Why the poverty-stricken are still poor

Why the poverty-stricken are still poor

The following is the second 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): Direct policies to alleviate poverty in the past
included credit facilities for small scale indigenous traders
introduced in December 1973, and presidential funds for poor
villages (IDT). They failed to considerably reduce poverty,
particularly due to poor implementation.

Small-scale credit schemes were expected to reach low-income
groups by stimulating productive activities and generating
employment opportunities.

These schemes were also expected to be an effective vehicle to
reach women, who were heavily concentrated in either informal
activities, such as petty trading and handicrafts, or in the
small-scale businesses in markets.

But reality showed it was very difficult for them to get
credit. Having government or semigovernment agencies
administering credit weakened incentives to invest wisely or to
repay promptly.

Rent seeking and building political connections to get debt
relief sometimes became more important than responsible
investment behavior.

A fundamental dilemma of the credit market has been that
outside agencies (including government banks) do not have enough
local information about the borrower. Monitoring is costly, so
they insist on collateral that excludes many of the poor.

Unlike small-scale credit schemes, the IDT program was a
problem with respect to the entrepreneurial skill of the target
groups. Because target groups were not only for people who were
already in small businesses, the question was whether the program
could be effective in stimulating productive activities, due to
difficulties in creating entrepreneurial skills in the short-
term.

Then there was the "rich people's grant" policy -- the
obligation for rich people to share some of their wealth with the
country's poor.

Much skepticism of this policy stemmed from the fact that the
funds were to be funneled through a new foundation -- the
Prosperous Self-Reliant Fund -- in which ex-president Soeharto
was chairman; his second son, Bambang Trihatmodjo, served as
treasurer and close business associates Sudwikatmono and Soedono
Salim acted as deputy chairmen.

Questions were directed at the transparency of the use of the
donations. Prospective donors were worried that there was no
mechanism to coordinate the distribution of the funds -- an
obvious hurdle to the collective success of the program.

The latest program on poverty alleviation, the Social Safety
Net Program also suffers from poor implementation. According to
researchers Hardjono and Suryahadi in their 1999 reports, the
target groups have been largely missed in the programs.

The result has, however, been uneven between programs and
regions. Some programs under the safety net have both high
coverage amongst the poor and show some reasonable amounts of
targeting, while programs in some other districts show both low
coverage and little or no targeting of the poor.

Given the prolonged problem, continuing the present policy of
sustaining a higher level of economic growth through structural
reform is, therefore, the first component of a poverty reduction
strategy.

Investment in labor-intensive, export-oriented production,
supporting infrastructure and the social sectors will have to
rise. Carefully managed public expenditure will support economic
growth, raise the efficiency of public investment and contribute
to less poverty.

Without economic growth, it is not possible to achieve a
reduction in poverty in the long-term. But targeting of poverty
programs must be improved to speed up reduction of the poor.

In many instances, the poor do not possess the assets
necessary to participate in the growth process. Therefore, a
poverty reduction strategy would need to be supplemented with
specific initiatives to generate income earning opportunities,
and programs to provide them the skills needed to exploit these
opportunities.

The income generating programs specifically designed to reach
the poor are more effective if guided by several factors. Apart
from better targeting, income generating programs should be
sustainable in the long term.

Such programs must also be an integral part of an overall
development strategy. Two types of policies could be designed,
i.e. providing the poor with access to necessary assets to ensure
a permanent flow of income, and providing them with increased
employment opportunities.

Mechanisms to avoid poor implementation must be carefully
considered -- which can only be properly executed under a clean
government.