metadata: authors: 0: author: Madeira Nunes Duarte,Mafalda Sofia
1: author: Korkeala,Outi Kaarina
2: author: Newhouse,David Locke
count: Indonesia
docna: 0: docna: Distributional impact analysis of past
            climate variability in rural Indonesia
docty: Policy Research Working Paper
subtopic: Climate Change and Agriculture,Science of Climate Change,Climate Change and Health,Climate Change and Environment,Crops and Crop Management Systems,ICT Policy and Strategies,Hydrology,Food Security
teratopic: Macroeconomics and Economic Growth,Poverty Reduction
abstracts: cdata!: In rural Indonesia, around 60 percent of
            workers engage in agriculture and face regular climatic
            shocks that may threaten their crop production, household
            income, and human capital investments. Little is known about
            households ability to maintain consumption in response to
            these shocks. This paper uses both longitudinal and repeated
            cross-sectional data to examine the extent to which farm
            profits and household consumption are reduced by delayed
            monsoon onset, an important determinant of rice production
            in Indonesia. It also investigates whether poor households
            are more vulnerable to delayed onset. Overall, delayed onset
            has minor effects on rural households profit and
            consumption. For poor households, defined as those with
            average per capita consumption in the lowest quintile,
            delayed onset the previous year is associated with a 13
            percent decline in per capita consumption. Most of this
            decline is due to an increase in household size, however,
            and delayed onset two years ago is positively correlated
            with consumption. The findings suggest that poor households
            experience greater volatility but no lasting reduction in
            consumption following delayed monsoon onset.
geo_reg_key: 517198,517191
repnme: repnme: Distributional impact analysis of past
            climate variability in rural Indonesia
display_title: Distributional impact analysis of
            past climate variability in rural Indonesia
listing_relative_url: /research/2009/10/11174028/distributional-impact-analysis-past-climate-variability-rural-indonesia
topicv3: Agriculture and Food Security m1326205 435,Water m1326522 137,Crop Production m1326627 174,Climate Change m1326829 567,Monsoon m1503657 3193
publishtoextweb_dt: 2010-07-01T00:00:00Z
historic_topic: Macroeconomics and Economic Growth,Poverty Reduction
no_of_pages: 37
author_keys: 0: author_key: 708290
1: author_key: 1006543
2: author_key: 450079
model_extractions: WPS5070 Policy Research Working Paper 5070 Distributional Impact Analysis of Past Climate Variability in Rural Indonesia _Outi Korkeala David Newhouse Mafalda Duarte_ The World Bank East Asian and Pacific Region Poverty Reduction and Economic Management Division October 2009
Policy Research Working Paper 5070

# **Abstract**

In rural Indonesia, around 60 percent of workers engage in agriculture and face regular climatic shocks that may threaten their crop production, household income, and human capital investments. Little is known about households’ ability to maintain consumption in response to these shocks. This paper uses both longitudinal and repeated cross-sectional data to examine the extent to which farm profits and household consumption are reduced by delayed monsoon onset, an important determinant of rice production in Indonesia. It also investigates whether poor households are more vulnerable to delayed onset. Overall, delayed onset has minor effects on rural households’ profit and consumption. For poor households, defined as those with average per capita consumption in the lowest quintile, delayed onset the previous year is associated with a 13 percent decline in per capita consumption. Most of this decline is due to an increase in household size, however, and delayed onset two years ago is positively correlated with consumption. The findings suggest that poor households experience greater volatility but no lasting reduction in consumption following delayed monsoon onset.

This paper—a product of the Poverty Reduction and Economic Management Division, East Asian and Pacific Region—is part of a larger effort in the region to understand the effects of climate shocks on households in developing countries. Policy Research Working Papers are also posted on the Web at http://econ.worldbank.org. The authors may be contacted at dnewhouse@worldbank.org or mduarte@worldbank.org.

_The Policy Research Working Paper Series disseminates the findings of work in progress to encourage the exchange of ideas about development issues. An objective of the series is to get the findings out quickly, even if the presentations are less than fully polished. The papers carry the names of the authors and should be cited accordingly. The findings, interpretations, and conclusions expressed in this paper are entirely those of the authors. They do not necessarily represent the views of the International Bank for Reconstruction and Development/World Bank and its affiliated organizations, or those of the Executive Directors of the World Bank or the governments they represent._ Produced by the Research Support Team
# **<u>Distributional Impact Analysis of Past Climate Variability in Rural Indonesia</u>**

1 2 3 Outi Korkeala , David Newhouse , and Mafalda Duarte 1 _University of Sussex, UK_ _2_ _World Bank, Washington DC, USA 3 World Bank, Jakarta, Indonesia_ Key Words: climate variability, agriculture productivity, household consumption, farm profits We thank Shubham Chaudhuri, Boniface Essama-Nssah, Andy Mckay, Shobha Shetty, Emmanuel Skoufias, and Janne Tukiainen, as well as participants of seminars held at the World Bank Jakarta and Sussex University, for helpful comments. We are grateful to colleagues at CEREGE, the NOAA, and Badan Meterologi Klimatologi and Geofisika for sharing rainfall data, Bastian Zaini and Kathleen Beegle for providing kabupaten codes and expenditure aggregates, and John Strauss for sharing IFLS location data. Outi Korkeala thanks the Yrjö Jahnsson Foundation for partially funding this research. The team gratefully acknowledges the overall guidance, supervision, and financial support provided by Vivi Alatas and William Wallace.
Distributional Impact Analysis of Climate Variability in Rural Indonesia

