6.24 Child Poverty and Disparities

37 points to 10 per cent. The GFC, luckily, did not lead to an increase in the poverty rate based on the NPL standard, and the rate steadily declined from 15.42 per cent in 2008 to 14.15 per cent in 2009 and 13.33 per cent in 2010. The poverty gap index P1 and poverty severity index P2, however, indicated that the GFC might be associated with an increase in the value of both indexes to a level similar to 2006 Figure 1.13. This suggests an increase in disparities among the poor, with the poorest of the poor being badly affected by the crisis. Poverty in Indonesia has always been a predominantly rural phenomenon. Despite the growth of the urban population, which now accounts for almost half of the total population, the rural poor still account for more than 60 per cent of the total poor Figure 1.14. The most likely reason for this is that most people in rural areas work in the agricultural sector even though, as discussed previously, the economic share of the agricultural sector has been declining. The relatively low education level of the rural poor limits their opportunities Figure 1.13: Poverty gap and poverty severity indexes, 2002–2010 Source:฀BPS฀–฀Statistics฀Indonesia฀various฀years 0.50 2002 3.01 3.13 2.89 2.94 3.43 2.99 3.37 2.50 2.21 0.79 0.85 0.78 0.81 1.00 0.84 1.00 0.68 0.56 2003 2004 2005 2006 Poverty Gap Index P1 Poverty Severity Index P2 2007 2008 2009 2010 1.00 1.50 2.00 2.50 3.00 3.50 4.00 Figure 1.14: Share of urban and rural poor as a proportion of the national poor, 1976–2010 Source:฀BPS฀–฀Statistics฀Indonesia฀various฀years฀ 1976 1978 1980 1981 1984 1987 1990 1993 1996 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 10 20 30 40 60 50 70 80 90 100 Rural Urban of total poor 38 2005 2002 1999 1996 2006 2007 2008 2009 5 10 15 20 25 30 35 40 2010 0.365 0.326 0.33 0.343 0.357 0.374 0.368 0.362 0.352 0.274 0.244 0.29 0.264 0.276 0.302 0.3 0.288 0.297 0.4 Gini ratio of poverty rate 0.35 0.3 0.25 0.2 13.39 19.41 14.46 11.68 13.47 12.52 11.69 10.72 9.87 19.78 26.03 21.1 19.98 21.81 20.37 18.93 17.35 16.56 0.15 0.1 0.05 Poverty Rate - Urban Poverty Rate - Rural Gini ratio - Urban Gini ratio - Rural Figure 1.15: Urban and rural poverty rates and Gini ratios, 1996–2010 Source:฀BPS฀–฀Statistics฀Indonesia฀various฀years to benefit from increasing labour demand in the manufacturing and service sectors. The fact that most manufacturing establishments and various forms of financial services are located in or near cities also hinders the development of both farm and non-farm businesses in rural areas. Although the poverty rates in urban areas are lower than those in rural areas, the income inequality as reflected in the Gini ratio is subsequently higher. However, while the inequality in urban areas has tended to decline in recent years, the inequality in rural areas has been relatively stagnant, oscillating around 0.3 Figure 1.15. In addition to rural–urban disparities, income poverty also varies across provinces. Although most of the poor are living in Java, the poverty rates in the provinces of eastern Indonesia remain among the highest. In 2010, around half of the poor lived in the three provinces with the highest numbers of poor people: East Java, Central Java and West Java. The variation of poverty rates among provinces is quite high: approximately 35 per cent of the people in West Papua and Papua are categorized as poor, while less than 5 per cent of people in Jakarta and Bali are poor Figure 1.16. The provincial performance in terms of a reduction in poverty rates also varies considerably. Five provinces recorded the highest poverty reductions during 2005–2010; they were Riau, Central Kalimantan, West Kalimantan, Jambi and East Kalimantan – all rich in natural resources. Meanwhile, two provinces – Jakarta and North Sulawesi – recorded increasing poverty rates during the same period. 