Cash transfers protecting dietary diversity during food crisis

Summary of working paper¹

A village scene in Indonesia

In 1998, during the financial crisis in Indonesia, the value of the rupiah (Rp) depreciated dramatically from around Rp 2,400 per US$ (June 1997) to just under Rp 15,000 per US$ (June 1998). It finally settled between Rp 8,000 and 9,000 per US$ by December 1998. These fluctuations in the exchange rate led to large increases in the price of tradable commodities in domestic markets. The consumer price index increased by 107% between February 1996 and February 1999. During the same period, the food price index rose by 188%. In addition, a number of existing subsidies on consumer goods such as rice, oil and fuel were removed in 1998.

In a recent paper, researchers used the shock to food prices in Indonesia to assess various aspects of the relationship between nutrient consumption and prices.

Type of analysis

The authors conducted the analysis at two levels. First, using the Starchy Staple Ratio (SSR) as the summary measure of household nutritional welfare, they assessed the impact of the dramatic change in food prices on household dietary composition. SSR is defined as the share of caloric availability derived from starchy staple foods (cereals and tubers). According to Bennett's Law, this ratio is inversely related to the importance of inexpensive starches relative to higher quality, more expensive and micronutrient- rich foods (such as meat and fish, fruits and vegetables). Secondly, the authors examined how the income elasticity of the SSR differs in the two survey rounds characterised by very different relative prices between cereals and other major food groups.

The analysis was conducted separately for urban and rural areas in the province of Central Java (one of the poorest provinces in Indonesia) in 1996 and 1999. Results are reported using non-parametric and regression methods. The analysis was supplemented by providing updated estimates of the income elasticity for energy (kcalories) and important nutrients in Indonesia, such as protein, carbohydrate, fat, iron, calcium, phosphorous, and vitamins A (carotene), B1 (thiamin), and C (ascorbic acid).

The authors suggest that at times of crises, cash transfers may be the fastest and least costly method of reaching the households most likely to be adversely affected, if the delivery infrastructure exists and has low levels of leakage. Reliable elasticity estimates can help policy makers determine before the event whether cash transfer programme can be at all effective at increasing nutrient availability among poor households or if alternative interventions may be necessary. Therefore, particular emphasis in the paper is placed on the sensitivity of the elasticity estimates to biases due to measurement error in consumption and the nutrient availability at the household level.

The authors also provide a test for whether the income elasticity for nutrients varies with the economic conditions faced by households. Changes in the relative prices of the staple food items may plausibly give rise to rather unexpected responses to how the demand for nutrients may be affected through a cash transfer. Take a situation where the level of total caloric availability is already low, for example. If the relative price of the staple increases during a crisis, households receiving a cash transfer may choose to spend more of their additional income on that same staple as long as it continues to be the cheapest source of calories and energy.

The analysis is based on the detailed consumption module of the nationally representative (urban and rural) National Socio-Economic Survey (SUSENAS) collected every three years by the Central Statistical Agency (BPS) of the Government of Indonesia. The 1996 round surveyed 60,678 households and the 1999 round surveyed 62,217 households. In February 1999 when the second SUSENAS was conducted, the inflation rate in Indonesia peaked. Comparing prices with 1996 provided the opportunity to examine economic behaviour in the context of dramatically different relative price regimes.

The consumption module of SUSENAS involves a 7 day household food quantity and value recall (216 food items in 1996 and 214 food items in 1999). It includes food purchased, gifted or self produced. Quantities were valued by local interviewers using the prevailing market prices in the villages where households reside. The micro-nutrient content of each food item was calculated using conversion factors published by the Nutrition Directorate in the Ministry of Health of Indonesia.

Findings and policy implications

The analysis led to a number of key findings:

Summary measures, such as the income elasticity of the SSR, may not change during crises but this masks important differences across specific nutrients.

Controlling for measurement error, the income elasticity of some key micronutrients, such as iron, calcium, and vitamin B1, were significantly higher in the crisis year compared with a normal year, particularly in urban areas.

The income elasticity for certain micronutrients - vitamin C in this case - remains close to zero.

These results suggest that cash transfer programmes may be even more effective during crises to protect the consumption of many essential micronutrients compared with non-crisis periods. However, in order to ensure that all micronutrients are consumed, specific nutritional supplementation programmes are also likely to be required.

The results have two specific implications for policy. First, given the significant increases in the income elasticity of both micronutrients and macronutrients during a crisis, it appears that cash transfer programmes can play an integral role in helping households protect their consumption of essential nutrients during crisis. To the extent that the delivery infrastructure already exists and operates at low levels of leakage, cash transfers are widely accepted as the quickest and the cheapest interventions to scale up in order to reach households that are most likely to be adversely affected. This research shows that they can also be more effective in protecting the consumption of nutrients than in normal economic conditions. The second implication is that if the goal of policy in response to economic crises is to ensure the protection of all important micronutrients, then relying entirely on cash transfers may not be sufficient. For example, the consumption of vitamin C was found not to be responsive to income in both rural and urban Central Java. This suggests that specifically targeted micronutrient supplementation programmes may have to accompany cash transfers to ensure that key micronutrients are not sacrificed during crises. Future research could be directed at understanding and identifying which specific nutrients households are likely to sacrifice during a crisis in different settings.

¹Skoufias. E, Tiwari. S and Zaman. H (2011). Can we rely on cash transfers to protect dietary diversity during food crisis. World Bank policy research working paper, 5548. January 2011