Publications

1. The Nature of Poverty in Indonesia

63. There have been significant long-term improvements in the incidence and impact of poverty, driven mainly by export-oriented labor-intensive industrialization and earlier gains in agriculture productivity. Not all have benefited from this improvement, especially not women and those in the less developed islands. There remain a number of nationwide concerns, including low quality education, poor maternal health, and deficiency of the diet of the poor and near poor. Although women have benefited from some targeted programs including family planning, the high level of maternal mortality remains a concern. Women have performed less well than their male counterparts in the labor market. There is enormous regional variation in the incidence of poverty in Indonesia and considerable regional variation in terms of broader indicators of human development. The regional variation in income has exacerbated political and sectarian tension, which, in turn, increases the challenges to development.

2. Assessment of Economic Potential

64. Despite constraints, Indonesia's economic potential remains strong. Indonesia has a large competitive export base, and with prudent macroeconomic management and sound sector policies could exploit its comparative advantage, especially in labor-intensive manufacturing and agricultural products. Indonesia also has a potentially large domestic market, which could support economic expansion to complement export-led growth. The young labor force could be tapped to expand the new economy sectors—taking advantage of the telecommunication and information technology (IT) revolution. Labor market policies will be increasingly important as the economy moves into more complex production. Ongoing reforms in the banking and capital market will improve the channeling of savings to investment. Economic development since the 1980s raised the savings rate rapidly and supported the rapid economic transformation. Although the average savings rate declined dramatically due to the crisis, Indonesia's propensity to save out of incremental income is high.

3. Sound Economic Policy as a Basis for Long-Term Poverty Reduction

65. The economic crisis produced a major surge in poverty, testifying to the vulnerability of the poor to sharp disruptions in the economy. In particular, inflation must be kept under control. A huge debt overhang imposes severe constraints on the resources required to stimulate growth and poverty reduction and heightens the importance of setting priorities and improving efficiency and targeting especially for poverty reduction. Any poverty reduction in the near term will depend on sustaining and deepening the nascent economic recovery.

66. Industrial and sectoral policies must be market-oriented so that private sector development can provide a basis for equitable long-term poverty reduction. The relatively good infrastructure for private sector development in Java and Bali must not be wasted by failure to adopt market-oriented pricing and industrial structures, particularly for energy. Poor financial health and ongoing difficulties in maintaining previous contracts for private sector power supply have raised the specter of power shortages in the Java-Bali grid starting in 2004.¹⁹ In the less developed islands, infrastructure remains inadequate for a dynamic private sector. The driving force for future industrialization in the more developed areas will have to be technology and skill-intensive manufacturing. Investment in education is essential and Indonesia must prepare to take advantage of emerging information and communications technologies.

67. Addressing the needs of the rural sector and the less developed islands will be crucial for sustainable poverty reduction. Diversification of agriculture is essential. Horticulture and livestock must be promoted in Java, and smallholder tree crops in other areas. The provision of microfinance can also be an effective tool for poverty reduction, as can measures to support SMEs. This is especially true in areas off Java where development has often been limited by inward-looking policies, deficient infrastructure, and lack of business services support.

4. Good Governance as an Essential Element in Poverty Reduction

68. Improved governance is crucial for long-term poverty reduction. Nontransparent and arbitrary government practices, protection for established businesses, and a judicial system that caters to the rich will defeat the most ardent efforts of the poor to improve their situation. By the same token, inefficient public administration will more sharply reduce support for the poor than for the rich, who can afford to pay for such services as education and health. The recent move toward decentralized governance has immense potential to contribute to the cause of poverty reduction. This potential, however, can be put at risk if ambitious implementation programs falter.

69. Reflecting this understanding, pro-poor governance reforms include those to reduce the role of Government in economic activities, promote market-based development, encourage competition, strengthen the legal and regulatory framework for economic activity, raise awareness, and foster participatory development processes, including those enhancing the involvement of civil society. Reforms of this nature will improve the access of the poor to resources and opportunities. The governance reform agenda is extensive and daunting. The key issues include anticorruption, decentralization, corporate governance, financial governance, legal and judicial reform, public financial and expenditure management, and strengthening civil society.