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ISLAND

GRADUATE SCHOOL

BOGOR AGRICULTURAL UNIVERSITY

BOGOR

2015

ii

iii

DECLARATION

I declare that this thesis is my original work and that all resources of

materials used for this thesis have been duly acknowledged. This thesis has been

submitted to Graduate School Department of Statistics Bogor Agricultural

University in partial fulfillments of the requirements for M.Sc. degree in

Statistics. I seriously declare that this thesis has not been submitted to any other

institution and anywhere for the award of any academic, degree, diploma, or

certificate.

ID: G151148291

iv

SUMMARY

MULUGETA AKLILU ZEWDIE.Spatial Econometrics Model of Poverty in Java

Island. Advised by. MUHAMMAD NUR AIDI and BAGUS SARTONO.

Poverty means people's basic needs like food, clothing, and shelter are not

being met. It is generally of two types: Absolute poverty and Relative Poverty:

absolute poverty is synonymous with destitution and occurs when people cannot

obtain adequate resources (measured in terms of calories or nutrition) to support a

minimum level of physical health. Relative poverty occurs when people do not

enjoy a certain minimum level of living standards as determined by

a government (and enjoyed by the bulk of the population).

independence of error term and play a very important role because if we use

multiple linear regression model that exclude explicit specification of spatial

effects, when it is exist, can lead to inaccurate inferences about predictor

variables. Moran Index test is applied to test for the existence of spatial

autocorrelation among district poverty rates and confirm the existence of spatial

effect. The Weighted matrix is obtained by using queen contiguity criteria. Model

selection is also one of predominant issue in spatial econometric model. The

Likelihood Ratio common factor test, Robust LM test and AIC are used for model

selection criteria. The SAR model proved to be better than the other model for a

given data.

Finally this paper gives you the concept of spatial econometric model on

poverty and applies it to analyze the spatial dimensions of poverty and its

determinants using data from Java Island 2010 census survey, for 105 districts of

Java Island. Dependent variable used in this research is percentage of poverty rate

at particular district and predictors are some selected variables those are correlated

to poverty. Weighted matrix is obtained by using queen contiguity criteria and

four statistical models are applied to the data, multiple linear regression models,

Spatial Error Model, Spatial Lag Model and Spatial Durbin Model. It is shown

that the multiple the OLS estimates of the poverty function suffer from spatial

effects that indicated the OLS model are miss specified since Moran Index test

also confirmed the existence of spatial autocorrelation. LM and Robust LM are

used for testing the existence of spatial effect. The Likelihood Ratio common

factor test and AIC are used for model selection criteria. Gauss Markov

Assumptions is done and the Spatial Lag model proved to be better than other

model for a given data and the result shows that Education and Working hours

have significant impact on poverty.

Keywords: Spatial Effects, Spatial Error Model, Special Lag Model, Spatial

Durbin Model, Robust LM, &AIC

v

RINGKASAN

MULUGETA AKLILU ZEWDIE.Spasial Ekonometrika Model Kemiskinan di

Pulau Jawa. Dibimbing oleh. MUHAMMAD NUR AIDI dan BAGUS

SARTONO.

pakaian, dan tempat tinggal yang tidak terpenuhi. Hal ini umumnya dibagi

menjadi dua jenis: kemiskinan mutlak dan kemiskinan relatif: kemiskinan mutlak

dapat diartikan dengan keadaan orang yang tidak memperoleh sumber daya yang

memadai (diukur dari segi kalori atau nutrisi) untuk mendukung tingkat minimum

kesehatan fisik. Kemiskinan relatif terjadi ketika orang tidak menikmati tingkat

minimum standar hidup tertentu yang ditentukan oleh pemerintah (dan dinikmati

oleh sebagian besar penduduk).

asumsi independensi jangka kesalahan. Jika menggunakan model regresi linier

berganda yang didalamnya tidak terdapat efek spasial yang spesifik, maka dapat

menyebabkan ketidak akuratan inperensis pada variable predictor. Moran indeks

test digunakan untuk menguji keberadaan autokorelasi spasial pada data

kemiskinan ditingkat kabupaten dan hasilnya terdapat autokorelasi pada data

kemiskinan tersebut. Pembobotan matrik menggunakan kriteria pendekatan

Queen. Pemilihan model, didalam analisis ini menggunakan uji factor Likelihood

Ratio, Robust LM (Lagrange multiplier) dan AIC (Akaike’s Information criteria).

dan berlaku untuk menganalisis dimensi spasial kemiskinan. Data yang digunakan

merupakan hasil survey pada tahun 2010 dari 105 kabupaten di Pulau Jawa.

Variabel dependen yang digunakan dalam penelitian ini adalah persentase tingkat

kemiskinan di tingkat kabupaten dan variable independen merupakan beberapa

variable yang berhubungan dengan kemiskinan. Dari pembobotan matrik yang

menggunakkan pendekatan Queen dan empat model statistic yang digunakan pada

data, analisis model regresi berganda, analisis model eror spasial, analisis model

spasial Lag dan analisis model spasial Durbin, menunjukkan bahwa estimasi OLS

(ordinary least square) pada model kemiskinan belum memenuhi salah satu

asumsi regresi. Oleh karena itu dibutuhkan analisis spasial ekonometrika model.

Setelah penggunaan spasial ekonometrika model, asumsi Gauss Markov telah

terpenuhi dan hal ini menunjukkan analisis spasial Lag model lebih baik daripada

analisis model lainnya untuk data kemiskinan. Hasil dari penelitian ini

menunjukkan bahwa tingkat pendidikan dan jam kerja memiliki dampak yang

signifikan terhadap kemiskinan.

