Monday, July 14, 2008

Predicting poverty?

Last week I attended INDEF's mid-year evaluation on government policy, titled "Oil, Food and Poverty." One thing I particularly noted was their prediction that poverty rate will increase by around 1.3 percentage points next year. The main reason was the fuel price hike will create inflation, especially in the food, food products and transportation categories. They also predicted that inflation will rise to around 12 percent.

I've never been a big fan of economic predictions (though in my past job I had to do that). Among different indicators, I wonder if we can make a good prediction for poverty rate. Nevertheless, I wondered why they would predict poverty is to increase by 1.3 percentage points when, at the same time, they predict inflation will rise to 'only' 12 percent. In 2005, when the fuel price increased by 130 percent, inflation jumped to 18 percent, and headcount poverty rate increased by 1.8 percentage points. Now, with lower increase in both fuel price and inflation rate, they predict more or less the same magnitude of increase in poverty rate. Unless if we are facing a very difference situation between now and then, which, I think, is very hard to justify.

Their explanation in the Q&A session revealed that they didn't take the effect of BLT (cash transfer) into account. Well, perhaps because they, at least my colleague Ikhsan Modjo, one of the panelists, belong to the 'BLT is useless' school of thought. For sure, much to be done to improve BLT, and BLT is not a desirable long-term safety-net policy. However, discounting the impact of BLT in providing cushions for the poorest households is unfair.

In case you are interested, here is my comment and further elaboration on this issue.


  1. Ape,
    I am more interested in how the numbers come, not what the numbers are, i.e. how the model works and what the assumptions are. Commenting the predictions without knowing those would be "debat kusir".

  2. Sure, Den. Read more in my personal blog on how I respond to the numbers and assumptions.

  3. Dendi, even you put the assumptions that you perceive the best assumptions you ever have, you are still doing nothing. Models are the same with games. All models are wrong in the reality.
    On the other side, Menko Perekonomian will appoint AP as Menkeu after his comments.

  4. anonymous,
    I don't put myself in the position as uttermost as you. Yet, a blind man need a stick to guide where he has to go. Sensitivity analysis may be helpful to play a game-model.