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Agricultural Demand Linkages and Growth Multiplier in Rural Indonesia

  • Asep Suryahadi

    (SMERU)

  • Daniel Suryadarma
  • Sudarno Sumarto
  • Jack Molyneaux

In a fast urbanizing Indonesia, the rural sector still plays an important role in the countrys economy. Although declining, the majority of the population still live and find employment in rural areas. However, rural areas lag behind urban areas in many aspects. As a result, around 80% of all the poor in the country are found in rural areas. Resolving this problem requires a clear and effective strategy to jump-start and sustain economic growth in rural areas. This study finds that the growth of the agricultural sector strongly induces the growth of the non-agricultural sector in rural areas. Although it has been fluctuating over time, it is estimated that, on average, one percent growth in the agricultural sector will induce 1.2% growth in the non-agricultural sector in rural areas. This finding vindicates the view that rising incomes in the agricultural sector stimulate demand for locally produced goods and services in rural areas, in particular those produced by the non-tradable sector. Formulated appropriately, a rural development strategy that develops the agricultural sector could provide a major impetus for achieving a fast growing and vibrant rural sector in Indonesia.

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Paper provided by East Asian Bureau of Economic Research in its series Development Economics Working Papers with number 22551.

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Date of creation: Jan 2006
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Handle: RePEc:eab:develo:22551
Contact details of provider: Postal: JG Crawford Building #13, Asia Pacific School of Economics and Government, Australian National University, ACT 0200
Web page: http://www.eaber.org

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  1. Datt, Gaurav & Ravallion, Martin, 1998. "Why Have Some Indian States Done Better Than Others at Reducing Rural Poverty?," Economica, London School of Economics and Political Science, vol. 65(257), pages 17-38, February.
  2. Simphiwe, N., 2001. "Prospects For Rural Growth? Measuring Growth Linkages In A South African Smallholder Farming Area," Working Papers 18027, University of Pretoria, Department of Agricultural Economics, Extension and Rural Development.
  3. Block, Steven A., 1999. "Agriculture and economic growth in Ethiopia: growth multipliers from a four-sector simulation model," Agricultural Economics of Agricultural Economists, International Association of Agricultural Economists, vol. 20(3), May.
  4. Ravallion, Martin & Datt, Gaurav, 1996. "How Important to India's Poor Is the Sectoral Composition of Economic Growth?," World Bank Economic Review, World Bank Group, vol. 10(1), pages 1-25, January.
  5. Haggblade, Steven & Hazell, Peter B. & Brown, James, 1988. "Farm-nonfarm linkages in rural sub-Saharan Africa," Policy Research Working Paper Series 6, The World Bank.
  6. Lewis, John P., 1976. "The new economics of growth: A strategy for India and the developing world : John W. Mellor a twentieth century fund study (Cornell University Press, Ithaca, NY, 1976) pp. xv+335," Journal of Development Economics, Elsevier, vol. 3(4), pages 390-393, December.
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