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A Theoretical and Empirical Investigation of the Application of an Endogenous Poverty Line and Its Relationship with the Poverty Impact of Policy Reforms

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  • Teguh Dartanto

    ()
    (Department of Economics Faculty of Economics, University of Indonesia)

Abstract

This research aims to theoretically and empirically investigate the difference of poverty outcome between applying a fixed and an endogenous poverty line. Applying the microeconomic theory of consumer behavior and the CGEMicrosimulation, this study has theoretically and empirically proven that, if a fixed poverty line is applied, the poverty impact of policy reforms (economic shocks) which significantly increase (decrease) price will always be underestimated (overestimated). This study empirically found that there is 0.316 percentage point difference in the poverty outcome between applying the endogenous poverty line and the fixed poverty line when analyzing the impact on poverty in Indonesia of 100 percent increase in the world soybean price. Supposing the fixed poverty line, the poverty rate will increase by 0.180 per cent, while supposing the endogenous poverty line, the poverty rate will increase by 0.496 per cent. Therefore, applying either an endogenous or a fixed poverty line will have a different policy implication.

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Bibliographic Info

Paper provided by Faculty of Economics, University of Indonesia in its series Working Papers in Economics and Business with number 201101.

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Length: 20 pages
Date of creation: Nov 2011
Date of revision: Nov 2011
Handle: RePEc:lpe:wpecbs:201101

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Related research

Keywords: Endogenous Poverty Line; Poverty; Economic Modeling; CGE; Micro-simulation; Economic Development;

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References

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  1. Datt, Gaurav & Ravallion, Martin, 1996. "Why have some Indian states done better than others at reducing rural poverty?," Policy Research Working Paper Series 1594, The World Bank.
  2. B. Decaluwé & L. Savard & E. Thorbecke, 2005. "General Equilibrium Approach for Poverty Analysis: With an Application to Cameroon," African Development Review, African Development Bank, vol. 17(2), pages 213-243.
  3. Atkinson, Anthony B., 1970. "On the measurement of inequality," Journal of Economic Theory, Elsevier, vol. 2(3), pages 244-263, September.
  4. Elizabeth T. Powers, 1995. "Inflation, unemployment, and poverty revisited," Economic Review, Federal Reserve Bank of Cleveland, issue Q III, pages 2-13.
  5. Aldi Hagenaars & Klaas de Vos, 1988. "The Definition and Measurement of Poverty," Journal of Human Resources, University of Wisconsin Press, vol. 23(2), pages 211-221.
  6. Foster, James & Greer, Joel & Thorbecke, Erik, 1984. "A Class of Decomposable Poverty Measures," Econometrica, Econometric Society, vol. 52(3), pages 761-66, May.
  7. Sen, Amartya K, 1976. "Poverty: An Ordinal Approach to Measurement," Econometrica, Econometric Society, vol. 44(2), pages 219-31, March.
  8. Sen, Amartya, 1973. "On Economic Inequality," OUP Catalogue, Oxford University Press, number 9780198281931, October.
  9. Mas-Colell, Andreu & Whinston, Michael D. & Green, Jerry R., 1995. "Microeconomic Theory," OUP Catalogue, Oxford University Press, number 9780195102680, October.
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