# **Table of Contents**

|I. Introduction ............................................................................................................................................... 3|
|---|
|II. Context ..................................................................................................................................................... 5|
|Climate variability and agricultural productivity in Indonesia ................................................................. 5|
|III. Data and Methodology ............................................................................................................................ 6|
|1. Results from IFLS ................................................................................................................................ 9|
|All rural households ................................................................................................................................... 9|
|Farm households, non-farm households, poor households, and rich households .................................... 11|
|2. Results from SUSENAS ..................................................................................................................... 13|
|IV. Summary and conclusions .................................................................................................................... 15|
|References .............................................................................................................................................. 18|
|Annex 1. Econometric Results ............................................................................................................... 20|
|Annex 2: IFLS Rainfall Maps ................................................................................................................ 31|

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Distributional Impact Analysis of Climate Variability in Rural Indonesia also be less vulnerable to climatic shocks, to the extent that they protect themselves by adopting low risk and low return strategies that perpetuate their poverty (Rosenzweig and Binswanger 1993).

**Households’ response to shocks can have important effects on both their short and long-term prospects.** Well-developed financial and insurance markets, where they exist, help insulate household consumption from shocks. In developing countries, however, formal financial and insurance markets tend to be limited. As a result, most _ex-ante_ and _ex-post_ strategies for coping with rainfall shocks in poor rural areas are costly, and may lead to lasting reductions in consumption or asset holdings.<sup>4</sup> Rainfall shocks and crop loss can also have pernicious long-term impacts by disrupting human capital investments.<sup>5</sup>

**Past climate shocks have reduced Indonesian households’ human capital investments and income.** For example, early-life drought between 1953 and 1974 adversely affected health, educational attainment, and adult socioeconomic status (Maccini and Yang, 2009). Self-reported crops loss was associated with reduced education expenditure (Cameron and Worswick, 2001). Finally, low rainfall in specific quarters has, in the past, been correlated with substantial and lasting reductions in farmers’ income (Newhouse, 2005).

**We know of no study that has examined the effects of delayed monsoon onset on the welfare of different types of households.** Previous studies have instead focused on estimating the impact of climate variability on aggregate Indonesian rice production **.** This paper fills this gap by investigating the effect of delayed monsoon onset in prior years on farm profits and per capita consumption of rural Indonesian households, separately for poor and rich farm and non-farm households. The timing of the monsoon is an important factor in determining the amount of rice and other crops that can be planted. A key innovation in this study is the use of a large longitudinal household survey, which allows us to separately estimate the effect of delayed onset on groups of households defined on the basis of time-invariant household characteristics, such as initial farm status and average per capita consumption of the household.

**Our primary finding is that on average, households are well protected against delayed onset, but that poor households are vulnerable to temporary falls in consumption.** A one-standard deviation or 24 day delay in monsoon onset the previous year is associated with a 1 percent reduction in household per capita expenditure for all rural households, but a 13 percent reduction for the poorest households. This reduction largely occurs through an increase in household size. However, a one standard-deviation delay in monsoon onset is associated with an 11 percent increase in household per capita expenditure for all rural households, measured two years later, and a 23 percent increase for poor households. These increases are largely due to an increase in total household expenditure. We conclude that delayed onset reduces per capita consumption for poor households, largely through increased household size, but that poor households recover within two years.

> 4 For example, in response to the 1998 financial crisis in Indonesia, households sold non-productive assets such as jewelry (Frankenberg, _et al_ , 2003).

> 5 See Jacoby and Skoufias for India, 1997, Jenson in Cote d’Ivoire, 2000, and Beegle, et al, in Tanzania, 2008, among others.

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Distributional Impact Analysis of Climate Variability in Rural Indonesia

**El Nino events can delay rice planting by up to two months, reducing the area cultivated and delaying the plantings of next year’s dry-season crop** .<sup>**6**</sup> Monsoon timing affects the total amount of land planted for many crops (Table 1), but is especially important for rice. From 1983-2004 a 30-day delay in monsoon onset caused rice output to fall, on average, by 580.000 metric tons in East Java/Bali and 540.000 metric tons in West/Central Java during the main rice harvest season between January and April<sup>7</sup> (Naylor, _et a_ l, 2007). Also studies on rice farming in India have found that variability in area cultivated is higher than yield variability (Walker and Ryan, 1990).

|**Table 1. ENS**|**O-Sensitivity**<sup>1</sup>**by Crop in Indonesia 1963-**|**1998.**|
|---|---|---|
|**Crop**|**Production (t)**<br>**Area Harvested (ha)**|**Yield**|
|**Maize**|0.61*<br>0.61**|**0.2**|
|**Sweet Potato**|0.48*<br>0.46**|**0.05**|
|**Soybean**|0.41*<br>0.43**|**-0.02**|
|**Groundnut**|0.34*<br>0.52**|**-0.25**|
|**Rice**|0.23<br>0.50**|**-0.17**|
|**Cassava**|0.16<br>0.05|**0.16**|

Correlation between percentage deviations from 5 year moving average and SOI monthly average (June-September). Significance:<sup>**</sup> P<0.01,<sup>*</sup> P<0.05 Source: Irawan (2002).

