Impacts of sectoral economic growth on the proverty rate in Indonesia after the crisis

SUKARMAN, Prof. Motoyoshi Suzuki

2009 | Tesis | S2 Magister Ekonomika Pembangunan

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This thesis describes and explores the relationship between economic growth and incidence of poverty by differentiating growth and poverty into their sectoral compositions and locations. Specifically, using the elasticity of sectoral growth to poverty rate based on panel data from 2000 to 2007, this paper aims to estimate the impacts of sectoral economic growth on the poverty change in Indonesia after the economic crisis across regions as well as in an urban-rural context. The relationship between economic growth and poverty reduction has been discussed at great length by experts. Most of them believe that rapid growth eventually provides advantage to the poor through “trickle down” effects. To this end, the effects run through the channeling pipe of the pie of economic growth to provide indirect and direct effects that impact on the whole of society, including the poor. The empirical results reveal that the impact of sectoral economic growth on poverty change has been far from uniform in pattern. From economic growth at national level, the transport- communications sector contributed the highest amount to reducing incidence of poverty compared to other sectors. In the Sumatera and Maluku-Papua regions, trade-hotelrestaurant growth became the major element of poverty reduction, whereas in the context of Java, the most densely populated area, electricity-gas-water supply and financial-ownershipbusiness- services (FOB) combined growth had a significant impact. In the less-developed eastern regions of Indonesia, the impact of trade-hotel-restaurant growth in reducing poverty rate had the highest level, which is more than 3.5 percent by increasing 1 percent of this sectoral economic growth. In the urban-rural context, the trade-hotel-restaurant sector also contributed significantly more in declining the incidence of poverty in almost every region significantly. Those findings suggested that building the public infrastructure in poor areas, especially in rural areas, is the determinant key to significantly reducing the poverty trap. These results imply that the most effective way to accelerate poverty reduction is by focusing on those sectors that largely alleviate incidence of poverty at national and regional levels as well as in urban-rural area. Hence, the achievement of poverty alleviation is not only attributable to the aggregate rate of growth but also influenced by the initial level of poverty itself. The initial FGT index (P1 and P2) contributed a statistically insignificant impact on poverty reduction in even though the index improved greatly during the period 2000 to 2007 period. Hence, to fight the incidence of poverty necessary to improve the quality of poverty itself, not only by narrowing the gap between the poor and the rich but also reducing the inequality among the poor themselves. Base on empirical results and contrary to the previous findings, during the period 2000 to 2007, the contribution of the agriculture sector, in which most of the Indonesian poor work daily, seemed to fail to some extent at fighting poverty. This may be due to two reasons as follows: First, the biggest constraint on poverty reduction is if overall incomes are highly skewed to the rich. In such cases, efforts at boosting agricultural growth might not have much impact on the poor in most circumstances. The second is the problem of geographic areas that are unresponsive to improvements in crop technology and lack the capacity to make high value products. Hence, returns on investment here are far lower than those for the more responsive areas. Furthermore, simultaneous efforts on focusing, invigorating and improving the sector growth that have a positive impact on poverty alleviation, at national and regional level, need well-coordinated across-sector planning strategies. Indeed, these efforts are more likely to directly reach the poor rather than other sector growth inducements that do not directly fight incidence of poverty, and in the long run the focus should be shifted to achieving robust overall growth. This underlines that to ensure success, making sectoral growth work for the poor should be at the core of government efforts. Finally, as shown by the empirical results in this study, the overall impact of sectoral economic growth on incidence of poverty in Indonesia has a similar aim that is while government financial budgets and periods of services are limited, it would be wise if efforts at poverty alleviation conducted both in national and local level are focused particularly on sectoral growth which significantly reduces the number of poor who live below the poverty line.

Kata Kunci : Sectoral economic growth,Poverty reduction,After the crisis,Panel regression