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Economic growth and poverty reduction: the role of the agricultural sector in rural Indonesia

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  • Kadir, Kadir
  • Amalia, Ratna Rizki

Abstract

Agricultural sector has emerged as the engine of economic growth in Indonesia. The sector is expected to contribute to poverty reduction in rural areas which is the largest contributor to poverty in Indonesia. Growth in the agricultural sector can induce the growth of the non-agricultural sector through linkages between the two sectors. Thus, the growth of the agricultural sector is not only a positive impact on poverty reduction through the rising of incomes in the sector, but it can also encourage non-agricultural activities in rural areas. This study aims to determine how much the growth of the agricultural sector impacts on the non-agricultural sector in rural areas and how much the growth of these two sectors impacts on poverty reduction in rural areas. Data used in this research is panel data from 2002 to 2008. Data are analyzed using simultaneous equations model estimation and the estimation of panel data regression model. The results of simultaneous equations model analysis show that growth in the rural agricultural sector by 1 percent will induce the growth of the rural non-agricultural sector at 1.35 percent. Meanwhile, the results of estimation of panel data regression model reveal that productivity growth in both the agricultural and the non-agricultural sectors in rural areas by 1 percent will reduce the rural poverty rate by 3.91 percent and 3.97 percent, respectively. Both these findings affirm that the agricultural sector is still the driving force of economic growth and is critical to the success of poverty alleviation in rural areas. In addition, the government also needs to develop the non-agricultural sector to support poverty alleviation efforts.

Suggested Citation

  • Kadir, Kadir & Amalia, Ratna Rizki, 2016. "Economic growth and poverty reduction: the role of the agricultural sector in rural Indonesia," MPRA Paper 95111, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:95111
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    References listed on IDEAS

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    1. Sumarto, Sudarno & Suryahadi, Asep, 2004. "The Role of Agricultural Growth in Poverty Reduction in Indonesia," MPRA Paper 60724, University Library of Munich, Germany.
    2. Asep Suryahadi & Daniel Suryadarma & Sudarno Sumarto, 2006. "The Effects of Location and Sectoral Components of Growth," Development Economics Working Papers 22550, East Asian Bureau of Economic Research.
    3. C. Peter Timmer, 2008. "Agriculture and Pro-Poor Growth: An Asian Perspective," Asian Journal of Agriculture and Development, Southeast Asian Regional Center for Graduate Study and Research in Agriculture (SEARCA), vol. 5(1), pages 1-27, June.
    4. Asep Suryahadi & Daniel Suryadarma & Sudarno Sumarto & Jack Molyneaux, "undated". "Agricultural Demand Linkages and Growth Multiplier in Rural Indonesia," Working Papers 355, Communications Section.
    5. Gustavo Anríquez & Kostas Stamoulis, 2007. "Rural development and poverty reduction: is agriculture still the key?," The Electronic Journal of Agricultural and Development Economics, Food and Agriculture Organization of the United Nations, vol. 4(1), pages 5-46.
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    Keywords

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    JEL classification:

    • O4 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity
    • O47 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - Empirical Studies of Economic Growth; Aggregate Productivity; Cross-Country Output Convergence

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