Poverty Reduction in Indonesia: The Need for a Paradigm ShiftRemarks Presented to the Consultative Group for Indonesia
by
Dr. H. S. Dillon, Chairman of the Coordinating Agency for Poverty Reduction
Jakarta, April 23, 2001


Introduction: The Poverty Shock

Indonesia recorded remarkable progress in poverty reduction from the early 1970s to the mid-1990s. In the late 1960s, more than half of the population had an income below the poverty line. By the mid-1990s, less than 15 percent of the population were classified as absolutely poor.

Many different factors contributed to this remarkable progress. In the 1970s and early 1980s, the green revolution breakthroughs in rice led to a rapid increase in agricultural productivity and farm incomes. Not only was Indonesia able to feed itself, but millions of farm families were at last able to break out of a bare-subsistence lifestyle. In the late 1980s and early 1990s, labor intensive, export-oriented industrialization was the main engine of growth. Rising labor demand in the industrial and services sector created employment for the poor and boosted real wages. The combination of the two helped to lift large numbers out of poverty.

Progress in poverty reduction was rudely interrupted during the crisis years. At the peak of the crisis, nearly a third of the population were classified as poor (using a consumption yardstick) and close to half of the population were found to be "vulnerable" to poverty. Poverty levels were estimated at 23 percent in August of 1999 and are probably modestly lower today. There are, moreover, an additional quarter of the population with incomes just marginally above the poverty line, and they are vulnerable to poverty from time to time. While recovery has certainly improved living standards, the fact remains that close to half of the Indonesian population are either poor or vulnerable to poverty.


Disillusionment with the past poverty reduction approach

The fact that hard-fought gains in poverty reduction could be so quickly reversed contributed to popular disillusionment and ultimately the fall of the New Order regime. That poverty reduction efforts could be so rudely interrupted also prompted the current Government to carefully review the efficacy of past poverty reduction strategies and approaches. While there was considerable merit in many of the approaches pursued to alleviate poverty, and by this we refer to efforts taken to stimulate agriculture in the 1970s and 1980s, to broaden access to social services and to integrate the nation through investment in economic infrastructure, many aspects of the poverty alleviation effort were clearly flawed.

At the risk of some injustice to past poverty reduction efforts, we can characterise these as being based on the notion of the poor as the object of development with growth as the main solution to the poverty problem. Environmental degradation, inequity, vulnerability and the sacrifice of democratic rights and liberties were treated as a cost worth paying for higher incomes and falling poverty levels. In practice, Government took responsibility for overcoming poverty. Policies, programs and projects were defined in a top-down manner. Each Department operated its own individual set of initiatives, often jealously guarding its turf from others in the bureaucracy. Participation by local government, local communities and certainly the poor themselves was very limited indeed. The "project" approach to tackling poverty has weakened the coherence of the Government's efforts to address poverty, has provided to be bureaucratically divisive and has created a "project culture" that may have suited donors and some bureaucrats but hasn't accomplished much for the poor. Corruption and other governance weaknesses tended to limit the impact of these programs. Meanwhile, accustomed to one anti-poverty project or program after another, poor households became dependant on project assistance and deferential in their attitude towards the state.


The New Paradigm

Nothing less than a paradigm shift in our understanding and approaches to poverty reduction will be needed if durable progress in poverty reduction is to be achieved. This new paradigm is different from the old in three dimensions: the definition of the poor, the strategies to be pursued for poverty reduction, and the approaches taken to combat poverty.

In the past, poverty was measured in terms of the share of the population with incomes below one poverty line or another. The definition of poverty needs to be broadened beyond the traditional expenditure based measures to include access to basic services such as health, education, justice and infrastructure; to take into consideration vulnerability to risks of physical insecurity and to reflect the extent of opportunities to participate in social and political decision-making.

While growth remains important for poverty reduction, it is the pattern, sustainability and distribution of the benefits of growth that counts. Pro-poor growth, rather than growth per se, is to be the main engine of poverty reduction. This is to be fostered in a manner that both expands opportunities and fosters social justice.

But perhaps the need for a paradigm change is most acute in the actual approaches that are adopted to combat poverty. The approach must rest on the premise that the poor are the main actors in the fight against poverty. Other parties---governments, donors, civil society---should facilitate the poor to overcome their problems but not attempt to solve the poverty problem for them.

