Presented in Syiah Kuala University, 27 February 2008 Enrique Blanco Armas Economist, World Bank

Main messages Poverty increased slightly in 2005 and had declined to below pre-tsunami levels in 2006, facilitated by the end of conflict and reconstruction activities; Poverty in Aceh is a rural phenomenon. A large number of Acehnese remain vulnerable to poverty (living just above poverty line); The abundance of natural resource has not resulted in higher growth rates or lower poverty levels; Aceh will have the necessary resources to combat poverty and promote economic growth, but efficient allocation of resources is key for success.

Methodology (i) Two principal data sources: (i) Susenas, a large scale household survey fielded annually by BPS in the whole of Aceh and (ii) STAR, special purpose longitudinal survey re-contacting a selection of 2004 Susenas households in tsunami affected areas SUSENAS records several dimensions of welfare: household composition, characteristics, and consumption as well as access to health and education services

Methodology (ii) We start with BPS poverty lines in 2004. For 2005 and 2006, to provide a welfare consistent update we: (1) determine a consumption bundle representative to the poor in urban and rural areas, (2) apply these consumption weights to monthly BPS urban price series. Limitations of this approach: (i) price changes are measured only in Banda Aceh and Lhokseumawe, so poverty at the district level might not be accurately estimated and (ii) small sample size at the district level makes inferences valid only at the province level

Poverty increased in 2005, but by 2006 had declined below pre-tsunami levels 2004 2005 2006 Aceh 28.4 32.6 26.5 Aceh Urban 17.6 20.4 14.7 Aceh Rural 36.2 30.1 Indonesia 16.7 16.0 17.8

The relatively low poverty increases in 2005 masks large differences in tsunami and conflict affected areas The relative odds of poverty by kecamatan classification of high or low tsunami and high or low conflict, 2004-06, show that the likelihood of being poor in Aceh increased significantly in tsunami and conflict affected areas in 2005, but it was not significant any more by 2006.

A large share of the population lives just above the poverty line – a small shock can send them below the poverty line Cumulative Distribution Function for rural Aceh, 2004-06

Pre-tsunami, poverty in Banda Aceh and surrounding districts was significantly lower…

Poverty increased in many districts in 2005, but decreased in most in 2006

Characteristics of the poor in Aceh are similar to the poor in other parts in Indonesia Source: BPS data and World Bank staff calculations. Note: ++/-- indicates statistical significance at the 1% or 5% level, +/- significance at the 10% level.

Aceh’s economy continued to decline from 2001-05, as the rest of Indonesia recovered from the financial crisis

As a result, poverty continued to increase in Aceh while it declined in most of Indonesia

Poverty growth elasticity in Aceh is one third of the rest of Indonesia – normal for economies reliant on natural resources

… availability of oil and gas does not necessarily translate into lower poverty levels

Aceh will have the necessary resources to combat poverty and promote economic growth

Education per capita public expenditure is the second highest in the country (2004)

Health per capita public expenditure is well above the national level (2004)

But both education and health outcomes are not significantly better than in the rest of the country… …signaling the need to improve the efficiency of spending Graduation rates 2004/05 Primary school (SD) Junior high school (SMP) Senior high school (SMA) Aceh 96.6 89.5 91.5 North Sumatra 97.6 93.4 87.7 Indonesia 96.8 98.0 92.1 Immunization Coverage in Aceh vs. Indonesia

Priorities for Poverty Alleviation (i) Longer-term development efforts should focus on the poorest areas of Aceh, in particular those in the rural interior and more remote areas. Current focus on tsunami affected areas might have to be revised; Any poverty alleviation strategy should focus on increasing the productivity of the agricultural and fisheries sectors, as well as a strategy to improve the capabilities of the poor and linking them to growth poles in urban areas; The Government of Aceh should diversify the economy away from natural resources and increase transparency of the distribution and use of revenues.

Priorities for Poverty Alleviation (ii) The Government of Aceh should invest in a strong civil service that ensures an efficient allocation of resources, as well as the provision of quality public services; Given Aceh’s large resources and opportunities, spending patters should be improved. Scrutinize increased spending on government administration and the civil service wage bill; Education and health spending is very high, but efficiency of spending can be improved. In all sectors, better planning and budgeting should align needs identified with allocation of resources.