39 u 5 10 15 20 25 30 35 40 45 13.3 36.8 1.000 2.000 3.000 4.000 5.000 6.000 Figure 1.16: Numbers of poor people and poverty rates by province, 2010 Source:฀BPS฀–฀Statistics฀Indonesia Papua W est Papua Maluku Gorontalo NTT NTB Aceh Lampung Bengkulu Central Sulawesi Southeast Sulawesi Y ogyakarta Central Java South Sumatra East Java W est Sulawesi South Sulawesi North Sumatra W est Java W est Sumatra North Maluku North Sulawesi W est Kalimantan Riau Jambi Riau Islands East Kalimantan Banten Central Kalimantan Bangka Belitung South Kalimantan Bali Jakarta Number of poor people millions Poverty rates of population Number of Poor People - Urban National Poverty Rate Number of Poor People - Rural Poverty rates 3.5 0.00 -6.00 -8.00 -2.00 2.00 4.00 6.00 8.00 Figure 1.17: Progress in poverty reduction and economic development by province, 2005 – 2010 Source:฀Calculated฀using฀data฀from฀BPS฀–฀Statistics฀Indonesia Riau Central Sulawesi East Kalimantan Central Kalimantan Banten W est Kalimantan NTB Jambi Lampung Bangka Belitung W est Sumatra South Sumatra Papua South Kalimantan W est Java East Java Central Java North Sumatra North Maluku North Sulawesi Southeast Sulawesi Jakarta South Sulawesi Gorontalo Bengkulu NTT Bali Maluku Aceh Yogyakarta -4.00 Annual A verage ProgressRegress during 2005-2009 EconomyGRDP Poverty 40

1.6 Macroeconomic policy and budget allocation

The macroeconomic policies adopted by a country affects the capacity of the government and the general community to invest in future generations, namely, children. Changes in commodity prices affect a household’s capacity to invest in their children’s future consumption and education and the government’s capacity to invest in the provision of public services. During the last decade, Indonesia struggled to survive the 1997–1998 Asian financial crisis and other consecutive shocks due to increases in global food, oil and gas prices as well as the latest 2008–2009 global financial crisis. In order to survive these shocks, the government has adapted monetary policy measures to maintain currency and inflation stability, and adjusted the fiscal policy to provide sufficient development stimulus. The Indonesian central bank BI, Bank Indonesia is the institution authorized by law to manage the country’s monetary policy Law No. 32004 concerning Bank Indonesia. It is mandated to achieve and maintain the stability of the rupiah, defined as the stability of prices for goods and services reflected in inflation, among other factors. To achieve this goal, Bank Indonesia decided in 2005 to adopt an inflation targeting framework, in which inflation control is the primary monetary policy objective, while adhering to the free floating exchange rate system. Exchange rate stability plays a crucial role in achieving price and financial system stability. For this reason, Bank Indonesia also operates an exchange rate policy designed to minimize excessive rate volatility, rather than pegging the exchange rate to a particular level. These measures have resulted in relatively stable inflation and exchange rates during the past five years Figures 1.18 and 1.19, and have helped the country survive the global financial crisis. Regarding fiscal policy, Indonesia has adopted a deficit financing budget in order to stimulate growth. From 2005 to 2007 the government’s budget deficit tended to increase each year. In 2005 the total budget deficit was IDR14.4 trillion million million, which increased to IDR29.1 trillion in 2006, and further increased to IDR49.8 trillion in 2007. In 2008, the total budget deficit decreased by IDR4.1 trillion compared to the previous year. In the aftermath of the global financial crisis, which caused an economic slowdown in late 2008, tax revenue decreased in 2009 and caused the budget deficit to rise to IDR88.6 trillion 6 per cent of GDP. The decision to increase the budget deficit in 2009 was also based on an intention to provide fiscal stimulus as a counter cyclical measure to the potential adverse