SUMMARY OF INDONESIAS

POVERTY ANALYSIS

Priasto Aji

No. 04
ADB PAPERS ON INDONESIA
October 2015
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 POVERTY ANALYSIS (SUMMARY)

1. Profile of poverty. Economic growth averaging 5.8% since 2010 has helped to lift 3.3
million Indonesians out of poverty. Yet 28 million were still living below the governments poverty
line in March 2014. Indonesias national poverty line is set at consumption outlays of Rp
302,735 (US$25) per month per personabout 82 cents a day. If an international poverty line of
$2 a day is used, then 40% of the population would be classified as poor. Some 68 million
Indonesians are classified as nearpoor or vulnerable. Many of them move in and out of poverty
during their lifetime. Some 55% of households who were classified as poor in 2014 were not
poor a year earlier, indicating the high risk of falling back into poverty.

2. The pace of poverty reduction in Indonesia is slowing. From 2006 to 2010, poverty
incidence declined by 1.2% per annum. From 2011 to 2014, the rate of decline was just 0.5%
per annum (Table 1). Increasing difficulty in reaching the remaining poor and rising disparity in
economic growth have contributed to the slowdown. As the poverty rate gradually falls toward
10%, many of the remaining poor households have incomes far below the poverty line. For
example, the poorest half of the population registered zero or slightly negative growth in real per
capita consumption from 2012 to 2013, compared to growth of 4% in mean consumption across
the entire population and average growth of 7% for the top two deciles.1 This implies that
significantly higher consumption growth of the poor is required to maintain the annual rate of
poverty reduction.

3. Majority of the poor in Indonesia live in rural areas. In 2014, some 13.8% of the rural
population was classified as poor, compared to 8.2% of the urban population. They mainly
participate in low-productivity jobs in agriculture and low-end service sectors.

Table 1: Poverty Incidence, 2006 to 2014

2006 2007 2008 2009 2010 2011 2012 2013 2014
Relative Poverty (% of population) 17.8 16.6 15.4 14.2 13.3 12.5 11.7 11.5 11.0
Absolute Poverty (in millions) 39 37 35 33 31 30 29 29 28
Rural Poverty (% living below rural 21.8 20.4 18.9 17.4 16.6 15.7 14.3 14.4 13.8
poverty line)
Urban Poverty (% living below 13.5 12.5 11.6 10.7 9.9 9.2 8.4 8.5 8.2
urban poverty line)
Source: BPSStatistics Indonesia (various issues).

4. While most of the poor live on the island of Java, poverty rate is far higher in Eastern
Indonesia. In 2014, poverty incidence was highest in the provinces of Papua (27.8%), West
Papua (26.3%), East Nusa Tenggara (19.6%), Maluku (18.4%), Gorontalo (17.4%), and West
Nusa Tenggara (17.1%). Collectively, these provinces had fewer poor people than were found
in East Java, which had a poverty incidence of 12.3% or 4.8 million poor persons in 2014.2

5. Poverty reduction and inequality. Income and consumption inequality in Indonesia have been
steadily increasing since 2000. After recovering from the 19971998 Asian financial crisis,
Indonesia experienced a period of strong economic growth, driven in part by a commodities
boom and strong domestic consumption. During this period the Gini coefficient climbed from .31

1
World Bank. 2014. Indonesia Economic Quarterly July 2014. Jakarta.
2
BPSStatistics Indonesia. 2015. Poverty Statistics. http://www.bps.go.id/linkTabelStatis/view/id/1488
3
in 2000 to .43 by 2013. The distribution of consumer credit suggests that inequality could be
greater still, and the World Bank estimates the Gini coefficient was as high as 0.51 in 2014,
making Indonesia a highinequity country.3 Some 49% of national income goes to the richest
quintile, and since 2003, the growth process has benefited the rich much more than lower or
middleincome groups. Rising inequality is reflected in a growing gap between the rich and the
poor. In 2002, average consumption per person of the richest 10% of households was 6.6 times
that of the poorest 10%; by 2013, this had risen to 10.3 times.

6. Increased inequality contributes to the slower pace of poverty reduction. Poverty

generally falls with economic growth, but the speed of poverty reduction depends on how
equally growth is shared. If the pattern of growth benefits the rich more than the poor, the pace
of poverty reduction slows. Had income growth been equally shared, then the average growth
effect would have reduced poverty from 17.4% in 2003 to near zero levels by 2010.4 However,
the unequal distribution of income growth meant that poverty fell only by 5.4% instead, to 12%
in 2013.

7. Higher inequality can also lead to slower economic growth and thus can further hamper
poverty reduction efforts. The extent to which households in the bottom 40% are unable to move
into the middle class could weaken middle classdriven consumption growth. This may also
reduce economic growth through a number of other channels, such as low investments in
human capital and decreased entrepreneurial activity. Also, inequality of opportunity can impact
on the ability of children to achieve their full potential, hindering future growth.

8. Drivers of inequality. Poverty levels and rising inequality are both associated with a
lack of good jobs in the economy. Since 2000, the majority of jobs that have been created are in
lowproductivity services. The agriculture sector, which absorbs about 35% of the labor force,
has consistently grown at a slower rate than the countrys average GDP growth. At the same
time, the manufacturing sector has experienced slower growth, averaging 5.3% from 2011
2014. Growth in mining, industrial crops, timber, telecommunications, and financial services has
been accelerating since 2010, while ownership in these sectors remains highly concentrated
and production tends to be capital intensive. As a result, recent economic growth has benefitted
mostly the countrys wealthy and generated relatively few jobs. Furthermore, even those with
skills have often been unable to find jobs in the formal sector, and have to settle for self
employment or informal sector jobs.

