Three Essays on Poverty and Polarization in Indonesia
Author: Alvin Pratama
Publisher:
Published: 2013
Total Pages: 198
ISBN-13:
DOWNLOAD EBOOKThis dissertation examines the poverty line, the levels and trends of income polarization, and the relationship between income polarization and economic growth in Indonesia. The first essay takes a close look at the data, methodology, and implications of the way in which the national poverty line and indices were calculated rather than simply accepting these figures as givens. Several key findings are as follows. First, the disclosure of two data sets from the Central Bureau of Statistics (CBS) and the significant differences between them in 2008 and 2009 explain why attempts to replicate the official poverty figures often fail. Second, the number of food items in the food poverty basket is the most sensitive assumption affecting the poverty line. Finally, an alternative method used to estimate Indonesia's poverty line shows not only a higher level but also a different trend than the official poverty line data for 2008 to 2010. The second essay studies the level of national and regional polarization in Indonesia and its evolution from 2000 to 2010, and compares polarization measures with traditional inequality measures. Our results show that polarization and inequality generally move in the same direction; however, there are certain periods in which the two move in opposite directions. Another key finding is that, since 2000, Indonesia has rapidly become more polarized in terms of consumption expenditures at the national and regional levels. One possible explanation for this rapid increase in polarization is that the expenditures of the rich have risen much more quickly than those of the poor. We find that polarization was substantially high when fuel subsidy cuts occurred in 2002, 2005, and 2008. The compensation programs that followed fuel subsidy cuts assisted the poor (and the non-poor due to large leakages) and reduced polarization, but only temporarily. Fuel subsidy cuts saved the government's budget from deteriorating; however, they clearly exacerbated polarization indicating that maintaining the government's fiscal position was prioritized over improving socioeconomic conditions. Lastly, the third essay analyzes the link between income polarization and economic growth. Despite Indonesia's rapid economic growth in the last decade, regional differences in growth remain substantial. It is shown that provinces with higher polarization tend to have lower subsequent growth, which exacerbates polarization further. Our findings also suggest that better institutions are associated with lower polarization; weak local institutions tend to favor large firms whose owners are politically and economically powerful. The collusions between local leaders and large firms often turn a blind eye to environmental degradation and other social issues. Institutional factors including legal certainty, regional finance, government services, and local regulations clearly play an important role in reducing polarization. To the extent that rising polarization could be harmful from the perspectives of socio-political and future growth prospect, the importance of countering this trend of rising polarization should be seriously considered in efforts to promote growth.
