1. society
2. work
3. unemployment

The 3rd Uzbekistan-Indonesia International Joint Conference on
Economic Development and Nation Character Building to Meet the Global Economic Challenges
The Simultaneous Analysis of Economic Growth and
Poverty : Case Study in Indonesia Periode 2007-2010
Rini Aprilia
Management Department,
STIE Multi Data
Palembang
[email protected]
Charisma Ayu Pramuditha
Management Department,
STIE Multi Data
Palembang
[email protected]
Abstract
This study empirically investigates the simultaneity between economic growth and poverty and also
analyze the predetermined variables that affect them by using a simultaneous equation framework.
The endogenous variables are economic growth and poverty, while unemployment, inflation, life expectancy, and literacy are predetermined variables. This research using panel data of 33 provinces in
Indonesia from 2007-2010, using two stage least square (2SLS) regression model. The result show that
economic growth and poverty have negative simultaneous relationship which indicate that there are
complementary to each other. This study also found that unemployment is significant affect economic
growth and also poverty. Furthermore, life expectancy, and literacy rate are significantly affect poverty
rate.
Keywords :Economic growth, poverty and simultaneous
1
Background
The wealth of nations indicated by economic
growth and poverty . Every country will strive
to increase economic growth and reduce poverty
. But in developing countries like Indonesia, it’s
a high poverty rate although economic growth is
increasing every year, but the poverty rate has not
decreased significantly. Development carried out
to community prosperity through economic development by addressing issues such as social development, unemployment and poverty. In addition to economic growth, the most important
aspect to assess economic development is using
resources efectively so that there are jobs to absorb the available labor force. The Increasing of
economic growth means production of goods or
services produced increases. Thus required more
labor to produce goods / services that reduced unemployment and poverty will decrease.
Based on the results of the National SocioEconomic Survey (NSES) by Central Bureau of
Statistics, Indonesia’s population living below the
poverty line in 2010 was still huge, around 31.02
million people or approximately 13.33 per cent.
The conditions of people living in poverty in general would suffer from malnutrition, poor health
levels, high illiteracy rate, poor environment and
lack of access to infrastructure and public services. In 2007 recorded a population approximately 37.17 million and 2009 the poverty rate
reached 32.53 or approximately 14.15 per cent.
ISBN: 978-602-9438-24-6
Table 1: The number and Percentages of Poor People in Indonesia Based on Region, 2007-2010
(a) Number Of Poor People (Million)
Year
2007
2008
2009
2010
Number of poor people (Million)
City
Village
City+Village
13,56 23,61
37,17
12,77 22,19
34,96
11,91 20,62
32,53
11,10 19,93
31,02
(b) Percentage of Poor People
Year
2007
2008
2009
2010
Percentage of Poor People
City
Village City+Village
12,52 20,37
16,58
11,65 18,93
15,42
10,72 17,35
14,15
9,87
16,56
13,33
It includes improved enough, there is poverty reduction in the number of the years 2007 to 2010.
Economic growth is a measure of the development of goods and services produced in a country with the aim of improving the welfare of society. According to Kuznets (in Tambunan, 2001),
economic growth and poverty has a very strong
correlation, because in the early stages of the development process and poverty rates tend to increase when approaching the final stage of development the number of poor people is gradually
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The 3rd Uzbekistan-Indonesia International Joint Conference on
Economic Development and Nation Character Building to Meet the Global Economic Challenges
reduced. Based on economic indicators of Central
Bureau of Statistics, Indonesia’s economic growth
has fluctuated from year 1986-2010 and declined
significantly in the year 1997-1999.
Figure 1: Indonesia Economic Growth
The lowest economic growth occurred in 1998.
Indonesia economic growth was was -13.24 percent and the lowest growth ever in Indonesia.
