Poverty and Inequality in Indonesia

Sutyastie S.M. and Prijono Tjiptoherijanto *)

Introduction
Prior to 1997, Indonesia recorded a relatively remarkable decline in poverty
level as compared to achievement in other less-developed countries. The success of
poverty alleviation, in term of monetary measure of welfare, was consistently coupled
with the improvement in non-monetary measures of welfare and poverty, such as
education and health indices. The improved peoples welfare was subject to almost
three decades of sustained economic growth resulting from a series of developmental
strategies, including green revolution since the late 1970s, trade liberalization in the
early 1980s and the establishment of export-oriented growth economy starting in the
early 1990s.
However the crisis squeezing the Indonesian economy in the mid 1997,
following the long drought during the year, has been adversely affecting the overall
macroeconomic condition, and most importantly peoples welfare. The number of
people living in poverty is believed to increase drastically. The readily available
contemporary data from the result of the 1998 SUSENAS-type suggests a substantial
increase in poverty incidence from the pre-crisis period (1996) to the end of 1999.

Trends in Poverty and Inequality

During 1976 1996 the overall number of the poor in Indonesia sharply
decreased from 54.2 million people (40.08% to total population) to 22.5 million people
(11.34%). However, the comparable figure in 1998 was estimated to rise to 36.5 million
(17.86%), or an absolute change in the number of the poor by around 14 million as
compared to the 1996 figure. The 14 million increase did not necessarily indicates the
real impact of crisis on poverty incidence from the mid-1997 to the end of 1998. To
really measure the crisis impact, one should compared the 1997 (estimate) figure with
that of 1998. As the 1997 figure was believed to be lower than the 1996 poverty level,
the crisis impact would be higher than 14 million. Provided the 1997 poverty level was
presumably 21.5 million (assuming the same annual rate of decline in the absolute
poverty as happened from 1993 to 1996), there might have appeared around 51 million
additional poor people which likely measures the crisis impact on poverty.
This finding seems to confirm the earlier estimates that in aggregate the urban
population was suffered more severely by the crisis than their rural counterparts. There
are two possible explanations for the more rapid increase in the number of the urban
poor. First, the crisis tends to most adversely affect some major economic sectors in
urban areas, such as construction, trade and banking, leading to a negative impact on
*)

Sutyastie Soemitro Remi is Head, Population Studies Center, Padjadjaran University and Prijono Tjiptoherijanto
is Professor in Economics, University of Indonesia red.

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urban unemployment. Second, while rural people could fulfill subsistence level from
their own production, the increased food prices negatively affected the net purchasers
more than it affected the net producers of food, that brought about a more suffering
among urban households than among rural households. In their survey-based study of
295 companies mostly in urban areas, Irawan and Sutanto (1999) also found that the
number of displaced workers increased between 1997 and 1998, and the majority of laid
off workers were those of lower socio-economic status, indicating an intense pressure
on employment and welfare of urban poor people presumably due to the crisis.
A substantial increase in absolute poverty in fact was resulted from a drastic
change in the designated poverty lines in both urban and rural areas. As compared to
1996, the poverty lines in 1998 increased by around 154% and 165% in urban and rural
areas respectively. The adjusted 1998 poverty line, as compared to 1996, increased by
around 123.60% and 147.09% for urban and rural, respectively. This indicates that
nominal value of expenditure spent by an individual per month to fulfill their basic
needs in December 1998 has multiplied by more than two times of the value in February
1996. The extent of the increase in poverty line was apparently consistent to the
skyrocketing prices, especially food commodities, during the same period and partly,
due to the redefinition of the food and non-food bundle. From February 1996 to
December 1998, the inflation rate for food was recorded at around 148.6% (BPS,
monthly series of Economic Indicators).
During the period prior to the crisis (1993 1996) income (peroxide by
expenditure) inequality as indicated by Gini ratio tended to increase in Indonesia as a
whole, from 0.34 to 0.36. The inequality seemed to be more apparent in urban
Indonesia, reaching a level of 0.36 in 1996 (categorized as medium inequality with a
coefficient ranging between 0.35 and 0.50), than in rural Indonesia with a level of 0.27
or less inequality (less than 0.35). However, in 1998 there were declines in Gini
ratios, reaching 0.33 in urban areas and 0.26 in rural areas. It means that the inequality
has decreased by 8.3% in urban and by 3.7% in rural areas during period of 1996
1998.
This finding was at glance confusing and inconsistent, given the previous
evidence concerning the worsening inequality among those living below the poverty
line. Whether the improvement in inequality during the crisis was simply
methodological-related issues, especially non-sampling error in probing questions on
expenditure or merely a real fact, is hardly known. However, it is possible to speculate
that the crisis may have affected more severely the total expenditure of those involved
in modern-formal sector than those in traditional-informal sector, representing for
middle and high income classes for the former and low income class for the latter. This
impact was believed to get through large shifts in relative prices that may have had
benefited those engaged in the rural economy, rather than for those in the modernformal economy. As a consequence, presumably, the crisis has caused a more drastic
drop in the averaged expenditure of the middle and the high classes than the expenditure
of the low class that has already been at a low level.

