5 - The Evolution of Poverty during the Crisis in Indonesia

Summary

INTRODUCTION

The present study is an attempt to piece together a consistent series of data from various sources on the headcount measure of absolute consumption expenditure poverty during the crisis. There are many broad issues in defining poverty, which is intrinsically a complex social construct. Even within a narrow definition of poverty based on a deficit of consumption expenditures, there are numerous thorny technical issues in setting an appropriate poverty line (Pradhan et al. 2001; Ravallion 1994; Sen 1981). This study avoids those issues and is limited to examining how poverty, defined on a consistent, welfare-comparable basis, changed in Indonesia over the course of the series of crises after the middle of 1997. We use a variety of data sets as well as various studies to put together a consistent series of the evolution of poverty over a six-year period from February 1996 to February 2002.

As the issues surrounding poverty measurements are complex, we begin with two basic issues. The first is the deflation of nominal to real expenditures to maintain comparability in welfare levels, while the second is the responsiveness of poverty rates to changes in real expenditures. With these basics in hand, we can estimate changes in headcount poverty rates over time, using a range of price deflators. Based on the outlined methods, we create a consistent set of estimates of poverty over the course of the crisis based on various data sets and studies that are available.

DEFINING REAL EXPENDITURES

The deflation of nominal to real expenditures is central to a “welfare-comparable” basis for comparisons of poverty over time. For any given distribution of expenditures across households, the determinant of the poverty rate is the poverty line. The poverty line is expressed in rupiah terms and is simply the amount of expenditure above which households are considered not poor and below which households are in (varying degrees of) poverty.

A fruitful way of thinking about deflation of the poverty line in nominal rupiah, so that it represents “the same” amount of “real” rupiah in another period, is to use the standard microeconomic theory of consumer choice with individual welfare maximization. The consumer choice problem is to choose a consumption basket for a given expenditure budget and prices so as to maximize their utility (Varian 1992, Chapter 7).