Poverty and Inequality in Indonesia: Estimates, Decomposition, and Key Issues

Abstract

This article argues that the decline in the incidence of poverty in Indonesia during the past two decades, as shown by the official estimates, is statistically as well as practically significant. Decomposition results using the official estimates indicate that intra-sectoral effects, in particular the decline in rural poverty in the 1980s, were the largest contributor to the drop in aggregate poverty. The decomposition also shows an unexpected result that population shift did not have a positive impact on poverty reduction. Growth-equity decomposition proves that economic growth has been responsible for much of the poverty reduction. The official estimates of inequality in consumption distribution, measured by the Gini coefficient, do not show obvious changes in inequality, but an over-time pattern can still be detected. The paper also discusses two key issues that concern the official poverty estimates: the poverty level and urban-rural poverty comparison, and considers the usual expenditure inequality, provide estimates of income inequality, and address issues concerning the group price specific index and different ways of looking at changes in equality.