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Program Related to Poverty Alleviation

The crisis looming over Indonesias poor is huge. Once growth resumes, of
course, employment opportunities and income gains will reduce their misery. But it will
take several years. During the economic crisis, the Government of Indonesia and other
donors fully recognized that there was a need to establish social safety net programs to
meet the decline of purchasing power of the majority. Substantial funding for this
purpose has been allocated since mid-1998 (see Table). Thus was embedded in the
Community Recovery Program (CRP) and the Social Protection Sector Development
Program (SPSDP), which aimed to directly help people in need. The program assumes
that civil society can lead and coordinate the CRP and act as the channel for distribution
of resources. Short-term assistance is given to people who are unable to continue their
daily social and economic activities. This would be implemented by proactively
plugging gaps in the crisis and establishing synergy between the civil society,
government, and the private sector, together with the international community for
improved-response to the need. The design called for decentralization of resources and
decision-making processes, strong involvement of civil society, and transparency. The
CRP and SPSDP programs can be classified as emergency or ad-hoc programs for
poverty alleviation during the economic crisis. The programs are established according
to the need. Once economic performance improves, these programs will be terminated.
The purpose of social safety net programs are:
to provide services which can be accessed by poor people
to provided productive labor opportunities that can improve purchasing
power of poor people
to improve the welfare of poor people
to recover social and economic services for poor people, and
to recover economic activities for poor people

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Budget Allocated for Social Safety Net Program, 1998/99 and 1999/2000
Programs Component/Activities

Budget (in billion rupiah)

1998/1999

1999/2000

Sources of Funding and Institutions

which are responsible for
implementation

Food Security
Special Market Operation

PM

PM

633.1

119.5

Social Protection

4975.0

3719.0

Education

National Food Reliance

Rice Procurement Agency (BULOG)

Ministry of Agriculture

2704.8

2033.6

- Scholarships and operational financial aids

1259.1

1188.7

- Rehabilitation of Primary school buildings

850.7

308.5

Presidential Instruction for Regency

- Construction of new primary school buildings

594.9

536.4

Presidential Instruction for Regency

2270.2

1685.3

1042.7

880.0

Ministry of Health and Social Welfare

Health
- Basic Health Services in Community Health

Ministry of Education

Center
-

48.0

Ministry of Health and Social Welfare

92.0

105.0

Ministry of Health and Social Welfare

- Basic Health Service in Hospital

- Social Welfare
- Revitalization of Emergency Food Relief (SKPG)
- Health Infrastructure

15.7

Presidential Instruction for Health

720.9

85.7

Presidential Instruction for Health

- Food Supplement for School Children

414.4

550.0

Supplement for School Children

Employment Creation

3768.6

1800.0

Sector Labor Intensive

2076.1

1000.0

- Labor Intensive of Public Worked Sector

578.8

1000.0

- Crisis Impact and Employment Problems Solving

598.5

Ministry of Manpower and Transmigration

- Skilled Unemployment Problem Solving (P3T)

399.1

Ministry of Manpower and Transmigration

- Labor Intensive of Forestry Sector

490.5

Ministry of Forestry

1701.4

800.0

9376.7

5638.6

Ministry of Public Work

(PDKMK)

- Regional Labor Intensive (PDM-DKE)

Total

Presidential Instruction for Regency and Bappenas

Source: Bappenas, 1999

The programs cover four activities, which are as follow:

Food Security Programs

Social Protection of Education Programs
Social Protection of Health Programs, and
Labor Intensive Public Works Programs

