00074910012331337793
Bulletin of Indonesian Economic Studies
ISSN: 0007-4918 (Print) 1472-7234 (Online) Journal homepage: http://www.tandfonline.com/loi/cbie20
Poverty and Inequality in The Soeharto Era: An
Assessment
Anne Booth
To cite this article: Anne Booth (2000) Poverty and Inequality in The Soeharto
Era: An Assessment, Bulletin of Indonesian Economic Studies, 36:1, 73-104, DOI:
10.1080/00074910012331337793
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Bulletin of Indonesian Economic Studies
Vol 36 No 1, April 2000, pp. 73–104
POVERTY AND INEQUALITY IN THE
SOEHARTO ERA: AN ASSESSMENT
Anne Booth*
School of Oriental and African Studies, London
This paper surveys the evidence on trends in poverty and inequality during
the years of Soeharto’s presidency. That Indonesia saw a decline in the
incidence of poverty, and improvements in other welfare indicators such
as infant mortality rates and literacy rates over these years, seems
indisputable. Comparative studies show that by the latter part of the 1980s,
the headcount measure of poverty in Indonesia was below that in the
Philippines although above that in Malaysia and Thailand. But relative
poverty has declined more slowly, and indeed increased in some urban
areas between 1987 and 1996. The paper also examines evidence on the
determinants of rural poverty in Indonesia in 1993, and suggests that rural
development programs targeted to the specific needs of poor people in
poor areas will be essential if rural poverty is to be further reduced in
future years.
Thee Kian Wie is an economic historian by training, and although much
of his own research has been contemporary in focus, he has never lost
his enthusiasm for the historical study of economic development, both
in Indonesia and in other parts of the world. As Soeharto’s ‘New Order’
fades into history, I trust that he will appreciate a paper which explores
how one important aspect of the New Order’s economic record might be
evaluated by future economic historians. Certainly, in the Indonesian
context, no one individual since van den Bosch has stamped his
personality on the economic policies of an era as has Soeharto and, right
up until the crisis hit in late 1997, it was the economic achievements that
above all others conferred legitimacy on his regime. My view is that these
achievements were substantial, and in spite of the severe economic
contraction of 1998–99 they will endure. But they are by no means fully
understood, and indeed I would argue that they have often been
misrepresented by defenders and critics alike. A full examination of
Soeharto’s economic legacy is obviously beyond the scope of a journal
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74
Anne Booth
article; my more limited aim here is to review some of the evidence relating
to poverty and income distribution, and to discuss the policy implications
of this evidence.
THE SITUATION IN THE 1960s
How poor were Indonesians in March 1966, when the New Order
effectively began? The available evidence indicates that they were very
poor indeed. Per capita income in Indonesia was well below that of other
Southeast Asian economies for which reliable data are available; indeed
real per capita GDP is estimated to have been only 535 international
dollars (1985 prices) in 1966, compared with 650 dollars in India.1 The
time series compiled by van der Eng (1992: table A-4) shows that real per
capita GDP (in 1983 rupiah) was about the same in 1965–67 as in 1911–13.
The household survey data collected between November 1964 and
February 1965 indicated that in much of Java over half the rural
population fell below a very modest poverty line set in terms of the price
of cereals (20 kg per capita per month). The situation was little better in
urban areas. Outside Java the incidence of poverty was on average lower,
although in Bali, Northern Sulawesi and West Nusa Tenggara it was little
different from that in Java (Booth 1988: table 4.19). Only in some parts of
Sumatra and Kalimantan was the headcount measure markedly lower
than in Java.
The stabilisation policies carried out by Soeharto and his economics
team from 1966 to 1969 were very successful in reducing inflation to
single-digit levels, and in returning the economy to sustained economic
growth. Their effect on income disparities was more contentious. King
and Weldon (1977: 703–6) compared data on household income and
expenditures from several sources for Java over the years 1963–64 to 1970.
They found evidence of growing inequalities in urban areas (especially
Jakarta) although in rural areas the trend was far less marked. In 1964–65,
when inflation and economic dislocation were at their height, the Gini
coefficient of consumption expenditures in urban Java (excluding Jakarta)
was only 0.3; in 1967 it had fallen slightly to 0.29. But by 1969–70 it had
increased to 0.33. It appears that inflation and economic stagnation had a
more severe impact on urban workers, especially those with fixed incomes
such as civil servants. In rural areas, the better-off farmers with a surplus
of food to sell probably increased their incomes relative to both urban
workers and the rural poor. This would explain the quite low urban–
rural disparities in consumption expenditures that prevailed in the mid
1960s in Indonesia, and also the surprising finding that inequalities were
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Poverty and Inequality in the Soeharto Era: An Assessment
75
TABLE 1 Trends in the Gini Coefficient of Household per Capita
Consumption Expenditure
Year
1964–65
1969–70
1976
1978
1980
1981
1984
1987
1990
1993
1996
Urban
Rural
Urban and Rural
0.34
0.33
0.35
0.38
0.36
0.33
0.32
0.32
0.34
0.33
0.36
0.35
0.34
0.31
0.34
0.31
0.29
0.28
0.26
0.25
0.26
0.27
0.35
0.35
0.34
0.38
0.34
0.33
0.33
0.32
0.32
0.34
0.36
Sources: BPS, Statistical Yearbook of Indonesia, various issues; 1990–96: BPS (1997a).
actually lower in urban than in rural areas (Sundrum 1973: tables 5 and
7). These trends were reversed only slowly as inflation fell and economic
growth accelerated.
By 1969–70, the Gini coefficient of per capita consumption
expenditures in rural Indonesia was 0.34, indicating a moderate degree
of inequality. It was slightly lower in urban areas (table 1). International
comparisons are difficult, as data for other parts of the developing world
often refer to household income rather than expenditure.2 But there is
little reason to think that inequalities in rural Indonesia were much lower
than those in the rest of Asia, although they were probably lower than in
Latin America or Africa. In urban areas, the cost of living surveys carried
out in 1968–69 indicated that the Gini coefficient of household income
was close to, or rather greater than, 0.4 in Jakarta, Manado and Yogyakarta,
although it was lower in Bandung and Surabaya, and in most of the large
towns outside Java (table 2). Bearing in mind that the Gini coefficient of
urban household incomes in the Philippines in 1971 was 0.44, and that
that country is widely considered to have an unequal distribution of
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Anne Booth
76
TABLE 2 Urban Inequalities in Indonesia: Gini Coefficient of Household Income
1968–69a
1977–78
1989
Jakarta
Bandung
Semarang
Yogyakarta
Surabaya
0.40
0.35
n.a
0.43
0.35
0.40
0.43
0.40
0.44
0.41
0.41
0.41
0.41
0.41
0.44
Medan
Padang
Palembang
Pontianak
Banjarmasin
Manado
Ujung Pandang
Denpasar
Mataram
Kupang
0.36
n.a
0.36
n.a
0.33
0.40
n.a
0.32
n.a
n.a
0.36
0.31
0.32
0.36
0.35
0.35
0.42
0.35
0.37
0.40
0.36
0.35
0.37
0.37
0.36
0.37
0.38
0.35
0.43
0.38
Urban Philippines
0.50 (1965)
0.44 (1971)
0.43 (1988)
City
a
Data for Banjarmasin and Manado refer to 1970–71.
Sources: Sundrum (1974): table 23; BPS (1990): appendix 2. Philippines data from
Balisacan (1993): table 3.
income at least by Asian standards, it would appear that urban income
disparities in Indonesia’s larger towns and cities in the latter part of the
1960s were already quite marked.
Although the growth in per capita consumption expenditure that
occurred after 1968, combined with a slight fall in rural expenditure
inequalities, would have led to some decline in poverty in both urban
and rural Indonesia between 1964–65 and 1969–70, there was still
widespread concern about the problem of poverty, especially in rural
Java. Using the poverty lines proposed by Professor Sajogyo, Sundrum
and Booth (1980: table 7) estimated that 61% of the rural population in
Java was poor in 1970, and 21% destitute.3 In urban Java the percentage
considered destitute was 26%, while outside Java it was 21% in urban
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Poverty and Inequality in the Soeharto Era: An Assessment
77
areas and 15% in rural areas. While the Sajogyo poverty line was criticised
by some analysts, there could be little doubt that the incidence of poverty
was very high in many parts of Indonesia in 1970, whatever the poverty
line concept used (Esmara 1986: table 9.7). Ravallion and Datt (1996a:
2,480) point out that in 1970, using a comparable poverty line, India’s
headcount measure of poverty was very close to that of Indonesia. So
there can be little doubt that, in spite of the economic recovery that
occurred in the latter part of the 1960s, the great majority of Indonesians
were still poor by Asian standards when the first of the Soeharto era fiveyear plans got under way at the end of that decade.
GROWTH AND EQUITY DURING THE 1970s
The 1970s were, of course, the years when the rapid increase in the world
price of oil had important consequences for both economic growth and
income distribution in Indonesia. By the mid 1970s there was considerable
debate about the distributional consequences of the oil boom, especially
in rural areas of the country. It was argued that while the oil boom had
led to rapid growth in government expenditure, the benefits of this growth
were uneven by sector and region, with urban areas benefiting to a
disproportionate extent. In addition, several analysts were pointing to
the adverse consequences of the real appreciation of the rupiah (popularly
known as the ‘Dutch disease’) for the incomes of producers of non-oil
export commodities, especially in the agricultural sector (see, for example,
Paauw 1978, for an early statement of this argument). While the rice sector
was protected via import controls and producer subsidies, it was argued
that the oil boom was harming many millions of smallholder producers
of rubber, coffee, tea, pepper and copra. Even before the full effects of the
oil boom were felt, the very sharp increase in the price of rice that occurred
in 1972–73 was thought to have adversely affected the poorer segments
of the population, in whose consumption basket rice and other basic foods
had a higher weight. In short, there appeared to be plenty of evidence to
support the view that the oil boom was making the rich (especially in
urban areas) richer, while the poor might actually have become worse
off.
