A Theoretical and Empirical Investigation of the Application of an Endogenous Poverty Line and Its Relationship with the Poverty Impact of Policy Reforms

This research aims to theoretically and empirically investigate the difference of poverty outcome between applying a fixed and an endogenous poverty line. Applying the microeconomic theory of consumer behavior and the CGEMicrosimulation, this study has theoretically and empirically proven that, if a fixed poverty line is applied, the poverty impact of policy reforms (economic shocks) which significantly increase (decrease) price will always be underestimated (overestimated). This study empirically found that there is 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 100 percent increase in the world soybean price. Supposing the fixed poverty line, the poverty rate will increase by 0.180 per cent, while supposing the endogenous poverty line, the poverty rate will increase by 0.496 per cent. Therefore, applying either an endogenous or a fixed poverty line will have a different policy implication.