9. Returns to education are rising, which means that highly skilled workers tend to earn
much more than those with a more basic education. Compared to workers with a primary
education or less, those with junior secondary education now enjoy a 20% premium, those with
senior secondary education a 40% premium, and those with tertiary education earn twice what
those with primary education would earn. Moreover, the junior secondary and tertiary premium
has increased. The resulting wage gap between the more educated and the less educated
directly influences consumption inequality. Households whose head is better educated will have
higher consumption, and this consumption gap has also been increasing.

10. Unequal opportunities during childhood also contribute to higher inequality. Some
inequality is due to circumstances beyond the control of an individual, such as gender, ethnicity,

3
World Bank. 2015. Inequality in Indonesia: Why is it rising and what can be done? Jakarta.
4
World Bank. 2014. Indonesia Economic Quarterly July 2014. Jakarta.
4
birthplace, and family background. Just three of these factorsgender of the household head,
level of education, and household location (urban or rural, which particular region of Indonesia)
accounted for 33% of total consumption inequality in 2012.

11. Children in remote and rural areas tend to experience multidimensional inequality of
opportunity. They are more likely than urban children to lack access to education, health, and
transportation services. Of the 35% of all urban children who lack access to at least one of
these services, 20% lack access to two and only about 3% lack access to all three. By contrast,
58% of children in rural areas lack access to at least one of the services, with onethird of them
lacking access to two, and another third lacking access to all three services.

12. Lack of protection from shocks makes it harder for households at the lower end of
income distribution to climb out of poverty. Since 1997, Indonesian households have faced
many negative economic shocks, food price surges, and natural disasters.5 Risks specific to
particular individuals or households are just as significant. These include loss of employment,
illness and accidents, death of a spouse, and divorce. For many households, such a shock is
sufficient to push them back into poverty.

13. The role of infrastructure development. The poor suffer the most from a lack of
economic infrastructure. Improved public infrastructure can make a significant contribution to
reducing poverty and closing gaps in income inequality.6 Better infrastructure, particularly for
transportation and power generation, would support growth in manufacturing, which generates
jobs in the formal sector. The performance of manufacturing has been lackluster since the late
1990s and has started to improve only since 2013. Investment in infrastructure is also needed to
address high poverty rates in rural areas. Some 41% of district roads and 24% of provincial
roads throughout Indonesia are in bad condition. Development prospects are poor for rural
areas that lack good access to towns and markets. Poverty in some eastern provinces is directly
linked to poor infrastructure, which hinders farmers from accessing markets, limits economic
opportunities, and constrains access to essential social services.

14. Government Poverty Reduction Programs. In the National MediumTerm

Development Plan 20102014 (RPJMN 20102014), the governments poverty reduction
strategy comprised three clusters. The first was social assistance, which provided direct
assistance to poor households to assist them in meeting basic necessities. The second was
community empowerment, which provided funds to poor communities to improve their basic
social and economic services. The third cluster was microenterprise empowerment, which
focused on providing access to noncollateralized credit for microenterprises. To help design
and oversee these programs, a national team for accelerating poverty reduction was
established, chaired by the Indonesian vice president.7 An evaluation of these programs

5
Indonesia was the worsthit country by the Asian financial crisis of 1997/1998. During the 2008/2009 global
financial crisis, Indonesia saw growth slow but it fared better than most countries. Indonesians have faced periods
of high food prices, such as in 20052006, 2008, and 2010. Major natural disasters since 1998 include the 2004
tsunami in Aceh Province, earthquakes in several locations, and the 2010 eruption of Mount Merapi in Java.
6
ADB. 2012. Asian Development Outlook 2012. Manila. ADB. 2013. Asian Development Outlook 2013. Manila.
7
In February 2010 the government issued Presidential Decree No. 15/2010 on Accelerated Poverty Reduction.
This decree changed the poverty reduction agencys name to the National Team for the Acceleration of Poverty
Reduction (TNP2K). TNP2K has three main tasks: formulate poverty reduction policies and programs, make
poverty reduction activities more synergic between ministries and institutions, and monitor and evaluate poverty
reduction programs. Under the new decree, the Vice President was directed to lead TNP2K.
5
showed mixed results, attributed to difficulties in targeting assistance and to adverse effects of
food price shocks.8

15. The new national framework for poverty reduction. The RPJMN 20152019 focuses
on poverty reduction in the context of making the growth process more inclusive. It targets
closing the growing gap in consumption per capita between different income groups and
reducing poverty from 11.25% in March 2014 to 6%8% in 2019. Over the next 5 years, the
government plans to reduce inequality and poverty through several means. To greater job
opportunities, the government will improve investment climate for labor-intensive industries and
small business. The government will improve connectivity and accelerate development of basic
infrastructure to support economic activity and sustainable livelihood in rural and border areas.
At the government will improve the delivery of basic social services such as education and
health to the poor and vulnerable. Government will also rollout more comprehensive and better
targeted social protection programs.

8
A. Suryahadi et al. 2010. Review of the Governments Poverty Reduction Strategies, Policies, and Programs in
Indonesia. The SMERU Research Institute. Jakarta.