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Faculty of Economics and Business


Mudrajad Kuncoro, Prof. Dr., M.Soc. Sc.

Group member:
Amelia Putri Santosa


Annisa Rahmawati


Sjors Van Uden


Thomas Gerrit Agterhuis


Poverty is worldwide a big problem. Poverty is a multifaceted concept which contains the
characteristics of a lack of healthcare, lack of nutrition, lack of education, lack of shelter and lack of
future. It is a worldwide problem, but mostly in developing countries. In the last 40 years there has
been quite some progress, relatively less and less people live in poverty. There again, there are
multiple ways to measure it, and different perspectives whether or not someone lives in poverty. In
this report we will look at the global level of poverty, and poverty in Indonesia.

1. Definition..........................................................................................................................................4
2. Poverty Measurement........................................................................................................................7
3. Reduction of Poverty.........................................................................................................................9
4. The Importance of Reducing Poverty..............................................................................................14
5. The Difference between Urban and Rural Poverty..........................................................................15
6. Poverty in the World........................................................................................................................17
7. Poverty in Indonesia........................................................................................................................18
8. Government Program.......................................................................................................................23
9. Conclusion.......................................................................................................................................24
10. References.....................................................................................................................................25

1. Definition
Poverty is hunger. Poverty is lack of shelter. Poverty is being sick and not being able to see a
doctor. Poverty is not having access to school and not knowing how to read. Poverty is not
having a job, is fear for the future, living one day at a time.
Poverty has many faces, changing from place to place and across time, and has been described
in many ways. Most often, poverty is a situation people want to escape. So poverty is a call to
action -- for the poor and the wealthy alike -- a call to change the world so that many more may
have enough to eat, adequate shelter, access to education and health, protection from violence,
and a voice in what happens in their communities.
- World Bank
The deprivation in well-being:

Low income, inability to meet basic needs for survival with dignity

Low levels of health and education, inaccessible clean water

Inadequate physical security, lack of speech, lack of reading

No chance for a better future

There are 3 kinds of poverty:

a. Absolute
Absolute poverty, is the standards which are consistent over time and are valid in
every country. It was introduced in 1990. From then on absolute poverty was measured by the
one dollar a day poverty line. In 2008 it was adjusted to $1.25, and in 2015 $1.90. The term
absolute poverty is a synonym for extreme poverty. A condition so limited by malnutrition,
not being able to read and or write, bad health, high infant mortality and low life expectancy.
The absolute poverty line has a major downside. Because the purchasing power of $1
is not the same throughout the world, many countries have their own poverty line. For
instance, one can buy a lot more from $1 in sub-Saharan Africa, than in New-Zealand.
The World Bank states that living on $1 or less a day means extreme poverty.
Between $2-5 is categorized as moderate poverty. Because of the purchasing power difference
across countries, the World Bank measures not only with $1, but with how much one can buy
with $1 and how much local currency is required to buy the same goods.

The number of people living in absolute poverty was 1.95 billion in 1981, or 43% of
the world population. In 2011, this number was reduced to 1.01 billion, which is (only) 14%.
Almost the same number of people as 200 years ago live in poverty right now, despite the
massive growth in world population. In 1820 the world was inhabited by 1 billion people,
which made the percentage of people in absolute poverty almost 90%.



Source: Earthtrends (2006)

b. Relative
Relative poverty looks at poverty in a social context. It is impossible to draw a line
worldwide. Whether someone lives in poverty is dependent on his or her social context. This
means that poverty is a measure of inequality of income. It is mostly measured as the
percentage of people with an income below a fixed proportion of the median income in a
Big Mac Index
From the US$1 is equal to 13.113 but the implied PPP is just Rp6.151. Thus, rupiah is
undervalued exchange rate with US dollar by 53.1%.

