Why the poor are still poor

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.