Vulnerability to poverty needs to be examined

Ari A. Perdana, Center for Strategic and International Studies, School of Economics, University of Indonesia, Jakarta

In his 1981 book entitled Poverty and Famines, Nobel Laureate Amartya Sen wrote, "Much about poverty is obvious enough. One does not need elaborate criteria, cunning measurement, or probing analysis, to recognize raw poverty and to understand its antecedents". However, the statement views poverty only in a static concept. It basically captures poverty as a condition of welfare at a certain point in time. In reality, poverty is also a dynamic concept. Households frequently move in and out of poverty overtime. This raises an issue of "vulnerability" to poverty.

Vulnerability to poverty can be defined as the risk or probability that a household will become poor in the near future. There is always a chance that a "currently non-poor" may end up being poor in the near future. Non-poor households may fall into poverty due to events such as natural shocks, disasters, economic shock and crisis, security problems and many others.

Vulnerability measures the resilience against such bad events -- the probability that those events will result in a decline in well-being.

Conversely, a currently poor person also has a chance to escape from poverty. Economic upturn may bring more job opportunities, which provides income. As the result, economic improvement enables the poor to climb up from poverty. However, this situation does not always apply to those who suffer chronic poverty. People in the chronic poor category face not only income deprivation, but also deprivation of their capability. They lack access to economic resources and human capital. Consequently they are more exposed to economic downturn, but unlikely to benefit from economic upturn.

According to a 2000 World Bank report, a household or individual becomes more vulnerable to poverty due to several reasons. First, fewer physical assets -- those that can be sold to compensate for temporary loss of income -- which a household possesses. Among households who have adequate physical assets, those who have income diversification are less vulnerable. But income diversification does not always provide more income if the sources of income have risks that are related to each other.

Second, more limited human capital, especially education. People with low level of education are in general unable to manage risk and subject to economic fluctuations.

Third, the lack of social insurance system. A social insurance system may not be a formal one and provided by the government. The informal safety net system, provided by family or local community, has played a significant role as social insurance in may societies, including Indonesia.

An empirical study by Suryahadi and Sumarto in 2001 reveals that the economic crisis has not only increased the poverty incidence, but has also significantly increased the number of Indonesian households with high vulnerability to poverty. The number of poor households almost doubled from 1996 to 1999. This is equivalent to about 27 million additional poor people during the period.

However, the number of households which are statistically not poor but face a relatively high probability of falling below poverty line have increased from 13 million to 38 million. This illustrates that the crisis has put households at risk of falling into poverty three times as much as before the crisis.

One possible explanation for the increase in vulnerability is that during the crisis, many people have to withdraw their savings to compensate for their loss of regular earnings. When the amount of savings is smaller, these people had been more exposed to any future economic shock. Another explanation is, during the crisis households have had to adjust their expenditure. Often they have had to sacrifice education and health expenditure to compensate for basic needs. Consequently, the level of human capital in general decreased, making harder for many people to manage risk.

As an implication, poverty alleviation strategy should not focus only on reducing the headcount poverty rate, or the percentage of poor households to total population. Decreasing headcounts in the poverty rate may be a short-term objective. But in the longer-run, policy objective should be to reduce the level of vulnerability to poverty. In general, that degree of vulnerability is higher for rural households, agricultural workers, women and those who completed lower than tertiary level of education. This suggests the general characteristics of vulnerable groups as the main target of a specific policy.

We therefore need to establish a social insurance system. A comprehensive social insurance system includes three main components. The first is a formal social safety net to prevent a household fall far below the poverty line.

Second, the unemployment and pension benefit as protection for people who are temporarily unemployed or who are no longer in the labor market.

And third, policies to promote human capital, especially those that enhance access to education and health infrastructures.