The food security program is established so poor families have better access to
food in terms of price and readiness. The program covers two main activities; first, food
aids through special market operations (Operasi Pasar Khusus/OPK). In OPK, poor
families can buy rice at one thousand rupiah per kilograms. Each family can buy 20
kilogram rice per month. In the 1998/1999 fiscal year, OPK had been implemented to
7354 million families according to the number of poor families collected by National
Family Registration. Besides rice, through the OPK activity, poor families have the
possibility of receiving, free of charge, cooking oil, milk powder, and soybean.
However, the availability of these commodities depends on international communities
or donor agency grants. The second aim is to improve national food reliance through
empowering farmers. During the 1998/1999 fiscal year, the activity had been
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implemented in 27 provinces. In the fiscal year 1999/2000, the national food reliance
activity has changed to fishery and poultry breeding activity.
The purpose of the Social Protection of Education Program is to maintain
education service to poor families. The program covers three activities, which are:
scholarships and operational financial aids; rehabilitation of primary school buildings;
and construction of new primary school buildings. Under the Social Protection of
Education Program, children from poor families are free from tuition and other financial
obligations related to study purposes. During the 1998/1999 fiscal year, scholarships
have been given to around 4.1 students including 321 thousand college students
throughout the country. Operational financial aids have been given to around 131
thousand schools and 1200 universities in Indonesia.
In the health sector, the social safety net program covers four main activities,
namely:
providing basic health services for poor families
providing pregnancy and delivery as well as child-rearing services for poor
families
providing food supplements for infants (six to 11 months) and children (12
to 23 months) of poor families, and
providing food supplements for school children.
All family members or poor families receive, free of charge, health services at
the Community Health Center. They also receive a nutrition supplement especially for
mothers and children (including infants). Food supplements are also provided in schools
and orphanages. Therefore, the government has allocated a special budget for essential
drugs, vaccines, and primary health care. The communicable disease and community
health programs get special attention.
The Labor Intensive Public Work Program is designed to help poor households
maintain purchasing power. In the fact, the Government has a long history of using a
labor intensive public works program, called padat karya. In the beginning, the
program was implemented in the areas that suffered greatly from the crisis, such as
urban areas and drought areas. Three main programs have been developed in the
program. These first, Sector Labor Intensive, is mainly to redesign current projects to
become labor intensive projects. For example, infrastructure projects at the Ministry of
Public Works were redesigned in order to absorb more manpower. The key is to
redesign the current project. The second, Special Labor Intensive, is mainly to create a
special project in order to absorb people who have been laid-off from their current job.
The Special Labor Intensive program consists of projects to face the employment
problem due to economic crisis, called PDKMK program, labor intensive projects to
face unemployment of skilled workers (P3T), and labor intensive projects in the forestry
sector. The approaches of the two above programs are top-down and departmental.
Government has been much criticized on the this matter.
Therefore in November 1998, the government launched the third program
called Local Empowerment in Facing the Impact of Economic Crisis (Pemberdayaan
Daerah dalam Mengatasi Dampak Krisis Ekonomi: PDM-DKE). The program has been
launched in all villages throughout the country. Under this scheme, the central
government provided budgets directly to communities via local government according
to the number of poor households and the amount of unemployment in their villages.
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Indeed, under this scheme, economic activities as well as target groups are selected by
local community people. The government hopes that the PDM-DKE program will run
smoothly since the program is monitored actively by the community.
Social safety net programs have been criticized by many parties, particularly by
non-government organizations (NGOs). Most of the criticisms are about the
transparency of the programs. According to them, the social safety net programs funds
are mostly not received by the target group. They even argue that the government
spends that budget for political purposes. Therefore, they insist, government and
international donor agencies should terminate the programs. In the last couple of months
there have been not debates in the country on these matters. In this regard, government
is trying hard to improve the quality of the programs implementation. NGOs and
students are welcome to participate actively in the programs implementation, starting
from the planning phase through to the monitoring phase.

Concluding Remarks
There is no doubt that in the last twenty five years, Indonesias economy has
been improving remarkably. The most powerful indicator of the success of Indonesias
development strategy and policy adjustment is the degree of absolute and relative
poverty reduction. Considering the development process in the last twenty five years,
much progress has been made in reducing the absolute poverty in Indonesia. Data shows
that in 1999, the number of poor people in Indonesia were around 37.5 million and it
was much lower that in 1970 which were 54.2 million people.
In line with the smaller number of poor people, the effort to alleviate the poverty
is becoming harder than before. There are two reasons for above condition, (1) the
target group is harder to be found than before, and (2) the governments concern on
poverty alleviation is less than before since the budget for alleviating them is getting
more expensive. However, since the National Ideology and the 1945 Indonesian
Constitution stated that all Indonesia people should benefit from the development, no
matter the cost and effort, the poverty alleviation has to be done.
Concerning the number and location of poor people at the present time,
Government of Indonesia aware that policy and program on poverty alleviation can not
be depended only on macro economic policy. Micro economic policy or even social
policy should be bring together with macro economic policy to alleviate the poverty.
One example of micro economic and social approach in alleviating the poverty in
Indonesia is the development of prosperous family.

References
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Crisis: Lessons from the IDT Experience, May 1999.

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Sutanto, and Sutanto, 1999, The December 1998 Poverty Estimate: Methodological
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