Kata kunci: Spasial Efek, Spasial Error Model, Spasial Lag Model, Spasial Durbin

Model, Robust LM, dan AIC

vi

transmitted in any form or by any means, electronic, mechanical, photocopying,

recording, or otherwise, without prior written permission from IPB.

vii

transmitted in any form or by any means, electronic, mechanical, photocopying,

recording, or otherwise, without prior written permission from IPB.

viii

ISLAND

Thesis

Masters of Science

in

Statistics

GRADUATE SCHOOL

BOGOR AGRICULTURAL UNIVERSITY

BOGOR

2015

ix

Thesis Title : Spatial Econometrics Model of Poverty in Java Island

Name : Mulugeta Aklilu Zewdie

ID : 0151148291

Accepted by

Adviser committee

Main Advisor Co-Advisor

Approved by

xi

i

ACKNOWLEDGMENTS

Thanks and Praise to the Living triune God who guided, provided and

sustained me with wisdom, courage and perseverance throughout this journey.

Next I would like to deeply thank my advisors Dr. Ir. Muhammad Nur

Aidi and Dr. Bagus Sartono for their valuable advice and constructive comments

in while working this thesis, and throughout accomplishment of my entire career

in IPB.

From my heart, I would like to express my gratitude to the government of

Indonesia for financial support during my study in IPB and specially department

of statistics for providing me the opportunity of doing my M.Sc. study.

Finally my deep thanks go to all my family, colleagues and others who

encouraged me in various aspects while conducting this Thesis.

Bogor, Oct.2015

ii

TABLE OF CONTENTS

TABLE OF CONTENTS i

LIST OF ABBREVIATIONS iii

LIST OF TABLES iv

LIST OF FIGURES iv

LIST OF APPENDICES iv

1.INTRODUCTION 1

Background 1

Statement of the Problem 3

Objective of the Study 3

Significance of the Study 3

2.LITERATURE REVIEW 4

Multiple linear regression 5

Weighted Matrix 5

Test Spatial Autocorrelation 6

Spatial Econometric Models 6

Spatial Lag Model 7

Spatial Error Model 7

Spatial Durbin Model 7

Test for Assumptions 10

Model Selection 11

3.RESEARCH METHODS 11

Description of Study Area 11

Data 11

Dependent Variable 12

Independent Variables 12

Steps of Analysis 12

4.RESULTS AND DISCUSSION 14

Descriptive Statistics 14

Global vs Spatial Econometric Model 16

5.CONCLUSIONS AND RECOMMENDATIONS 18

Conclusions 18

Recommendations 18

REFERENCES 19

APPENDICES 20

BIOGRAPHY 22

iii

LIST OF ABBREVIATIONS

DW Durbin Watson

LM Lagrange Multiplier

RI Republic of Indonesia

iv

LIST OF TABLES

Table 2: Spatial Vs Global Model 16

Table 3: Assumption Tests 17

LIST OF FIGURES

Figure 2: Methods of Analysis in Flow Chart 13

Figure 3: Percentage of Poverty Rate in Java Island 14

LIST OF APPENDICES

Appendix 1: R Syntax 20

Appendix 2: Java Island in Map 21

1

1. INTRODUCTION

Background

Poverty is pronounced deprivation in well-being meaning people's

basic needs like food, clothing, and shelter are not being met. Poverty is generally

of two types: (1) Absolute poverty is synonymous with destitution and occurs

when people cannot obtain adequate resources (measured in terms of calories or

nutrition) to support a minimum level of physical health. Absolute

poverty means about the same everywhere, and can be eradicated as demonstrated

by some countries. (2) Relative poverty occurs when people do not enjoy a certain

minimum level of living standards as determined by a government (and enjoyed

by the bulk of the population) that vary from country to country, sometimes

within the same country. Relative poverty occurs everywhere, is said to be

increasing, and may never be eradicated. The measurement and analysis of

poverty and inequality is crucial for understanding peoples’ situations of well-

being and factors determining their poverty situations. A poverty profile describes

the pattern of poverty, but is not principally concerned with explaining the causes

of poverty. Yet, a satisfactory explanation of why some people are poor is

essential if we are to be able to tackle the roots of poverty. Among the key

correlates, of poverty are region-level characteristics, which include vulnerability

to flooding or typhoons, Remoteness, quality of governance, and property rights

and their enforcement. Community-level characteristics, which include the

availability of infrastructure (roads, water, electricity) and services (health,

education), proximity to markets, and social relationships. Household and

individual characteristics, among the most important of which are

a. Demographic, such as household size, age structure, dependency ratio,

gender of head.

b. Economic, such as employment status, hours worked, property owned.

c. Social, such as health and nutritional status, education, shelter.

An economic approach to poverty frequently measures poverty

quantitatively in terms of per capita consumption, income levels or calorific

intakes, such methods used by the World Bank and the UN, Which reflects the

minimum income or consumption necessary to meet basic needs. For low-income

countries, the World Bank has calculated poverty lines between $1 and $2 a day.

Although these minimum requirements vary across countries and over time, $1

and $2 a day measures allow policymakers to compare poverty across countries

using the same reference point. The head count measure of poverty identifies the

percentage of the population living in households with consumption or income per

person below the poverty line. (Coudouel et al.2002).The head count is reported

either as a percentage (the incidence of poverty) or as the number of individuals

who are poor. Another popular measure is the poverty gap, which measures the

mean distance below the poverty line as a proportion of the poverty line.

(Harrison 2007). Poverty studies have, for some time, sought to disaggregate the

poor in order to refine the understanding of causes of poverty and design effective

interventions.

