Abstract
Indonesia has an impressive record of economic growth and poverty reduction over the past two decades. The growth-poverty nexus appears strong at the aggregate level. However, newly constructed panel data on the country's 285 districts reveal huge differences in poverty change, subnational economic growth and local attributes across the country. The results of econometric analysis show that growth is not the only factor to affect the rate of poverty change; other factors also directly influence the welfare of the poor, as well as having an indirect effect through their impact on growth itself. Among the critical ones are infrastructure, human capital, agricultural price incentives and access to technology. While fostering economic growth is crucial, a more complete poverty reduction strategy should take these relevant factors into account. In the context of ecentralisation, subnational analysis can be an instructive approach to examining local governance in relation to growth and poverty reduction.
Highlights
By international standards, Indonesia has done remarkably well in both economic growth and poverty reduction
This paper examines the key determinants of poverty reduction in Indonesia during the 1990s
Price incentives matter to poverty reduction, as indicated by the positive and significant coefficient of the terms-of-trade variable. This means that changes in the price of agriculture relative to the price prevailing in other sectors of the local economy have an impact on the welfare of the poor, both directly by affecting income redistribution and indirectly through its positive effect on overall growth
Summary
Indonesia has done remarkably well in both economic growth and poverty reduction. For two decades prior to the Asian financial crisis in the late 1990s, economic growth averaged 7 percent per annum. Based on independent estimates (Suryahadi et al 2000), poverty incidence in late 1999 was down to 10 percent, a level comparable to what it was in early 1996, after shooting up to 16 percent in mid-1998 These estimates suggest that poverty in Indonesia responds quite strongly and relatively quickly to large shocks. Primary Gross Enrolment Ratio (percent)b Indonesia East Asia and Pacific South Asia Low & Middle Income Countries. Secondary Gross Enrolment Ratio (percent)b Indonesia East Asia and Pacific South Asia Low and Middle Income Countries.
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