With the benefit of hindsight and some careful appraisals of the
statistical evidence, it now appears that the rapid inflation induced by
both the rice shock of 1972–73 and the onset of the oil boom did lead to
faster growth in the cost of the consumption basket consumed by the
bottom 40% of the expenditure distribution, especially in rural areas (Asra
1989: table 3). In addition, real per capita expenditure in rural Java on
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Anne Booth
78
TABLE 3 Headcount Measure of Poverty According to the
Central Bureau of Statistics Poverty Line, 1970–96
Year
1970a
1976
1978
1980
1981
1984
1987
1990
1993
1996
Percentage below
the Poverty Line
Numbers in Poverty
(millions)
Urban
Rural
Urban
Rural
Total
(53.6)
38.8
30.8
29.0
28.1
23.1
20.1
16.8
13.5
9.7
(38.7)
40.4
33.4
28.4
26.5
21.2
16.4
14.3
13.8
12.3
10.0
8.3
9.5
9.3
9.3
9.7
9.4
8.7
7.2
44.2
38.9
32.8
31.3
25.7
20.3
17.8
17.2
15.3
54.2
47.2
42.3
40.6
35.0
30.0
27.2
25.9
22.5
a
The 1970 estimates are derived from a poverty line based on the 1976 BPS poverty lines, deflated using the price indices for the bottom 40% of the expenditure
distribution, as estimated by Asra (1989): table 3.
Sources: BPS (1992): table 3.1; BPS (1994): table 3.1; Department of Information
(1998): table IV-1.
average declined between 1969–70 and 1976 (Booth 1992: table 10.2). Thus
the percentage of the population and the numbers falling below the official
poverty line actually increased in rural areas between 1970 and 1976 for
the country as a whole (table 3).
Inequalities, too, increased between 1969–70 and 1976, in both urban
and rural areas. As Asra (1989: table 1) has demonstrated, if the 1976
rural expenditure data are corrected for differential changes in prices by
decile groups, then rural expenditure inequalities increased in both Java
and the Outer Islands, rather than declining as shown in the unadjusted
data (table 1). In urban Java inequalities in expenditure also increased;
Booth and Sundrum (1981: table 7.22) estimate that expenditure in the
top decile group in urban Java grew by 66% between 1970 and 1976,
compared with an increase of less than 20% in the bottom decile groups.
On average, real per capita expenditure increased more rapidly in Jakarta
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Poverty and Inequality in the Soeharto Era: An Assessment
79
TABLE 4 BPS Poverty Line as a Percentage of Average per
Capita Consumption Expenditure, 1970–96
Year
Urban
Rural
1970
1976
1978
1980
1981
1984
1987
1990
1993
1996
86.3
66.7
53.9
56.0
58.1
54.5
52.0
46.8
43.6
38.0
67.4
72.9
63.0
61.7
62.5
58.1
57.0
54.7
54.6
51.9
Source: BPS, Survei Sosial Ekonomi Nasional (Susenas), various years; other sources
as for table 3.
than in other urban areas, and more rapidly in urban Java than in urban
areas of the Outer Islands (Booth and Sundrum 1981: table 7.20). A
consequence of these trends was a sharp increase in urban–rural
disparities, especially on Java and especially for non-food items.
Some of these trends were reversed in the years from 1976 to 1981.
Asra’s calculations suggest that between 1976 and 1981 the rate of inflation
was broadly similar for all decile groups in the expenditure distribution,
both in Java and elsewhere (Asra 1989: table 2). In rural areas there was a
discernible fall in expenditure inequality. In rural Java on average, real
per capita expenditure increased rapidly, although it fell in rural areas
outside Java (Booth 1992: table 10.2). The upshot of these trends was a
marked decline in the incidence of poverty in both urban and rural areas,
although because of faster population growth in urban areas, the numbers
under the official poverty line fell more sharply in rural areas (table 3).
By 1981 it was estimated that there were 40.6 million Indonesians under
the official poverty line, of whom 9.3 million were in urban areas.
Over the 1970s, average per capita consumption expenditure had
increased more rapidly than the official poverty line used by BPS (the
Central Bureau of Statistics, since renamed the Central Statistics Agency).
Whereas in 1970 the urban poverty line was over 86% of average per
capita expenditure, by 1980 it had fallen to only 56% (table 4). The fall in
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Anne Booth
80
TABLE 5 Estimates of Relative Poverty, 1970 and 1980
Proportion of Population Spending
Below 50% of Average per
Below 33% of Average per
Capita Consumption Expenditure Capita Consumption Expenditure
1970
1980
1970
1980
Urban
Java
Outer Islands
Indonesia
21.5
16.8
20.8
25.3
16.3
22.6
7.0
5.2
7.2
7.7
3.5
6.6
Rural
Java
Outer Islands
Indonesia
16.1
20.4
21.9
13.3
15.2
16.7
5.2
8.2
7.9
2.7
3.9
4.5
Urban + Rural
Java
Outer Islands
Indonesia
19.3
20.2
22.9
21.1
16.4
20.5
6.5
8.1
8.1
5.9
4.5
5.9
Sources: 1970: BPS (1973); 1980: BPS (1982a, 1982b).
rural areas relative to average per capita expenditure was less rapid but
still appreciable.4 Given these trends it is of some interest to look at trends
in relative poverty during the 1970s, where relative poverty is defined in
terms of the proportion of the population spending less than one half, or
less than one third, of average per capita consumption expenditure.5 In
urban Java, relative poverty defined in both these ways actually increased
between 1970 and 1980, although in urban areas of the Outer Islands and
in rural areas it fell (table 5).
Certainly the decline in the incidence of both absolute and relative
poverty in rural areas of Indonesia over the 1970s was a remarkable
achievement, especially in comparison with other petroleum economies
with substantial agricultural sectors. To what extent was it due to
government policy? It is certainly true that the oil boom did see an increase
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Poverty and Inequality in the Soeharto Era: An Assessment
81
in government expenditure, although little of this increase was explicitly
targeted to the poor. Even the regional development grants, or Inpres
grants as they came to be known, were not specifically designed to
alleviate poverty, but rather to give provincial and subprovincial levels
of government more scope to carry out much needed infrastructure
rehabilitation and development.6 After the mid 1970s, the employment
generated by the ‘Inpres kabupaten’ fell continuously (Asher and Booth
1992: table 2.12). The sharp fall in poverty over the latter part of the 1970s
was due in part to the successful stabilisation of food prices which,
especially in Java, meant that the poor experienced a lower rate of inflation
than the rich (Asra 1989: table 3). In addition, the growth in agricultural
production that occurred in the 1970s and early 1980s, in considerable
part due to the successful dissemination of new production technologies
in the foodcrop sector, created new employment opportunities in
production, processing and marketing. Indonesian agriculture remained
very unmechanised and labour intensive compared with agriculture in
most other parts of Asia well into the 1980s, because the small average
size of holdings made purchase of agricultural machinery uneconomic
for most farmers. In addition, the devaluations of 1978 and 1983 raised
the price of farm machinery and discouraged its adoption (Booth 1988:
181).
The oil boom also led to rapid growth of sectors producing non-traded
goods, such as construction and trade, and this growth provided
additional employment opportunities for unskilled workers. More and
more people from densely settled rural areas migrated to urban areas on
a temporary or permanent basis to seek work. The 1983 Agricultural
Census sample survey of farm incomes indicated that, on average, farm
households in some provinces in Java were receiving over half their
income from non-farm activities, including wage labour (BPS 1987:
table 9). In many provinces outside Java, reliance on farm income was
greater, reflecting both the larger average size of holdings, and the lower
availability of off-farm employment. The Social Accounting Matrices
(SAM) constructed by the BPS showed that in 1975, poor farm households
(defined as those controlling less than 0.5 hectares) received almost 40%
of their income from off-farm sources, and in absolute terms their offfarm income was higher than for medium or large farmers (table 6). This
was partly reversed in 1980, when medium farmers (those controlling
between 0.5 and one hectare) began to earn more in absolute terms from
off-farm activities than small farmers. But the growth in off-farm income
for small farmers was significant over these years, and must have played
a crucial role in pushing many thousands of households controlling small
amounts of land over the poverty threshold.
y [Universitas Maritim Raja Ali Haji], [UNIVERSITAS MARITIM RAJA ALI HAJI TANJUNGPINANG, KEPULAUAN RIAU] at 22:03 19
Anne Booth
82
TABLE 6 Sources of Income for Agricultural Households, 1975–98
Year
Poora
Mediuma
Percentage of total household income accruing from farm operation
1975
62.2
77.4
1980
72.2
64.4
1985
58.4
60.7
1990
52.9
60.5
1993
49.4
58.1
1998
26.2
32.8
Non-agricultural income per farm household (Rp ‘000)
1975
16.4
13.0
1980
38.0
55.5
1985
104.9
136.7
1990
266.8
270.1
1993
395.5
395.1
1998
1146.1
1341.3
Richa
88.9
86.4
85.3
53.4
50.6
34.8
9.4
27.5
83.3
491.0
733.8
1930.4
a
Poor farm households are those cultivating less than 0.5 hectares, medium, 0.5 to
one hectare, and rich, over one hectare.
Source: BPS (1996): table 4.37; BPS (1999): table 4.22.
The SAM tables also indicated that, over the decade 1975–85, per
capita incomes of farm labourer households (the poorest of the socioeconomic groups in the 1975 SAM) grew slightly faster than the national
average (table 7), while those of poor farmers (those operating less than
0.5 hectares) grew more slowly, so that by 1985 farm labourer households
were earning slightly more on average than poor farm households. But
middle and especially larger farmers had increased their incomes even
faster over these years, relative both to the national average and to
incomes of farm labourers. The income data collected in the 1976 Labour
Force Survey (Sakernas) indicated that, in both Java and the rest of the
country in 1976, the Gini coefficient of household income distribution
was in fact higher in rural than in urban areas, and higher for agricultural
households than for any other category of household (Sigit 1985: tables 2
and 3). Clearly we cannot assume that the distribution of incomes within
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Poverty and Inequality in the Soeharto Era: An Assessment
83
TABLE 7 Agricultural Household Incomes as a Percentage of the National Average,
1975–98
Year
1975
1980
1985
1990
1993
1995
1998
Labourer
52.1
50.8
57.8
49.3
37.9
29.1
28.8
Poora
Mediuma
56.2
66.5
55.3
65.1
61.3
45.9
47.4
75.0
76.9
82.7
78.6
73.0
58.9
61.0
Richa
110.2
98.8
133.9
122.9
119.1
86.5
90.6
a
See table 6 for definitions of ‘poor’, ‘medium’ and ‘rich’.