2. Poverty Measurement
For measuring absolute poverty we use poverty line from Statistics Indonesia
(BPS) and World Bank while relative poverty we use Purchasing Power Parity (PPP)
which is the law of one price.
BPS Poverty Line
BPS uses basic needs approach and headcount index. The first approach is more
common to use so poverty is the incapability of people from economic concern to fulfill
their daily needs. The indicator consists of two parts: food and non-food poverty line.
Food poverty line is set to achieve a caloric intake of 2100 calories per person per day.
Non-food poverty line is the sum of scaled values across the 27 commodities. Finally, the
poverty line is obtained by summing up the food and non-food poverty lines. Hence,
poor people are people who have average income per capita and per month below
poverty line.
There are 14 variables in BPS indicator, they are:
1. Floor area
2. Type of the floor
3. Type of the wall
4. Toilet facility
5. Drinking water resources
6. The use of lighting
7. The use of fuel oil
8. Frequency of eating
9. Frequency of buying meat/chicken/milk
10. Capability to buy clothes
11. Capability to afford health facility
12. Employment of head family
13. Head family education
14. Asset

World Bank Poverty Line

World Bank has two criteria in order to determine poverty line. First, they use
the consumption 2100 calories per day. Second, poverty line based on PPP US$1 and
The most commonly used measure is the poverty line. Like discussed before, many
countries have their own poverty line in their own currency. But still, if adjusted for purchasing
power, it enables one to get a good overview of poverty across the globe.
Poverty Headcount Ratio at $1.90 A Day (2011 PPP) (% of Population)

Source: Wikimedia
Commons (2006)

3. Reduction of Poverty
How to reduce poverty?
Poverty reduction is not only about statistics, but it also has a social, humanitarian
factor. Poverty reduction is a set of actions that are projected to permanently lift people
out of poverty. Especially the permanent part is important, because a lot of people in
Indonesia live just above the poverty line, as defined by the World Bank. A small change
can cause them to rapidly fall back in to poverty. According to the United Nations (UN),
poverty is a condition resulting from sever deprivation of basic human needs such as
food, shelter, safe drinking water, sanitation, health, education and information. Because
of the multifaceted reality, there is not one universal way to solve poverty, a more
comprehensive approach is needed to face the problem of poverty.
Poverty reduction
Poverty reduction over the world has been mostly a result of overall economic
growth across the world. Shortages of food were very common before the industrial
revolution started. Modern agricultural technology made it possible to work in a larger
and more efficient scale, resulting in a higher availability of food. This led to high
economic growth in the 19th and 20th century, reducing the mass poverty in what is
nowadays called the developed world. World GDP per person has doubled itself 5 times
during the 20th century.
Economic growth only aids until a certain height. In the long run rich people take
the most fruits of economic growth. The inequality gap becomes bigger in the most
developing countries, not really helping out the poor people.
Economic growth can bolster some pillars which will help the reduction of
poverty. Some of these will be discussed below; education, nutrition & hydration and
transport & energy.

The education of a countrys inhabitants is a powerful driver of economic growth
and the reduction of poverty. Universal public education can prepare the youth of a
country for some basic knowledge about financial issues. Also knowledge about hygiene,
birth control and for example the empowering of women can help a country a lot to get
more developed, and eventually so less poor. Lately there has been great progress in
education, more and more children have the possibility to attend schools. Also the
education of girls has improved. The Millennium Development Goal 2: Achieve
Universal Primary Education has seen some considerable progress. A big problem is
however, the level of the kids attending to school in developing countries is still fairly
low, and often too low to teach the children the basic knowledge which is needed.
Water & Nutrition
People being underfed and/or dehydrated are often in a vicious circle of poverty.
Because they are poor they cant feed and hydrate themselves. But the other way around,
people who are underfed and dehydrated are not able make work and make a full
contribution to the development of a country. So it is very important for a country to
have its people fed and hydrated. Access to water is also fruitful for farmers. With better
water management poverty among farmers can be reduced. Economic growth can aid the
process of dehydration and hunger.
Transport & Energy
Economic growth enables the facilitating of electricity across the country.
Electricity can help people to work and connect with the outside world. The lifestyle of
poor people can seriously by improved by the use of electricity. Economic growth also
leaves the opportunity to invest in the infrastructure of a country. Investments in
infrastructure can cause at their turn more economic growth, because more people can so
be connected to the potential working share of people. The productivity can also grow
enormously when the infrastructure of a country gets an upgrade. A good example of
transport used for poverty reduction is the bicycle poverty reduction project. This is a
project which experimented by distributing bicycles in developing countries. The results
of this experiment showed that a single bicycle could increase the income of a poor
family by 35%.