What the Government can and must do, in full cooperation with other stakeholders, is to provide a ladder of enabling pre-conditions and effective services that poor individuals and communities can use to climb out of poverty. At the bottom rung of this ladder would be the most essential services---law and order, physical security and freedom from hunger. Without these pre-conditions and services, poverty is bound to be transmitted from one generation to the next. The next rung of the ladder would include the basic health, education and economic infrastructure needed to provide all households with the skills and market access needed to participate in the modern economy. Clear definition and protection of property rights, and an effective system of law and order accessible to all citizens would be the next rung in this ladder. Further up this ladder are efforts to foster agriculture and rural development and to stimulate the activities of small enterprises. Especially in the cities, efforts will need to be made to foster clean urban environments. At the top rungs of the ladder are the economy-wide conditions that will help to ensure that the poor can take advantage of domestic and global market opportunities. This includes competitive market conditions, effective market regulation, macro-economic stability and fiscal sustainability.

In implementing this new approach, we are confronted with a variety of real constraints. Changing past attitudes and practices in Government and poor communities both are deeply entrenched and will need a concerted effort. The existence of very tight fiscal constraints means that not everything can be done at once and that clear priorities must be set. Moreover, we can maximise the anti-poverty effects of existing government programs by making their design more pro-poor as well as by constantly focusing on the elimination of inefficiencies in their implementation.


The Role of the Poverty Reduction Agency

At the Tokyo CGI, the government made a commitment to establish a body that would coordinate the poverty reduction effort. This has been done, and I am proud to declare that the Agency for Poverty Reduction has been formally established over the past few months. The main goal of the Agency is to encourage Government and civil society to shift from the old, government-driven poverty reduction paradigm to one in which the poor are literally and truly the main actors in the fight against poverty. The poverty reduction agency will employ a full range of planning, facilitation, mediation and advocacy efforts to promote this shift from the old to the new approach in poverty reduction. What we will not do is design or manage the implementation of poverty reduction projects. Once again, our brief is to be an agent of change---not a project advocate.

A shift in the poverty reduction paradigm also implies a need to refine our strategies for poverty reduction, especially to take into consideration the knowledge and understanding of the needs, constraints and opportunities faced by the poor themselves. Towards this end, we intend to launch a process of strategic planning that will involve a mix of review, analysis and consultation. The poverty reduction agency staff will draw on available sources of information and insight, including that provided by Indonesia's development partners. In this respect, we have already engaged Bappenas and the Ministry of Finance. We will be working closely in preparing poverty reduction programs, and provide inputs into the 2002 budget preparation.

A continuous process of stakeholder consultation will be undertaken to ensure that the voice of the poor, of civil society, of the academic community and of government agencies, at both the national and local level, is taken into consideration. Towards this end, a stakeholder's forum, with representatives from regional governments, NGO's, academic institutions and the private sector will meet regularly to review progress and to discuss proposed strategic reforms. Stakeholder forums in two or three provinces will also be launched to provide a range of local perspectives on strategic reforms. Consultations at the national and local level can help provide a fuller understanding of reform options and promote wider ownership in the reform process.

The strategic planning process will be conducted in an open and transparent manner. A web site for the Agency will be established and the site will be used to solicit input and feedback from the public at large. The working documents and the Agency minutes will be posted on the web-site to promote trust and confidence in the planning process.

The ultimate aim of this planning process is not a series of planning documents, but is a robust, locally owned process of strategic change. To foster this change, we intend to advocate on behalf of the poor, with Government Departments, with the Parliament, through the press and with civil society organisations as a whole. We have already initiated the process by conducting a one-day seminar at Bappenas two weeks ago. We are encouraged by the response of Bappenas and the line Ministries, the enthusiasm shown by the NGO community, and the regional perspective provided by the Bupatis and Ketua DPRD Tingkat II.

Mainstreaming new poverty reduction strategies won't be quick or easy because resource constraints are severe, public sector wages are low, accountability and rule of law is still evolving, and regional frustrations run high. Still, the Government believes that there are ample opportunities to adopt new approaches and instruments to stimulate change and reward good poverty reduction performance.

One option we are exploring is the establishment of poverty reduction benchmarks to recognise different regions in the country that have been successful in poverty reduction. Such a benchmarking system, if combined with public recognition, could inspire local governments to focus their efforts squarely on poverty reduction.

Decentralization has brought the locus of decision-making closer to the poor, and in the long-run, this should have a significant impact on the effectiveness of public sector initiatives. Certain policy areas, such as education, agriculture and health care, are now broadly under the control of local governments. If the central government is to exert a positive influence on policies in these areas, it will require new approaches. One such approach is the use of matching-grants programs.

