ABSTRACT
The goal of reducing absolute poverty has always featured prominently in policy discourse in Indonesia. As noted in the introductory chapter, in 2005 the incoming government set the target of halving the aggregate poverty incidence in tandem with halving the national unemployment rate by 2009. The government also committed itself to the attainment of the Millennium Development Goals (MDGs) at national level. This in turn entails the need to address multiple forms of deficient capabilities, especially in the areas of health, education and nutrition. This chapter provides a critical evaluation of the above government goals. It will suggest that the current emphasis given to poverty reduction is commendable, and yet this focus may run the risk of overlooking the other important issue of vulnerability, that is, the risk that individuals and households can be vulnerable to transient episodes of poverty. As will be seen, moderate levels of current poverty in Indonesia co-exist with high incidence of vulnerability. The chapter will also argue that the common identification of unemployment as the source of poverty in the media and government policy documents misreads the nature of the relationship between poverty and the labour market. Developments in the labour market certainly have an important influence on poverty, but such an influence is mediated through other channels than through reducing open unemployment. An important theme explored in this chapter is that poverty should not be conceptually separated from inequality. Poverty, growth and inequality represent the ‘eternal triangle’ (Bourguignon 2004). Growth leads to lower poverty, but a high initial level of inequality or rising inequality can impair the capacity of growth to reduce poverty. For example, one study shows, using data from the 1990s, the incidence of extreme poverty, in terms of the dollar a day criterion, could fall by 4 percentage points, from 24 to 20 per cent, if the world inequality as measured by the Gini ratio fell only marginally from 0.54 to 0.52. Others have suggested that, in some cases, a 1 per cent reduction in observed inequality is equivalent to a 4 per cent increase in the growth rate required to reduce income poverty (Islam 2004). Given the thesis of the ‘eternal triangle’, the chapter will suggest how various dimensions of inequality affect the sustainable reduction of poverty and the
attainment of the MDGs. It will also argue that particular aspects of inequality are related to an assessment of labour market performance. These include the reduction of gender disparities that is part of both the global development agenda and the Indonesian national policy agenda. An understanding of the evolution of inter-sectoral disparities is equally important, especially given their relevance to understanding the evolution of the ‘working poor’ and the view that the current labour market regulations can exacerbate wage inequality.