2

Halving the number of people living in less than a dollar a day by 2015 was

the key focus of the Millennium Development Goals agreed to at the Fifty-fifth

session of the General Assembly of the United Nations and subsequently adopted

by leading development institutions. They have inspired unprecedented efforts to

meet the needs of the worlds poorest and have focused attention on the issue of

poverty reduction amongst the most poor. Yet, despite the progress that has been,

made recent estimates suggest that between 300 million and 420 million people in

the world are living in chronic poverty (McKay & Lawson 2003)while currently

this number is increased.

Poverty is one of the fundamental problems that become the center of

attention of the governments of all countries in the world, especially for

developing countries like Indonesia. As National Development Planning Agency

(Bappenas 2010) report peoples living below poverty line in Indonesia is still

quite large. In 2010, Bappenasas figured the numbers of poor people in Indonesia

are around 31.02 million. Additionally, Bappenas noted that as much as half of the

total percent or around 55.83% of the total poor population in Indonesia settled in

Java Island (Bappenas 2010).Java Island is the most populous island in Indonesia.

It consists of 6 provinces namely the Special Capital Region of Jakarta, West

Java, Banten, Central Java, Yogyakarta and East Java. Each province consists of

several districts. One of the efforts made to address the problem of poverty is to

identify the variables that affect poverty on these districts. The poverty of the

district due to the impact of poverty in the surrounding district indicates a spatial

effect. Based on the first law of Geography, “everything is interconnected to each

other, but something close more influence than something far”. (Lee et al.2001).

Indonesia's poverty line is determined by a complex function taking in what

the poor spend on different kinds of food to reach 2.100 calories per day, as well

as costs associated with dozens of non-food goods, including housing, clothing,

education and health care. The poverty line is established as an average, allowing

for the fact that prices vary widely from urban to rural areas, and from more

prosperous Indonesian regions. Based on the government's official poverty line is

233.740 rupiah per capita per month which is close to UN poverty line

measurement from 1-2 dollar a day.

A spatial analysis framework offers advantages over tabular analysis. From

spatial analysis perspective Poverty maps are important tools that provide

information on the spatial distribution of poverty. It used to affect various kinds of

decisions, ranging from poverty alleviation programmers’ to emergency response

and food aid. The Visualization of the estimates in map form is an efficient

medium for planning responses to poverty. Spatial statistics can quantify and

clarify patterns seen in maps. A spatial framework allows for incorporating

spatially continuous environmental variables in the analysis. Explicit spatial

analyses take into account the local nature of relationships between poverty and

its determinants. However, the use of poverty maps alone does not furnish an

estimate of the causal linkage between poverty and the variables influencing it;

such maps furnish only “visual” advice. For this reason, researchers usually look

for the possible existence of empirical relationships between poverty and socio-

economic indicators that was applied in South Africa and Ecuador (Hentschel et

al.2000).

3

interaction (spatial autocorrelation) and spatial structure (spatial heterogeneity) in

regression models for cross-sectional and panel data. It is the result of the

development of the classical linear regression method. The development was

based on the presence or influence of a spatial effect.

Most of the researcher in the analysis of poverty they used classical linear

regression model however the result gives less precise because of the nature of

poverty data contains spatial effect so that the model will be less accurate and led

to the conclusion that less precise due to the assumption of independent errors and

homogeneity assumptions are not met. Therefore, the need for a more accurate

analysis on spatial data is spatial econometric model. In this research, modeling

and analysis of the poverty data which has spatial effect can be used spatial

Econometric model.

Objectives

Main objective

The main objective of this research is to identify the variables that affect

poverty by applying Spatial Econometric Model in Java Island with105 districts.

Specific Objective

a. To identify the variable that significantly determine poverty

b. To make policy recommendation to prevent and alleviate poverty

c. To compare the best model among classical linear regression and Spatial

Econometric Models

a. The outcomes of the analysis are used to inform policy making as well as

in designing appropriate model and for assessing effectiveness of on-going

policies and strategies on the reduction of poverty.

b. Can be used as source of methodological approach for studies dealing on

the spatial econometric model.

c. Can be used as a source of information to other researchers for further

investigations to identify the determinants of poverty.

4

2. LITERATURE REVIEW

Nelson Mandela came out of retirement in February 2003 to speak on behalf

of to Make Poverty History campaign in London, an effort to renew the global

commitment to eliminating poverty worldwide. “Like slavery and apartheid,

poverty is not natural”, Mandela intoned. “It is man-made, and it can be overcome

and eradicated by the action of human beings.” In imagining a world without

poverty, hope that Mandela’s strong voice will spur surer action to eliminate the

deprivations suffered by the world’s poor.

Statistical offices spend much time and effort setting and updating poverty

lines. However, the place of poverty lines needs to be put in context. A recent

study of 17 Latin American countries, for example, shows that many other

elements of poverty measurement are more important than the choice of poverty

lines. These include adjustments for adult equivalent family size and the treatment

of missing data in surveys is important rather than choosing poverty line. (Szekely

et al. 2000).

Over the past many years, the causes and consequences of poverty, and

changes in poverty over time, have been the subjects of much academic research

and social policy debate. In large measure, two schools of thought have dominated

this research and debate. One attributes the causes of poverty primarily to

individualistic or family compositional forces. Sometimes referred to as “people

poverty”, another school of thought focuses on contextual or structural forces,

sometimes referred to as “place poverty.” These include issues such as urban

economic dislocations, faltering regional economies, high unemployment, poor

and often disorganized local employment opportunity structures all forces over

which the individual has little or no control. (Pebley & Sastry 2003).