Source: BPS (1999): table 3.13.
the agricultural sector was especially egalitarian at the time the green
revolution was gathering pace in Indonesia in the mid 1970s. Neither
can we assume that agricultural household incomes became more equally
distributed as a result of the dissemination of the new agricultural
technologies, even if the years from 1976 to 1987 were characterised by
some decline in inequality in the distribution of per capita consumption
expenditures in rural areas (table 1).7
STRUCTURAL ADJUSTMENT POLICIES
AND POVERTY DECLINE, 1981–87
One of the most striking aspects of the decline in poverty in Indonesia
since the mid 1970s, as depicted in the official statistics, is that it continued
more or less regardless of changing macroeconomic policies. Between
1976 and 1981, the years of the oil boom, the annual average decline in
the numbers below the BPS poverty line was 5.6%. After 1981, Indonesia’s
revenues from oil exports began to fall, and the government adopted a
series of measures designed to increase non-oil exports, diversify the
domestic tax base, attract more foreign investment, deregulate the
financial sector, and improve the efficiency of public sector enterprises,
y [Universitas Maritim Raja Ali Haji], [UNIVERSITAS MARITIM RAJA ALI HAJI TANJUNGPINANG, KEPULAUAN RIAU] at 22:03 19
Anne Booth
84
TABLE 8 Estimates of Relative Poverty, 1970–96
Year
Urban
Rural
Urban + Rural
Percentage of the population spending:
Below 50% of average per capita consumption expenditure
1970
20.8
21.9
1980
22.6
16.7
1984
18.8
13.5
1987
18.1
10.0
1990
20.2
10.3
1993
19.8
9.5
1996
23.2
11.8
22.9
20.5
19.0
17.0
16.0
18.5
21.2
Below 33% of average per capita consumption expenditure
1970
7.2
7.9
1980
6.6
4.5
1984
4.9
3.7
1987
4.4
0.8
1990
4.1
2.3
1993
4.8
1.3
1996
6.0
1.2
8.1
5.9
4.0
2.9
2.4
3.0
5.0
Sources: BPS (1973); BPS, Statistical Yearbook of Indonesia, various issues; BPS (1997a).
measures which have been much discussed (e.g. Pangestu 1991; Azis
1994). Over the years from 1981 to 1987, GDP growth was lower than in
the oil boom years, and government expenditures were cut back. But in
spite of fiscal austerity and slower GDP growth, the annual percentage
decline in the numbers under the official poverty line was only slightly
slower than in the oil boom years. In addition, the incidence of relative
poverty declined, in both urban and rural areas (table 8).
The Indonesian experience of 1981–87 has attracted considerable
attention as one of the few examples of a sustained program of
macroeconomic policy reform, along the lines advocated by the World
Bank and the IMF, that has not had an adverse effect on poverty (Stewart
1995: 206–8; Thorbecke et al. 1992). 8 Thorbecke et al. (1992: 135–6)
developed a structural adjustment model for Indonesia that simulated
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Poverty and Inequality in the Soeharto Era: An Assessment
85
the impact of several different retrenchment policies in the 1983–87 period.
They found that the policy package actually adopted came quite close to
the most favourable simulation in terms of the impact on poverty. They
argued that a more drastic budget retrenchment ‘would have resulted in
overkill. Economic stagnation and a worsening income distribution would
have been a very high price to pay for maintaining the level of public
debt prevailing at the outset of the crisis’.
The budget cuts implemented after 1981 were most severe in the more
capital-intensive sectors such as energy, transmigration and grants to
public enterprises, which did not have much direct impact on
employment (Asher and Booth 1992: table 2.7). Government expenditure
as a share of GDP (estimated in international dollars; see note 1) fell from
16.1% in 1982 to 14.5% in 1984, and remained at around this level for the
rest of the 1980s.9 Indonesia in fact managed to maintain a reasonably
expansionary fiscal stance between 1982 and 1988 while at the same time
keeping inflation in check in the wake of two substantial devaluations,
thus engineering a substantial real devaluation over these years (Intal
1992: 113). One reason was that domestic monetary growth was held
down, although not at the expense of the credit needs of the export sector.
In addition, the government relied on foreign borrowing to balance the
budget, which reduced the necessity for borrowing from the domestic
monetary authorities with potentially inflationary consequences.
Well judged macroeconomic policy thus created an environment in
which producers could take advantage of the opportunities created by
the large real devaluation to expand traded goods production. At the
same time, improved infrastructure and flexible labour markets made it
easy for people to move to take advantage of new employment
opportunities, or indeed to diversify their sources of income while staying
in rural areas. In their analysis of the Susenas for 1984 and 1987, Huppi
and Ravallion (1991: 1,672–3) stressed the importance of increasing wage
incomes for poor self-employed farmers in Central and East Java. These
two provinces accounted for over half the total income gains made by
the rural farming poor in the country as a whole over these three years.
Outside Java, where wage earning opportunities were less abundant,
there was less income diversification, and ‘wage earnings were of little
importance in poverty alleviation’ (Huppi and Ravallion 1991: 1,673).
THE RETURN TO RAPID GROWTH, 1987–96
Over the period 1981–87, Indonesia managed to achieve a substantial
real devaluation without a severe domestic recession. What Intal (1992)
termed the policy of ‘aggressively adjusting the exchange rate’ as the
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Anne Booth
86
TABLE 9 Regional Breakdown of GDP, Population and Poverty Incidence, 1996
(%)
Region
GDPa
Population
Poor
Population
Poverty
Incidenceb
Jakarta
Java/Bali
‘Mining four’c
Sumatra
Kalimantan
Sulawesi
Eastern islandsd
16.0
45.5
14.1
13.7
4.1
4.3
2.3
4.7
55.4
6.3
17.1
4.2
7.1
5.2
1.0
56.1
6.2
15.6
6.4
5.4
9.3
2.5
11.5
11.2
10.3
17.1
8.6
20.2
100.0
100.0
100.0
11.3
Indonesia
a
GDP data are provisional.
’Poverty incidence’ refers to the percentage of the population under the BPS
poverty line in 1996.
c
Provinces of Aceh, Riau, East Kalimantan and Irian Jaya.
d
Provinces of West and East Nusa Tenggara, East Timor and Maluku.
b
Sources: Department of Information (1998): table IV-4; BPS (1997b).
terms of trade declined thus paid off. Non-oil export industries grew
rapidly, in response to both the real depreciation of the rupiah and the
other reforms aimed at improving incentives for exporters, including the
introduction of a duty drawback scheme. The government was also able
to push through major tax reforms and, in 1988, a substantial deregulation
of the financial system (Nasution 1993; Cole and Slade 1996: 109–15). But
although these reforms ushered in a period of faster GDP growth after
1987, which was sustained right up until 1997, the years from 1987 to
1996 witnessed a slower decline in the numbers under the BPS poverty
line. This was especially true in rural areas: whereas from 1976 to 1987
the number of people below the official poverty line in rural areas declined
at almost 7% per annum, between 1987 and 1996 the annual rate of decline
slowed to just over 3% per annum. Drawing attention to this slowdown
in a speech in 1994, President Soeharto suggested that increasingly the
poor were isolated in ‘pockets of poverty’ which government
development programs were not reaching. By the mid 1990s it was
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Poverty and Inequality in the Soeharto Era: An Assessment
87
TABLE 10 Estimates of Relative Poverty, 1987 and 1996
Proportion of Population Spending below 50% of
Average per Capita Consumption Expenditure
1987
1996
Urban areas
Jakarta
West Java
Central Java
East Java
North Sumatra
South Sumatra
South Sulawesi
Indonesia
13.9
16.9
13.3
18.3
12.5
11.0
12.8
18.1
22.1
23.9
15.2
16.4
13.8
15.7
16.0
23.2
Rural areas
Indonesia
10.0
11.8
Whole country
17.0
21.2
Sources: BPS, Statistical Yearbook of Indonesia (1989, 1996); BPS (1997a).
obvious that these pockets of poverty were located in many parts of the
archipelago and not just in Java: in 1996 the incidence of poverty was
higher in Kalimantan and Eastern Indonesia than in Java and Bali (table 9).
The unadjusted household survey data show a rise in inequalities in
urban per capita consumption expenditure between 1990 and 1996
(table 1). The household income data collected in the urban cost of living
surveys (not yet available for the 1990s) show more or less constant
inequality in Jakarta from the late 1960s until the late 1980s, but an increase
in the Gini coefficient in Bandung and Surabaya (table 2). Although the
proportion of the population under the official poverty line continued to
fall in both urban and rural areas, there was an increase in the incidence
of relative poverty (defined as the proportion of the population spending
less than half the monthly average) in most parts of the country. It was
especially pronounced in Jakarta, and in urban areas of West Java
(table 10). The rapid population growth of greater Jakarta, and of other
large cities in Java, due mainly to a huge influx of migrants, has obviously
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Anne Booth
led to sharper disparities in consumption expenditure and living
standards.
In their study of trends in household expenditure inequalities in
Indonesia between 1987 and 1993, Akita, Lukman and Yamada (1999:
table III) demonstrate that both Theil and Gini indices increased in urban
areas over these years, although most of the increase occurred between
1987 and 1990. There was a slight decline in rural inequalities. These
authors decomposed the Theil indices by region and by educational
achievement. They found, perhaps surprisingly, that interprovincial
inequalities are not a major factor in overall national inequalities,
confirming earlier results which showed that interprovincial disparities
in household expenditures are far smaller than interprovincial disparities
in GDP (Akita and Lukman 1995). They argued that rural–urban
inequalities accounted for a much larger share of overall inequalities and
thus that policies aimed at reducing them should be given high priority.
They also argued that educational attainment was a significant
determinant of expenditure inequality, accounting for around 33% of total
inequalities by 1993. This finding was confirmed by Cameron (1999: 26),
who concluded from her analysis of the household expenditure data for
1984 and 1990 that ‘increased educational attainment was the largest
single determinant of the inequality increase’ over these years. The policy
implications of these findings are examined in the next section.
Between 1993 and 1996, the Gini coefficient of per capita expenditure
in urban Indonesia increased from 0.33 to 0.36; in rural Indonesia it
increased only slightly, and remained much lower than that for urban
areas (table 1). The increase in relative poverty in rural areas was also
much more modest; by 1996 the proportion of the rural population
spending less than half of average expenditure was about half that in
urban areas (table 10). Some students of rural change in Indonesia find
the evidence of quite low expenditure inequalities hard to accept. It must
be stressed again that these data refer to expenditure only, not to income
or wealth, and attention has already been drawn to the evidence that
income inequalities in rural areas of Indonesia in the mid 1970s were
much higher than inequalities in per capita consumption expenditure
(Sigit 1985). 10 There is also evidence that since the mid 1980s the
mechanisms promoting an egalitarian distribution of income in rural areas
may have been working less effectively than in the decade 1975–85.
For example the SAM data show that, between 1985 and 1998, incomes
from off-farm employment rose faster for richer farmers than for poorer
ones. By 1993, farmers owning more than one hectare of land were earning
about the same proportion of their total income from off-farm activities
as were farmers owning less than half a hectare, but the absolute amount
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Poverty and Inequality in the Soeharto Era: An Assessment
89
was much larger (table 6). Indeed household incomes for all types of
farm households were lower relative to the national average in 1993 than
they were in 1990, but only for farm labouring households were they
much lower than in 1975 (table 7). To the extent that off-farm employment
was having an equalising effect on rural incomes in the late 1970s and
early 1980s, this was apparently no longer the case by the early 1990s.
