POVERTY AND

INCOME INEQUALITY
MAIN PROBLEM OF DEVELOPING
COUNTRIES :

1. Economic disparity or inequality of income

distribution
2. Poverty level (the number of people living
below the poverty line)
3. The economic growth only gives little trickle
down effect
POVERTY

Poverty is a situation where there is

an inability to fulfill their basic needs
in life such as food, clothing, shelter,
education, and health.
 POVERTY LINE

Poverty line is the minimum level of income

that is assumed to be fulfilled to obtain
adequate standard of living in a country.
 ABSOLUTE AND RELATIVE
POVERTY
o Absolute poverty is the degree of poverty
below the minimum requirement living
standard that cannot be fulfilled (housing,
clothing, food)

o Relative poverty is a measure of the gap in

income distribution. In developed countries,
poverty is measured as a proportion of the
average income level.
POVERTY INDICATORS
Due to differences in location and standards of living the
poverty line used by each country, The Central Statistics
Agency (BPS) the amount of rupiah spent per capita a month to
acquire the minimum food and non-food needs as the poverty
line(BPS, 1994).
For the minimum consumption of food needed, the benchmark
is 2,100 calories per day. Whereas the minimum requirement
for non-food items includes expenses for housing, clothing, and
various goods and services.
LEVEL OF POVERTY

Destitude
2

3
Poor group

Vulnerable
group/near poor
THE EFFECT OF
POVERTY
The effects of poverty vary due to different condition
and causes that lead to different consequences. Such as:
1. Unemployment
2. Crime
3. School dropouts and lost of educational opportunities
4. Health is something that difficult to obtain since the
lack of daily nutrition
5. Poor quality of the next generation
The size of poverty depends on several
factors, such as:
1. The standard of living
counted by the expenditure for
consumption for a certain period of time.
2. Poverty line, where individuals are
categorized as poor.
Persistent poverty Cyclical poverty

Poverty
based on
time period

Seasonal poverty Accidental poverty

ANSEL M.SHARP
THE CAUSE OF POVERTY FROM THE
ECONOMIC SIDE :

• Differences in ownership of resources

• Differences in human resources quality
• Differences in access to capital
 POVERTY FACTORS :

o sluggish and uneven economic growth, unbalanced income distribution

o stagnation of labor productivity, low wage rates

o Low education level

o High unemployment, few job opportunities

o High birth rate, low quality of human resources

o Lack of the use of technology

o Culture/tradition, Poor work ethic and motivation

o Degradation in natural resource and environmental capabilities

o Unstable politics
INCOME INEQUALITY
IN INDONESIA
THE RELATION OF GROWTH AND GAP

there is a positive correlation between

the growth rates and the economic gap:

the higher GDP or the larger per

capita income
the greater the gap between the
poor and the rich.
The greater gap of income distribution is caused
by :
o shifting demographics
o labor market changes
o public policy changes
• Growth
• Level of education
• Economic structure
THE RELATION BETWEEN
GROWTH AND POVERTY
Kuznets’ hypothesis:
• in the early stages of development process, the
poverty rate tend to increase, and as the
development reach its final stages, the number of
the poor will gradually diminished.
• However, there are many other factors besides
growth, which also influencing the level of poverty
in a country, such as labor education and
economic structure.
These can be interpreted as:
• Evolution of income distribution in the process
of transitioning from the rural economy to urban
economics (industrial economy)
• At the beginning of the development process,
inequality in income distribution rise as a result
of the process of urbanization and
industrialization, and the end of the
development, it will diminish since the industrial
sectors in the urban area will require labor from
the rural, or production from small agriculture.
Development Strategy of the New Order
government :

• they believed that the process of economic development would

produce a Trickle down effect.
• The results of development would trickle into other sectors and other
Indonesian territories.
• Government's economic development focuses on achieving high
economic growth rates in a short time through development on:
a. Regions that have relatively complete facilities (ports,
telecommunications, railways, industrial complexes, etc.), namely
on the island of Java, especially West Java.
b. Certain sectors that provide high added value.
 The results of the development strategy are
less effective :

• 1980 - 1990: High economic growth rate (GDP)

• Increasing gaps (increasing number of poor
people)
Changes in development strategies
Based on the results of the development, starting
from PELITA 3, the government changes its objectives
to achieve growth and prosperity of the community.

Strategy:
a. The concentration of the government shifted to
development throughout Indonesia.
b. Development for all sectors: the development of
the agricultural sector through various programs
such as transmigration, labor-intensive industries,
and home industries
POVERTY ALLEVIATION POLICY

Ahluwalia, Carter, dan Chenery

(1979)
• accelerating economic growth
• improving income distribution
• reducing population growth.
 POVERTY ALLEVIATION POLICY
Bigsten and Levin (2000) :
the outward-oriented strategy in the form of export-
driven economic growth
which is based on labor-intensive manufacturing, agricultural
development and rural areas.
This can be done by promoting new technology, investment
in physical infrastructure and human capital, efficient
Institutions that provide incentives to farmers and
entrepreneurs, social policies to promote health, education,
social capital, and safety nets to protect the poor.
POVERTY ALLEVIATION POLICY
Tambunan (2001):
There are three main pillars of the poverty reduction
strategy:
1. Sustainable growth
2. Good governance
3. Social development

To support these strategies, government intervention is

needed, such as the short-term interventions, especially the
development of the agricultural sector and the rural economy.
The important medium and long term
interventions are:
1. Development of the private sector
2. Regional cooperation
3. Management of government expenditure (APBN)
4. Decentralization
5. Education and health
6. Provision of clean water and urban development
 WORLD INSTITUTIONS POLICY
(THE WORLD BANK AND ADB)

World Bank (2000) provides a new method for fighting against poverty with 3
points:
 Empowerment, which is the process of increasing the capacity of the poor
to influence government institutions which affect their lives through
strengthening their participation in local political process and decision
making.
 Security, which is the protection for the poor from economic instability
that will significantly affect their lives by better management in handling
economic shocks and more comprehensive safety network.
 Opportunity, which is the process of increasing the access of the poor for
physical and human capital, and increasing the rate if the return of these
assets.
ASIAN DEVELOPMENT BANK (1999) STATES
THAT
THERE ARE 3 PILLARS TO ALLEVIATE
POVERTY:

• Pro-poverty sustainable development

• Social development which includes: human resource
development, social development, improvement of women’s
status, and social protection.
• Good macroeconomics and government management are
required to achieve the success

Additional factors:
•Cleaning the air and water from pollution in big cities
•Reforestation, human resource growth, and land improvement.
POVERTY SOLUTIONS
(FORMER VICE PRESIDENT, BOEDIONO)

• The high economic growth at this time does not guarantee that it can alleviate
poverty and improve the welfare of the entire community.

• In alleviating poverty and improving the quality of human life as measured by

the human development index (HDI), state intervention and special programs
that directly touch the community are absolutely necessary.

• Improving the quality of human life is the main instrument to measure the
success in development. This also underlies the preparation of the human
development index (HDI) published by the United Nation Development
Program (UNDP).

• UNDP has just released HDI data in some countries. Indonesia's HDI in 2011
was in the 124th position from 187 countries, with an index of 0.617.