**Most of the climate-induced variation in rice production is a consequence of changes in the area harvested rather than in the per hectare yield.** Falcon _et al_ (2004) estimated each degree Celsius increase in the SSTAs (using the August Niño 3.4 sea surface temperature anomaly) results in a national area affected of -261 thousand hectares, a production effect of -1,318mt<sup>8</sup> and a $21/metric ton change in the world price for lower quality rice (Table 2). El Niño events cause delays in the main rice harvest and often also drive up prices in domestic and international markets. Decreases in rice stocks and increases in prices have a disproportionate impact on poor net consumers of rice (Naylor _et al:_ 2007; Falcon _et al:_ 2004). During the 1997-1998 El Niño, for example, Indonesia had to import over five million tons of rice to ensure food availability (Kishore _et al._ 2000).

# **III. Data and Methodology**

**Our prior hypothesis is that late onset reduces both farm profits and household expenditure in rural areas.** This is based on previous research which indicates that delayed monsoon onset decreases the amount of rice area harvested in the following rice calendar year (Falcon _et al_ , 2004). Early onset, on the other hand, is expected to have a neutral or positive effect on consumption. There is, however, no direct empirical evidence on the magnitude of the negative effects and the types of rural households are most vulnerable.

> 6 During El Nino events, the warmer ocean water shifts eastward away from Indonesia causing rain to fall over the central Pacific Ocean.

> 7 The average production in this season was 9 million metric tons – mmt - in West/Central Java and 5 mmt in East Java/Bali. 8 For the September-December trimester changes are 142 thousand hectares in area harvested and production by 556tmt. For the January-April trimester the production change is of 938 mmt. For the May-August trimester the slope coefficients are positive rather than negative.

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Distributional Impact Analysis of Climate Variability in Rural Indonesia

**Table 2. Estimated effects of a one degree Celsius increase in August SSTA on rice production, by province.**

|**Province**|**Crop-Year**<br>**Production**<br>**Effect (Sep-**<br>**Aug) (tmt)**|**Percentage of**<br>**National Effect**|**Significance of**<br>**Production Effect**<br>**(t-statistic)**|**Ratio of**<br>**Production Effect**<br>**to Average Yearly**<br>**Production**<br>**1997/98 – 2001/02**|
|---|---|---|---|---|
|**West Java**|-380|28.83|-3.01|**-0.037**|
|**Central Java**|-238|18.06|-3.67|**-0.026**|
|**East Java**|-232|17.60|-4.06|**-0.026**|
|**South Sulawesi**|-102|7.74|-2.02|**-0.033**|
|**North Sumatra**|-54|4.10|-1.57|**-0.016**|
|**West Sumatra**|-46|3.49|-2.18|**-0.026**|
|**East Kalimantan**|-41|3.11|-2.60|**-0.118**|
|**North Sulawesi**|-38|2.88|-3.31|**-0.104**|
|**West**<br>**Nusa**|-30|2.28|-2.63|**-0.021**|
|**Tenggara**|||||
|**Riau**|-17|1.29|-2.14|**-0.041**|
|**Southeast Sulawesi**|-10|0.76|-1.68|**-0.033**|
|**Bali**|-3|0.23|-2.82|**-0.003**|
|**Subtotal**|**-1.191 **|**90.36**|||
|**Coefficient for all**<br>**Indonesia**|**-1.318**|**100.00**|||

Source: Falcon _et al_ . (2004).

**To obtain empirical evidence on this question, we utilize the first three rounds of the Indonesian Family Life Survey.**<sup>**9**</sup> The IFLS is a longitudinal household survey that began with roughly 7,200 households taken from 320 communities in 13 out of Indonesia’s 33 provinces. The 13 provinces encompass 83 percent of the population and the survey covers virtually all of the provinces highlighted in figure 2, which account for roughly 85 percent of national rice production. Subsequent rounds of the survey, conducted in 1997 and 2000 attempted to re-contact all households interviewed in 1993, and household attrition rates were generally below 5 percent. Split-off households, which were tracked as long as they remained in the 13 provinces, are included in the sample but treated as new households. The exclusion of urban areas limits the total sample to 11,400 observations on 4,000 households, taken from 181 communities in 1993.<sup>10</sup> The consumption module consists of 37 food and 19 non-food items, and self-consumption is reported separately. Household per capita expenditure is equal to the sum of all expenditures reported by the spouse in the past month, deflated by a local price index, divided by the number of persons in the household.<sup>11</sup>

**The national socioeconomic survey is as an important and complementary source of data on household consumption.** Each year, in late February or early March, a new set of roughly 190,000 households are interviewed as part of the core of the national socio-economic census (SUSENAS). The dataset includes results from a small consumption module, consisting of 15 food items and 8 non-food items, that combines purchased and self-consumption. To utilize these data, we randomly drew a 5 percent sample of all rural households from 1993 to 2004, stratified by district and per capita

> 9 A fourth round of the survey was conducted in 2007, but this was not used in study, due to our inability to obtain rainfall data beyond 2004.

> 10 Additional information about the survey is provided in Strauss _et al_ (2000), Frankenberg and Thomas (1997), and Frankenberg and Karoly (1993).

> 11 For IFLS1, per capita consumption is taken from the expend2.dta file provided in the re-release of IFLS, which imputes nonfood expenditures for households that were not asked to report them. In addition, because no price index is provided for the 1993 data, the national price index for the local provincial capital is used to deflate expenditures from 1993 to 1997.