The 1990s also saw a steep decline in all agricultural incomes relative to
the national average, but the decline was sharpest for agricultural labourer
households (table 7). By 1998, per capita disposable incomes in farms
operating more than one hectare of land were over three times those of
farm labourer households, compared with less than twice in 1980 (BPS
1999: table 3.14). But the SAM data also show that disparities widened
between rural and urban areas and especially between the rural poor
and the urban well-to-do. In 1985 the ‘upper stratum’ of urban households
had an average disposable income per capita of less than four times that
of agricultural labour households; by 1998 it was 9.5 times the level of
agricultural labour households.11
THE CHANGING TRADE-OFF BETWEEN
GROWTH AND EQUITY IN INDONESIA
The lesson of the years from 1987 to 1996 would seem to be that the
elasticity of poverty decline with respect to economic growth fell in
Indonesia. In other words, the rapid growth of these years was
accompanied by increasing inequality, especially in urban areas, and this
increase in inequality reduced the impact of the growth on poverty
decline.12 Much more analysis of the available data is needed before we
can arrive at convincing explanations for this, but several hypotheses
suggest themselves.
• Since 1987, the manufacturing and modern service sectors have
been the principal engines of growth in the Indonesian economy;
the agricultural sector has been relegated to a secondary role in
policy debates, and receives a falling share of budgetary resources.
In other parts of Asia, it has been argued that the sectoral
composition of economic growth has an important effect on
poverty reduction. Ravallion and Datt (1996b: 19) argue that in
India both primary and tertiary growth have ‘reduced poverty
nationally and within urban and rural areas’, whereas secondary
sector growth has had little discernible impact on poverty
reduction. Thus at least part of the reason why growth has been
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90
Anne Booth
less pro-poor in Indonesia since 1987 could be that it has relied
less on agriculture and more on industry.
• Another reason put forward in some official documents, and
espoused by former President Soeharto, is that increasingly since
the mid 1980s, the poor in Indonesia have been located in remote
regions outside Java, and unable to benefit from Java’s rapid
manufacturing-based growth. To the extent that these regions are
characterised by poor soils, erratic rainfall and poor market access,
they have not benefited much from agricultural modernisation
either. According to this explanation, there is nothing inherently
anti-poor about manufacturing-led growth, but if people are
caught in isolated poverty traps which are not connected to the
more dynamic parts of the economy, and from which they cannot
escape, then they cannot benefit from such growth.
• A third reason why growth has been less egalitarian in Indonesia
since the latter part of the 1980s concerns access to education, and
especially what may be termed ‘international quality higher
education’. People with degrees from the most prestigious
domestic universities or from overseas, especially in disciplines
such as medicine, accountancy and engineering, have been able
to command considerable ‘rents’ in the booming private sector,
and their incomes have increased relative to those in other parts
of the urban labour force. In spite of the rapid growth in
educational enrolments at all levels in Indonesia since the 1970s,
access to international quality higher education, or even good
quality secondary education, was still severely limited in the late
1980s and early 1990s, and these rents were not dissipated through
increased supply. This explains the findings of several analysts
that educational disparities contributed significantly to overall
expenditure inequalities in these years.
As far as the first explanation is concerned, Ravallion and Datt (1996b:
19) stress that the Indian result, that capital-intensive industrialisation
behind extremely high protectionist barriers had negligible benefits for
the poor, is hardly surprising. In other economies, such as Taiwan, where
the early phase of industrialisation was more oriented to export markets,
and based on more labour-intensive production technologies, the sectoral
shift from agriculture to industry did not lead to a perceptible increase in
income inequalities. In fact they declined between 1953 and 1972 (Kuo
1975). Indonesia after 1987 can be viewed as an intermediate case between
India and Taiwan: although exports of labour-intensive manufactures
grew rapidly, a substantial part of manufacturing value added was still
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Poverty and Inequality in the Soeharto Era: An Assessment
91
produced in sectors enjoying high levels of protection and quite capitalintensive production technologies. Thus although there was a significant
increase in the manufacturing labour force over these years, and indeed
over the entire period from 1971 to 1995, the rate of growth was not as
fast as in Taiwan or South Korea (Manning 1998: 93–4).13
The second explanation, based on the notion of ‘pockets of poverty’,
also has considerable empirical support. By 1996, 43% of the poor
population were outside Java and Bali; over 20% were in Kalimantan,
Sulawesi and the eastern islands (East and West Nusa Tenggara, East
Timor and Maluku). There seems to be little doubt that relatively
backward agriculture, combined with small holding sizes, was one
explanation for the high incidence of rural poverty in these regions. The
results of an OLS (ordinary least squares) regression analysis, shown in
table 11, indicate that a large part of the interprovincial variation in rural
poverty in Indonesia in 1993 can be explained by just three variables:
average holding size, value added per hectare in smallholder agriculture,
and the proportion of total value added in smallholder agriculture
accruing from foodcrop agriculture. In those provinces where per hectare
agricultural productivity is low, and this is not compensated by larger
holding sizes, and where a higher proportion of agricultural value added
accrues from the foodcrop sector than from treecrops, the poverty problem
is likely to be worse than the national average. By contrast, in the densely
settled provinces of Java/Bali, low holding sizes are more than
compensated for by high per hectare productivity, so that agricultural
value added per farm household is higher and, in addition, off-farm
sources of income are more plentiful. Thus rural poverty levels are lower.14
The policy implication of this is that agricultural and rural
development policies which raise per hectare productivity or holding
sizes should be given high priority in those parts of the Outer Islands
where the incidence of poverty is high. This is not just because agricultural
growth in itself helps to alleviate poverty, but also because it fuels the
growth of off-farm employment. Indeed, the Indonesian government has
in recent years given priority to agricultural development outside Java,
especially in Eastern Indonesia. But the problems associated with both
extensive and intensive agricultural development outside Java remain
formidable. The biophysical environment in Eastern Indonesia is much
less favourable to intensive agricultural development, and the seedfertiliser-water technologies that worked well in Java and the well
irrigated parts of Sumatra and Sulawesi are not easily transferable to the
more arid climate that prevails in many of the eastern islands, nor to the
soils of Kalimantan. In addition, the distribution of land is more skewed
in many parts of the Outer Islands than in Java, and the benefits of
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Anne Booth
92
TABLE 11 OLS Regression Results: Dependent Variable Rural Poverty, 1993
(headcount measure; all provinces)
Equationsa
Explanatory
Variables
1
2
AHS
–0.638
(–2.015)
–0.977
(–3.283)
PLF
–0.0668
(–0.104)
–0.1554
(–0.2246)
AHH
–0.6996
(–0.2468)
0.0404
(0.1336)
VA
–0.949
(–4.513)
–1.0037
(–4.4262)
GLF
0.2626
(0.5698)
FVA
0.8115
(2.139)
R2 (adjusted)
F-statistic
SE of regression
0.579
3
4
–0.548
(–2.105)
–0.844
(–3.256)
–0.9239
(–5.1157)
–0.9756
(–4.884)
0.4974
(1.0233)
0.8522
(2.549)
0.5043
0.6288
0.5401
F (6,19)
6.742
F (5,20)
6.087
F (3,22)
15.119
F (2,23)
15.68
0.2635
0.286
0.248
0.276
a
All equations estimated using logs of variables; t ratios given in brackets.
AHS: average holding size.
PLF: percentage of the rural labour force employed in agriculture.
AHH: percentage of agricultural households with more than 70% of household
income derived from on-farm activities.
VA: value added per hectare in smallholder agriculture.
GLF: growth of the agricultural labour force, 1986–94.
FVA: percentage of total value added in smallholder agriculture from
foodcrops.
Sources: Poverty data taken from BPS (1994); data on value added in agriculture
from BPS (1997b); other agricultural data from BPS (1995a, 1995b). Labour force
data from Sakernas, 1986 and 1994.
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Poverty and Inequality in the Soeharto Era: An Assessment
93
agricultural development policies are more likely to accrue in the first
instance to the non-poor population.15
The third hypothesis I have suggested to explain the fall in the
elasticity of poverty decline with respect to GDP growth relates to access
to education. Since the late 1960s, Indonesia has witnessed an enormous
expansion of educational opportunities at all levels. This expansion has
been driven by greatly increased provision of facilities by both the
government and the private sector; in addition, parental demand for
education has expanded, although this increase has not been uniform by
region or by social class. As in most other Asian countries, public subsidies
per student rise sharply by level of education. In the mid 1980s, the
cumulative public subsidy per student in higher education was more
than four times the subsidy to students in primary education (Tan and
Mingat 1992: 80).16 Several analyses of household survey data have shown
that enrolments at the primary level vary little by income decile, but at
the secondary and tertiary levels the disparity is very marked (Gertler
and Rahman 1994: table 4.10; King 1997: 169; Oey-Gardiner 1997: 152–3).
King’s analysis shows that government subsidies for primary education
are quite strongly pro-poor, because primary-aged children represent
twice as large a fraction of the population in the poorest deciles as in the
richest, but at the secondary and tertiary levels, especially the latter, the
benefits of public subsidies are skewed very heavily towards the richest
decile. But public subsidies do not cover the full cost of education even
at the primary level. Parental ‘top-up’ contributions have long been
required by government schools, and these fees are a higher proportion
of household expenditure in poor households (Gertler and Rahman 1994:
180).
In Indonesia, as in most other parts of the developing world, education
is viewed by parents as a crucial channel of social mobility, and the level
of education is clearly an important determinant of lifetime earnings. In
1996, an employee with university qualifications was earning, on average,
more than three times as much as an employee who had only completed
primary education (table 12). Thus, as far as an individual is concerned,
the higher the level of educational attainment that he or she can reach,
the higher the expected earnings stream over a lifetime. But at the national
level this simple relationship must be modified. The earnings of any
particular type of worker are determined, ultimately, by supply and
demand, and if the supply of workers with, for example, post-secondary
qualifications increases relative to demand, their earnings can be expected
to fall. It is clear from table 12 that the very high dispersion of earnings
by educational attainment that was found in Indonesia in the 1970s was
in fact compressed during the 1980s, as the supply of workers with at
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Anne Booth
94
TABLE 12 Monthly Employee Remuneration by Educational Level
(Rp ‘000)
No schooling
Not completed primary
Completed primary
Lower secondary (general)
Lower secondary (vocational)
Upper secondary (general)
Upper secondary (vocational)
Diploma I/II
Diploma III/Academy
University
Average
a
1976
1986
1996
7.5a
35.4a
92.1
122.4
145.7
186.7
209.3
256.3
263.4
333.2
419.0
487.5
12.7
22.4
21.4
31.3
24.9
57.6b
51.3
77.7
76.4
99.0
93.6
105.7
152.4b
12.4
63.3
207.1
Average for no schooling and incomplete primary.
