The Role of Agricultural Growth in Poverty Reduction in Indonesia

Indonesia experienced a rapid reduction in poverty during the strong economic growth pre-crisis period. By estimating the impact of sectoral economic growth components on consistently measured poverty rates across regions and over time, this study finds that agricultural growth is the largest factor behind the poverty reduction. Agricultural growth accounts for 66 percent of the reduction in overall poverty, 55 percent of the reduction in urban poverty, and 74 percent of the reduction in rural poverty. The growth of industrial sector – which has been the emphasis of Indonesian development strategy – has statistically significant impact only on reducing urban poverty. Even so, the impact is much smaller than the impact of agricultural growth. This implies that efforts to push productivity and growth in the agricultural sector – where most of the poor have a livelihood – is the most effective channel to reduce poverty. Furthermore, redirecting industrialization process to put more emphasis on developing integrated agro-industries with strong linkages to agriculture will certainly help in reducing poverty.