A key element affecting poverty is regionalism; Said Levernierand

concluded that economic development targeting predominantly African-American

community’s counties would be most effective in alleviating poverty.Triest 1997

concluded that increased employment of the low-income population and increased

educational opportunity would narrow the interregional gap in poverty. Goetz

2007 suggested that government can increase investment in social capital to

reduce the poverty rate by easing transaction costs paid by local

associations.Findeis found that welfare assistance to help the poor workers had

effects on poverty in metro areas. Mauro found that the poor countries tend to

have corrupted bureaucracies and politic instability. (McKay & Perge 2011)

5

Simple linear regression model is not adequate for modeling many

economic phenomena, because in order to explain an economic variable it is

necessary to take into account more than one relevant factor. Multiple linear

regressions is given by the following expression: (Rawling et al. 1998)

k

yi 0 j xij i

j 1

Where:

y i : poverty rate of the i-th district (i = 1,2,…,n)

: constant term or y intercept

0

j : Regression parameters(j=1,2…k)

x ij : predictor variables

i : Random error term iid with mean zero and constant variance.

areas such as an irregular lattice, it is common to find spatially auto-correlated

residuals. When spatial autocorrelation exists, in multiple linear regressions

above; the error term has to take the autocorrelation into account. (Anselin 2001)

and look for spatial models would be prefer because Ordinary Least Squares

(OLS) in multiple linear regression analysis, the resulting parameter estimates are

biased, inconsistent and the R square values is not an accurate fitness of fit

measure due to violation of assumption that was explain in the problem of

statement.

Weighted Matrix

The basis for most models is an indicator of whether one region is a spatial

neighbor of another; or equivalently, which regions are neighbors of a given

region. This is a square symmetric weighted matrix (W) nxn (row standardized)

matrix that define who are neighbours with who. To construct this weighted

matrix:

1) Contiguity based weighted matrix: Queen

2) Inverse Distance weighted matrix

3) K –nearest neighbor weighted matrix

For this Research the researcher used contiguity weighted matrix that is

based on queen two regions are neighbors in this sense if they share any part of a

common border, no matter how short is it. Queen Contiguity weighted matrix is as

follows:

6

w2 n

W w21 0 w23

wn1 wn 2 wn 3 0

wij

With row standardization weighted matrix: wij

*

n

w

j1

ij

Spatial autocorrelation stems from "similarities" between neighboring clusters;

there is autocorrelation when the covariance between "neighboring" cluster i and

cluster j does not equal zero, and no autocorrelation exists otherwise .One of the

most common tests for the existence of spatial autocorrelation (measures is Global

Moran's I which depends on a "weight matrix" at particular data residual or vector

y.Moran test statistics for spatial autocorrelation is as follows:

I - E(I)

Z cal ~ N (0,1)

var(I)

n 2 ij Wij2 n ( j Wij ) 2 3(Wij ) 2

var( I )

i ij

(n 1)(W )

2 2

ij

ij

H0:I = 0 (no autocorrelation ) H1:I 0 (the is a posetive or negative

autocorelation) Reject Ho if Z cal Z / 2

When significant spatial autocorrelation, (spatial dependence) exists either

globally or locally, spatial heterogeneity exists and accordingly non constant

errors.(Anselin 1988; Higazi et al. 2013)

where there is spatial heterogeneity between and spatial homogeneity within

neighboring clusters; thus “spatial dependence" is exhibited among these clusters.

When these characteristics are ignored and using Ordinary Least Squares (OLS) in

multiple linear regression analysis, for example, the resulting parameter estimates

are biased, inconsistent and the R square values is not an accurate fitness of fit

measure, since the assumption of independent error terms is violated since spatial

dependence and spatial autocorrelation exist in the data.

7

The spatial autocorrelation model is a combination of spatial lag effect

model and spatial error models which calls most of time Simultaneous

autoregressive model or general spatial model according to (Lesage 2009) and

(Paraguas & Kamil 2005) is as follows:

.

With: ; ε ~ N (0, 2 I)

Where: =the spatial error coefficient; =spatial lag coefficient

W=n Xn spatial weight matrices

y = vector of response variable (n x 1)

X = matrix of pridictor variable (n x (k+1)) u = vector error n x 1

.

ε = vector of uncorrelated errorterm (nx1)

From the Spatial Autocorrelation model restricting the spatial error effects

parameters equal to 0 can derive other models SAR. Meaning λ= 0, a “spatial lag”

model or following SAR model can be derived which is analogous to the time-

series lagged dependent variable is:

ε ~ N (0, 2 I)

When ρ in Spatial Autocorrelation model is set to 0, a spatial error model

(SEM) with spatial effect of error term can be derived the form:

ε ~ N (0, 2 I)

Since in the likelihood ratio common factor test according to Elhorst’s flow

chart if the null hypothesis accepted lamda will be equal to rho so the model can

be write in above form.

Spatial Durbin Model according to (Lesage 1999) is:

variable predictor in General. This just adds average-neighbor values of the

independent variables to the specification.

Example: the level of poverty in region j depends on the intensity of

policing in j as well as on the intensity in neighboring jurisdictions. Apart from

potential Problems of multicollinearity (recall that row-wise, X and WX are for

different regions because the diagonal elements of W are zero), this model poses

no problems for us.

8

Under SDM by using likelihood ratio common factor we can come out to

SEM model & SAR model.H0: if it is not significant our model goes to

SEM.if it is significat it will be SAR or OLS depending on spatial lag coeeficients

here is the concept:

The entire above all models uses Maximum likelihood estimation for the

parameters beta and teta.

