Why the poor are still poor

The following is the first of two articles on an assessment of poverty in Indonesia by Poppy Ismalina, a researcher and lecturer on economics at the Yogyakarta-based Gadjah Mada University.

JAKARTA (JP): When the government, dubbed the "Reform Order", under Abdurrahman Wahid (Gus Dur) and Megawati Soekarnoputri came to power, the economy was in considerable disrepair.

With the onset of the financial and banking sector crisis in mid 1997, Indonesia's fortunes were reversed. The crisis which quickly spilled over into the real sector led to a substantial increase in poverty.

As stated in a World Bank working paper, when a macroeconomic crisis hits, there are several channels through which its impacts are felt by households. These can be traced to the different sources of household income -- wages, salaries, and self- employment incomes; returns on physical assets; and the receipt of public transfers -- and to the prices a household faces when purchasing goods and services.

The government has tried to recover the economy by undertaking both prompt macro-economic adjustment measures and structural reforms.

The government has also implemented a series of programs, known as the Social Safety Net (JPS) programs. Such programs are designed to provide short term support for the poor during the economic crisis. The program specifically aims to provide food- security, maintain incomes through employment creation and preserve access to health and educational services.

Surprisingly, there is evidence that poverty declined in August 1999 to 11.3 per cent, as quoted in a report this year by the Asia Development Bank. The poor decreased from 41.6 million people in February 1999 to 23.3 million people in August 1999.

However, the effect has been uneven between sectors and regions. In the process, either some individuals or certain regions advanced more quickly than others, while traditional support such as from families, especially for the poor, may have ceased to be effective.

Moreover, the above figure of the poor does not include workers from manufacturing sectors receiving minimum wages as much as Rp 6,000 a day, although workers in this sector had reached more than 11 million by 1998.

Given the continued problem of poverty, which has been blamed for contributing to violent outbursts, a key challenge to the new government is designing a program to further reduce poverty and to attain more balanced regional development.

Here a special study which assesses the government policies and programs of reducing poverty is needed.

While poverty is still largely a rural phenomenon, it is becoming more prominent in urban areas given accelerating rates of rural to urban migration, and high fertility in urban poor households.

Before the crisis, the decline in poverty was particularly marked in rural areas. Whereas 44.2 million poor people lived in these areas in 1976, by 1996 this number had fallen to 15.3 million, according to the 2000 ADB Poverty Assessment report.

The decline in urban areas was less dramatic. In 1976, the poor people living in these areas was 10 million, while there were 7.2 million in 1996.

However, the urban population has been growing more rapidly than the rural population over these years; so the decline in the absolute numbers living in poverty has been much slower in urban areas, and the urban poor accounted for almost one-third of the total poor by 1987.

The effect of the crisis is reflected in the increase of the poor from 1996 -- when the figure was 22.5 million -- to 1998, when it rose to 34.2 million people.

Nevertheless, the number decreased significantly in August 1999 to 23.3 million people. The effect of the crisis has differed across regions.

In the national Susenas survey of 1999, the sub-sample studied from February 1999 showed a larger increase in poverty in urban areas than in rural areas.

In rural areas, from 1996 to 1998, the percentage of people who lived in poverty increased from 12.3 per cent to 17.64 per cent, whereas in urban areas, during the same periods, the percentage of poor people rose from 9.71 per cent to 15.35 per cent.

The New Order regime adopted policies which were neither specifically designed for the poor nor to reduce poverty.

Policies designed for specific purposes had implications for policy goals outside their immediate environments.

This was as true for macro-economic policy as for other policies. Macro-economic policy was usually directed at price stability, full employment, exchange rate stability, credibility in foreign debt obligations, and so on.

The policies designed to achieve these objectives had implications for poverty, but normally their influence on poverty was incidental, and poverty alleviation was not a priority in macro-economic policy.

The trickle down mechanism, which assumed that the poor would in time get some benefits, did not work as expected, even though employment growth had averaged 2.5 percent annually since the mid-1980s, when deregulation and other structural reform measures started.

The effectiveness of the trickle down effect heavily relies on a structure of taxation and allocation of government budget. Yet the government only undertook a serious attempt to introduce a progressive structure of taxation since in the mid 1980s.

Budget allocation for rudimentary social services like primary education or basic health care were usually somewhat "pro-poor", but distribution of benefits of public spending for higher education and expensive medical care was likely to be much more regressive, as a 1993 World Bank study showed.