Making Indonesia Work for the Poor Summary

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Making the New Indonesia Work for the Poor - Chapter 4
Making Growth for the Poor
Karina Mahirda – 311380

Growth is essential for poverty reduction. However, growth may bring about one of two things; more equality or more inequality. The current pattern of growth in Indonesia (that leads to a widening inequality) could mean that the government will fail to hit its poverty headcount target by 8.3% by 2009. Looking at the recent past (past 10 years), there are 2 key pathways through which households and individuals have escaped poverty in Indonesia: (1) improvements in agricultural productivity in rural areas and (2) increases in non-agricultural productivity in both urban and rapidly urbanizing rural area, and alternatively by Indonesia’s structural transformation from agricultural sector to non-agricultural sector as some rural areas rapidly urbanized. The question is: what policies help the poor onto these pathways? First, is by maintaining macroeconomic stability. Second, is by investment in the capabilities of the poor. Third, is by connecting the poor to opportunities.

What are the pathways out of Poverty?
We need to acknowledge that there are 2 major groups of the poor that need to be reached: (1) the poorly/uneducated rural households whose members are predominately involved in low-productivity agricultural activities that are mostly disconnected from the major growth centers, and (2) the poor who are living in close proximity to major growth centers but who are struggling to participate in the economic opportunities in those areas. After that, we need to reflect the challenges of reaching these 2 groups of the poor and construct a framework for thinking about the pathways out of poverty. How to do that? We need to set up the 2 main driver of poverty reduction in this country: (1) rising agricultural productivity by the moving from low-productivity (subsistence farming to commercial farming; intensification and diversification), and (2) increasing productivity and profitability of non-farm enterprises; creation of new jobs and better-paid formal employment in the sector. The 2 pathways can take place in both rural and urban areas. Accompanying these 2 productivity drivers are 2 transition phases that individuals may go through to reach the second pathway out of poverty. The first phase is a sectoral shift from the farm to rural off-farm employment. The second phase is a locational shift from rural areas to urban; through migration. These transitions should be viewed as continuums rather than discrete starting and ending points. The challenges are, in the densely populated parts of Indonesia, it’s often hard to distinguish between ‘urban’ and ‘rural’ and households often engage in both farm and non-farm sectors. Notes: see Figure 4.2

What have been the most important pathways out of poverty?
The changing numbers of the poor over time indicate the most important pathways. In analyzing this, we need to know how many people are there in each of the cells of Figure 4.2 and how these numbers have changed over time. Notes: see Figure 4.3

Official data suggest a large increase in the share of employment in non-farm sectors in urban areas and at the same time a decline in the share of all forms of employment in rural areas. Figure 4.3 suggests that the way out of rural poverty from 1993 to 2002 was to leave rural areas altogether. However, urbanization rather than migration is responsible for most of this change (a substantial number of rural households became urban households without changing location due to the definition of ‘urban’ is based on village characteristics that can change overtime based on population density and thus villages in the periphery of urban areas can themselves become urban areas). This led to at least 10% of rural villages in 1993 had been reclassified as urban by 2002, and this reclassification made a tremendous different in interpreting the significance of the pathways out of...
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