Average for academy and university.
b
Sourc
ISSN: 0007-4918 (Print) 1472-7234 (Online) Journal homepage: http://www.tandfonline.com/loi/cbie20
Poverty and Inequality in The Soeharto Era: An
Assessment
Anne Booth
To cite this article: Anne Booth (2000) Poverty and Inequality in The Soeharto
Era: An Assessment, Bulletin of Indonesian Economic Studies, 36:1, 73-104, DOI:
10.1080/00074910012331337793
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Bulletin of Indonesian Economic Studies
Vol 36 No 1, April 2000, pp. 73–104
POVERTY AND INEQUALITY IN THE
SOEHARTO ERA: AN ASSESSMENT
Anne Booth*
School of Oriental and African Studies, London
This paper surveys the evidence on trends in poverty and inequality during
the years of Soeharto’s presidency. That Indonesia saw a decline in the
incidence of poverty, and improvements in other welfare indicators such
as infant mortality rates and literacy rates over these years, seems
indisputable. Comparative studies show that by the latter part of the 1980s,
the headcount measure of poverty in Indonesia was below that in the
Philippines although above that in Malaysia and Thailand. But relative
poverty has declined more slowly, and indeed increased in some urban
areas between 1987 and 1996. The paper also examines evidence on the
determinants of rural poverty in Indonesia in 1993, and suggests that rural
development programs targeted to the specific needs of poor people in
poor areas will be essential if rural poverty is to be further reduced in
future years.
Thee Kian Wie is an economic historian by training, and although much
of his own research has been contemporary in focus, he has never lost
his enthusiasm for the historical study of economic development, both
in Indonesia and in other parts of the world. As Soeharto’s ‘New Order’
fades into history, I trust that he will appreciate a paper which explores
how one important aspect of the New Order’s economic record might be
evaluated by future economic historians. Certainly, in the Indonesian
context, no one individual since van den Bosch has stamped his
personality on the economic policies of an era as has Soeharto and, right
up until the crisis hit in late 1997, it was the economic achievements that
above all others conferred legitimacy on his regime. My view is that these
achievements were substantial, and in spite of the severe economic
contraction of 1998–99 they will endure. But they are by no means fully
understood, and indeed I would argue that they have often been
misrepresented by defenders and critics alike. A full examination of
Soeharto’s economic legacy is obviously beyond the scope of a journal
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74
Anne Booth
article; my more limited aim here is to review some of the evidence relating
to poverty and income distribution, and to discuss the policy implications
of this evidence.
THE SITUATION IN THE 1960s
How poor were Indonesians in March 1966, when the New Order
effectively began? The available evidence indicates that they were very
poor indeed. Per capita income in Indonesia was well below that of other
Southeast Asian economies for which reliable data are available; indeed
real per capita GDP is estimated to have been only 535 international
dollars (1985 prices) in 1966, compared with 650 dollars in India.1 The
time series compiled by van der Eng (1992: table A-4) shows that real per
capita GDP (in 1983 rupiah) was about the same in 1965–67 as in 1911–13.
The household survey data collected between November 1964 and
February 1965 indicated that in much of Java over half the rural
population fell below a very modest poverty line set in terms of the price
of cereals (20 kg per capita per month). The situation was little better in
urban areas. Outside Java the incidence of poverty was on average lower,
although in Bali, Northern Sulawesi and West Nusa Tenggara it was little
different from that in Java (Booth 1988: table 4.19). Only in some parts of
Sumatra and Kalimantan was the headcount measure markedly lower
than in Java.
The stabilisation policies carried out by Soeharto and his economics
team from 1966 to 1969 were very successful in reducing inflation to
single-digit levels, and in returning the economy to sustained economic
growth. Their effect on income disparities was more contentious. King
and Weldon (1977: 703–6) compared data on household income and
expenditures from several sources for Java over the years 1963–64 to 1970.
They found evidence of growing inequalities in urban areas (especially
Jakarta) although in rural areas the trend was far less marked. In 1964–65,
when inflation and economic dislocation were at their height, the Gini
coefficient of consumption expenditures in urban Java (excluding Jakarta)
was only 0.3; in 1967 it had fallen slightly to 0.29. But by 1969–70 it had
increased to 0.33. It appears that inflation and economic stagnation had a
more severe impact on urban workers, especially those with fixed incomes
such as civil servants. In rural areas, the better-off farmers with a surplus
of food to sell probably increased their incomes relative to both urban
workers and the rural poor. This would explain the quite low urban–
rural disparities in consumption expenditures that prevailed in the mid
1960s in Indonesia, and also the surprising finding that inequalities were
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Poverty and Inequality in the Soeharto Era: An Assessment
75
TABLE 1 Trends in the Gini Coefficient of Household per Capita
Consumption Expenditure
Year
1964–65
1969–70
1976
1978
1980
1981
1984
1987
1990
1993
1996
Urban
Rural
Urban and Rural
0.34
0.33
0.35
0.38
0.36
0.33
0.32
0.32
0.34
0.33
0.36
0.35
0.34
0.31
0.34
0.31
0.29
0.28
0.26
0.25
0.26
0.27
0.35
0.35
0.34
0.38
0.34
0.33
0.33
0.32
0.32
0.34
0.36
Sources: BPS, Statistical Yearbook of Indonesia, various issues; 1990–96: BPS (1997a).
actually lower in urban than in rural areas (Sundrum 1973: tables 5 and
7). These trends were reversed only slowly as inflation fell and economic
growth accelerated.
By 1969–70, the Gini coefficient of per capita consumption
expenditures in rural Indonesia was 0.34, indicating a moderate degree
of inequality. It was slightly lower in urban areas (table 1). International
comparisons are difficult, as data for other parts of the developing world
often refer to household income rather than expenditure.2 But there is
little reason to think that inequalities in rural Indonesia were much lower
than those in the rest of Asia, although they were probably lower than in
Latin America or Africa. In urban areas, the cost of living surveys carried
out in 1968–69 indicated that the Gini coefficient of household income
was close to, or rather greater than, 0.4 in Jakarta, Manado and Yogyakarta,
although it was lower in Bandung and Surabaya, and in most of the large
towns outside Java (table 2). Bearing in mind that the Gini coefficient of
urban household incomes in the Philippines in 1971 was 0.44, and that
that country is widely considered to have an unequal distribution of
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76
TABLE 2 Urban Inequalities in Indonesia: Gini Coefficient of Household Income
1968–69a
1977–78
1989
Jakarta
Bandung
Semarang
Yogyakarta
Surabaya
0.40
0.35
n.a
0.43
0.35
0.40
0.43
0.40
0.44
0.41
0.41
0.41
0.41
0.41
0.44
Medan
Padang
Palembang
Pontianak
Banjarmasin
Manado
Ujung Pandang
Denpasar
Mataram
Kupang
0.36
n.a
0.36
n.a
0.33
0.40
n.a
0.32
n.a
n.a
0.36
0.31
0.32
0.36
0.35
0.35
0.42
0.35
0.37
0.40
0.36
0.35
0.37
0.37
0.36
0.37
0.38
0.35
0.43
0.38
Urban Philippines
0.50 (1965)
0.44 (1971)
0.43 (1988)
City
a
Data for Banjarmasin and Manado refer to 1970–71.
Sources: Sundrum (1974): table 23; BPS (1990): appendix 2. Philippines data from
Balisacan (1993): table 3.
income at least by Asian standards, it would appear that urban income
disparities in Indonesia’s larger towns and cities in the latter part of the
1960s were already quite marked.
Although the growth in per capita consumption expenditure that
occurred after 1968, combined with a slight fall in rural expenditure
inequalities, would have led to some decline in poverty in both urban
and rural Indonesia between 1964–65 and 1969–70, there was still
widespread concern about the problem of poverty, especially in rural
Java. Using the poverty lines proposed by Professor Sajogyo, Sundrum
and Booth (1980: table 7) estimated that 61% of the rural population in
Java was poor in 1970, and 21% destitute.3 In urban Java the percentage
considered destitute was 26%, while outside Java it was 21% in urban
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Poverty and Inequality in the Soeharto Era: An Assessment
77
areas and 15% in rural areas. While the Sajogyo poverty line was criticised
by some analysts, there could be little doubt that the incidence of poverty
was very high in many parts of Indonesia in 1970, whatever the poverty
line concept used (Esmara 1986: table 9.7). Ravallion and Datt (1996a:
2,480) point out that in 1970, using a comparable poverty line, India’s
headcount measure of poverty was very close to that of Indonesia. So
there can be little doubt that, in spite of the economic recovery that
occurred in the latter part of the 1960s, the great majority of Indonesians
were still poor by Asian standards when the first of the Soeharto era fiveyear plans got under way at the end of that decade.
GROWTH AND EQUITY DURING THE 1970s
The 1970s were, of course, the years when the rapid increase in the world
price of oil had important consequences for both economic growth and
income distribution in Indonesia. By the mid 1970s there was considerable
debate about the distributional consequences of the oil boom, especially
in rural areas of the country. It was argued that while the oil boom had
led to rapid growth in government expenditure, the benefits of this growth
were uneven by sector and region, with urban areas benefiting to a
disproportionate extent. In addition, several analysts were pointing to
the adverse consequences of the real appreciation of the rupiah (popularly
known as the ‘Dutch disease’) for the incomes of producers of non-oil
export commodities, especially in the agricultural sector (see, for example,
Paauw 1978, for an early statement of this argument). While the rice sector
was protected via import controls and producer subsidies, it was argued
that the oil boom was harming many millions of smallholder producers
of rubber, coffee, tea, pepper and copra. Even before the full effects of the
oil boom were felt, the very sharp increase in the price of rice that occurred
in 1972–73 was thought to have adversely affected the poorer segments
of the population, in whose consumption basket rice and other basic foods
had a higher weight. In short, there appeared to be plenty of evidence to
support the view that the oil boom was making the rich (especially in
urban areas) richer, while the poor might actually have become worse
off.