Xj Xi Xj Xi Xj Xi Xj Xi

Yj Yi Yj Yi Yj Yi Yj Yi

Ɛj Ɛi Ɛj Ɛi Ɛj Ɛi Ɛj Ɛi

No influence Dependent variable Residuals Independent variable

from neighbors Influenced by influenced by influenced by

neighbors neighbors neighbors

9

There are several diagnostic tests that could be used to test the Significance

of spatial effects; these are Lagrange Multipliers (LM lag test and LM-error) to

tests spatial dependences. Also residual plots and residual maps are also examined

to locate extreme values and reveal heterogeneity, globally and locally. According

to Anselin (2010) the Lagrange Multiplier Test for Spatial Error (LM-ERR)

hypothesis is as follows: H0 : = 0 (no spatial error effect )

H1: ≠ 0( there is spatial error effect)

The Lagrange Multiplier test statistics for this is:

LM error

e We /( e e / n)

t t 2

Reject Ho LM-error> ( ,1)

2

tr (W W W )

t t

The next Lagrange Multiplier Test for Spatial Lag (LM-Lag) hypothesis is :

H0: = 0 (there is no spatial lag effect)

H1: ≠ 0 ( there is spatial lag effect )

The Lagrange Multiplier test statistics for this is:

LM lag [e tWy / e t e / n)]2 /[ D tr (W 2 W tW ]

Where D [(WX ) t ( I X ( X t X ) 1 X t )(WX ) /(e t e / n)]

Reject Ho LMlag> ( ,1)

2

Another test used is Likelihood ratio common factor test with the following

hypothesis: H0: vs H1: With Test statistics of :

and log-likelihood function of the restricted model respectively. (Mur & Angulo

2006) Reject/accept by using p-value criteria.

Finally the best model checked all Gauss Markov assumptions and

Multicollinearity; For Homogeneity of error term the researcher used Breusch

pagan test to test the model error term is homoscedasticity against

heteroscedasticity; For Normality of error term the researcher used Kolmogorov

Smirnov test to test the model error term is normal against non normal and finally

the best model also checked the existence of autocorrelation or independent of

error term by using Durbin Watson test and Moran test.

10

V (εj ) = σ2 for all j. That is, the variance of the error term is constant.

(Homoskedasticity). If the error terms do not have constant variance, they are said

to be heteroskedastic. [Tidbit from Wikipedia: The term means “differing

variance” and comes from the Greek “hetero” ('different') and “skedasis”

('dispersion').]Breusch pagan test is one of the test statistics to test it and

Hypothesis are as follows: H0: Homoscedasticity H1: hetroscedasticity

With Test statistics where SSR(explained sum squared /sum squared

dueto regresion from new model) Ri=Xi hence refer the detail

of this equation written by Arbia (2006) . Reject H0 where n is number

of independent variable.

Smirnov (K-S) test where the hypothesis is as follows: H0: residual is normal

distribution H1: residual is not normal distribution .(Arbia, 2006) as stated the test

statistics is:

k max Fn ( x) F0 ( x)

Where Fn(x) = being the empirical cumulative distribution function based on

n observations

F0(x) = the theoretical cumulative distribution function under the

null hypothesis Reject H0 if |k| > q (1- α)

One assumption of our model is that the error terms are independent. In this case

if the order of autocorrelation more than one Moran Index test would be better.

The Durbin-Watson test statistic is typically used to test (there is no

autocorrelation) ρ (residuals areautocorrelated),where the test statistics

is as follows:

e ei 1

n 2

i 1 i

d cal Reject Ho dcal ≤ dL,α/2 or dL,α/2 ≤ (4 – dcal) ≤ dL,α/2

n 2

e

i 1 i

11

Model Selection

Model selection can be helpful to identify a single best model or to make

inferences from a set of multiple competing hypotheses Up to now, however, only

a few model selection procedures have been tested for spatially auto correlated

and spatial lag data. Therefore the researcher developed model selection

procedures and selected the best models among OLS, SDM, SAR and SEM by

model selection criteria of akaike information criteria (AIC) as follows:

equal to the number of independent variables plus 1 for the intercept term.

3. RESEARCH METHODS

Indonesia is a large Southeast Asian country with 497 regencies and

administrative cities spread out in 33 provinces. The country is an archipelago

consisted by big five island (Java, Sumatera, Kalimantan, Sulawesi and Papua)

beside more than 17 thousand small islands hemmed in the Atlantic Ocean in the

Northern edge and the Indian Ocean in the Southern edge. The researcher interest

goes to the most populated Island named Java Island which has 6 provinces

namely the Special Capital Region of Jakarta, West Java, Banten, Central Java,

Yogyakarta and East Java. Each province consists of several districts. However

the researcher only takes under consideration of 105 districts.

Data

The data is secondary data which is collected by BPS Indonesia, in 2010.

All the response and explanatory variables are continuous and all variable are

changed to percentage for analysis purpose.

Dependent Variable

The responses variable in this study is percentage of poverty rate at

particular city or region of 105 districts.

12

Independent Variables

The explanatory variables that are included in this study by assumed to be

correlates to poverty are:

X1: Percentage Unemployment rate

X2: Percentage Malnutrition rate

X3: Percentage Child mortality rate

X4: Percentage Morbidity (occurrence of disease)

X5: Percentages of household more than high school

X6: Percentage of access to clean water

X7: Percentage of non-sanitation

X8: Percentage Literate rate

X9: Percentage Employment rate

X10: Percentage of un worked hour per week

X11: Percentage health complain of the household

X12: Length of sickness

Methods of Analysis

1. Data exploration with graph and descriptive statistics: this part explain

descriptive part of the analysis by using bar chart of the given province data

without considering the districts so that can know the general outline of poverty in

java island.