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Distributional Impact Analysis of Climate Variability in Rural Indonesia consumption quintile. These 12 datasets were then combined into a single dataset consisting of 118,500 households.

**Both datasets were matched to local daily rainfall data.** Rainfall data is taken from the NOAA (National Oceanic and Atmospheric Administration) Global Summary of the Day combined with additional data obtained from the Indonesian Meteorological Agency ( _Badan Meteorologi dan Geofisika, BMG_ ). Imputed values for the missing values in the Global Summary of the Day data were provided by CEREGE, _Centre Europeen de Recherche et d’Enseignement des Geosciences de l’Environnement_ . Rainfall data contains daily rainfall data for 52 stations, of which 36 stations match with the IFLS data and 49 stations match with the SUSENAS data. In the IFLS data households were matched with the closest weather station at the community level whereas in the SUSENAS they were matched at the kabupaten (district) level.

**The definition of monsoon onset is based on daily rainfall data.** The start of the monsoon is defined as the number of days past August 1 that cumulative rainfall exceeds 200 mm, following Naylor _et al._ (2007). For each station, we calculated the start date of monsoon defined as the number of days past August 1 when cumulative rainfall exceeds 200 mm.  Onset was then standardized using each station’s “leave-out” mean and standard deviation across years. In other words, data from the onset year was excluded when calculating the mean and standard deviation used to standardize each year’s onset.

**Monsoon onset is sufficiently variable across Indonesia to allow for detailed analysis.** Annex 2 displays district-level maps of Indonesia that indicate the timing of monsoon onset from 1990 to 1999. These maps show that the 36 rain stations used to match the IFLS data generate meaningful variation in monsoon onset.

# **To estimate the effect of late monsoon onset on household expenditure, we estimate the following simple model.**

Where _Cit_ represents the per capita expenditure of household **_i_** in year **_t_** , and  _i_ is a household-specific fixed effect that captures all time-invariant characteristics of the household, including all household characteristics determined prior to 1993. _Dt_ represents a vector of dummy variables for each year.

_Oi_ , _t_  1 represents standardized monsoon onset, at the nearest weather station in the previous year. A value

> of _Oi_ , _t_  1 equal to zero would indicate that the nearest station’s monsoon onset last year was equal to its historical average, while a value equal to one would indicate that last year’s monsoon  arrived one standard deviation late. The standard deviation of monsoon onset across the entire sample is 24 days.

The key estimated parameters are  1 and  2 ,  3 and  4 , which define a quartic function that approximates the effect of monsoon onset on per capita consumption the following year.

 _it_ is a stochastic error term, which is robust to heteroscedasticity and clustered on weather station in order to allow correlation between households that have been allocated the same rain station.

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Distributional Impact Analysis of Climate Variability in Rural Indonesia

**Our preferred specification includes two lags of onset.** During the years and regions covered in the survey, rainfall exhibits negative serial correlation. As a result, late onset in a particular year is associated with a reduced probability that the monsoon will be delayed the following year.<sup>12</sup> If late onset is detrimental to household consumption and this effect persists for two years, then the estimated effect of late rainfall in equation (1) will underestimate the true negative effect of delayed onset. This is because the effect of late onset, estimated in equation (1), will also capture the diminished probability of late onset the previous year. Less intuitively, if late onset two years ago is associated with an increase in per capita consumption, perhaps because households experiencing late onset adapt in ways that improve their income-generating capacity, then the estimated effect from equation (1) will be overestimated. Regardless, to capture the potential effects of prior years’ onset, our preferred specification includes an additional lag of monsoon onset:

In addition, we also estimated the effect of another specification that included the second lag without the first lag. The results change little, and therefore for the sake of brevity we only present results from equation (2).<sup>13</sup>

**The model is re-estimated for poor and rich farm and non-farm households.** Households are classified as rich or poor on the basis of their average real per capita consumption, over the course of the panel. Poor households are those whose average consumption falls in the bottom quintile, while rich households are those whose average consumption falls in the top quintile. Households are classified as farm households if at least one member reported working on a farm business on household-owned land in 1993. Across all three years of the survey, 58 percent of rural households are farm households. Both owning a farm and being rich or poor do not vary for households over the course of the panel, and are therefore collinear with  _i_ in equations (1)-(2). As a result, these variables are uncorrelated with the error term, and restricting the sample does not introduce bias into the estimates.

# **1. Results from IFLS**

_All rural households_

**To facilitate interpretation, we focus on the implied effects of monsoons that arrive one standard deviation early or late, relative to the average date.** We report the estimated effect of early onset, defined as the effect on per capita consumption when onset is set to negative one:

This is equal to the average effect on consumption of experiencing monsoon onset one standard deviation early, relative to the average date of onset. The estimate effect of late onset is calculated analogously, as:

> 12 The correlation between rainfall and lagged rainfall in the data is -0.33.

> 13 We also estimated versions of the model with three lags, with qualitatively similar results.

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Distributional Impact Analysis of Climate Variability in Rural Indonesia Late onset therefore represents the average effect of moving from a mean onset year to a year in which onset is one standard deviation late. In general, we focus on these estimated effects of early and late onset estimated from equation (2), since they conveniently summarize the regression results. Tables 1 through 10 in Annex 1 provide these results for early and late onset for a variety of subsamples.

