reduced form method (propensity score matching) and a structural approach. This allowed for an empirically compelling identification and statements on the welfare impact of a specific social insurance program. Results demonstrated that the program benefits recipient households with positive marginal welfare consequences. This was most prominent for highly risk averse households that often tend to be the ultra poor. It demonstrated that the provision of cash transfers enables households faced with an adverse shock to avoid resorting to costly consumption smoothing mechanisms. Chapter 3 estimates a Panel Vector Autoregressive model to study how structural shocks jointly affect the macroeconomy and health outcomes in the short run for Eswatini, Malawi, Mauritius, and Zambia. Results revealed a strong relationship between public health spending and health outcomes, evidence of rivalry for fiscal capacity across components of public spending and the detrimental effect of fluctuations in external financing. These findings have a clear policy relevance regarding government consumption and it’s implications for improvements in population health and robust healthcare systems.