2. Analysis Multiple linear Regression model using OLS estimation: In this part

all we want to compare the global model by using ols estimation after that we

want to extract the error to check the assumption.

3. Create row standardized weighted matrix Using contiguity Queen Criteria: the

row standardized matrix helpful before go to the spatial part must be created here

by looking Queen Criteria refer more detail for this matrix in the Research

reviews.

4. Test for the existence of spatial autocorrelation using Moran Index test :

After we get the weighted matrix we want to know about the spatial correlation

since spatial correlation can affect the result of multiple linear regressions so that

Moran I test will be held on here.

5. Test for spatial lag and spatial error effect by using LM and Robust LM test

If the spatial effect occurs we need to identify the source of its effect by using

Lagrange multiplier Test.

6. Analysis Spatial Lag Model, Spatial Error Model and SDM model

The analysis our Spatial Econometrics model so far we already identified the

effects of spatial models in the existence of autocorrelation

7. Under spatial Durbin model test LRcom factor test and come up to the reduced

model: likelihood ratio common factor test is very important to identify our best

model.

8. Select the best model by using model selection criteria and test assumptions of

residual: Finally we used model selection criteria that are mention in the research

review.

13

Data Exploration

Autocorrelation

Analysis M-OLS and

Analysis OLS

Diagnosis Analysis SDM

(LMerr&LMlag)

All significant

Significant

Robust LM

Significant RLMerr Likelihood ratio

Yes No

common factor

Yes test significant

SEM SAR

Yes

AIC

and Check assumption

14

Under descriptive statistics the researcher express all Java Island provinces

with the respective number of districts. For DKI Jakarta (5), West Java (21),

Banten (7), Central Java (33), DIY Yogyakarta (5) and East Java (34) districts.

The rest districts which are not here indicated that they are minimum percentage

of poverty rate, the data does not collected by BPS for the explanatory variables

and spatially their effect is insignificant if they are geographically far from their

neighbor’s jurisdiction. According to Tobler's first Law."Everything is related to

everything else, but near things are more related than distant things." Under

descriptive statistics concept the researcher also makes a bar chart to identify

which province has higher or lowest poverty rate without considering their

districts so that this just shows that the overall view of poverty rate in each of Java

Island provinces as follows in figure 3.

16.83%

15.26% 15.56%

11.27%

7.16%

3.48%

DKI Jakarta Banten West Java East Java Central Java DIY

Yogyakarta

Figure 3. Percentage of poverty rate in Java Island.

From the above figure we can see that DKI Jakarta, Banten, West Java,

East Java, Central Java and DIY Yogyakarta indicated by depending up on poverty

rate respectively. So that among the Java Island provinces in 2010 house hold

survey there was high percentage of poverty rate in DIY Yogyakarta, Central Java

and East Java respectively while in DKI Jakarta is relatively small percentage of

poverty rate. In the next step of finding the researcher look the factors that affect

poverty rate in Java Island. Why poverty rate is less in DKI Jakarta some

researcher found that more rural places are worse in poverty than urban why we

shall get it on the outcome. The next step after it is creating weighted matrix with

105 by 105 matrixes after that test the existence of spatial autocorrelation and

spatial dependency. If there is no spatial autocorrelation keep our classical linear

regression model and give conclusion and recommendation based on it.

15

Table 1 Spatial autocorrelation test and spatial dependence test for poverty of ols

Moran Index Test for autocorrelation

Moran I statistic standard deviate = 8.464, p-value < 2.2e-16

Moran I statistic Expectation Variance

0.5596 -0.0096 0.0045

Lagrange multiplier diagnostics for spatial dependence

LMerr = 19.016, df = 1, p-value = 1.296e-05

LMlag = 27.620, df = 1, p-value = 1.477e-07

Robust Lagrange multiplier diagnostics for spatial dependence

RLMerr = 0.0015, df = 1,p-value = 0.9691

RLMlag = 8.6051, df = 1, p-value = 0.0034

From the above table 1 Moran I test statistics (0.56) indicated that there is

a positive autocorrelation in this poverty data. And the researcher test the

significant of autocorrelation by looking p value (2.2e-16) that is very small and

less than 0.05 so reject the null hypothesis as stated in the research methods and

we conclude that there is a positive spatial autocorrelation in the given poverty

data meaning high values of a poverty rate at one locality are associated with high

values at neighboring localities or low values of a poverty rate at one locality are

associated with low values at neighboring localities since the spatial

autocorrelation is positive. In another way Moran’s I (0.56) can be interpreted as

the correlation between variable, poverty rate, and the spatial lag (Wy) of poverty

rate formed by averaging all the values of poverty rate for the neighboring

polygons. Now after the existence of spatial autocorrelation the researcher needs

to test spatial dependence, if spatial autocorrelation exist spatial dependence will

also exist. First, check the significance of the Lagrange Multiplier (LM) test,

which tests for the presence of spatial dependence. If only one is significant, (lag

or error), proceed to do that test. If both are significant, check the Robust LM

tests, which tests which one could be at work. If only one is significant in Robust

test, (lag or error), then do that test. If they are both significant, choose the test

with the biggest value. From Lagrange multiplier as we seen all spatial lag and

spatial error dependence occur so our model should not be OLS so far we also

know that as spatial autocorrelation occur spatial dependence and spatial

heterogeneity also occur how ever in the lm test both of the error and the lag

model will be appropriate but Anselin stated that we should go further robust lm

test so as we can see the error model is no more significant than the lag model in

Robust LM test. So from here we can say our best model well be SAR model

while latter will see on LR test and AIC as comparison.