**Estimates of the impact of monsoon onset on household per capita expenditure, for all rural Indonesian households, are displayed in Table 1 in Annex 1** . The table, which gives the estimation results from equations (1) and (2), is divided in two parts. The top part displays the estimated coefficients on the timing of onset on consumption, while the bottom portion presents the estimated effect of early and late onset.

**Early onset in the previous year, as expected, has a positive effect on expenditure.** The first row of the estimated effects shows that early onset increases household per capita consumption by approximately 7 percent. Both farm and non-farm households benefit from the early onset, which most likely boost the agricultural output (see for example Naylor _et al_ . 2004).

**Late onset in the previous year does not have a significant effect on per capita consumption for all rural households.** The bottom rows of Table 1 give the estimated effect of late onset on household per capita expenditure (PCE). Late onset is associated with a reduction in consumption of 1.4 percent. The estimated effect is larger – 6.5 percent – when only one lag is included, but this estimate is not statistically significant.   These findings suggest the rural households as a whole are relatively well insured against late start of the rainy season.

**These results are robust to non-parametric estimation.** Figure 3 shows non-parametric estimates of the relationship between onset and per capita consumption non-parametrically, after controlling for household and year fixed effects. The results are similar to the parametric estimates presented above. When monsoon onset is one standard deviation early, household consumption rises by approximately 6 percent. Meanwhile, household consumption begins to fall when onset exceeds 0.75 standard deviations. When onset is one standard deviation late, per capita consumption falls by approximately 9 percent, and this fall is statistically significant. The similarity with the regressions results reported above indicates that the quartic specification described in equation (1) and (2) is sufficiently flexible to capture the highly nonlinear relationship between onset and consumption.

**Late onset two years ago is positively associated with per capita consumption.** The bottom part of the second column of Table 1 in Annex 1 shows the effect of early and delayed onset coefficients from equations (2). Early onset two years ago has negative but insignificant effect on consumption. Late onset two years ago, however, is associated with a roughly 11 percent increase in per capita consumption, and the estimate is marginally statistically significant. This result essentially rules out the possibility that households experience a substantial reduction in consumption two years following delayed onset.

**Most of the positive association with delayed onset two years ago results from an increase in total consumption rather than household size.** The third column of Table 2 in Annex 1 shows that late onset two years ago decreases household size by a negligible amount. Therefore, late onset two years ago is associated with an 11 percent increase in total household consumption, despite having virtually no effect on household size. _El Niño_ is usually followed by _La Niña_ , abnormally high rainfall, implying that if our one-lagged early onset is not fully capturing the positive effects of La Niña, this could at least partially explain the positive effect of twice-lagged late onset.

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Distributional Impact Analysis of Climate Variability in Rural Indonesia

**Figure 3. Local polynomial smooth for all rural households, IFLS.**

<!-- Start of picture text --> All rural<br>-1 -.5 0 .5 1<br>deviation of onset_residual<br>95% CI lpoly smooth<br>kernel = epanechnikov, degree = 2, bandwidth = .4, pwidth = .71<br>.2<br>.1<br>0<br>pce_residual<br>-.1<br>-.2<br><!-- End of picture text --> Local polynomial smooth, conditional on household and year fixed effects.

# _Farm households, non-farm households, poor households, and rich households_

**Farm households and non-farm households face similar risk to all rural households.** Farm households are defined as those that reported owning a farm in 1993. These households may be more susceptible to crop loss due to delayed onset, due to their reliance on agricultural profits. On the other hand, however, the negative effect of delayed planting may be at least partially offset by higher prices for crops in late onset years.  To assess the effect of delayed onset on farm and non-farm households, we reestimate equations (1) and (2) on rural farmers and non-farmers.  Tables 3 and 4 in Annex 1 show the results, which are broadly similar to those for all rural households. For farmers, Table 3 shows that late onset reduces consumption by approximately 4 percent, but this is not statistically different from zero. Meanwhile, early onset has a moderate positive effect of 7 percent on farm households’ per capita consumption, and the effect is statistically significant at 10 percent level. Finally, the effect of late onset two years ago is positive, marginally statistically significant, and approximately the same as for all households. Table 4 shows similar results for non-farm households. These households also benefit from early onset, which increases their per capita consumption by 8.2 percent. For non-farmers, late onset in the previous year has a positive effect on households’ expenditure, but the effect is not statistically different from zero. The positive association between per capita consumption and delayed onset two years ago is 5 percent and not statistically significant for non-farmers.  In general, however, the estimated effect of onset timing is similar for farm and non-farm rural households.

**Late onset reduces total farm profits by a small and statistically insignificant amount.** Table 5 in Annex 1 shows the results from regressions of delayed onset on monthly farm profits, with two lags of rainfall. The dependent variable is not logged, in order to include observations in which reported farm profit was negative. The results do not support our prior hypothesis that delayed onset decreases farm profits.  Late onset one year ago has a negative effect on farm profits, but the coefficient is not

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Distributional Impact Analysis of Climate Variability in Rural Indonesia statistically significant. The estimated effect is mild- roughly five thousand rupiah per month, or six percent of mean reported profits. Farm profits, however, are likely to be poorly measured in the IFLS survey, as respondents may not know their revenues (including production for own consumption) and costs for the past 12 months, and there is no disaggregated information on revenues and costs.

