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.