16

variable

Significant

Global vs. Spatial Econometric Model

Variable

OLS-M SAR SEM SDM

7.3929 3.9881 5.9084 6.6336

Intercept

(0.000) (0.00076) (0.000) (0.0016)

-0.0255

X1 -0.00786 -0.0045 0.0031

(0.01881)

X2 0.0050 0.00435 0.0024 0.0084

-0.0088

X3 -0.00411 -0.0017 -0.0011

(0.0687)

X4 -0.0083 0.00004 0.00578 0.0028

-0.0052 (-0.0078) -0.0088 -0.0116

X5

(0.0106) (0.0050) (0.0049) (0.0003)

-0.0080

X6 -0.00360 -0.0026 -0.00192

(0.0106)

X7 0.00198 -0.00036 0.0013 0.00088

-0.03637 -0.02293 -0.0273 -0.02032

X8

(0.0001) (0.0022) (0.0006) (0.01153)

X9 -0.0089 -0.00102 -0.0064 -0.00864

0.0389 0.0377 0.0399

X10 0.0350

(0.0294) (0.032) (0.0331)

X11 0.0043

X12 0.0089 -0.0067 -0.0130 -0.0191

Lagged 0.5170 0.44604

y( (0.000) (0.0003)

Lagged 0.6940

error ( (0.000)

Lag x1 -0.036(0.03)

Lag x4 -0.035(0.02)

Lag x5 0.012(0.03)

Lag x6 -0.009(0.05)

AIC 68.614 43.838 43.991 44.858

23.134

LR test

(0.026)

N 105 105 105 105

8.6051 0.002

RLM

(0.003) (0.969)

From the above table 2 the researcher can observe that the more

appropriate model for our poverty data is the spatial lag model which has

minimum AIC (43.8) even the likelihood ratio common factor test pointed that

spatial Durbin model is differ from spatial error model. If spatial Durbin model is

differ from spatial error model or it cannot be reduced to spatial error model so

that our model pointed to OLS or Spatial Lag Model; in above table as discussed

17

before the OLS result is affected by the presence of spatial dependence and even

seen unexpected sign since the spatial effect are significant so that the best model

is spatial lag model. So from it as we can see that literate rate and house hold who

has higher education is a negative impact on poverty while employer who has

more un worked hours per week has a positive impact on poverty. In our lag

model the spatial lag effect is significant (0.51702) which mean that on average

100 percent increased in poverty rate in a location resulted in 51.7 percentage

point increase in poverty rate in neighbors location and the highest significant of

error lag also indicated that a random shocked in spatially omitted variable that

affects percentage of poverty rate in a particular location triggers a change in

percentage of poverty rate. The next thing is to check our best model to fulfills the

requirement of assumptions remember the dependent variable was change to log

since the residuals have a skewed distribution. The purpose of a transformation is

to obtain residuals that are approximately symmetrically distributed (about zero,

of course),all the non bracket page with respect to each model shows the value of

the variable is insignificant and under bracket of above table shows p value.

Table 3. Assumptions Test SAR/lag model

No. Tests Test Process Stat vs DF P-value vs CI

1 Normality KS-Test 0.095238 0.7277

2 Homogeneity Breusch- 11.043(11) 0.4397

Pagan test

3 Independency DW-Test VS 2.24 (dl=1.416,

Moran I test du=1.948)

From the above table 3, residuals of the lag model as we seen it, it is

enough to say that our model has no problem on normality assumption, From KS

test we can also conclude that our model is normal distributed since

(KS=0.095238 with p-value=0.7277) indicated that we accept the null hypothesis

so that there is no normality problem in our model. For more the researcher also

tested the constant variance assumption here the result above from BP test

indicated that there is no more heterogeneity problem since the p value is greater

than 0.05 we accept the null hypothesis that mean the variance is homogen.

Remember as stated before in the research methods our null hypothesis is

homoscedasticity against hetroscedastcity.The OLS result of Durbin Watson is

1.56 which indicates that residual are auto correlated so that the OLS model will

not accurate since this assumption violated while the SAR model as we seen

above table DW=2.24 is greater than du that means there is no problem of

autocorrelation or don’t reject the null so that our model is good enough, it is also

checked by Moran since Dw test only test the first autocorrelation effect.

Remember multicollinearity also checked using VIF.

18

Conclusion

Global Econometric model has largely ignored spatial dependency

between the observations and spatial heterogeneity in the relationship we are

modeling, because they violate the Gauss-Markov assumptions used in regression

modeling. A major assumption that is never satisfied when variables are from

contiguous observations is the independence of error terms. Spatial analyses

treated the violation of this assumption and play a very important role because

global Models that exclude explicit specification of spatial effects, when it is

exist, can lead to inaccurate inferences about predictor variables. Based on it

between Global and Spatial Econometric model the researcher found that the best

model is spatial model in the existence of spatial autocorrelation obviously in case

of spatial dependence and heterogeneity to full fill all the required assumptions.

Among all models the best one for this poverty data is Spatial lag model.

As we know poverty is a complex phenomenon we cannot determine it

within a short period of time if we don’t know the significant determinant factors

but if we know the significant factors to reduce poverty so that we can easily fight

it. In this research the researcher found that based on the best model (spatial lag

model) the literate rate, house hold who have higher degree and employer

unworked hours are significant determinate factor of poverty as we see on the

output of spatial lag model. The parameter of literate rate is negative which

indicated that poverty and literate rate has a negative relationship that mean the

more we are educated we can alleviated poverty as well, the more we are illiterate

the more we are poor while employer un worked hours are a positive relationship

that indicated the more we have un worked hours or spent our working time

without doing our activity the more we are poor.