Imagine that a refined and actionable set of anti-poverty strategies has been defined. Even those changes that cost less than existing policies and programs will undoubtedly result in a "costly" redirection of resources from one group to another. Matching grant funds can help fuel and reward this redirection of effort. Matching grants could be offered to the regions in response to proposals to improve the quality of social and economic infrastructure serving poor communities. Clear performance and poverty reduction targets would need to be established, performance contracts could be signed and the regions could set about implementing strategic change to foster more effective and efficient services for the poor.

The advantage of using matching grants is that a small amount of money can be leveraged against the accumulated capital assets of local and central governments to influence pro-poor change, while fostering partnerships and, at the same time, providing scope for autonomous decision-making. Matching grant programs serve as a basis for performance contracting, which unto itself, would impose new auditing, monitoring and evaluation requirements on the cooperating regions and agencies. A well-defined system of matching grants linked to local resource mobilization, to sensible strategies and action plans, and to clear performance contracts may help us to advance the reform agenda while respecting tight budget constraints and the Government's broader desire to promote greater regional autonomy. In this respect, it is heartening to note that in the health sector, an initiative has been taken to design a matching grant system - a Poverty Health Fund Grant -, reflecting the number of poor, their school health needs, and the local capability of providing for these needs.

For far too long, civil society organizations were suppressed. Only recently have many civil society organizations come into being. Many NGOs and CBOs are learning and adding to their institutional capacity. In the future, civil society organisations must come to play a major role in poverty eradication efforts. To foster civil society participation, the NGO community must be deeply involved in the strategic planning process. But more than that, they have to be involved in the actual implementation of strategic reform.

It is equally important to engage the private sector in the strategic planning and consultation process. Generally, the private sector has superior management abilities and financial capacity that far exceeds the public sector. While the ultimate goal of the private sector is to make profits, the private sector must also be encouraged to utilise its resources for poverty reduction purposes.

There are new approaches for engaging the private sector in poverty reduction efforts that build on the private sector's own desire to foster their reputation as socially responsive corporate citizens. The UN Charter, for example, provides a set of agreed global initiatives that private sector companies can voluntarily agree to adhere to. Our Agency is planning to work with stakeholders to define a set of core poverty reduction principles, goals and entitlements that are held to be in wide agreement. The Government, together with donor partners that endorse such core principles, could launch a poverty-reduction charter for Indonesia and encourage the private sector to subscribe to that charter. Similar to the UN exercise, voluntary participation of the private sector would be encouraged and a web site could be developed on which private companies could report their progress in contributing to the achievement of these core-principles. The Agency for Poverty Reduction would provide public recognition to those enterprises that demonstrate social responsiveness through initiatives that meaningfully reduce poverty.


A common platform

Although the poverty reduction agency is but a few weeks old, we have begun to work in earnest to foster change from the old to a new and more effective paradigm for poverty reduction. We are actively participating in the formulation of the annual plans and are encouraging Government Departments to examine opportunities to mainstream poverty reduction initiatives in their planning processes.

We recognize that the battle to combat poverty, as well as the efforts to change attitudes and practices within our own government will be a long and difficult process. Sometimes the process is bound to be frustrating and sometimes the process is likely to be fruitful and rewarding. What the process is not likely to be is quick or easy. What is needed on the part of the donor community is a sustained long-run commitment to poverty eradication in Indonesia.

Moreover, if we accept that the battle to combat poverty is likely to be long and difficult, than it is surely is a mistake to link support for poverty reduction efforts to progress in financial market stabilisation or other macro-policy reforms. While these are certainly rungs on the poverty reduction ladder, and important rungs at that, it is clearly a mistake to bring the construction of enabling ladders for poverty reduction to a screeching halt while one rung or another experiences kinks in its construction. Let us not argue whether poverty reduction ladders should be built from the top-down or from the bottom-up. Let us agree instead that construction of efficient and effective ladders for poverty reduction must not be interrupted by volatile financial flows of any kind.

Despite the irrefutable fact that the SSN program leaves much to be desired, it is important to continue to provide social protection to the poorest of the poor. The better performing components, such as scholarships, health care, and food security could be integrated into a sustainable social protection system.

Finally, I would like to end this presentation by urging the donor community to share our overwhelming sense of humility in the face of Indonesia's poverty reduction challenge. The poverty reduction challenge is complex and multifaceted. Much of what we thought would work to eradicate poverty over the past few decades has been shown to be ineffective or unsustainable at best. We have much to be ashamed of and much to learn. Let us be especially generous, in our sharing of ideas, knowledge and financial resources to effectively combat poverty in Indonesia today.