Income Shocks and Consumption Smoothing Strategies: An Empirical Investigation of Maize Farmer’s Behavior in Kebumen, Central Java, Indonesia

Abstract

Farmers in most developing countries usually face vulnerability in consumption due to income shocks caused by crop loss, price falls, disaster, sickness and death and unexpected expenditure. They will respond differently to income shocks depending on their asset ownership, labor endowment, access to loan, family assistance, and family structure. We quantitatively analyze the consumption smoothing strategies of maize farmers’ response to income shocks in Kebumen, Central Java-Indonesia. The Ordinary Least Square (OLS) method confirms that selling cattle plays a central role in protecting consumption especially from income shocks such as price falls and crop loss. Farmers that experienced income shocks related to demographic shocks such as sickness and death and experienced expenditure shocks related to custom such as birth, mar- riage and religious event require large effort by combining strategies to smooth their consumption. In this case, farmers are forced to sell their land even though it is a costly alternative. However, widening access to the loan market helps them maintain their consumption. Unfortunately, the hypothesis that the government policies such as cheap rice, cash transfer and health insurance are effective instrument to smooth consumption is not supported by consistent statistical evidences in all models.