Growth, price stability crucial to help the poor

Akhmad Rizal Shidiq, School of Oriental and African Studies, London, Institute for Economic and Social Research, University of Indonesia

On Jan. 23, economist Ari A. Perdana wrote about people's vulnerability to poverty. He argued that this susceptibility is rooted in three things: A lack of physical assets, limited human capital, and the absence of a social safety net system.

He suggested prevention through a formal social safety structure, adequate unemployment and pension benefits, and the generation of human capital, particularly through education and health availability.

Still, several factors must be considered regarding the social safety net, especially in the context of developing countries.

It is sometimes assumed that people are poor because they lack physical assets, human capital, and social insurance. This is coupled with a belief that, if these handicaps are removed, poverty will automatically be alleviated.

But it is not because of those factors alone that people are poor, or vulnerable to poverty. But those are some of the characteristics of the poor -- we could also add Amartya Sen's non-economic characteristics, such as powerlessness.

Hence, all those factors do not actually provide additional insight into understanding vulnerability to, let alone the causes of, poverty. Even the vulnerability itself is a distinct characteristic of poverty.

Second, to assess vulnerability, one must consider the determinants for poverty alleviation which, in a broader sense, are the growth of output, the relative cost of living, and the incidence of redistribution policies.

Growth is key for poverty alleviation as, without growth, there will be no wealth to be redistributed to the poor.

Yet such growth should be promoted by an increase in productivity.

The issue of how growth can be attained after the economic crisis remains controversial -- in light of the role of the IMF and World Bank in their stabilization policies, and in the structural adjustment in many developing countries.

The second determinant of poverty alleviation is the relative cost of living, which is important for the poor if prices of their products or labor does not rise as high as the prices of what they consume.

The average figures in developing countries indicates that about 70 percent of the poor's income is spent on food.

And it is clear that the poorer one is, the greater percentage of one's income is spent for food.

Hence, any fluctuations in the cost of basic food staples will truly affect people who live in poverty, and the degree to which others are vulnerable to becoming poor.

The message here is that state intervention to stabilize food prices is very important.

But, as it widely known, this idea is not compatible with minimizing the state's role in the economy, and reducing the budget deficit.

To let food prices be dictated by pure market mechanisms while reducing state expenditures for market intervention, implies that price fluctuations, in turn, may be harmful for poor.

If the domestic private sector is under pressure from high interest rates and slow recovery, government investment will be important to absorb employment, and eventually generate additional income.

This is particularly critical for the rural poor, as the agricultural sector has always been inadequate in absorbing jobs, so cutting state expenditures becomes questionable.

These two contradictions -- food price stabilization and employment creation -- show that the type of policy that enhances growth has implications for the poor as well as the economic growth that may be attained through that policy.

Poverty alleviation is also determined by the amount of redistribution policies, which include the concept of the social safety net. However, the success of a social safety net is tied to the institutional setting of a particular condition that varies across time and place.

The problem in Indonesia is a lack of accountability for a formal safety net, as well as for unemployment and pension benefits. This is also related to skewed power sharing and class structure among the poor. Power structure also influences employment creation and price levels.

Some failures of the earlier social safety net program indicate that power structure matters in distributing and allocating the funds.

The establishment of an effective administrative structure, which is crucial for any formal safety net and insurance, meanwhile, seems unlikely within the context of contemporary Indonesia anytime soon.

Ari Perdana also mentioned the need to promote education and health infrastructure; however, it is more appropriate to see that measure under the government's effort to absorb jobs, rather than as part of a social insurance system.

A social safety net alone will not deter poverty. Maintainable growth must be sustained, and the prices for food and basic necessities need to be stabilized, too.

Lastly, it seems that the role of government -- in contrast with today's mainstream economic approach -- plays a very important part in alleviating and preventing poverty.

Or, to use Ari Perdana's words, "minimizing the risk of being poor in the near future."