The application of an endogenous poverty line and its relationship with the poverty impact of economic shocks: An empirical investigation

Most of the studies on the poverty impact of economic shocks as well as policy reforms assumed the poverty line as a fixed line; thus, the poverty outcome of shocks may underestimate (overestimate) and mislead in policy guidance. This research aims at empirically investigating the difference of poverty outcome between applying a fixed and an endogenous poverty line. Applying computable general equilibrium microsimulation (CGE-MS), this study has empirically proven that, if a fixed poverty line is applied, the poverty impact of economic shocks which significantly increase (decrease) price will always be underestimated (overestimated). This study empirically found that there is a 0.316 percentage point difference in the poverty outcome between applying the endogenous poverty line and the fixed poverty line when analyzing the impact on poverty in Indonesia of a doubling in the imported soybean price. Supposing the fixed poverty line, the poverty rate will increase by 0.167 percentage points, while supposing the endogenous poverty line, the poverty rate will increase by 0.483 percentage points. Therefore, applying either an endogenous or a fixed poverty line will have a different policy implication. This study strongly suggested that the endogenous poverty line should be applied when analyzing the poverty impact of shocks due to the precision in outcomes.