In 1999, the Indonesian economy began to improve, it is seen from the figures of economic
growth have risen 12.63 per cent of the growth
in 1998. In 2008 the world economy shaken by
the global crisis, but the global crisis is just not
very influential in the growth of the Indonesian
economy. Economic growth in Indonesia has not
experienced a significant decrease as the time period of economic crisis, economic growth in 2008
stood at 6.01 percent, down 0.33 percent compared to growth in 2007. The impact of the global
crisis it has only felt in 2009. Economic growth in
2009 was experiencing a greater decline than the
decline in economic growth in 2008.
In 2010, the Indonesian economy showed fairly
good condition, the Indonesian economy grew 6.1
percent in 2010, an increase compared to 2009
and was able to higher than in 2008. Looking at
the performance and stability of the economy is
pretty good in 2010 gave some hope that next
year’s economic growth in Indonesia is able to
survive and increase. Theoretically, poverty alleviation requires economic growth quality. Quality
economic growth can be realized by the expansion of employment policy (to reduce unemployment) and maximize the productive investments
in the various sectors of the economy. According
to neo-classical theory, economic growth depends
on providing added production factors (population, labor, and capital accumulation) and the rate
of technological progress.
Based on previous background, the author
want to analyze whether there is a relationship
between poverty and economic growth in Indonesia from 2007-2010. The aim of this research is
to analyze the effect of life expectancy, gross regional domestic product (GDP), unemployment,
and the literacy rate against poverty, and also to
analyze the influence of poverty, unemployment
and inflation provinces to economic growth in In-
ISBN: 978-602-9438-24-6
donesia.
2
Methodology
This study focuses on the analysis of simultaneous
relationship between analysis of economic growth
and poverty among all provinces in Indonesia.
This study used secondary data that publish by
Indonesian Statistic Center (BPS).
The framework and design of this study is similar to past studies conducted by other researchers.
The variables used in this study are replicated
from prior studies and the period of observation
is 4 years starting form 2007-2012. The sample is
derived based on purposive sampling technique.
This technique is used to select the sample based
on specific and certain consideration adjusted to
the purpose of study. The initial sample used in
this study comprises of 33 provinces around Indonesia.
The parameter of independent variables is estimated by using panel data analysis combining
cross-sectional and time-series data. The reasons
for using panel data analysis are because data is
more informative and has greater variability and
higher degree of freedom. Potential collinearity
among explanatory variables could be reduced.
Thus, it will produce efficient econometric estimation. According to [3], panel data is able to
analyze more complex behaviors that exist in the
model and because of that, it does not require the
classical assumption test.
3
Analytical Techniques
The Theoretical framework of this study is to
show the link between control variables to economic growth and poverty. In this research, the
two dependent variables are economic growth
and poverty while independent variable consists
of unemployment, poverty, inflation, life expectancy, Gross Regional Domestic Product, and
literacy. The basic model of economic growth and
poverty equation is formulated as follows:
EG = α1.0 + α1.2U N P LY + α1.3P V T Y +
α1.4IN F + ε1
P V T Y = α2.0 + α2.1LIF E + α2.2EG +
α2.3U N P LY + α2.4LIT ER + ε2
Where:
EG
PV TY
U N P LY
IN F
LIF E
LIT ER
=
=
=
=
=
=
Economic Growth
Poverty
Unemployment
Inflation
Life expectancy
Literacy
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The 3rd Uzbekistan-Indonesia International Joint Conference on
Economic Development and Nation Character Building to Meet the Global Economic Challenges
Based on two equations above, it can be seen
that the economic growth, in addition to being the
dependent variable, can also become an independent variable in the poverty equation. While the
poverty, in addition to being the dependent variable, can also become an independent variable on
the economic growth equation. This condition
shows that economic growth and poverty affect
each other and it could occur simultaneously.
According to [3], simultaneous equations
model is very likely that the dependent variable
is correlated with the error term. In this case, the
economic growth and poverty variables are correlated with the ε1 and ε2 , respectively.
Each equation must meet the identification requirements before entering 2SLS analysis. [3]said
that an equation is said to be identified only if the
equation is uniquely expressed in statistical form,
and produces a unique parameter estimate. There
are two methods that can be used to fulfill the requirement of 2SLS, i.e. order condition and rank
condition. This study initially uses an order condition to identify the conditions. The order condition is divided into three parts which are under
identified, exactly identified and over identified.
