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AGRICULTURAL GROWTH AND POVERTY REDUCTION:
THE CASE OF INDONESIA
BySudarno SumartoAsep Suryahadi
The SMERU Research Institute
October 2003
2
Presentation Outline
I. Introduction
II. Data
III. The Role of Agriculture in the Rural Economy
IV. Poverty Trends and Sectoral Profile of Poverty
V. The Impact of Economic Growth on Poverty: Methods and Empirical Estimations
VI. Conclusion and Implications
3
I. Introduction
After uninterupted strong growth followed by rapid reduction in poverty for three decades, Indonesia was hit by an economic crisis starting in mid 1997.
Poverty increased rapidly as the crisis worsened. This raised questions on the sustainability of
poverty reduction achieved during the pre-crisis high economic growth era.
Hypothesis: Had Indonesia not industrialized “too fast”, the poverty reduction achieved would have been greater and more sustainable.
4
I. Introduction
Quality of growth: what kinds of growth are most beneficial for the poor and hence most effective in reducing poverty ?
• Composition of economic growth: is agricultural growth more important in reducing poverty than growth of industry or services ?
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II. Data
• The main data source for calculations of poverty in Indonesia is the Consumption Module of SUSENAS (the National Socio-Economic Survey): conducted every three years (1984-1999), collecting information on detailed consumption expenditures, sample of around 65,000 households.
• Core SUSENAS: conducted yearly, collecting information on household characteristics, sample of over 200,000 households.
• Regional Gross Domestic Product (RGDP) .
• Regional Consumer Price Index (RCPI).
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III. The Role of Agriculture in the Rural Economy A. The Macro Picture
• The Indonesian economy has undergone substantial structural change declining role of agriculture in output and employment.
Table 1. GDP and Employment Shares of Agriculture in Indonesia, 1971-2000 (% )
1971 1980 1990 2000
Gross Domestic Product 45 25 22 17
Employment 67 55 50 45
Ratio of GDP to employment share
0.67 0.45 0.44 0.38
Source: BPS, Statistik Indonesia (various years).
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III. The Role of Agriculture in the Rural Economy B. Agriculture and Household Livelihood
Figure 1. Proportion of Agricultural Households in Indonesia, 1984-1999
8.4 7.710.8
8.9 8.9 9.3
67.8
64.4
60.559.2 58.7
54.7
49.8 49.9
43.941.2
39.2
65.7
0
10
20
30
40
50
60
70
80
1984 1987 1990 1993 1996 1999
%
urban rural total
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III. The Role of Agriculture in the Rural Economy
Figure 2. Share of Agricultural Households Income from Total Households Income
5.7 4.96.5
5.2 5.26.7
59.2
55.8
59.2
50.8 50.852.2
40.9
36.237.3
28.727.4
28.5
0.0
10.0
20.0
30.0
40.0
50.0
60.0
70.0
1984 1987 1990 1993 1996 1999
%
urban rural total
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IV. Poverty Trends and Sectoral Profile of Poverty A. Measuring Poverty
Measure of poverty: current consumption expenditure deficit.
Setting an absolute “poverty line” is a complex exercise it should be complete, internally consistent, credible.
Foster-Greer-Torbecke (FGT) poverty indices.
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IV. Poverty Trends and Sectoral Profile of PovertyB. Consistent Poverty Estimates
Figure 3. Headcount Poverty Rate
29.3
24.3
16.6
10.2
7.1
16.3
65.1
54.1
39.7
32.9
23.3
33.9
56.7
45.9
32.7
25.3
17.4
27.0
0
10
20
30
40
50
60
70
1984 1987 1990 1993 1996 1999
Po
ve
rty
Ra
te (
%)
- Urban - Rural - Total
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IV. Poverty Trends and Sectoral Profile of Poverty
Figure 4. Poverty Gap Index
9.0
7.3
3.3
1.8
2.9
17.2
9.1
6.9
4.4
6.9
20.3
14.5
7.3
5.2 5.4
1.1
23.8
3.2
0
5
10
15
20
25
1984 1987 1990 1993 1996 1999
Po
ve
rty
Ga
p (
%)
- Urban - Rural - Total
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Table 2. Poverty Headcount Rate and Contribution to Total Poor by Main Sector of Occupation in Indonesia, 1999 (% )
Urban Rural Sector
Poverty Headcount
Contribution to total poor
Poverty Headcount
Contribution to total poor
Agriculture 33.6 18.9 40.1 70.5
Industry 18.1 15.3 30.1 6.7
Services 14.1 65.9 23.5 22.7
Total 16.4 100.0 33.9 100.0
IV. Poverty Trends and Sectoral Profile of Poverty C. Sectoral Profile of Poverty
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V. The Impact of Economic Growth on Poverty
Figure 6. Index of Real GDP (1984 = 100)
0
50
100
150
200
250
300
350
1984 1987 1990 1993 1996 1999
Ind
ex
- Agriculture - Industry - Services - Total
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V. The Impact of Economic Growth on PovertyA. Literature Review
The basic model to estimate the impact of economic growth on poverty: (2).