Recommendation

As individual level the researcher recommend to the household of all family

member must be increase there working time if they are whatever government

employer or private employer so that it can help to generate income and alleviate

poverty.

As a government level the researcher recommended that the policy must

focused on developing human capacity by increasing literacy rate and education

should be free and supported by government until strata one so that educated

people can be alleviate poverty in many direction.

Due to limitation of resource the researcher does not cover all the expected

factors of poverty.

19

REFERENCES

Anselin L.1988. Spatial Econometrics: Methods and Model, Kluwer, Dordrecht.

Anselin L.2001.Spatial Econometrics in a companion to Theoretical Econometrics

( Baltagi B.H. ed). Blackwell.Oxford.

Anselin L.2010.Lagrange multiplier diagnostics for spatial dependence and

heterogeneity, Geographical Analysis. Wiley online library.

Arbia G. 2006.Spatial Econometrics Statistical Foundations and Applications to

Regional Convergence, Italy.

[BAPPENAS] National Development Planning Agency. 2010. Report on the

Achievement of the Millennium Development Goals Indonesia.

Coudouel A, Jesko H, Quentin W. 2002. Poverty Measurement and Analysis, in

the PRSP Sourcebook, World Bank, Washington D.C.

Harrison A. 2007.Globalization and Poverty, NBER Books, National Bureau of

Economic Research.

Hentschel J, Lanjouw P, Poggi J. 2000. Combining census and survey data to trace

the spatial dimensions of poverty: a case study of Ecuador. World Bank

Econ.

Higazi SF, Abdel-Hady DH, Al-Qulfi SA. 2013. Application of Spatial Regression

Models to Income Poverty Ratios in Middle Delta Contiguous Counties in

Egypt.Tanta University, Tanta, Egypt

Lee J, David W. 2001. Statistical analysis with arc view GIS, John Wiley, New

York.

Lesage JP, Pace K. 2009. Introduction to Spatial Econometrics, Boca Raton: CRC

Press.

Lesage JP. 1999. The Theory and Practice of Spatial Econometrics, Department of

Economics University of Toledo.

Mckay A, Lawson D. 2003.Assessing the Extent and Nature of Chronic Poverty in

Low Income Countries: Issues and Evidence, University of Nottingham,

UK.

McKay A, Perge E. 2011. How strong is the evidence for the existence of

poverty traps? A multi country assessment, Working Paper series.

Mur J, Angulo A. 2006. The Spatial Durbin Model and the Common Factor Tests,

Spatial Economic Analysis.

Paraguas FJ, Kamil A. 2005. Spatial Econometrics Modeling of Poverty paper

presented on the 8th WSEAS International Conference on applied

mathematics, Tenerife, Spain.

Pebley AR, Sastry N. 2003. Neighborhoods, Poverty and Children’s Well-being,

University of California, Los Angeles.

Rawling JO, Pantula SG, Dickey DA. 1998. Applied Regression Analysis A

Research Tool Second Edition. Raleigh, North Carolina USA.

Szekely M. Lustig N, Cumpa M, Mejia JA. 2000.Do We Know How Much

Poverty There Is? Inter-American Development Bank, Felipe Herrera

Library.

20

APPENDIX

A1. R-Syntax

poverty<-read.table("D:/poverty14.csv",sep=",",header=TRUE)

weight<-read.table("D:/weight12.csv",sep=",",header=FALSE)

attach(weight)

attach(poverty)

w<-as.matrix(weight)

library(spdep)

library(lmtest)

mat2listw(w)

moran.test(poverty$y,mat2listw(w))

ols<-lm(y~x1+x2+x3+x4+x5+x6+x7+x8+x9+x10+x11+x12)

summary(ols)

bptest(y~x1+x2+x3+x4+x5+x6+x7+x8+x9+x10+x11+x12, data=poverty)

lm<-lm.LMtests(ols,mat2listw(w),test=c("LMerr","LMlag"))

lm

sar<lagsarlm(y~x1+x2+x3+x4+x5+x6+x7+x8+x9+x10+x11+x12,data=pov

erty,mat2listw(w)

summary(sar)

bptest.sarlm(sar)

l<-as.matrix(residuals(sar))

sem<errorsarlm(y~x1+x2+x3+x4+x5+x6+x7+x8+x9+x10+x11+x12,data=p

overty,mat2listw(w))

summary(sem)

bptest.sarlm(sem)

e<-as.matrix(residuals(sem))

mod.sdm <- lagsarlm(y~x1+x2+x3+x4+x5+x6+x7+x8+x9+x10+x11+x12,

data = poverty, mat2listw(w), zero.policy=T, type="mixed",

tol.solve=1e-12)

summary(mod.sdm)

bptest.sarlm(mod.sdm)

d<-as.matrix(residuals(mod.sdm))

durbin.test<-LR.sarlm(mod.sdm,sem)

print(durbin.test)

21

Capital City of RI

22

BIOGRAPHY

The author of this Thesis entitled “Spatial Econometrics Model of

Poverty in Java Island” was born in 19 May 1989 in Ethiopia. Then, He joined

Department of Statistics at Hawassa University in 2008/9. After finishing of his

first degree in 2011 he employed at Mekelle University as Graduate Assistance

Lecturer after 2 year he joined MSc program in Statistics at Bogor Agricultural

University in RI.

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