The terms of an equation can be identified as simultaneous equations are as follows:
K − k < m − 1 : U nder Identif ication
(1)
K − k = m–1 : Exact Identif ication
(2)
K − k > m − 1 : Over Identif ication
(3)
Once it has been determined that an equation
is identified or over identified, the model can be
estimated by the 2SLS method, where the 2SLS
consists of exogenous variables appearing in the
other equation.
In performing the analysis of simultaneous
equation through the 2SLS method, there are two
stages to be observed. The first stage is OLS regression analysis which performed for each equation with the aim of eliminating the correlation
between the dependent variable with the error
term. The first stage of 2 SLS analysis is as a follows:
The first stage
EG = α1.0 + α1.2U N P LY + α1.3P V T Y +
α1.4IN F + ε1
EG = EG ∗ +µ1
While,
P V T Y = α2.0 + α2.1LIF E + α2.2EG +
α2.3U N P LY + α2.4LIT ER + ε2
P V T Y = P V T Y ∗ +µ2
EG∗and P V T Y ∗ are estimated (predicted)
value of economic growth and poverty respectively for all the independent variables which
show that EG∗ and P V T Y ∗do not correlate with
the error term. µ1and µ2 are signifies the OLS
residuals.
The second stage
The second stage of 2SLS is to perform a regression analysis on each equation by using economic
growth and poverty variables with its predicted
value. There are as a follows:
Where:
endogenous variables in the
model
m = endogenous variables in each
structural equation
K = predetermined variables in the
model
k
= predetermined variables in each
structural equation
Based on these criteria, the identification of the
simultaneous equations model in this study is as
follows:
M
=
EG = α1.0 + α1.2U N P LY ∗ +α1.3P V T Y ∗
+α1.4IN F + ε1
P V T Y = α2.0 + α2.1LIF E + α2.2EG ∗
+α2.3U N P LY + α2.4LIT ER + ε2
4
Analysis and Finding
Based on the result of regression analysis in
both model using Two Stage Least Square (2SLS)
with Y1 (Economic Growth) as endogenous variable with 3 predetermined variables i.e. Unemployment, poverty and also inflation. While
Table 2: Identification of Simultaneous Equation Y2 (Poverty) as endogenous variable and life exModel
pectancy, economic growth, unemployment, and
literacy as a predetermined variables.
Equation
K
k
M
Condition
Identification
From the table 3 below, explain that unemployModel
ment and also poverty have a significant effect to
Economic
5
3
2
K−k =m−1
Over
economic growth. The result show that the unemGrowth
identified
ployment is positive correlation to the economic
Poverty
5
4
2
K−k =m−1
Exact
growth, it is mean that contradict with the theory
identified
that said high unemployment can make decrease
ISBN: 978-602-9438-24-6
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The 3rd Uzbekistan-Indonesia International Joint Conference on
Economic Development and Nation Character Building to Meet the Global Economic Challenges
our economic growth. Coefficient of unemployment is about 0.5314, it is mean that for every
increasing 1% of unemployment will also increasing the economic growth about 0,53 percent with
0,05 probability.
While, the result of poverty have negative correlation towards economic growth in Indonesia. It
is mean that for every decreasing of poverty will
effect to the higher economic growth. From the
table we see that coefficient of poverty is abput
0,0860 , in which it can be means that for every decreasing 1 percent of poverty in Indonesia will increasing the level of economic growth
about 0.08 percent.
Based on the result shows that poverty significantly influences economic growth in Indonesia.
It is mean that still many Indonesian people who
live in poverty especially in rural areas. Based on
the data, more than 60% poor people is living in
rural areas that depend on the agricultural sector,
in which they are far away from the capital access, technology and education. Under such conditions, the resulting output will be low because
limited access to capital led the poor can not afford to develop their business so it will affect their
income[4].
These results also consistent with the theory, in
which country with the better health levels, so
each individual will live longer, thus economically
have the opportunity to earn a higher income.