With the benefit of hindsight and some careful appraisals of the
statistical evidence, it now appears that the rapid inflation induced by
both the rice shock of 1972–73 and the onset of the oil boom did lead to
faster growth in the cost of the consumption basket consumed by the
bottom 40% of the expenditure distribution, especially in rural areas (Asra
1989: table 3). In addition, real per capita expenditure in rural Java on
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TABLE 3 Headcount Measure of Poverty According to the
Central Bureau of Statistics Poverty Line, 1970–96
Year
1970a
1976
1978
1980
1981
1984
1987
1990
1993
1996
Percentage below
the Poverty Line
Numbers in Poverty
(millions)
Urban
Rural
Urban
Rural
Total
(53.6)
38.8
30.8
29.0
28.1
23.1
20.1
16.8
13.5
9.7
(38.7)
40.4
33.4
28.4
26.5
21.2
16.4
14.3
13.8
12.3
10.0
8.3
9.5
9.3
9.3
9.7
9.4
8.7
7.2
44.2
38.9
32.8
31.3
25.7
20.3
17.8
17.2
15.3
54.2
47.2
42.3
40.6
35.0
30.0
27.2
25.9
22.5
a
The 1970 estimates are derived from a poverty line based on the 1976 BPS poverty lines, deflated using the price indices for the bottom 40% of the expenditure
distribution, as estimated by Asra (1989): table 3.
Sources: BPS (1992): table 3.1; BPS (1994): table 3.1; Department of Information
(1998): table IV-1.
average declined between 1969–70 and 1976 (Booth 1992: table 10.2). Thus
the percentage of the population and the numbers falling below the official
poverty line actually increased in rural areas between 1970 and 1976 for
the country as a whole (table 3).
Inequalities, too, increased between 1969–70 and 1976, in both urban
and rural areas. As Asra (1989: table 1) has demonstrated, if the 1976
rural expenditure data are corrected for differential changes in prices by
decile groups, then rural expenditure inequalities increased in both Java
and the Outer Islands, rather than declining as shown in the unadjusted
data (table 1). In urban Java inequalities in expenditure also increased;
Booth and Sundrum (1981: table 7.22) estimate that expenditure in the
top decile group in urban Java grew by 66% between 1970 and 1976,
compared with an increase of less than 20% in the bottom decile groups.
On average, real per capita expenditure increased more rapidly in Jakarta
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79
TABLE 4 BPS Poverty Line as a Percentage of Average per
Capita Consumption Expenditure, 1970–96
Year
Urban
Rural
1970
1976
1978
1980
1981
1984
1987
1990
1993
1996
86.3
66.7
53.9
56.0
58.1
54.5
52.0
46.8
43.6
38.0
67.4
72.9
63.0
61.7
62.5
58.1
57.0
54.7
54.6
51.9
Source: BPS, Survei Sosial Ekonomi Nasional (Susenas), various years; other sources
as for table 3.
than in other urban areas, and more rapidly in urban Java than in urban
areas of the Outer Islands (Booth and Sundrum 1981: table 7.20). A
consequence of these trends was a sharp increase in urban–rural
disparities, especially on Java and especially for non-food items.
Some of these trends were reversed in the years from 1976 to 1981.
Asra’s calculations suggest that between 1976 and 1981 the rate of inflation
was broadly similar for all decile groups in the expenditure distribution,
both in Java and elsewhere (Asra 1989: table 2). In rural areas there was a
discernible fall in expenditure inequality. In rural Java on average, real
per capita expenditure increased rapidly, although it fell in rural areas
outside Java (Booth 1992: table 10.2). The upshot of these trends was a
marked decline in the incidence of poverty in both urban and rural areas,
although because of faster population growth in urban areas, the numbers
under the official poverty line fell more sharply in rural areas (table 3).
By 1981 it was estimated that there were 40.6 million Indonesians under
the official poverty line, of whom 9.3 million were in urban areas.
Over the 1970s, average per capita consumption expenditure had
increased more rapidly than the official poverty line used by BPS (the
Central Bureau of Statistics, since renamed the Central Statistics Agency).
Whereas in 1970 the urban poverty line was over 86% of average per
capita expenditure, by 1980 it had fallen to only 56% (table 4). The fall in
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80
TABLE 5 Estimates of Relative Poverty, 1970 and 1980
Proportion of Population Spending
Below 50% of Average per
Below 33% of Average per
Capita Consumption Expenditure Capita Consumption Expenditure
1970
1980
1970
1980
Urban
Java
Outer Islands
Indonesia
21.5
16.8
20.8
25.3
16.3
22.6
7.0
5.2
7.2
7.7
3.5
6.6
Rural
Java
Outer Islands
Indonesia
16.1
20.4
21.9
13.3
15.2
16.7
5.2
8.2
7.9
2.7
3.9
4.5
Urban + Rural
Java
Outer Islands
Indonesia
19.3
20.2
22.9
21.1
16.4
20.5
6.5
8.1
8.1
5.9
4.5
5.9
Sources: 1970: BPS (1973); 1980: BPS (1982a, 1982b).
rural areas relative to average per capita expenditure was less rapid but
still appreciable.4 Given these trends it is of some interest to look at trends
in relative poverty during the 1970s, where relative poverty is defined in
terms of the proportion of the population spending less than one half, or
less than one third, of average per capita consumption expenditure.5 In
urban Java, relative poverty defined in both these ways actually increased
between 1970 and 1980, although in urban areas of the Outer Islands and
in rural areas it fell (table 5).
Certainly the decline in the incidence of both absolute and relative
poverty in rural areas of Indonesia over the 1970s was a remarkable
achievement, especially in comparison with other petroleum economies
with substantial agricultural sectors. To what extent was it due to
government policy? It is certainly true that the oil boom did see an increase
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Poverty and Inequality in the Soeharto Era: An Assessment
81
in government expenditure, although little of this increase was explicitly
targeted to the poor. Even the regional development grants, or Inpres
grants as they came to be known, were not specifically designed to
alleviate poverty, but rather to give provincial and subprovincial levels
of government more scope to carry out much needed infrastructure
rehabilitation and development.6 After the mid 1970s, the employment
generated by the ‘Inpres kabupaten’ fell continuously (Asher and Booth
1992: table 2.12). The sharp fall in poverty over the latter part of the 1970s
was due in part to the successful stabilisation of food prices which,
especially in Java, meant that the poor experienced a lower rate of inflation
than the rich (Asra 1989: table 3). In addition, the growth in agricultural
production that occurred in the 1970s and early 1980s, in considerable
part due to the successful dissemination of new production technologies
in the foodcrop sector, created new employment opportunities in
production, processing and marketing. Indonesian agriculture remained
very unmechanised and labour intensive compared with agriculture in
most other parts of Asia well into the 1980s, because the small average
size of holdings made purchase of agricultural machinery uneconomic
for most farmers. In addition, the devaluations of 1978 and 1983 raised
the price of farm machinery and discouraged its adoption (Booth 1988:
181).
The oil boom also led to rapid growth of sectors producing non-traded
goods, such as construction and trade, and this growth provided
additional employment opportunities for unskilled workers. More and
more people from densely settled rural areas migrated to urban areas on
a temporary or permanent basis to seek work. The 1983 Agricultural
Census sample survey of farm incomes indicated that, on average, farm
households in some provinces in Java were receiving over half their
income from non-farm activities, including wage labour (BPS 1987:
table 9). In many provinces outside Java, reliance on farm income was
greater, reflecting both the larger average size of holdings, and the lower
availability of off-farm employment. The Social Accounting Matrices
(SAM) constructed by the BPS showed that in 1975, poor farm households
(defined as those controlling less than 0.5 hectares) received almost 40%
of their income from off-farm sources, and in absolute terms their offfarm income was higher than for medium or large farmers (table 6). This
was partly reversed in 1980, when medium farmers (those controlling
between 0.5 and one hectare) began to earn more in absolute terms from
off-farm activities than small farmers. But the growth in off-farm income
for small farmers was significant over these years, and must have played
a crucial role in pushing many thousands of households controlling small
amounts of land over the poverty threshold.
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Anne Booth
82
TABLE 6 Sources of Income for Agricultural Households, 1975–98
Year
Poora
Mediuma
Percentage of total household income accruing from farm operation
1975
62.2
77.4
1980
72.2
64.4
1985
58.4
60.7
1990
52.9
60.5
1993
49.4
58.1
1998
26.2
32.8
Non-agricultural income per farm household (Rp ‘000)
1975
16.4
13.0
1980
38.0
55.5
1985
104.9
136.7
1990
266.8
270.1
1993
395.5
395.1
1998
1146.1
1341.3
Richa
88.9
86.4
85.3
53.4
50.6
34.8
9.4
27.5
83.3
491.0
733.8
1930.4
a
Poor farm households are those cultivating less than 0.5 hectares, medium, 0.5 to
one hectare, and rich, over one hectare.
Source: BPS (1996): table 4.37; BPS (1999): table 4.22.
The SAM tables also indicated that, over the decade 1975–85, per
capita incomes of farm labourer households (the poorest of the socioeconomic groups in the 1975 SAM) grew slightly faster than the national
average (table 7), while those of poor farmers (those operating less than
0.5 hectares) grew more slowly, so that by 1985 farm labourer households
were earning slightly more on average than poor farm households. But
middle and especially larger farmers had increased their incomes even
faster over these years, relative both to the national average and to
incomes of farm labourers. The income data collected in the 1976 Labour
Force Survey (Sakernas) indicated that, in both Java and the rest of the
country in 1976, the Gini coefficient of household income distribution
was in fact higher in rural than in urban areas, and higher for agricultural
households than for any other category of household (Sigit 1985: tables 2
and 3). Clearly we cannot assume that the distribution of incomes within
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83
TABLE 7 Agricultural Household Incomes as a Percentage of the National Average,
1975–98
Year
1975
1980
1985
1990
1993
1995
1998
Labourer
52.1
50.8
57.8
49.3
37.9
29.1
28.8
Poora
Mediuma
56.2
66.5
55.3
65.1
61.3
45.9
47.4
75.0
76.9
82.7
78.6
73.0
58.9
61.0
Richa
110.2
98.8
133.9
122.9
119.1
86.5
90.6
a
See table 6 for definitions of ‘poor’, ‘medium’ and ‘rich’.
