Revisiting Growth and Poverty Reduction in Indonesia

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ERD WORKING PAPER SERIES NO. 25
ECONOMICS AND RESEARCH DEPARTMENT

Revisiting Growth
and Poverty Reduction
in Indonesia: What Do
Subnational Data Show?

Arsenio M. Balisacan
Ernesto M. Pernia
Abuzar Asra

October 2002

Asian Development Bank

ERD Working Paper No. 25

REVISITING GROWTH AND POVERTY REDUCTION IN INDONESIA:
WHAT DO SUBNATIONAL DATA SHOW?

Arsenio M. Balisacan
Ernesto M. Pernia
Abuzar Asra

October 2002

Arsenio M. Balisacan is Professor of Economics at the University of the Philippines, while Ernesto M. Pernia is Lead Economist and Abuzar Asra is Senior Statistician at the Economics and Research Department of the Asian Development Bank. The authors gratefully acknowledge the valuable assistance on the data provided by the P.T. Insan Hitawasana Sejahtera, in particular Swastika Andi Dwi Nugroho and Lisa Kulp for advice. Gemma Estrada provided very able research assistance. The views expressed herein are those of the authors and do not necessarily reflect the views or policies of the institutions they represent.

27

ERD Working Paper No. 25
REVISITING GROWTH AND POVERTY REDUCTION

IN INDONESIA:

Asian Development Bank
P.O. Box 789
0980 Manila
Philippines
2002 by Asian Development Bank
October 2002
ISSN 1655-5252
The views expressed in this paper
are those of the author(s) and do not
necessarily reflect the views or policies
of the Asian Development Bank.

28

WHAT DO SUBNATIONAL DATA SHOW?

Foreword
The ERD Working Paper Series is a forum for ongoing and recently completed research and policy studies undertaken in the Asian Development Bank or on its behalf. The Series is a quick-disseminating, informal publication meant to stimulate discussion and elicit feedback. Papers published under this Series could subsequently be revised for publication as articles in professional journals or chapters in books.

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Contents
I.

Introduction

1

II.

Data and Measurement Issues

4

III.

Subnational Differences in Average Welfare

8

IV.

Other Determinants of Poverty Reduction

14

V.

Differential Effects across Quintiles

18

VI.

Conclusion

20

References

23

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ERD Working Paper No. 25
REVISITING GROWTH AND POVERTY REDUCTION

IN INDONESIA:

WHAT DO SUBNATIONAL DATA SHOW?

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. Newly constructed panel data on the country’s 285 districts (kotamadyas/kabupatens), however, reveal huge differences in poverty changes, subnational economic growth, and local attributes. Results of econometric analysis show that besides growth, other factors directly influence the welfare of the poor, apart from their impact on growth itself. Among the critical ones are infrastructure, human capital, agricultural price incentives, and access to technology. Thus, while fostering economic growth is evidently crucial, a more complete poverty reduction strategy should take into account these relevant factors. In the context of decentralization, subnational analysis can be an instructive approach to examining local governance in relation to growth and poverty reduction.

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I. INTRODUCTION

B

y international standards, 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. This was the norm for East Asia and was substantially higher than the average growth rate of 3.7 percent for all developing countries. At the same time, Indonesia’s poverty incidence fell from 28 percent in the mid-1980s to about 8 percent in the mid-1990s, compared with the poverty reduction of from 29 to 27 percent for all developing countries (excluding People’s Republic of China [PRC]).1 Indonesia’s record also compares well with those of...
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