**Delayed onset one year ago has substantial adverse effects on the expenditure of poor households.** We re-estimated equations (1) and (2) for the subsample of poor households. Poor households are defined as those whose average per capita consumption, over the three rounds of the survey, falls in the bottom quintile. The results are given in Table 6 (Annex 1). In contrast to all rural households, poor households suffer from delayed onset. The estimated reduction in consumption due to late onset in the previous year is approximately 13 percent and statistically significant. Poor household also benefit slightly less from early onset than all households, as early onset only raises consumption by 2.7 percent. The findings suggest that poor households are not well-insured against delayed onset, at least in the short run.

**Delayed onset two years ago is strongly and positively associated with per capita consumption for poor households.** Delayed onset two years ago is associated with a 23 percent rise in per capita consumption, which is larger than the 1 percent increase for all households. At this point, we cannot explain the large estimated positive effect of delayed onset two years ago on per capita consumption. A more detailed analysis on the effect of delayed onset on rural wages and rice prices is needed to shed further light on this result. For now, we conclude that poor households are able to recover within two years, and that delayed onset has no lasting negative effects on poor household’s consumption.

**Most of the negative effect of late onset one year ago on per capita consumption is due to an increase in household size.** The timing of the monsoon arrival can affect per capita consumption either through the numerator, total consumption, or the denominator of household size. The effect of climatic shocks on household size is ambiguous, in theory. Climatic shocks may increase household size by encouraging households to combine and discouraging the formation of new households. Shocks, however, may also decrease household size by encouraging out-migration from large households (Henry _et al_ . 2004). To better understand the effect of delayed onset on per capita consumption, we decomposed the effect of delayed onset into its effect on household size and its effect on total household consumption, by re-estimating equation (2) with log household size and log total consumption as dependent variables. Table 7 in Annex 1 shows the results for the poor households. The bottom portion of the second and third column indicates that delayed onset in the prior year decreases household consumption by roughly 4.3 percent while increasing household size by roughly 6.8 percent. Therefore, in this specification, over 60 percent of the total effect of delayed onset on per capita consumption comes through an increase in household size.

**For rich rural households, variation in monsoon onset is not an important determinant of per capita expenditure or farm profits.** Table 8 in Annex 1 gives the estimated effects of late onset for rich households – those whose average per capita consumption fall in the top quintile. Rich households neither benefit from early onset, nor suffer from delayed onset one or two years ago. While early onset two years ago reduces consumption by 12 percent for the richest households, the estimate is only marginally statistically significant. If rice prices falls with early onset, following a peak in rice production, net producers would be negatively affected. However, it is not possible to study further whether the households in the top quintile are mostly net producers or consumers of rice.

**In general, delayed onset reduces consumption only for poor rural households.** Across all rural households, consumption decreases by 1.5 percent the year following delayed onset, but these changes are not statistically different from zero. The most disadvantaged households – those in the bottom quintile of per capita expenditure - face substantially larger effects, both positive and negative. Delayed onset

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Distributional Impact Analysis of Climate Variability in Rural Indonesia reduces per capita expenditure of the poor by 13 percent but poor people benefits from late onset two years ago approximately by 23 percent. Table 3 below summarizes the key results.

**Table 3. Impact of delayed monsoon onset on rural household’s consumption and farm profit, IFLS.**

|||**Dependent**<br>**variable**|**One year**|**ago**|**Two ye**|**ars ago**|
|---|---|---|---|---|---|---|
|**IFLS**|||Coef|S.E.|Coef|S.E.|
|**All**|All|Log PCE|-0.014|0.088|0.108|0.060*|
||Farm|Log PCE|-0.41|0.080|0.143|0.071*|
|||Profit pc (’00 rp)|3,815|7,121|4,524|5,45|
||Non-farm|Log PCE|0.098|0.065|0.05|0.049|
|**Rich**|All|Log PCE|-0.034|0.114|0.100|0.114|
||Farm|Log PCE<br>Profit pc (’00 rp)|-0.052<br>-48,943|0.180<br>32,211|0.200<br>10,971|0.166<br>13,001|
||Non-farm|Log PCE|-0.243|0.399|-0.018|0.081|
|**Poor**|All|Log PCE|-0.136|0.062**|0.229|0.066***|
||Farm|Log PCE<br>Profit pc (’00 rp)|-0.093<br>2,572|0.058<br>4,251|0.228<br>8,454|0.072***<br>5,715|
||Non-farm|Log PCE|-0.018|.130|0.140|0.110|
|**Susenas**|||||||
|**All**|All|Log PCE|0.001|0.007|-0.003|0.006|
||IFLS<br>equivalent|Log PCE|-0.082|0.038**|-0.011|0.032|

# **2. Results from SUSENAS**

**This section considers the estimated impacts of monsoon onset on consumption using repeated cross-sections from the SUSENAS core survey.** The SUSENAS core data has both advantages and disadvantages as a data source, compared with the IFLS. The main advantage is that annual data are available from 1993 through 2004, rather than only 1993, 1997, and 2000. In addition, since the SUSENAS covers the entire country, 49 weather stations covering 22 provinces can be matched per year.<sup>14</sup> The IFLS, in contrast, only covers 13 provinces and 36 matched weather stations. However, the SUSENAS has two important drawbacks. First, its consumption module in the SUSENAS core surveys covers relatively few goods and may not be sufficiently detailed to accurately detect variation in household consumption. Second, it does not re-interview the same households in successive years. As a result, the effect of rainfall on consumption is estimated with less precision, for a fixed number of households. In addition, it is not possible to separately estimate the effect on onset on different types of households using the SUSENAS, without introducing spurious correlation between household type and the error term.

