Too little too late : welfare impacts of rainfall shocks in rural Indonesia

WPS5615 Policy Research Working Paper 5615 Too Little Too Late Welfare Impacts of Rainfall Shocks in Rural Indonesia Emmanuel Skoufias B. Essama-Nssah Roy S. Katayama The World Bank Poverty Reduction and Economic Management Network Poverty Reduction and Equity Unit March 2011 Policy Research Working Paper 5615 Abstract The authors use regression analysis to assess the potential affected. Rice farm households appear to be able to welfare impact of rainfall shocks in rural Indonesia. In protect their food expenditure in the face of weather particular, they consider two shocks: (i) a delay in the shocks at the expense of lower nonfood expenditures onset of monsoon and (ii) a significant shortfall in the per capita. The authors use propensity score matching amount of rain in the 90 day post-onset period. Focusing to identify community programs that might moderate on households with family farm businesses, the analysis the welfare impact of this type of shock. Access to credit finds that a delay in the monsoon onset does not have and public works projects in communities were among a significant impact on the welfare of rice farmers. the programs with the strongest moderating effects. However, rice farm households located in areas exposed This is an important consideration for the design and to low rainfall following the monsoon are negatively implementation of adaptation strategies. This paper is a product of the Poverty Reduction and Equity Unit, Poverty Reduction and Economic Management Network. It is part of a larger effort by the World Bank to provide open access to its research and make a contribution to development policy discussions around the world. Policy Research Working Papers are also posted on the Web at http:// econ.worldbank.org. The author may be contacted at eskoufias@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  Too Little Too Late: Welfare Impacts of Rainfall Shocks in Rural Indonesia Emmanuel Skoufias B. Essama-Nssah 1 Roy S. Katayama 1 Emmanuel Skoufias is a Lead Economist, Boniface Essama-Nssah is a Senior Economist, and Roy Shuji Katayama is an Economist, all at the Poverty Reduction and Equity Unit of the PREM Network at the World Bank, We wish to thank Will Martin, Syud Amer Ahmed, William Wallace, and two anonymous referees for useful comments in an earlier version of this paper. The findings, interpretations, and conclusions are entirely those of the authors. They do not necessarily represent the view of the World Bank, its Executive Directors, or the countries they represent.  1. Introduction The adverse impacts of climate change2 and extremes represent a serious challenge to development efforts around the globe and are likely to exacerbate the incidence, severity and persistence of poverty in many countries. The global mean surface temperature of the earth has been rising as a result of increased emission of greenhouse gases, particularly carbon dioxide (DFID 2004). Climate change and extremes are expected to affect mostly climate-sensitive sectors of the economy and in turn influence the pattern of household income and consumption. It is estimated that three-quarters of the world's poorest whose standard of living falls below $2 per day rely mostly on natural resources for their livelihoods (WRI 2008). The degradation of natural resources induced by climate change thus places significant stress on these livelihoods. As for agriculture, an important sector of activity for the poor, yields from rain-fed agriculture could be cut by half by 2020 in some parts of the world. It is feared that climate change could reduce soil fertility by 2 to 8 percent inducing a significant reduction in yields for a variety of crops. However, very little is known about the welfare losses that households experience from these phenomena. Households at low levels of income are believed to be the most vulnerable to the impacts of climate change and extremes. This is due to their geographical locations, limited assets, limited access to resources and services, low human capital and high dependence upon natural resources for income and consumption. While there is wide recognition of this impending threat of climate change upon the poor, limited attention is given upon quantifying the poverty and distributional effects of climate change and identifying adaptation strategies and targeted measures that could mitigate the poverty impacts. 2 According to the Intergovernmental Panel on Climate Change (IPCC) a narrow definition of climate refers to the statistical description in terms of the mean and variability of quantities such as temperature, precipitation and wind over a period of time ranging from months to thousands of years. The norm is 30 years as defined by the World Meteorological Organization (WMO). In a wider sense, climate refers to the state and the statistical description of a system composed of the following five components: atmosphere (gaseous envelope around the Earth), hydrosphere, cryosphere (snow and ice), land surface, and biosphere (all ecosystems and living organisms). For more details, please see Parry et al.( 2007). Climate is different from weather which refers to atmospheric conditions in a given place at a specific time. The term "climate change" is used to indicate a significant variation (in a statistical sense) in either the mean state of the climate or in its variability for an extended period of time, usually decades or longer (Wilkinson 2006). 2  The purpose of this paper is to analyze the potential welfare impacts of rainfall shocks in rural Indonesia, and to draw relevant policy lessons. With an estimated population of 237.5 million, Indonesia is the largest archipelago and the fourth most populous nation in the world. Located in Southeastern Asia between the Indian and the Pacific Oceans, the country has a tropical climate with two distinct seasons, monsoon wet and dry, and is endowed with high levels of biodiversity. The country has been experiencing change in both mean temperature and precipitation. Since 1900, it is estimated that the annual mean temperature has increased about 0.3o C. 1998 was the warmest year in the century as the temperature rose 1o C above the 1961- 1990 average (PEACE 2007). The increase in average temperature is projected to lie between 0.36 and 0.47o C by the year 2020. It is reported that overall annual precipitation has decreased by 2 to 3 percent, but there are significant regional differences (WWF 2007). Southern regions such as Java, Lampung, South Sumatra, South Sulawesi, and Nusa Tenggara have seen a decline in annual rainfall. Northern regions on the other hand have experienced an increase in precipitation. These include most of Kalimantan and North Sulawesi. These changes in precipitation are strongly influenced by El Ni