Trends in Poverty and Inequality in Decentralising Indonesia

Abstract

As one of the world's largest emerging economies, Indonesia has experienced rapid economic growth and substantial reduction of poverty over the past three decades, particularly prior to the 1997-98 Asian Financial Crisis. After the crisis, Indonesia entered a new development phase that saw the fall of the Suharto government and new governance which moved highly centralised policies and powers towards a decentralised process. This research report analyses economic and social patterns and trends of poverty and inequality in Indonesia with a particular focus on the decentralisation period from 2001 to 2010.The Indonesian political and economic environment has changed significantly during this period and this had implications for individual wellbeing, regional economic prosperity and national economic growth. The report finds that in general, absolute poverty rates have continued to decline during the decentralisation period although the reduction has not been as strong as it was prior to the Asian economic crisis. In contrast, consumption inequality has increased during the same period. New estimates of growth and inequality elasticity of poverty suggest that this rising inequality has been offsetting the positive benefits of consumption growth on poverty. The report also finds that regional disparities persist including the disparities at the district level (areas where much of the governance has shifted to), with substantial differences in poverty rates. New analyses of living conditions of Indonesians have revealed that there is still a wide gap between the population who are in the top and the bottom two quintiles of consumption per capita with a substantial proportion of poorer households still not having access to clean water or adequate toilet facilities. These findings illustrate that equal access to infrastructure which is typically provided through government intervention is still a major issue. Finally, the report focuses on the provision of direct social assistance, which remains a key policy pillar to alleviate poverty in Indonesia. A key policy challenge is how to improve targeting of social assistance, using an integrated poverty alleviation strategy through a combination of policies at the national, provincial and district level.