> 14 Provinces were omitted from the analysis if they did not contain a rain station.

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Distributional Impact Analysis of Climate Variability in Rural Indonesia To assess the effect of delayed onset on consumption using the SUSENAS core data, we estimated the following equation: Where, as before, _Cit_ represents the per capita expenditure of household _i_ in year _t_ and O represents monsoon onset measured in standard deviations. Z contains a vector of household characteristics that are assumed to be unaffected by rainfall shocks (gender, age, and education of the household head). _DP_ is a set of province dummy variables, and _Dt_ is a set of year dummies. As with the IFLS estimates, we also estimated versions of equation (5) that included two lags of monsoon onset. The results are shown in Tables 13, 14 and 16 in Annex 1.

**Variation in onset has little effect on household per capita consumption.** Table 15 (Annex 1) shows that delayed onset the previous year has virtually no effect on per capita expenditure when estimated for all years and provinces in the sample. Neither does early onset affect per capita expenditure. The estimates are sufficiently precise to rule out negative effects larger than 1.3 percent with 95 percent confidence.  The decomposition of the effect of monsoon onset on total household consumption and household size are presented in Table 16. As we would expect from earlier results, monsoon onset has little effect either on total household consumption or household size.

**Delayed onset two years ago has virtually no effect on consumption when using the SUSENAS.** The positive association between delayed onset two years ago and per capita consumption found in the IFLS analysis is not robust to the use of SUSENAS. In the full rural sample, delayed onset two years ago is associated with a less than a one half percent reduction in log per capita consumption, and can rule out effects larger than 1.5 percent.

**Late onset has a larger negative effect when the sample is limited to IFLS years and provinces.** IFLS data covers only a subset of the provinces and years covered by the SUSENAS.  To test the importance of this limited coverage, we re-estimated the effect on variation in monsoon onset using the SUSENAS, but limited the sample to only the provinces and years covered by the IFLS.  Table 17 shows that there is a substantially larger negative effect of delayed onset on per capita consumption, equal to 8.2 percent, when the SUSENAS sample is limited to IFLS years and provinces.

**The negative correlation between delayed onset and consumption in the cross-section appears to be especially strong in IFLS years.** When the sample is extended to all provinces but limited to IFLS years, delayed onset reduces consumption by 6.6 percent. On the contrary, the negative effect of delayed onset disappears when the sample is extended to all years but only IFLS-provinces are included. This evidence suggests that the negative effect of delayed onset on household expenditure is not consistent across years.

**IFLS years contain disproportionately few cases of late monsoon onset.** In 1993 approximately 4.6 percent of households experienced onset that was at least 0.5 standard deviations late; in 1997, none of the households did and in 2000, 10 percent of the households did. For all years, the corresponding proportion is 26.5 percent.

**The nature of the IFLS survey, which disproportionately represents older heads, may also overstate the impact of delayed onset.** The IFLS makes no effort to re-contact persons born after 1968 that exited households after 1993, unless they were the two children of the head in 1993 that were selected as “main

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Distributional Impact Analysis of Climate Variability in Rural Indonesia respondents”. In addition, not all new split-off households are successfully re-contacted and reinterviewed. As a result, successive rounds of the IFLS increasingly over-represent households with older heads. If households with older head are more likely to accept new members in response to delayed onset, this may also lead the IFLS results to overstate the negative effect of delayed onset on per capita consumption.

**The SUSENAS surveys’ limited information on household consumption, in contrast, may not accurately capture the effect of delayed onset on consumption.** The IFLS consumption measure is likely to be more accurate, for three reasons. First, The IFLS consumption questionnaire is far more detailed than the SUSENAS core. It asks households to report expenditures on 37 food items and 19 nonfood items, whereas the SUSENAS core questionnaire only asks about 15 food items and 8 non-food items. Second, the IFLS questionnaire asks separately about purchased food, and food that was given or self-produced. In contrast, the SUSENAS asks households to estimate the total amount that is purchased, self-produced, or given. Third, the IFLS likely uses more accurate deflators. In 1997 and 2000, price deflators were calculated for each specific IFLS village. For the first IFLS round, as well as all SUSENAS rounds, consumption was deflated using price data published by the Central Bureau of Statistics (BPS). Unfortunately, price data is only published for major cities, meaning that the SUSENAS data is deflated by the capital city in the provinces, and may not accurately reflect changes in rural prices as a result of delayed onset.

**In sum, analysis of the SUSENAS core provides additional evidence that the effect of delayed onset on all rural households is small.** In the SUSENAS, delayed onset in the previous year has virtually no correlation with per capita consumption, and delayed onset two years ago is associated with one-half percent lower per capita consumption. Furthermore, rural households in IFLS provinces appear to be more vulnerable to delayed onset than rural households in provinces not covered by the IFLS. Unfortunately, it is impossible using the SUSENAS data to test the hypothesis that poor households are more vulnerable to late onset.