Source: BPS (1999): table 3.13.
the agricultural sector was especially egalitarian at the time the green
revolution was gathering pace in Indonesia in the mid 1970s. Neither
can we assume that agricultural household incomes became more equally
distributed as a result of the dissemination of the new agricultural
technologies, even if the years from 1976 to 1987 were characterised by
some decline in inequality in the distribution of per capita consumption
expenditures in rural areas (table 1).7
STRUCTURAL ADJUSTMENT POLICIES
AND POVERTY DECLINE, 1981–87
One of the most striking aspects of the decline in poverty in Indonesia
since the mid 1970s, as depicted in the official statistics, is that it continued
more or less regardless of changing macroeconomic policies. Between
1976 and 1981, the years of the oil boom, the annual average decline in
the numbers below the BPS poverty line was 5.6%. After 1981, Indonesia’s
revenues from oil exports began to fall, and the government adopted a
series of measures designed to increase non-oil exports, diversify the
domestic tax base, attract more foreign investment, deregulate the
financial sector, and improve the efficiency of public sector enterprises,
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TABLE 8 Estimates of Relative Poverty, 1970–96
Year
Urban
Rural
Urban + Rural
Percentage of the population spending:
Below 50% of average per capita consumption expenditure
1970
20.8
21.9
1980
22.6
16.7
1984
18.8
13.5
1987
18.1
10.0
1990
20.2
10.3
1993
19.8
9.5
1996
23.2
11.8
22.9
20.5
19.0
17.0
16.0
18.5
21.2
Below 33% of average per capita consumption expenditure
1970
7.2
7.9
1980
6.6
4.5
1984
4.9
3.7
1987
4.4
0.8
1990
4.1
2.3
1993
4.8
1.3
1996
6.0
1.2
8.1
5.9
4.0
2.9
2.4
3.0
5.0
Sources: BPS (1973); BPS, Statistical Yearbook of Indonesia, various issues; BPS (1997a).
measures which have been much discussed (e.g. Pangestu 1991; Azis
1994). Over the years from 1981 to 1987, GDP growth was lower than in
the oil boom years, and government expenditures were cut back. But in
spite of fiscal austerity and slower GDP growth, the annual percentage
decline in the numbers under the official poverty line was only slightly
slower than in the oil boom years. In addition, the incidence of relative
poverty declined, in both urban and rural areas (table 8).
The Indonesian experience of 1981–87 has attracted considerable
attention as one of the few examples of a sustained program of
macroeconomic policy reform, along the lines advocated by the World
Bank and the IMF, that has not had an adverse effect on poverty (Stewart
1995: 206–8; Thorbecke et al. 1992). 8 Thorbecke et al. (1992: 135–6)
developed a structural adjustment model for Indonesia that simulated
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Poverty and Inequality in the Soeharto Era: An Assessment
85
the impact of several different retrenchment policies in the 1983–87 period.
They found that the policy package actually adopted came quite close to
the most favourable simulation in terms of the impact on poverty. They
argued that a more drastic budget retrenchment ‘would have resulted in
overkill. Economic stagnation and a worsening income distribution would
have been a very high price to pay for maintaining the level of public
debt prevailing at the outset of the crisis’.
The budget cuts implemented after 1981 were most severe in the more
capital-intensive sectors such as energy, transmigration and grants to
public enterprises, which did not have much direct impact on
employment (Asher and Booth 1992: table 2.7). Government expenditure
as a share of GDP (estimated in international dollars; see note 1) fell from
16.1% in 1982 to 14.5% in 1984, and remained at around this level for the
rest of the 1980s.9 Indonesia in fact managed to maintain a reasonably
expansionary fiscal stance between 1982 and 1988 while at the same time
keeping inflation in check in the wake of two substantial devaluations,
thus engineering a substantial real devaluation over these years (Intal
1992: 113). One reason was that domestic monetary growth was held
down, although not at the expense of the credit needs of the export sector.
In addition, the government relied on foreign borrowing to balance the
budget, which reduced the necessity for borrowing from the domestic
monetary authorities with potentially inflationary consequences.
Well judged macroeconomic policy thus created an environment in
which producers could take advantage of the opportunities created by
the large real devaluation to expand traded goods production. At the
same time, improved infrastructure and flexible labour markets made it
easy for people to move to take advantage of new employment
opportunities, or indeed to diversify their sources of income while staying
in rural areas. In their analysis of the Susenas for 1984 and 1987, Huppi
and Ravallion (1991: 1,672–3) stressed the importance of increasing wage
incomes for poor self-employed farmers in Central and East Java. These
two provinces accounted for over half the total income gains made by
the rural farming poor in the country as a whole over these three years.
Outside Java, where wage earning opportunities were less abundant,
there was less income diversification, and ‘wage earnings were of little
importance in poverty alleviation’ (Huppi and Ravallion 1991: 1,673).
THE RETURN TO RAPID GROWTH, 1987–96
Over the period 1981–87, Indonesia managed to achieve a substantial
real devaluation without a severe domestic recession. What Intal (1992)
termed the policy of ‘aggressively adjusting the exchange rate’ as the
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Anne Booth
86
TABLE 9 Regional Breakdown of GDP, Population and Poverty Incidence, 1996
(%)
Region
GDPa
Population
Poor
Population
Poverty
Incidenceb
Jakarta
Java/Bali
‘Mining four’c
Sumatra
Kalimantan
Sulawesi
Eastern islandsd
16.0
45.5
14.1
13.7
4.1
4.3
2.3
4.7
55.4
6.3
17.1
4.2
7.1
5.2
1.0
56.1
6.2
15.6
6.4
5.4
9.3
2.5
11.5
11.2
10.3
17.1
8.6
20.2
100.0
100.0
100.0
11.3
Indonesia
a
GDP data are provisional.
’Poverty incidence’ refers to the percentage of the population under the BPS
poverty line in 1996.
c
Provinces of Aceh, Riau, East Kalimantan and Irian Jaya.
d
Provinces of West and East Nusa Tenggara, East Timor and Maluku.
b
Sources: Department of Information (1998): table IV-4; BPS (1997b).
terms of trade declined thus paid off. Non-oil export industries grew
rapidly, in response to both the real depreciation of the rupiah and the
other reforms aimed at improving incentives for exporters, including the
introduction of a duty drawback scheme. The government was also able
to push through major tax reforms and, in 1988, a substantial deregulation
of the financial system (Nasution 1993; Cole and Slade 1996: 109–15). But
although these reforms ushered in a period of faster GDP growth after
1987, which was sustained right up until 1997, the years from 1987 to
1996 witnessed a slower decline in the numbers under the BPS poverty
line. This was especially true in rural areas: whereas from 1976 to 1987
the number of people below the official poverty line in rural areas declined
at almost 7% per annum, between 1987 and 1996 the annual rate of decline
slowed to just over 3% per annum. Drawing attention to this slowdown
in a speech in 1994, President Soeharto suggested that increasingly the
poor were isolated in ‘pockets of poverty’ which government
development programs were not reaching. By the mid 1990s it was
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87
TABLE 10 Estimates of Relative Poverty, 1987 and 1996
Proportion of Population Spending below 50% of
Average per Capita Consumption Expenditure
1987
1996
Urban areas
Jakarta
West Java
Central Java
East Java
North Sumatra
South Sumatra
South Sulawesi
Indonesia
13.9
16.9
13.3
18.3
12.5
11.0
12.8
18.1
22.1
23.9
15.2
16.4
13.8
15.7
16.0
23.2
Rural areas
Indonesia
10.0
11.8
Whole country
17.0
21.2
Sources: BPS, Statistical Yearbook of Indonesia (1989, 1996); BPS (1997a).
obvious that these pockets of poverty were located in many parts of the
archipelago and not just in Java: in 1996 the incidence of poverty was
higher in Kalimantan and Eastern Indonesia than in Java and Bali (table 9).
The unadjusted household survey data show a rise in inequalities in
urban per capita consumption expenditure between 1990 and 1996
(table 1). The household income data collected in the urban cost of living
surveys (not yet available for the 1990s) show more or less constant
inequality in Jakarta from the late 1960s until the late 1980s, but an increase
in the Gini coefficient in Bandung and Surabaya (table 2). Although the
proportion of the population under the official poverty line continued to
fall in both urban and rural areas, there was an increase in the incidence
of relative poverty (defined as the proportion of the population spending
less than half the monthly average) in most parts of the country. It was
especially pronounced in Jakarta, and in urban areas of West Java
(table 10). The rapid population growth of greater Jakarta, and of other
large cities in Java, due mainly to a huge influx of migrants, has obviously
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Anne Booth
led to sharper disparities in consumption expenditure and living
standards.
In their study of trends in household expenditure inequalities in
Indonesia between 1987 and 1993, Akita, Lukman and Yamada (1999:
table III) demonstrate that both Theil and Gini indices increased in urban
areas over these years, although most of the increase occurred between
1987 and 1990. There was a slight decline in rural inequalities. These
authors decomposed the Theil indices by region and by educational
achievement. They found, perhaps surprisingly, that interprovincial
inequalities are not a major factor in overall national inequalities,
confirming earlier results which showed that interprovincial disparities
in household expenditures are far smaller than interprovincial disparities
in GDP (Akita and Lukman 1995). They argued that rural–urban
inequalities accounted for a much larger share of overall inequalities and
thus that policies aimed at reducing them should be given high priority.
They also argued that educational attainment was a significant
determinant of expenditure inequality, accounting for around 33% of total
inequalities by 1993. This finding was confirmed by Cameron (1999: 26),
who concluded from her analysis of the household expenditure data for
1984 and 1990 that ‘increased educational attainment was the largest
single determinant of the inequality increase’ over these years. The policy
implications of these findings are examined in the next section.
Between 1993 and 1996, the Gini coefficient of per capita expenditure
in urban Indonesia increased from 0.33 to 0.36; in rural Indonesia it
increased only slightly, and remained much lower than that for urban
areas (table 1). The increase in relative poverty in rural areas was also
much more modest; by 1996 the proportion of the rural population
spending less than half of average expenditure was about half that in
urban areas (table 10). Some students of rural change in Indonesia find
the evidence of quite low expenditure inequalities hard to accept. It must
be stressed again that these data refer to expenditure only, not to income
or wealth, and attention has already been drawn to the evidence that
income inequalities in rural areas of Indonesia in the mid 1970s were
much higher than inequalities in per capita consumption expenditure
(Sigit 1985). 10 There is also evidence that since the mid 1980s the
mechanisms promoting an egalitarian distribution of income in rural areas
may have been working less effectively than in the decade 1975–85.
For example the SAM data show that, between 1985 and 1998, incomes
from off-farm employment rose faster for richer farmers than for poorer
ones. By 1993, farmers owning more than one hectare of land were earning
about the same proportion of their total income from off-farm activities
as were farmers owning less than half a hectare, but the absolute amount
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Poverty and Inequality in the Soeharto Era: An Assessment
89
was much larger (table 6). Indeed household incomes for all types of
farm households were lower relative to the national average in 1993 than
they were in 1990, but only for farm labouring households were they
much lower than in 1975 (table 7). To the extent that off-farm employment
was having an equalising effect on rural incomes in the late 1970s and
early 1980s, this was apparently no longer the case by the early 1990s.