This study also in line with Lincolin (1999),
he explained that important policy tool to reduce poverty is through improve the health, it
is because health improvement will increase the
productivity of the poor, better health will improve employment and reduce absenteeism and
increase productivity of worker.
Table 4: Result of Two Stage Least Squares with
Poverty as Endogenous variable
Table 3: Result of Two Stage Least Squares with
Economic Growth as Endogenous variable
While for another endogenous variable like
poverty will be show on the Table 4. From the
result, life expectancy variables show that negative correlated to the level of poverty in Indonesia. This means that increasing life expectancy rate will decrease the poverty in Indonesia with regression coefficient about -1,0846. It
is means that increasing life expectancy about 1
year will decreasing the poverty about 1, 0846
percent. This result also has similar finding with
Kumalasari, et.al (2011) and [4] that show negative coefficient between life expectancy to poverty.
ISBN: 978-602-9438-24-6
Literacy also shows negative and significant results to the poverty. This means that increasingly
literate population in Indonesia, it will be decreasing the poverty rate. The result show that the
coefficient obtained at – 0,7696., which means
that every increase by 1 percent of literacy will
decrease the number of people who living below
poverty line at 0,7696 percent.
According to the Table 4 above, unemployment
rate have a significant effect to the poverty with
positive correlation. This results is support the
theory, in which higher unemployment rate will
increase higher poverty. For 1 percent unemployment rate increase, so it will make 0. 3172
percent increase the poverty. This study is in
line with [5], the research about effect of unemployment on poverty in Indonesia using Forrester
Greer and Horbecke indexes. The research found
that increasing of unemployment will increase the
poverty rate, otherwise the smaller of unemployment rate will lead to lower level of poverty rate
in Indonesia.
The last, this study investigates empirically the
relationship of simultaneity between economic
growth and poverty and factors that influence it
that using simultaneous equation framework in
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The 3rd Uzbekistan-Indonesia International Joint Conference on
Economic Development and Nation Character Building to Meet the Global Economic Challenges
which economic growth and poverty are endogenous variables. From the previous result, it indicate that there is presence of simultaneity between economic growth and poverty with negative coefficient and significantly proven. The
result shows that there is complementary relationship between economic growth and poverty
with negative direction between two equations.
It is mean that, lower poverty will increase the
economic growth. This finding also similar with
Seran (2012), explained that economic growth
has a negative relationship and significantly affect
the poverty.
5
Conclusion
Based on the results that have been discussed, it
can conclude that there is simultaneity between
economic growth and poverty with negative coefficient. So, it means that economic growth and
poverty is complementary each other in negative
direction. Negative direction reflects that both
variables are substitutes and complementary to
each other so that estimated in OLS regression
of single equation will suffer from simultaneous
equation bias.
Furthermore, unemployment and poverty are
significantly related to the economic growth while
life expectancy, unemployment and literacy rate
are also significantly related to poverty and also
support the purposed theory.
References
[1] Lincolin. Arsyad.
Pengantar Perencanaan
dan Pembangunan Daerah. BPFE, UGM, Yogyakarta., 1999.
[2] BPS. Bappenas. Berita Resmi Statistik 2012:
Profil Kemiskinan di Indonesia September
2012. 2013.
[3] D.N. Gujarati. Basic Econometrics, 4th edition. New York: The McGraw-Hill Companies, 2007.
[4] Arius Jonaidi.
Analisis pertumbuhan
ekonomi dan kemiskinan di indonesia.
Jurnal Kajian Ekonomi, 1, 2012.
[5] Dian. Octaviani. Inflasi, pengangguran, dan
kemiskinan di indonesia: Analisis indeks forrester greer & horbecke. Media Ekonomi,
7:100–118, 2001.
[6] Varlina. Yacoub.
Pengaruh tingkat pengangguran terhadap tingkat kemiskinan
kabuten/kota di provinsi kalimantan barat.
Jurnal EKSOS, 8:176–185, 2012.
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