# **IV. Summary and Conclusions**

**To our knowledge, no study has focused on how climatic variability has affected household welfare in rural Indonesia** . The topic is important for at least two main reasons. First, climate variability appears to be an important determinant of agricultural productivity, particularly rice production. In addition, the agricultural sector contributes the second largest share of GDP, employs more than 60 percent of the poor nationwide, and accounts for 60 percent of all rural workers (Kishore _et al_ : 2000; World Bank: 2008). We fill this gap by estimating the effect of delayed monsoon onset on household per capita consumption.

## **_...delayed monsoon onset one year ago for all rural households..._**

**Estimates consistently show small effects on all rural households.** To assess the effect of delayed onset, we consider the average effect of experiencing a one standard deviation delay, rather than an average date of monsoon onset, on per capita farm profits and per capita consumption. Delayed onset the previous year reduces per capita farm profits by a small amount -- nearly 4,000 rupiah, or roughly 40 cents per month. This is equal to six percent of average monthly profits and two percent of a standard deviation. This estimate is sufficiently precise to rule out a loss greater than 20,000 rupiah. Turning to household capita consumption, delayed onset the previous year is associated with a 1.4 percent reduction in per capita consumption. The SUSENAS cross-sectional data, however, include many more years and provide more precise estimates. In these data, the estimated effect of late onset the previous year is

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Distributional Impact Analysis of Climate Variability in Rural Indonesia negligible, and the results are sufficiently precise to rule out negative effects greater than 1.5 percent. Since the estimated negative effects of delayed onset rise to 6 percent when limited to IFLS provinces, and 8 percent when limited to IFLS provinces and IFLS years, the IFLS results may overstate the negative effect of delayed onset for all Indonesian households.

# **_...delayed monsoon onset two years ago for all rural households..._**

In the IFLS, delayed onset two years ago is associated with an 11 percentage point increase in per capita expenditure for all rural households and this result is statistically significant at the ten percent level. Most of this positive association is due to an increase in total consumption rather than household size. This may partly be explained by a _La Niña_ effect, which normally follows _El Niño_ episodes and is associated with abnormally high rainfall levels and higher agriculture outputs (to the extent that the _La Niña_ is not captured by controlling for lagged onset). However, the positive effect of delayed onset two years ago does not extend to the SUSENAS data, which shows a tiny negative effect of around three tenths of a percent. Overall, the results rule out the possibility that delayed onset has a substantial negative effect on rural households two years later.

# **_...distributional impact of delayed monsoon onset..._**

**Delayed monsoon onset has substantially larger short-term effects the following year on poor households.** The effect of delayed onset on poor households can only be estimated cleanly using the IFLS data. Delayed monsoon onset the previous year likely reduced household per capita expenditure for the poor, by approximately 13 percent, but the majority of this effect occurs through an increase in household size. Specifically, delayed onset in the previous year decreases household consumption by roughly 4.3 percent while increasing household size by roughly 6.8 percent. Climatic shocks may increase household size through several mechanisms. Households may respond to negative shocks by combining households. This could occur, for example, if higher food prices push more urban Indonesians to migrate back to their families in rural areas. Households with older heads, who are over-represented in the IFLS as the panel ages, may be particularly likely to receive additional household members. A final possibility is that delayed onset increases household size by reducing the number and size of roving bands of crop harvesters, which are common in Indonesia.

**Poor households show the largest positive effects of delayed onset two years later.** Delayed onset two years ago is associated with a 23 percent rise in per capita consumption, which is larger than the 11 percent for all households. This suggests that the positive association between per capita consumption and delayed onset two years ago might be due to the positive effects of _La Niña_ or the ability of farm households to “catch up” following delays in planting two years ago.<sup>15</sup>

# _Caveats_

**An important limitation is the amount and quality of the rainfall data.** Only 36 rain stations can be matched to each wave of the IFLS, which reduces the variation in our main independent variable. Unfortunately the years prior to the IFLS interviews do not show wide variation in monsoon onset, and none of the years captured by the IFLS follow a strong _El Niño_ year. Finally, the measure of late onset is based on daily rainfall data, which is undoubtedly measured with error. Since measurement error in rainfall is independent of local household consumption, the true effect of delayed onset, both positive and negative, is likely greater than the estimates presented here.

> 15 The beneficial effects of La Niña could occur even controlling for the timing of onset the previous year, due to the imprecise nature of the quadratic approximation used in the econometric possibility. Another possibility is that the beneficial effects of La Nina are felt through other factors such as rainfall amount that are not included as control variables.

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Distributional Impact Analysis of Climate Variability in Rural Indonesia

# _Future Research_

**An extensive agenda remains for future research on Indonesian households’ response to climate shocks.** Future studies could identify the mechanisms by which different types of households are able or unable to maintain their consumption in the face of delayed onset. The results presented above suggest that poor households are more vulnerable to climatic shock than wealthier households.  They say very little, however, about how some households protect their consumption and why others do not. For example, more research could probe migration decisions in response to rainfall shocks.

**Additional research could also probe the role of household income, labor supply decisions, and community infrastructure in mitigating climatic shocks.** Several existing studies examine the extent to which households are insured against income losses due to rainfall shocks in other countries. Additional work could use income data to examine this question in Indonesia, and could examine how rice prices and agricultural wages are affected by variation in the monsoon onset. From a policy perspective, it is important to understand how community characteristics such as the availability of irrigation and credit might play an important role in households’ ability to cope with climatic shocks. Finally, additional analysis could examine heterogeneity in households’ ability to maintain human capital investments, such as children’s school attendance, in response to rainfall shocks.

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