Economic liberalization
New enterprises and investments from firms and countries abroad can be driven
away by policies used in a country. Corruption and bureaucracy are examples of reasons
for a firm not to invest in a country. For example in Canada it takes two days, $280 and
two bureaucratic procedures to start a new enterprise. In Bolivia the same action takes 82
days, $2800 and while over 20 of bureaucratic procedures are needed. New enterprises
and foreign investments bolster the potential economic growth of a country, as stated
above, economic growth is a potential driver of poverty reduction.

Development Aid
Developed countries try to help third world countries in different ways. One way
is just to give financial aid to the third world country. This way of aiding isnt preferred
because giving money doesnt solve any problems, money makes it only temporarily
easy. A more bottom-up way of giving development aid is community based
development aid. There is a Dutch saying which states: Give a man fish and he can eat
for one day, teach a man to fish and he can eat for whole his life. This is exactly the
difference between the first form of development aid, and the community based
development aid. Community-driven development programs inspire the citizens of
villages and neighbourhoods to develop their own resources. Microfinancing is another
common way of development aid, it is often part of community-driven development.
Small amounts of money are loaned to farmers so they can buy basic tools which can
facilitate their economic growth and prosperity. A lot of farmers lack the funds to buy
relatively cheap tools which could enable them to contribute to the economy and raise
them out of poverty, thus small amounts of money can aid a lot of people.


Disaster risk management

In the regions that are vulnerable to natural disasters catastrophic things can occur
occasionally. If a natural disaster occurs in a poor region it is very difficult for the
country to aid their inhabitants. For example in Indonesia, before the tsunami in 2004,
one-third of Indonesias population living in coastal areas lived in poverty. After the
tsunami, nearly half of the Indonesian population living in coastal areas lived below the
poverty line. The poor people can so get even poorer, often foreign aid is needed for the
governments in these countries to meet the needs of the inhabitants. A strategy needs to
be implemented in the areas with a high risk of getting struck by some natural disaster.
When disaster risk management is implemented the disaster cant be prevented, but the
consequences can be minimized.
Challenges to poverty reduction
Like stated above, poverty reduction is very multifaceted problem, so it also
comes with some challenges. Some of the major challenges will be elaborated below.

Climate change
The changing climate is a topic discussed in the news every day. Unfortunately,
climate change is expected to hit the third world countries the hardest. The rising
temperatures at earth causes changes in wind, rainfall and rising sea levels. This all can
be bad for the agriculture and water supply in countries. Billions of people are at risk,
also a lot of people in third world countries live on the edge of coastal areas,
encountering high risks of flooding. All the good work of reducing poverty can be
overtaken by the climate changes caused by mankind.


Trade barriers
A second challenge to the poverty reduction in the world, is the fact that because
of trade barriers some third world countries cant compete with developed countries. By
using subsidies developed countries try to protect their own economies, but in this way
poor farmers cannot sell their goods for a sustainable prices. It is thus key to lower the
tariffs which are constraining the extreme poor. The markets need to be connected and
aligned, because economic growth can be bolstered if the third world countries can
contribute to global trading. It is true that the last years a sustained effort has been made
to integrate the third world countries in the global economy, but more work needs to be
Political instability
A third challenge to the poverty reduction in the world is political instability in a
country. Whenever a country has an instable government or corrupt government it is very
difficult for a country to grow and getting more developed. Often too much money is
spent on the military and propaganda in political instable countries. A stable political
situation causes safety and security, which are both important for economic prosperity
and economic growth. Obviously, foreign investments are very scarce when a country is
instable or in war, retaining economic growth. To aid the economic growth of a country it
is thus very important to have a stable and strong government, with good laws to protect
the people against violence and corruption.


4. The Importance of Reducing Poverty

There is no doubt that poverty is bad for national welfare. Poverty lowers education
level, health care, and productivity level, which lead the GDP to fall. As an example, if we take a
look at the Suharto era in 1997-1998, Indonesia was suffering a huge economic crisis. In those
two years, Indonesia was such a mess. Riots everywhere, children left schools because their
parents could not afford the tuition fee. Unemployment rate rose up, causing the criminality to
increase significantly since people lost their jobs and still had the obligations to pay the bills.
In the long run, poverty could damage a certain area or a country even worse. According
to International Organization for the LDCs, Somalia in one of the poorest countries in the world.
As we can see in Somalia, decent clothes and shelter are no longer their top priorities. It is even
quite impossible for them to eat decent food, thats why most of the people in Somalia suffer
from malnutrition. Due to poverty, neither the government nor the private sectors could afford
sufficient healthcare for the society, so those who are sick could not be taken care of properly
making Somalia to be one of the highest death rate in the world. Furthermore, poverty causing
their criminality level high. Ship robbery and piracy are very common and easy to be found in
Therefore, reducing poverty is very crucial to a nation. Because reducing poverty would
increase education level, productivity level, give better healthcare to the society, thus the GDP
and the welfare of society will also increasing.


