Growth, price stability crucial to help the poor

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."