impact of the global -2.0 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 Indonesia Malaysia Thailand Philippines Singapore Inflation rate 2000 - 2.0 4.0 6.0 12.0 10.0 8.0 14.0 16.0 18.0 Figure 1.18: Annual inflation in Indonesia and neighbouring countries, 2000–2010 Source: Indonesia Central Bank Bank Indonesia and Department of Statistics Singapore 41 Figure 1.19: Changes in exchange rates in Indonesia and neighbouring countries, 2000–2010 year 2000=100 Source: Calculated from International Financial Statistics ฀ [http:elibrary-data.imf.orgDataReport.aspx?c=1449311d=33061e=169393] 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2000 Changes in exchange rate year 2000 = 100 70 80 90 100 110 120 130 Indonesia 2000 : 8,421 per US Malaysia 2000 : 3.800 per US Thailand 2000 : 40.112 per US Philippines 2000 : 44.192 per US Singapore 2000 : 1.724 per US Figure 1.20: Central government revenues, expenditures and deficits, 2005–2010 Source:฀Budget฀Statistics฀2005–2011,฀Ministry฀of฀Finance 2005 2006 Revenues Expenditures Deficit 2007 2008 2009 2010 1,200 1,000 800 600 400 200 -200 IDR trillion million million financial crisis. In this fiscal year, the government allocated IDR73.3 trillion 1.4 per cent of GDP to a fiscal stimulus programme that consisted of tax reduction 58.7 per cent, subsidies for import taxes and duties 18.1 per cent, and additional subsidies and government expenditures 23.3 per cent used to finance labour intensive infrastructure developments and the expansion of the community driven development programme Program Nasional Pemberdayaan Masyarakat, PNPM and other measures. In 2010 the budget deficit was set at IDR133.7 trillion 8 per cent of GDP. Most of the government’s revenues come from tax, especially domestic taxation. On average, tax revenues account for almost 70 per cent of total revenues each year. In addition, oil and gas contribute around 20 per cent on average each year. The remainder comes from various means of budget financing. Most budget financing is from domestic sources in the form of government obligations, and from foreign sources such as foreign debt. Indonesia’s external debt is maintained at manageable levels. The level of debt based on loan agreements was relatively constant, 42 but government securities also increased considerably Figure 1.21. Thus, the total debt-service payments also increased. Most government debt in 2009 was a result of financial leasing and financial services 38 per cent, followed by other categories 16.6 per cent, services 17 per cent, and construction 13.5 per cent. The indicators of external debt burden indicate that Indonesia’s debt is still manageable. The debt service ratio DSR, debt to GDP and debt to export earnings have been declining, although they did increase slightly in 2009 Figure 1.22. Figure 1.21: Levels of government external debt and debt-service payments, 2004–2009 Source:฀Indonesia฀Central฀Bank฀Bank฀Indonesia,฀2010 70 80 68.6 63.1 62.0 66.7 62.3 14.7 9.9 65.7 2.1 6.2 11.0 18.4 18.0 7.7 7.8 8.3 9.1 9.4 60 20 10 US million 50 40 30 Loan Agreement Government Securities Debt-Service Payment 2005 2006 2007 2008 2009 2004 Figure 1.22: Indonesia’s external debt burden indicators, 2004–2009 Source:฀Indonesia฀Central฀Bank฀Bank฀Indonesia,฀2010 Note:฀DSR,฀debt฀service฀ratio 2005 2006 2007 2008 2009 2004 20 40 60 80 100 120 140 160 180 200 DSR Debt to GDP Debt to Export Regarding central government expenditure, subsidies still account for the biggest proportion of expenditure during 2005–2010. At their highest point, subsidies amounted to 40 per cent of total expenditure in 2008 Figure 1.23 when the global oil price escalated, placing a heavier financial burden on the government. However, the proportion of the budget spent on subsidies decreased to 22 per cent in 2009 and was 26 per cent in 2010. Among the subsidy components, fuel subsidies were the most dominant Figure 1.24, followed by subsidies for electricity.