Revisiting the Impact of Consumption Growth and Inequality on Poverty in Indonesia during Decentralisation

Abstract

This article analyses the consumption growth elasticity and inequality elasticity of poverty in Indonesia, with a particular focus on the decentralisation period. Using provincial panel data, we show that the effectiveness of growth in alleviating poverty across provinces was greater during decentralisation—that is, between 2002 and 2010—than at any other point since 1984. The growth elasticity of poverty since 2002 is estimated to have been –2.46, which means that a 10% increase in average consumption per capita would have reduced the poverty rate by almost 25%. However, we also find that rising income inequality negated a quarter to a third of the 5.7-percentage-point reduction in the headcount poverty rate. This increasing inequality has contributed to a lower level of pro-poor growth than that maintained in Indonesia before decentralisation.

Tulisan ini memberikan analisis terhadap elastisitas kemiskinan atas perubahan pertumbuhan konsumsi dan perubahan ketimpangan di Indonesia, dengan fokus pada era desentralisasi. Dengan menggunakan data panel propinsi, para penulis menunjukkan bahwa keampuhan pertumbuhan dalam mengurangi kemiskinan di berbagai propinsi lebih besar pada periode desentralisasi—yakni antara 2002–2010—dibandingkan berbagai semua periode lain sejak 1984. Elastisitas kemiskinan terhadap pertumbuhan sejak 2002 diperkirakan berkisar di –2.46, yang artinya kenaikan 10% pada konsumsi per kapita dapat menurunkan tingkat kemiskinan sebesar hampir 25%. Namun demikian, para penulis juga menemukan bahwa kenaikan ketimpangan pendapatan meniadakan seperempat sampai sepertiga dari penurunan tingkat kemiskinan per kepala yang besarnya adalah 5.7%. Peningkatan ketimpangan ini menyebabkan pertumbuhan yang berpihak kepada masyarakat miskin menjadi lebih rendah jika dibandingkan dengan tingkat pertumbuhan di Indonesia sebelum era desentralisasi.

Keywords:

• economic development
• consumption growth
• poverty
• inequality
• decentralisation

JEL classification:

• D63
• I30
• O1
• O4

This article is based mainly on section 3 of the authors’ OECD working paper of 2013, ‘Trends in Poverty and Inequality in Decentralising Indonesia’. The authors thank Yogi Vidyattama and Erick Hansnata, the other authors of that paper. They also thank Michael Forster, Ana Llena-Nozal, and other country delegates of the OECD for their funding, assistance, and feedback. Sonny Harmadi, Evi Nurvidya Arifin, Asep Suryahadi, and Jan Priebe provided useful comments, as did the two anonymous referees. Those who gave advice bear no responsibility for any errors or deficiencies.

Notes

¹ The data before 1990 can be seen in Miranti’s (2010) study.

² This employment elasticity was lower than it was during 1990–96 (0.58, as calculated in Miranti 2007).

³ The definitions of pro-poor growth vary, covering both absolute and relative definitions. This article uses the absolute definition, in which the poor benefit from the overall growth of income in the economy,

⁴ The consumption&-based Gini coefficient is an imperfect approximation of income inequality (Nugraha and Lewis 2013), and Susenas has the well-known problem that it does not accurately capture consumptive expenditure of the rich (Yusuf, Sumner, and Rum 2014).

⁵ Miranti et al. (2013) discussed the potential causes of this increasing inequality.

⁶ The second liberalisation period was characterised by slower and more cautious liberalisation than the first (see Miranti 2010 for a more detailed discussion).

⁷ Pritchett (2011) finds an average elasticity of –1.15 during 1976–96 and a calculated GEP of –0.70 for 2000–8.

⁸ See Priebe’s (2014) study for a review of the history of Susenas and official poverty measurement in Indonesia.

⁹ See Miranti’s (2007) study for this conversion methodology.

¹⁰ We acknowledge that the possibility of reverse causality runs from poverty rates to growth of consumption per capita. We conclude, however, that the likelihood is small, since we use the same Susenas year as the source of poverty rates and growth of mean consumption per capita. Further, causality runs only one way, from mean consumption per capita to the headcount poverty index, as in Ravallion and Datt’s (1996, 1999, 2002) series of papers; Ravallion and Chen’s (1997) study; and Meng, Gregory, and Wang’s (2005) study. The other possible source of endogeneity has already been solved by the fixed effects and the year dummies (owing to the nature of panel data).

¹¹ We also test for cross-sectional dependence regardless of whether the residuals from a fixed-effects estimation of regression model are spatially independent, following Hoechle (2007). The test proves that the random errors are not correlated among provinces and clusters.

¹² Miranti’s (2013) study adopts a slightly different specification, by including explanatory variables such as interprovincial migration, intergenerational transfers, human capital, and living conditions.