5. The Difference between Urban and Rural Poverty

Poverty Line (Rp/Capita/Month)


The Poverty Line(Rp/Capita/Month) in100000


The Poverty Line(Rp/Capita/Month) in Rural



Differences between Rural and Urban Areas

The graph above depicts the differences of poverty lines between rural and urban
areas. From the graph above, we know that poverty line of urban is higher than the rural.
As mentioned in Prof. Mudrajad Kuncoro, Ph.Ds Mudah Memahami & Menganalisis
Indikator Ekonomi book (2015), the standard of living in rural and urban areas are
certainly different. The population in urban areas are also increasing faster than in rural
areas. According to BPS, the population percentage of poor people in urban area were
also increasing rapidly since 1967, hence the poverty line of urban area was almost 70%
higher compared to rural area in 1987.
In 1976 until 2008, the price of goods consumed rose up resulting an increase in
poverty line. The poverty line was also increased in 1997-1998 since there was an
economy crisis that causes the inflation rate and living cost are incredibly high. In 20012002 and 2005-2006, fuels price was increased by the government, which leads to an
increase in living cost, causing the poverty line to increase as well. An increase in
poverty line was not only caused by the economic crisis but also because the standards
used changes.

Source: BPS (2014)


Migration also takes part in poverty. Indonesia has this tendency that people from
rural areas especially after public holidays would like to migrate to big cities with the
assumption of getting a better job and better salary. But due to education level and skills
differences, they could not meet the requirements and fall to compete with other job
seekers. They end up jobless and only make the city even more crowded with
impoverished people. This causes the unemployment rate in urban areas to increase faster
than rural areas. The higher the unemployment rate the higher poverty line.


6. Poverty in the World

Share of Population Living in Extreme Poverty in 2013

Percentage Population Undernourished World Map in 2013 Source: Our World in Data

Commons (2016)


7. Poverty in Indonesia
a. National Level
Following are factors affecting the number of poor people in Indonesia:
1. Basic needs price
Basic needs like food, shelter, and clothing are needed for everyone in the world. The
changes in its price would truly affect people purchasing power. The most fluctuating
product is rice. For example, when the price of rice is decreasing in 2008, it really
influenced the decrease of poverty level.
2. Inflation
Inflation is defined as a sustained increase in the general level of prices for goods and
services. Indonesia would have stable economy when the inflation below 10% but it would
be different if it is increasing too fast. Indonesia experienced high inflation by 17.95% in
2006 thus the price increased greatly.
3. Diminishing subsidy
In developed country like Indonesia, the economic activity rely on government subsidy to
keep business going. For example when there is energy crisis, government cut the subsidy
of fuel oil and allocate the money on other sides. Almost all economic activity use
transportation and even becomes the business itself thus this event would increase all
goods and services price of a country. It also might cause an increase of firm bankruptcy.
4. Exchange rate
When rupiah is weakening, it would disrupt economic activity since Indonesias export is
big so it depends on exchange rate.
5. Economic crisis
Economic crisis is when economy of a country experience a sudden bad condition like
high unemployment and high commodity price that decreasing people welfare.


Number of Poor People, 1970-2015

(in Million)

Number of Poor People (in Million)



Source: BPS (2016)

Based on paragraph above, there was a reduction in poverty from 1970 to 1996 but
significantly increased 1996 to 1998 because of economic crisis and decreased again 1998 to
2015. In 1981, the price of rice was increasing but it is relatively in small rate and slower
compared to other price. Then, there was economic crisis in 1996-1999 in Suharto era creates
a significant increase the number of poor people. Bad events occurred such as firms went
bankrupt leads to higher unemployment, crop failures due to long dry season, riots occurred,
and high inflation. After that in 2000-2005 our poverty level is stable but increases in 2006.
The number of poor people increases for around 5 million people. The main reason are the
price of basic needs increases because of high inflation (17.95%) and the diminishing
subsidies for oil. The near poor households which is vulnerable to any shock condition like
this are falling into poor category. In 2008, inflation rate is stable (8.17%), the price of rice
decreases by 3%, wages of farmer increases by 9.8%, and there are many job vacancies in
informal sector decreasing unemployment thus it lower poverty level.


