Income Shocks and Consumption Smoothing Strategies: An Empirical Investigation of Maize Farmer’s Behavior in Kebumen, Central Java, Indonesia

Teguh Dartanto, Nurkholis .

.

DOI: 10.4236/me.2010.13017                

Abstract

Farmers in most developing countries usually face vulnerability in consumption due to income shocks caused by crop loss, price falls, disaster, sickness and death and unexpected expenditure. They will respond differently to income shocks depending on their asset ownership, labor endowment, access to loan, family assistance, and family structure. We quantitatively analyze the consumption smoothing strategies of maize farmers’ response to income shocks in Kebumen, Central Java-Indonesia. The Ordinary Least Square (OLS) method confirms that selling cattle plays a central role in protecting consumption especially from income shocks such as price falls and crop loss. Farmers that experienced income shocks related to demographic shocks such as sickness and death and experienced expenditure shocks related to custom such as birth, mar- riage and religious event require large effort by combining strategies to smooth their consumption. In this case, farmers are forced to sell their land even though it is a costly alternative. However, widening access to the loan market helps them maintain their consumption. Unfortunately, the hypothesis that the government policies such as cheap rice, cash transfer and health insurance are effective instrument to smooth consumption is not supported by consistent statistical evidences in all models.

Keywords

Income Shock, Consumption Smoothing Strategy, Rural Economic Development, Government Assistance

Conflicts of Interest

The authors declare no conflicts of interest.

References

[1]	BPS-BAPENAS-UNDP, “National Human Development Report 2004, the Economics of Democracy: Financing Human Development in Indonesia,” Jakarta: BPS, 2004. http://www.undp.or.id/pubs/ihdr2004/ihdr2004_full.pdf
[2]	K. Kochar, “Explaining Household Vulnerability to Idio- syncratic Income Shocks,” The American Economic Re- view, Vol. 85, No. 2, 1995, pp. 159-164.
[3]	M. Eswaran and A. Kotwal, “Credit as Insurance in Agrarian Economies,” Journal of Development Econom- ics, Vol. 31, No. 1, 1989, pp. 37-53.
[4]	M. R. Rosenzweig, and K. Wolpin, “Credit Market Con- straints, Consumption Smoothing, and the Accumulation Of Durable Production Assets In Low-Income Countries: Investments In Bullocks In India,” The Journal of Politi- cal Economy, Vol. 101, No. 2, 1993, pp. 223-224.
[5]	J. Morduch, “Income Smoothing and Consumption Smoothing,” Journal of Economics Perspectives, Vol. 9, No. 3, 1995, pp. 103-114.
[6]	H. Kazianga and C. Udry, “Consumption Smoothing, Insurance and Drought in Burkina Faso,” Journal of De- velopment Economics, Vol. 79, No. 2, 2006, pp. 413- 446.
[7]	J. McPeak, “Contrasting Income Shocks with Asset Shocks: Sales in Northern Kenya,” Oxford Economic Papers, Vol. 56, No. 2, 2004, pp. 263-284.
[8]	M. R. Rosenzweig, “Risk, Implicit Contracts and Family in Rural Areas Of Low-Income Countries,” The Eco- nomic Journal, Vol. 98, No. 393, 1988, pp. 1148-1470.
[9]	A. Kochar, “Smoothing Consumption by Smoothing Income: Hours of Work Responses to Idiosyncratic Ag- ricultural Shocks in Rural India,” The Review of Eco- nomics and Statistics, Vol. 81, No. 1, 1999, pp. 50-61.
[10]	G. Berloffa and F. Modena, “Income Shocks, Coping Strategies and Consumption Smoothing: An Application to Indonesian Data,” Discussion Paper No.1-2009, Uni- versita degli Studi di Trento, Dipartimento di Economica, Italy.