Economic growth and poverty reduction in Indonesia before and after the asian financial crisis

Abstract

This paper assesses the relationship between poverty reduction and economic growth in Indonesia before and after the Asian financial crisis. The annual rate of poverty reduction slowed significantly in the post-crisis period. However, the trend in the growth elasticity of poverty indicates that the power of each percentage point of economic growth to reduce poverty did not change much between the two periods. In both, service sector growth made the largest contribution to poverty reduction in both rural and urban areas. Industrial sector growth largely became irrelevant for poverty reduction in the post-crisis period even though the sector contributed the second-largest share of GDP. Agricultural sector growth, mean-while, remained important, but in rural areas only. The findings suggest the need to formulate an effective strategy to promote sectoral growth in order to speed up the pace of poverty reduction.

Keywords:

• economic growth
• poverty reduction
• structural change

Acknowledgements

The authors would like to thank two anonymous referees for useful comments and suggestions, and Novita Maizir for assistance in preparing the figures.

Notes

¹In this paper, poverty is defined as monetary poverty and is measured using the current consumption deficit approach. The poor are those whose per capita household consumption expenditure is below the poverty line.

²The agricultural sector comprises food crops, estate crops, animal husbandry, forestry and fisheries. The industrial sector consists of mining and quarrying, and manufacturing. The services sector comprises electricity, gas and water supply; construction; trade, hotels and restaurants; transport and communications; finance, real estate and business services; and other services.

³In absolute terms, both industrial and service sector output grew in the post-crisis period. But because service sector output grew much faster than industrial sector output, the share of industry in total GDP stagnated while the share of the services sector increased. The same was true of employment, discussed in the next sub-section.

⁴Under the Rice for Poor Families program (Beras untuk Keluarga Miskin, or Raskin), the government sells rice to poor families at heavily subsidised prices. In 2011, the official Raskin price of rice was Rp 1,600 per kilogram, compared with a market price for mediumgrade rice of more than Rp 7,000 per kilogram.

⁵The independent variables in equation (2) are sectoral economic growth rates weighted by sectoral GDP shares. This follows from the fact that when total economic growth in equation (1) is decomposed into its sectoral components, they must be weighted by their GDP shares, that is,

⁶The complete derivation of the model can be found in Suryahadi, Suryadarma and Sumarto (2009). Their results suggested that it was necessary to control for each province's change in population share and its initial poverty rate. Change in population share was included to control for the effect of inter-provincial migration on poverty. (For more on the importance of rural–urban migration for poverty reduction, see Resosudarmo et al. 2010.) Following the suggestion of Datt and Ravallion (1998) and Son and Kakwani (2004), the authors of this paper also included two control variables to account for initial conditions: the Gini ratio as a measure of inequality, and the share of the labour force with at least nine years of education as a measure of the level of human capital.

⁷Rural–urban migration may be the mechanism by which growth in urban areas reduces poverty in rural areas, and vice versa. The model controls for migration across provinces but not for within-province rural–urban migration. The coefficients indicate that rural–urban migration responds to the location of sectoral growth, that is, that strong growth in urban areas induces people to move from rural to urban areas, while strong growth in rural areas dampens rural–urban migration. Resosudarmo et al. (2010) find that rural migrants generally experience improvements in welfare after moving to the cities.