b. Regional Level

According to Mr. Kuncoros book, there are 9 provinces with low poverty level which
is below the hard core (10%). There are Jambi, Bangka Belitung, Riau Islands, Jakarta,
in Kuncoro
Banten, Bali, Central Kalimantan, South Kalimantan, and
can see that
eastern island has higher poverty rate than the western island. Here is some brief reasons:
East Indonesia mostly has higher poverty rate than other because lack of human resources,

low economic activity, and unequal economic growth.

DKI Jakarta is the center of national economy thus it has the lowest rate
Provinces with good natural resources like East Kalimantan, Riau, Riau Islands, or Jambi
have the rate above average
Province that rely on natural resources for its Gross Regional Domestic Product

(GRDP) is vulnerable, the income can be fluctuating following the changes of price. When
the price of oil decreasing, the firms would decide to lay off their labor in huge number
leading to increasing unemployment rate.


Number of Poor People (in thousands) by Province in 2007 and 2016



0 1,000 2,000 3,000 4,0005,000 6,000 7,000 8,000

Number of Poor People (in thousands)

Regarding the graph above, we can conclude that poverty level of Indonesia for last
ten years is decreasing. This is the result of accumulated factors from year to year that
Indonesia tends to have stable inflation rate, low price of daily needs, provides higher wages,
and other.


Number of Poor People (in thousands) by Province in March 2016





500 1,0001,5002,0002,5003,0003,5004,0004,5005,000

Number of Poor People (in thousands)

As we can see here, East Java, Central Java, and West Java are still provinces with
highest number of poor people till now. Their poor people are much higher than national
average (823,688 people).


8. Government Program
Poverty has been a problem for every country and considered as an obstacle in
developing country therefore government take an action to reduce poverty seriously. In
Indonesia, there is Unconditional Cash Transfer (Bantuan Langsung Tunai) which is
giving poor people cash money. But the method is considered to be inefficient because
people would not manage the money well, they might use it just for paying debts. In
other word, the government is just spending the money. The second ways to reduce
poverty is Micro Credit Program (Kredit Usaha Rakyat) where the government provide
poor and micro entreprises an affordable credit. It is a program with six banks participate
on it and guarantee 70% subsidized by the government. It is more effective because the
money would circulated and bring more money back because the business activity. There
are another support like smart card, health card, and scholarship to help poor people.
Poverty Cycle

Government program would improve their income as the loans are given to invest
in business. The training is also given from local government, they would educate people
the effective ways to manage the resources to get optimum profit. They improve the
accessibility at first, then educate them, grow their willingness to be productive, and train
to be a good economic agents.


9. Conclusion
Poverty can be divided into two categories: absolute and relative poverty.
Absolute poverty is determined by poverty lines from BPS by the consumption level
(Rp/Cash/Month) and World Bank by consumption lines; < $1 (extreme poverty) and $2$5 (moderate poverty). Relative poverty can be measured by Purchasing Power Parity.
This means that the relative costs of certain products differ per country. This can be done
by the Big Mac Index. People who are happy even though they cannot fulfill their basic
needs are still considered as poor because they are qualified in that category by the
The trend of poverty globally is decreasing for the last decades. Everywhere in
the world people get less poor, except for Sub-Saharan Africa. Relatively speaking only
around 20% live in absolute poverty, absolute the number of people in poverty is the
same now, as it was 200 years ago.
The trend of poverty in Indonesia is decreasing for last 10 years, as well as in
global. Poverty in urban area is higher than rural area because the population in urban
area is much greater and also due to migration of people who are not skilled enough so
they become unemployment in big city. Eastern islands in Indonesia have higher poverty
level than western islands because they are lack of human resources, low economic activity,
and unequal economic growth.
Government programs are already conducted in order to reduce poverty. Micro credit

program is more effective rather than unconditional cash transfer because it is kind of
investment for poor people since it would generate more money in the future. There is
also other support like smart card, health card, and scholarship for poor people.


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