Can Indonesia Raise Incomes And Eradicate Poverty By 2030?

August 14, 2013Indonesiaby East Asia Forum

Can Indonesia Raise Incomes And Eradicate Poverty By 2030?

Several studies suggest that Indonesia is on track to end poverty and attain high-income country status in a decade or so, while others suggest that the economy could grow to be among the world’s top ten largest by 2030 if more investments are placed in manufacturing, infrastructure development and urbanisation. However, an honest look at long-run trends in inequality and historical growth rates indicate that 2040 or longer may be more likely.

Indonesia could plausibly become a high-income country as soon as 2025 and end poverty by 2030, although a more cautious approach based on historical growth rates indicates that this is more likely to take longer.

Much of the research on poverty in Indonesia has measured progress by using national poverty lines. But a new paper, presented recently at the Forum Kebijakan Pembangunan (video here), instead uses international poverty lines of US$1.25, $2 and adds $10 a day to discuss trends and patterns of poverty reduction from 1990–2010 as well as making projections on various scenarios to 2030.

How different are findings based on international poverty lines compared to those based on national poverty lines?

First, in line with previous research, $1.25 a day poverty (which is now somewhat similar to the national poverty line in value) significantly declined during the Soeharto era. Still, poverty remained at high levels in the late 1990s even before the 1997–98 Asian financial crisis. More than 40 per cent of the population lived at or below the $1.25 per day poverty line then and 80 per cent of the population at or below the $2 per day poverty line.

Analysis based on international poverty lines indicates that the substantial decline of $2 a day poverty largely dates to the post-Soeharto era, and that the $10 per day poverty count has changed surprisingly little in 25 years. The rate of $1.25 a day and $2 a day poverty reduction was particularly fast in the 2000–05 period, indeed faster than in the pre-crisis time, and possibly a reflection of the range of social programs introduced or extended in the post-crisis period. Yet that rate of poverty reduction has been slower since the 2005–06 rice price induced poverty spike, notably with respect to $1.25 poverty count, and to some extent the $2 poverty count.

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Additionally, when it comes to long-run trends in inequality, total inequality (measured by the Gini and Theil coefficients) fell in the early 1990s (although this masked rising urban inequality as it was rural inequality that fell substantially). This is in keeping with some of the previous research using national poverty lines. After the 1997–98 crisis, it is worth noting that inequality has risen in two waves: one wave visible in the data for 1999–2005 and a more recent wave from 2009–11. Rising inequality could slow not only poverty reduction but the rate and longevity of future economic growth.

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Overall, what does historical and forecast analysis of Indonesia’s growth, inequality and poverty using international (PPP) poverty lines tell us? First, as mentioned it is plausible that Indonesia may attain high-income country status in a decade or so, though historical growth rates indicate that 2040 or longer may be more likely.

Second, Indonesia could also plausibly end $1.25 and $2 poverty by 2030 if growth meets IMF forecasts and there is a favourable distribution movement. This would again be a highly optimistic estimate.

If current inequality trends continue it would take 10–20 years more of strong economic growth to end poverty in Indonesia. As a point of comparison, the historical growth and static inequality achieved by Thailand may be of interest to policy-makers in Indonesia because it provides a historical record of reducing poverty in the 20 year timeframe from Indonesia’s current levels.

Third, it is worth noting that a large proportion of the population may still find themselves between day-to-day poverty and security from poverty. This may lead to demand for more public policy measures based on social insurance and risk management. Further, poverty measured according to international poverty lines seems to be far more urban, and indicates a steep trend to a greater urban proportion of poverty in the future.

Ultimately, all of these predictions are of course subject to the possibility of slower growth and/or rising inequality which would delay the end of poverty and the attainment of Indonesia’s high income country status. The purpose of such projections is merely to illustrate what is possible and consider Indonesia’s substantial development by international as well as national poverty lines.

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By Andy Sumner

Andy Sumner is Co-Director of King’s International Development Institute, a newly established institute that has a focus on the emerging economies.

Could Indonesia become a high-income country with no poverty by 2030? is republished with permission from the East Asia Forum.

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