Analysis on distributional implications

As discussed above, theory offers ambiguous predictions with regards to the effect of delayed onset on poor households. The bottom portions of tables 2.3 and 2.4 and shed light on this by presenting estimation results for poor, middle-income and rich households.²⁶

The estimates suggest that the effect of delayed onset on farm profits and household expenditure is largest for middle-class households. For these households, late onset reduces farm profits by 13,500 rupiah per month. The reduction in farm profits is considerable, as it represents 44% of the monthly per capita farm profits, or 11% of average total profits, of the average middle-income farmers. The estimate is also robust to non-parametric estimation (see figure 2.8 below).

26 Full results are available in Appendix A, tables A10, A11, A12, A13, A14 and A15.

Figure 2.8. Local polynomial smoothing for farm profits per capita and monsoon onset;

households in the second expenditure tercile.

Note: Local polynomial smooth, conditional on household and year fixed effects.

The reduction in per capita expenditure of the middle-income households reflects the reductions in per capita farm profits. For these households delayed monsoon onset reduces per capita expenditure by 15.1 percent. The estimate is similar and statistically significant in the non-parametric estimation as well (see figure 2.9 below).

Figure 2.9. Local polynomial smoothing for per capita expenditure and monsoon onset;

households in the second expenditure tercile.

Local polynomial smooth, conditional on household and year fixed effects.

Poor farmers, on the other hand, suffer less than middle-income farmers following late onset. Late onset reduces farm profits by 7, 200 rupiahs for the poorest farmers, and expenditure by 7.1 per cent for poorest households. Moreover, only the estimated effect of farm profits is marginally statistically significant at the 10% level.²⁷

Finally, rich households are the least vulnerable to late onset. The estimates in table 2.3 above suggest that late onset reduces per capita profits for the wealthiest farmers by only 8,300 rupiah per month, which is nearly the same in absolute terms as the poorest farmers and not statistically significant. Furthermore, the impact of delayed onset on per capita expenditure of the wealthiest households is negligible.

Early onset, unlike late onset, appears to effect poor households most. Table 2.4 shows that early onset reduces per capita profits by nearly 3,800 rupiah per month, and per capita expenditure by 7.5 percent. The estimated effect on expenditure is statistically significant at

27 The estimated effect is statistically significant at the 5% level when only the first lag of monsoon onset is included in the regression.

the 1% level. Middle-class and wealthy households are much better protected from early onset. For middle-class households, early onset is associated with a small (1,750 rupiah) reduction in farm profits and a negligible reduction in per capita expenditure, and estimated magnitudes are similar for the top tercile of households. Early onset is associated with abnormally high rainfall, which could lead to minor flooding that reduces production for poor households.

As noted above in section 2.3.2, the division of households into terciles based on their average per capita expenditure could bias the estimates. As a robustness check, I estimate the portion of household per capita expenditure that is predetermined to the rainfall shocks.

The results when using this alternative classification are broadly similar to the original results. In terms of household per capita expenditure, middle-income households remain most vulnerable to delayed onset. A delayed monsoon onset in the previous year reduces the per capita expenditure of these households by 17.8 per cent and the effect is statistically significant at the 5% level. For poor households, the effect is close to zero and not statistically significant. Middle-income households also suffer the most both in absolute and relative terms when looking farm profits per capita. Farm profits of the middle-income farmers are reduced by 13,800 rupiah following a delayed monsoon onset, compared to 10,700 rupiahs of the poor farmers. However, the estimated effect of delayed onset on the profits of middle-income farmers is only marginally statistically significant.

An alternative method to address the possible endogeneity of the household economic classification is to use wealth instead of household expenditure. To the extent that wealth is less responsible to rainfall shocks than expenditure, this would mitigate the bias.

Classifying households based on wealth instead of expenditure does not change the primary finding that households in the middle of the per capita wealth distribution face the greatest loss in terms of farm profits and per capita expenditure after late onset, providing suggestive evidence that the magnitude of any bias of this nature is low. The reductions when using household assets as wealth indicator are of the same order of magnitude as when using household expenditure. The reduction in farm profits of the middle-income farmers became 15,000 rupiahs (instead of 13,500) and the reduction in per capita expenditure remained 15.1 percent. However, the results that poor households are most

vulnerable to early onset, as shown in table 2.4 is not confirmed when using average assets rather than average expenditure as the main indicator of household wealth.