Vulnerability to poverty needs to be examined

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.