Ravallion and Datt (1996): 85 percent of the reduction in poverty in India was due to agricultural growth.
Warr and Wang (1999): industrial sector growth has the largest impact on poverty reduction in Taiwan.
ydP
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V. The Impact of Economic Growth on Poverty
• Warr (2002): growth of services accounts for the largest reduction in poverty in four Southeast Asian countries.
• Quizon and Binswanger (1986, 1989): agricultural growth effects of the Green revolution did not benefit the rural poor.
• Criticized by Sarris (2001): spillover effects to non-agricultural incomes.
• Timmer (1997): impact of agricultural growth on poverty depends on income distribution.
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V. The Impact of Economic Growth on Poverty B. Method
No time-series data spanning a sufficiently long period to make empirical estimations of equation (2).
Panel data with provinces as the unit of observations need to take into account the
effect of migration across regions:
jjjj PnydP (7)
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V. The Impact of Economic Growth on Poverty
jjSj
Sj
SIj
Ij
IAj
Aj
Aj PnyHyHyHdP (9)
Model of sectoral growth impact on poverty reduction:
If SIA , then equation (9) collapses to equation (7).
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V. The Impact of Economic Growth on PovertyC. Empirical Estimations
Table 4. The Impact of Economic Growth on Poverty Headcount
Total Growth Sectoral Growth Independent Variables Coefficient t-values Coefficient t-values
Total Poverty Headcount: Total GDP growth -0.0254 -0.90 Agricultural GDP Growth -1.8595 -3.62 ** Industrial GDP Growth -0.0664 -1.63 Services GDP Growth 0.0048 0.09 Total population growth 0.0653 2.37 * 0.1193 3.93 ** Initial poverty headcount -0.1316 -2.96 ** -0.1085 -2.55 ** Constant 0.0189 0.78 0.0524 2.16 *
Number of observations 130 130 F-test 5.43 ** 7.16 ** R-squared 0.1144 0.224
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V. The Impact of Economic Growth on Poverty
Table 4. Continued
Urban Poverty Headcount:Total GDP growth -0.0095 -0.42Agricultural GDP Growth -1.1254 -2.84 **Industrial GDP Growth -0.0624 -1.90 *Services GDP Growth 0.0268 0.58Urban population growth 0.0062 0.17 0.0474 1.23Initial poverty headcount -0.1497 -3.33** -0.1356 -3.13 **Constant 0.0165 1.03 0.0352 2.16 *
Number of observations 130 130F-test 3.81 ** 5.12 **R-squared 0.0832 0.1711
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V. The Impact of Economic Growth on Poverty
Table 4. Continued
Rural Poverty Headcount:Total GDP growth -0.0230 -0.72Agricultural GDP Growth -2.8789 -4.56 **Industrial GDP Growth -0.0598 -1.33Services GDP Growth 0.0315 0.50Rural population growth 0.0479 2.23* 0.1046 4.45 **Initial poverty headcount -0.1373 -2.58** -0.1393 -2.85 **Constant 0.0320 1.00 0.1066 3.22 **
Number of observations 125 125F-test 4.2 ** 7.95 **R-squared 0.0942 0.2505Notes: ** = significant at 1 percent level * = significant at 5 percent level
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V. The Impact of Economic Growth on Poverty D. Agriculture Contribution to Poverty ReductionTable 7. The Contribution of Agricultural Growth to Poverty Reduction,
1984-1996
Urban Rural Total Poverty Headcount:
- Observed change in poverty (% point) -22.14 -41.82 -39.24 - Impact of agricultural growth (% point) -12.16 -31.12 -25.74 - Contribution of agricultural growth (%) 54.94 74.40 65.58
Poverty Gap:
- Observed change in poverty (% point) -7.87 -19.38 -17.08 - Impact of agricultural growth (% point) -2.84 -11.07 -8.73 - Contribution of agricultural growth (%) 36.05 57.15 51.13
Poverty Severity:
- Observed change in poverty (% point) - -9.98 - - Impact of agricultural growth (% point) - -4.91 - - Contribution of agricultural growth (%) - 49.22 -
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VII. Conclusions and Implications
Most of the poor in Indonesia are located in rural areas and have a livelihood in the agricultural sector.
Development strategy emphasizing industrialization was aimed at developing a high productivity. industrial sector to pull people out
from poverty. This strategy has not worked well for two
related reasons.
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VII. Conclusions and Implications
As the industrial sector expanded, the movement of people out of the agricultural sector into the industrial sector has not occurred as fast.
Agricultural growth is a much more potent factor in reducing poverty than industrial growth 66 percent of total poverty reduction, 55 percent of urban poverty reduction, and 74 percent of rural poverty reduction are due to agricultural growth.
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VII. Conclusions and Implications
Implications for policy to eliminate poverty: Direct efforts to push agricultural growth is the most
effective means to reduce poverty. The strategy of industrialization should be directed at
developing industries that have strong links with the agricultural sector, so that industrial growth will have bigger impact on reducing poverty.
The government should create an environment that is conducive to private sector participation in the agribusiness development trade and agricultural policies that harm agro-industries should be removed.
