AGRICULTURAL GROWTH AND POVERTY REDUCTION: THE CASE OF INDONESIA By Sudarno Sumarto Asep Suryahadi The SMERU Research Institute October 2003

2 Presentation Outline I. Introduction II.Data III.The Role of Agriculture in the Rural Economy IV.Poverty Trends and Sectoral Profile of Poverty V. The Impact of Economic Growth on Poverty: Methods and Empirical Estimations VI. Conclusion and Implications

3 I. Introduction  After uninterupted strong growth followed by rapid reduction in poverty for three decades, Indonesia was hit by an economic crisis starting in mid  Poverty increased rapidly as the crisis worsened.  This raised questions on the sustainability of poverty reduction achieved during the pre-crisis high economic growth era.  Hypothesis: Had Indonesia not industrialized “too fast”, the poverty reduction achieved would have been greater and more sustainable.

4 I. Introduction  Quality of growth: what kinds of growth are most beneficial for the poor and hence most effective in reducing poverty ? Composition of economic growth: is agricultural growth more important in reducing poverty than growth of industry or services ?

5 II. Data The main data source for calculations of poverty in Indonesia is the Consumption Module of SUSENAS (the National Socio-Economic Survey): conducted every three years ( ), collecting information on detailed consumption expenditures, sample of around 65,000 households. Core SUSENAS: conducted yearly, collecting information on household characteristics, sample of over 200,000 households. Regional Gross Domestic Product (RGDP). Regional Consumer Price Index (RCPI).

6 III. The Role of Agriculture in the Rural Economy A. The Macro Picture The Indonesian economy has undergone substantial structural change  declining role of agriculture in output and employment.

7 III. The Role of Agriculture in the Rural Economy B. Agriculture and Household Livelihood

8 III. The Role of Agriculture in the Rural Economy

9 IV. Poverty Trends and Sectoral Profile of Poverty A. Measuring Poverty  Measure of poverty: current consumption expenditure deficit.  Setting an absolute “poverty line” is a complex exercise  it should be complete, internally consistent, credible.  Foster-Greer-Torbecke (FGT) poverty indices.

10 IV. Poverty Trends and Sectoral Profile of Poverty B. Consistent Poverty Estimates

11 IV. Poverty Trends and Sectoral Profile of Poverty

12 IV. Poverty Trends and Sectoral Profile of Poverty C. Sectoral Profile of Poverty

13 V. The Impact of Economic Growth on Poverty

14 V. The Impact of Economic Growth on Poverty A. Literature Review  The basic model to estimate the impact of economic growth on poverty: (2).  Ravallion and Datt (1996): 85 percent of the reduction in poverty in India was due to agricultural growth.  Warr and Wang (1999): industrial sector growth has the largest impact on poverty reduction in Taiwan.

15 V. The Impact of Economic Growth on Poverty Warr (2002): growth of services accounts for the largest reduction in poverty in four Southeast Asian countries. Quizon and Binswanger (1986, 1989): agricultural growth effects of the Green revolution did not benefit the rural poor. Criticized by Sarris (2001): spillover effects to non- agricultural incomes. Timmer (1997): impact of agricultural growth on poverty depends on income distribution.

16 V. The Impact of Economic Growth on Poverty B. Method  No time-series data spanning a sufficiently long period to make empirical estimations of equation (2).  Panel data with provinces as the unit of observations  need to take into account the effect of migration across regions:

17 V. The Impact of Economic Growth on Poverty  Model of sectoral growth impact on poverty reduction:

18 V. The Impact of Economic Growth on Poverty C. Empirical Estimations

19 V. The Impact of Economic Growth on Poverty

20 V. The Impact of Economic Growth on Poverty

21 V. The Impact of Economic Growth on Poverty D. Agriculture Contribution to Poverty Reduction

22 VII. Conclusions and Implications  Most of the poor in Indonesia are located in rural areas and have a livelihood in the agricultural sector.  Development strategy emphasizing industrialization was aimed at developing a high productivity. industrial sector to pull people out from poverty.  This strategy has not worked well for two related reasons.

23 VII. Conclusions and Implications  As the industrial sector expanded, the movement of people out of the agricultural sector into the industrial sector has not occurred as fast.  Agricultural growth is a much more potent factor in reducing poverty than industrial growth  66 percent of total poverty reduction, 55 percent of urban poverty reduction, and 74 percent of rural poverty reduction are due to agricultural growth.

24 VII. Conclusions and Implications Implications for policy to eliminate poverty:  Direct efforts to push agricultural growth is the most effective means to reduce poverty.  The strategy of industrialization should be directed at developing industries that have strong links with the agricultural sector, so that industrial growth will have bigger impact on reducing poverty.  The government should create an environment that is conducive to private sector participation in the agribusiness development  trade and agricultural policies that harm agro-industries should be removed.