thus, their welfare.<sup>5</sup> Agriculture can help reduce poverty through two additional indirect channels. The first channel is the _“food price” pathway_ .<sup>6</sup> Increases in agricultural output supply can drive down food prices. Since many poor households are net food buyers and spend a substantial part of their income on food, reduced food prices improve their poverty and food security status (Darko et al., 2018). Second, improvements in agricultural output may indirectly affect households’ welfare through the _“non-farm sector” pathway_ . Growth in agricultural productivity provides a significant proportion of the raw materials used in Timor-Leste’s non-farm sector. The increase in incomes resulting from a growth in agricultural productivity could raise the demand for goods and services produced in the non-farm sector. This escalating demand could in turn stimulate employment in the non-farm sector through forward and backward linkages, and eventually increase off-farm household incomes (Hanmer and Naschold 2000; Mellor 1999).

# **2. Data and Methodology**

The study uses nationally representative data from the 2007 and 2014 waves of the Timor-Leste Survey of Living Standards. The surveys, which spanned over a 12-month period of data collection, are very comprehensive and cover the following subjects: demographics, housing, access to facilities, durable goods, education, health, employment, social capital, and subjective well-being. In all, 4,477 and 5,916 households were covered in 2007 and 2014, respectively, of which 72 percent in 2007 and 52 percent in 2014 were agricultural households. The analyses in this paper focus on the agricultural households. Since only a sub-group of the population (agricultural households) is included in the analyses, the two cross-sectional surveys are therefore pooled to increase the sample size in hopes of improving the precision of the estimates.

To answer the question on the extent to which agricultural productivity affects poverty, the analyses are conducted using five measures of poverty: whether or not a household is poor (i.e. poor/non-poor based on the national poverty line), per capita annual consumption expenditure, poverty gap, poverty severity, and relative deprivation in terms of per capita consumption expenditure. The annual consumption expenditure variable includes aggregate expenditures on food and non-food products. The poverty gap and severity of poverty are measured using the Foster-Greer-Thorbecke index (Foster et al. 1984), where the latter is the square of the former. The Foster-Greer-Thorbecke index is typically a summary statistic but, following Mason and Smale (2013), this study constructed a household-specific version of the index for use in a regression model. Both the poverty gap and poverty severity take values of zero for non-poor households and a fraction for poor households. Relative deprivation in terms of consumption expenditure—which compares a household’s mean consumption expenditure to that of better-off households—was

> 5 Datt and Ravallion (1998), for instance, find that higher real wages resulting from increases in agricultural productivity helped reduce absolute poverty levels in India. Also in India, Saxena and Farrington (2003) report that agricultural labor wages rose by 3 percent per annum following an increase in agricultural productivity during the 1970s and 1980s.

> 6 Otsuka (2000) and Biswanger and Quinzon (1986) observe that much of the positive impact of Asia’s green revolution in technology on inequality and poverty resulted from lower food prices accruing from output expansion. Schuh (2000) also suggests that world agriculture’s greatest achievement in the fight against poverty came via the supply of affordable food to the masses.

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