The 1990s also saw a steep decline in all agricultural incomes relative to
the national average, but the decline was sharpest for agricultural labourer
households (table 7). By 1998, per capita disposable incomes in farms
operating more than one hectare of land were over three times those of
farm labourer households, compared with less than twice in 1980 (BPS
1999: table 3.14). But the SAM data also show that disparities widened
between rural and urban areas and especially between the rural poor
and the urban well-to-do. In 1985 the ‘upper stratum’ of urban households
had an average disposable income per capita of less than four times that
of agricultural labour households; by 1998 it was 9.5 times the level of
agricultural labour households.11
THE CHANGING TRADE-OFF BETWEEN
GROWTH AND EQUITY IN INDONESIA
The lesson of the years from 1987 to 1996 would seem to be that the
elasticity of poverty decline with respect to economic growth fell in
Indonesia. In other words, the rapid growth of these years was
accompanied by increasing inequality, especially in urban areas, and this
increase in inequality reduced the impact of the growth on poverty
decline.12 Much more analysis of the available data is needed before we
can arrive at convincing explanations for this, but several hypotheses
suggest themselves.
• Since 1987, the manufacturing and modern service sectors have
been the principal engines of growth in the Indonesian economy;
the agricultural sector has been relegated to a secondary role in
policy debates, and receives a falling share of budgetary resources.
In other parts of Asia, it has been argued that the sectoral
composition of economic growth has an important effect on
poverty reduction. Ravallion and Datt (1996b: 19) argue that in
India both primary and tertiary growth have ‘reduced poverty
nationally and within urban and rural areas’, whereas secondary
sector growth has had little discernible impact on poverty
reduction. Thus at least part of the reason why growth has been
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less pro-poor in Indonesia since 1987 could be that it has relied
less on agriculture and more on industry.
• Another reason put forward in some official documents, and
espoused by former President Soeharto, is that increasingly since
the mid 1980s, the poor in Indonesia have been located in remote
regions outside Java, and unable to benefit from Java’s rapid
manufacturing-based growth. To the extent that these regions are
characterised by poor soils, erratic rainfall and poor market access,
they have not benefited much from agricultural modernisation
either. According to this explanation, there is nothing inherently
anti-poor about manufacturing-led growth, but if people are
caught in isolated poverty traps which are not connected to the
more dynamic parts of the economy, and from which they cannot
escape, then they cannot benefit from such growth.
• A third reason why growth has been less egalitarian in Indonesia
since the latter part of the 1980s concerns access to education, and
especially what may be termed ‘international quality higher
education’. People with degrees from the most prestigious
domestic universities or from overseas, especially in disciplines
such as medicine, accountancy and engineering, have been able
to command considerable ‘rents’ in the booming private sector,
and their incomes have increased relative to those in other parts
of the urban labour force. In spite of the rapid growth in
educational enrolments at all levels in Indonesia since the 1970s,
access to international quality higher education, or even good
quality secondary education, was still severely limited in the late
1980s and early 1990s, and these rents were not dissipated through
increased supply. This explains the findings of several analysts
that educational disparities contributed significantly to overall
expenditure inequalities in these years.
As far as the first explanation is concerned, Ravallion and Datt (1996b:
19) stress that the Indian result, that capital-intensive industrialisation
behind extremely high protectionist barriers had negligible benefits for
the poor, is hardly surprising. In other economies, such as Taiwan, where
the early phase of industrialisation was more oriented to export markets,
and based on more labour-intensive production technologies, the sectoral
shift from agriculture to industry did not lead to a perceptible increase in
income inequalities. In fact they declined between 1953 and 1972 (Kuo
1975). Indonesia after 1987 can be viewed as an intermediate case between
India and Taiwan: although exports of labour-intensive manufactures
grew rapidly, a substantial part of manufacturing value added was still
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Poverty and Inequality in the Soeharto Era: An Assessment
91
produced in sectors enjoying high levels of protection and quite capitalintensive production technologies. Thus although there was a significant
increase in the manufacturing labour force over these years, and indeed
over the entire period from 1971 to 1995, the rate of growth was not as
fast as in Taiwan or South Korea (Manning 1998: 93–4).13
The second explanation, based on the notion of ‘pockets of poverty’,
also has considerable empirical support. By 1996, 43% of the poor
population were outside Java and Bali; over 20% were in Kalimantan,
Sulawesi and the eastern islands (East and West Nusa Tenggara, East
Timor and Maluku). There seems to be little doubt that relatively
backward agriculture, combined with small holding sizes, was one
explanation for the high incidence of rural poverty in these regions. The
results of an OLS (ordinary least squares) regression analysis, shown in
table 11, indicate that a large part of the interprovincial variation in rural
poverty in Indonesia in 1993 can be explained by just three variables:
average holding size, value added per hectare in smallholder agriculture,
and the proportion of total value added in smallholder agriculture
accruing from foodcrop agriculture. In those provinces where per hectare
agricultural productivity is low, and this is not compensated by larger
holding sizes, and where a higher proportion of agricultural value added
accrues from the foodcrop sector than from treecrops, the poverty problem
is likely to be worse than the national average. By contrast, in the densely
settled provinces of Java/Bali, low holding sizes are more than
compensated for by high per hectare productivity, so that agricultural
value added per farm household is higher and, in addition, off-farm
sources of income are more plentiful. Thus rural poverty levels are lower.14
The policy implication of this is that agricultural and rural
development policies which raise per hectare productivity or holding
sizes should be given high priority in those parts of the Outer Islands
where the incidence of poverty is high. This is not just because agricultural
growth in itself helps to alleviate poverty, but also because it fuels the
growth of off-farm employment. Indeed, the Indonesian government has
in recent years given priority to agricultural development outside Java,
especially in Eastern Indonesia. But the problems associated with both
extensive and intensive agricultural development outside Java remain
formidable. The biophysical environment in Eastern Indonesia is much
less favourable to intensive agricultural development, and the seedfertiliser-water technologies that worked well in Java and the well
irrigated parts of Sumatra and Sulawesi are not easily transferable to the
more arid climate that prevails in many of the eastern islands, nor to the
soils of Kalimantan. In addition, the distribution of land is more skewed
in many parts of the Outer Islands than in Java, and the benefits of
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Anne Booth
92
TABLE 11 OLS Regression Results: Dependent Variable Rural Poverty, 1993
(headcount measure; all provinces)
Equationsa
Explanatory
Variables
1
2
AHS
–0.638
(–2.015)
–0.977
(–3.283)
PLF
–0.0668
(–0.104)
–0.1554
(–0.2246)
AHH
–0.6996
(–0.2468)
0.0404
(0.1336)
VA
–0.949
(–4.513)
–1.0037
(–4.4262)
GLF
0.2626
(0.5698)
FVA
0.8115
(2.139)
R2 (adjusted)
F-statistic
SE of regression
0.579
3
4
–0.548
(–2.105)
–0.844
(–3.256)
–0.9239
(–5.1157)
–0.9756
(–4.884)
0.4974
(1.0233)
0.8522
(2.549)
0.5043
0.6288
0.5401
F (6,19)
6.742
F (5,20)
6.087
F (3,22)
15.119
F (2,23)
15.68
0.2635
0.286
0.248
0.276
a
All equations estimated using logs of variables; t ratios given in brackets.
AHS: average holding size.
PLF: percentage of the rural labour force employed in agriculture.
AHH: percentage of agricultural households with more than 70% of household
income derived from on-farm activities.
VA: value added per hectare in smallholder agriculture.
GLF: growth of the agricultural labour force, 1986–94.
FVA: percentage of total value added in smallholder agriculture from
foodcrops.
Sources: Poverty data taken from BPS (1994); data on value added in agriculture
from BPS (1997b); other agricultural data from BPS (1995a, 1995b). Labour force
data from Sakernas, 1986 and 1994.
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Poverty and Inequality in the Soeharto Era: An Assessment
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agricultural development policies are more likely to accrue in the first
instance to the non-poor population.15
The third hypothesis I have suggested to explain the fall in the
elasticity of poverty decline with respect to GDP growth relates to access
to education. Since the late 1960s, Indonesia has witnessed an enormous
expansion of educational opportunities at all levels. This expansion has
been driven by greatly increased provision of facilities by both the
government and the private sector; in addition, parental demand for
education has expanded, although this increase has not been uniform by
region or by social class. As in most other Asian countries, public subsidies
per student rise sharply by level of education. In the mid 1980s, the
cumulative public subsidy per student in higher education was more
than four times the subsidy to students in primary education (Tan and
Mingat 1992: 80).16 Several analyses of household survey data have shown
that enrolments at the primary level vary little by income decile, but at
the secondary and tertiary levels the disparity is very marked (Gertler
and Rahman 1994: table 4.10; King 1997: 169; Oey-Gardiner 1997: 152–3).
King’s analysis shows that government subsidies for primary education
are quite strongly pro-poor, because primary-aged children represent
twice as large a fraction of the population in the poorest deciles as in the
richest, but at the secondary and tertiary levels, especially the latter, the
benefits of public subsidies are skewed very heavily towards the richest
decile. But public subsidies do not cover the full cost of education even
at the primary level. Parental ‘top-up’ contributions have long been
required by government schools, and these fees are a higher proportion
of household expenditure in poor households (Gertler and Rahman 1994:
180).
In Indonesia, as in most other parts of the developing world, education
is viewed by parents as a crucial channel of social mobility, and the level
of education is clearly an important determinant of lifetime earnings. In
1996, an employee with university qualifications was earning, on average,
more than three times as much as an employee who had only completed
primary education (table 12). Thus, as far as an individual is concerned,
the higher the level of educational attainment that he or she can reach,
the higher the expected earnings stream over a lifetime. But at the national
level this simple relationship must be modified. The earnings of any
particular type of worker are determined, ultimately, by supply and
demand, and if the supply of workers with, for example, post-secondary
qualifications increases relative to demand, their earnings can be expected
to fall. It is clear from table 12 that the very high dispersion of earnings
by educational attainment that was found in Indonesia in the 1970s was
in fact compressed during the 1980s, as the supply of workers with at
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94
TABLE 12 Monthly Employee Remuneration by Educational Level
(Rp ‘000)
No schooling
Not completed primary
Completed primary
Lower secondary (general)
Lower secondary (vocational)
Upper secondary (general)
Upper secondary (vocational)
Diploma I/II
Diploma III/Academy
University
Average
a
1976
1986
1996
7.5a
35.4a
92.1
122.4
145.7
186.7
209.3
256.3
263.4
333.2
419.0
487.5
12.7
22.4
21.4
31.3
24.9
57.6b
51.3
77.7
76.4
99.0
93.6
105.7
152.4b
12.4
63.3
207.1
Average for no schooling and incomplete primary.
Average for academy and university.
b
Sourc