POVERTY REDUCTION THROUGH FISCAL POLICY: INDONESIA EXPERIENCE

REVIEW ESSAY
POVERTY REDUCTION THROUGH

FISCAL POLICY: INDONESIA EXPERIENCE

by Beny Trias Oktora

Analyst at Ministry of Finance The Republic of Indonesia

1. INTRODUCTION

1. 1. Issue on Poverty Reduction

Even in advance country, poverty is still a major issue to deal with. Then, when we reach to less developed and developing countries we found that poverty is the most major issue and takes huge efforts and attempts of government and of involvement of non government organization to be solved in. Many techniques have already introduced to reduce poverty. From the ideal one which is the idea for empowering the poor through economic channel or education. This idea looks seem the best strategy. Or the most conservative one is just giving money to poor and that`s it STOP. There is no multiplier effect of giving money to poor instantly. We easily justify that this kind of strategy is not even giving small impact in the long run because the poor can easily use the money for only short term needs for example for only buying basic needs especially food.

In political ground, poverty is fuel for opposition to distract concentration of ruling party. Poverty is the best ammunition for party to gain ballot by attacking the fail of ruling party program and offering new strategy to reducing poverty. At this point, poverty is the sexiest issue that can be raised to win the game at political ground. However, the effectiveness of poverty reduction which is conducted in political platform is doubted. Non government organization that is not affiliated to party is much better known about how to reduce poverty. Why? Because they observe day by day how poorer people become poorer and how to excluding poorer people from poor.

A country effort is not quite enough to reduce poverty. A global effort is [was] taking in 1980s and in new millennium. Recent effort in new millennium is called Millennium Development Goals. Ultimate time of MDGs is 2015 which must be achieved all goals by all developing countries and less developed countries. Unfortunately, United Nations as leading agency should revise target year in 2015 because many of developing countries and less developed countries still grapple with poverty problem.

1. 2. Poverty in Indonesia

Fact about poverty in Indonesia is [was] depending on downturn of its economy. Moreover, Indonesia economic condition depends on world economy especially western. In 1997, when major Asian countries including Indonesia were hit by tsunami of monetary crisis, number of people that were becoming poor was increasing. Economic downturn caused poverty is just one cause. Access to social facility such hospital and education are [were] added the cause of poverty in Indonesia. Moreover, geographical obstacle is also challenge in attempting to reduce poverty in Indonesia.

Devolution of power is another effort in delivering public service in local community has not ended successful. Theoretical view has shown that devolution of power and follows by fiscal power to local government are needed more concise effort and commitment.

Figure 1 Number of Poor People between 2007 to 2010

However, when we look at the data at Badan Pusat Statistik (Central Statistic Agency) there is a decreasing number of poor people. In 2010, 14% of Indonesia citizen is still accounted as poor. Economist (even me strongly argued) argued that strengthening of economy is contributing on reducing poor people. Once again this argument is built on simply causality relation that needed to be proof.

1. 3. Poverty Reduction Program in Indonesia

I like the quote that says “there is no single cause for each event” and if we make relation to poverty issue, the quote has meaning that every poverty has own cause and needs different techniques to deal with and to solve. This essay is trying to review new strategy and new technique that have already implemented in Indonesia using fiscal instrument. The main discussion is based on devolution of power which has been implemented in Indonesia since 2001. As each of province, municipal and city in Indonesia in decentralization regime have their own power in managing their own budget and following the power, province, municipal and city must manage their own affairs so that fiscal power is now at local hands.

Started form this condition, coordinator ministry of welfare in first term and in second term of President Susilo Bambang Yudhoyono has been launching poverty reducing program under Program Nasional Pemberdayaan Masyarakat (National Program on Empowering Society). And ministry of finance as institution that has capability in mapping fiscal power of local government to be involved to formulate cost sharing between central government and local government in empowering society program using fiscal capacity and poverty depth index.

2. FISCAL CAPACITY AND POVERTY RATE

2. 1. Technique in Accelerating Poverty Reduction

New government administration means new policy. Or even to make different from previous government policy, new government makes new name for the same policy even though the essential of policy is quietly the same. The point is new administration needs to be characterized in their program. In New Order regime, poverty reduction program also introduced. What makes different? First, local government in decentralization regime has power in fiscal. Second, poverty is not only central government obligation but also local government obligation. Third, using local government fiscal power, central government especially ministry of finance makes regulation in sharing “the pain” on reducing poverty.

In decentralization regime, ministry of finance knows capacity of fiscal of local government. Together with Badan Pusat Statistik (Statistic Agency), local government fiscal capacity index is to be related to Poverty Depth Index. Province/municipal/city should provide amount of fund from their budget exclusively for poverty reduction.

2. 2. Fiscal Power Shifting

Devolution of power has shifted every single power holders in central government hands to local government hands. The map of fiscal power has been changed massively. Now local government holds fiscal power. Nevertheless, not all local government holds big fiscal power. Fiscal power depends on economic factor such tax revenue sharing, natural resources revenue sharing and original revenue of local government.

The idea is started from this point fiscal power shifting. Together with local government, ministry of finance as central government calculates formula for allocation for the poor. How much pain is to be shared between central government and local government? The detail of the concept as follows. This concept relates fiscal capacity of local government to amount of poor people. Then it is divided into four cluster or group. The cluster/group is classified by the obligation to allocate fund for reducing poverty.

2. 3. Fiscal Capacity

First step is to calculate fiscal capacity of local government. Local government fiscal capacity is sum of transfer fund and original local revenue excluding of personnel expenditure and special allocation fund divide by sum of amount citizen and construction cost index. As follows is the detail formula.

2. 4. Poverty Rate

Secondly is to calculate Index of Local Poor Citizen Percentage. The index is human poor index of city / municipal divided by national average of human poor index. Human poor index is calculated annually by BPS (statistical agency). The detail of calculation as follows.

2. 5. Sharing the Problem and Sharing the Cost

The calculation Local Fiscal Space Index makes the map of fiscal capacity. And then Index of Local Poor Citizen Percentage portraits the condition of each city and municipal in Indonesia. Both indexes are benchmark for sharing the problem and the cost. The indexes are divided into four cluster or group and here is the division.

1. Group 1 is for local government who has fiscal capacity above national average of fiscal capacity and who has percentage of poor people above national average. This group should allocate 15% of their budget for poverty reduction fund or should allocate very high allocation for poverty reduction.

2. Group 2 is for local government who has fiscal capacity below national average and who has percentage of human poor above national average. This group should allocate 5% of their budget for poverty reduction fund or should allocate low allocation for poverty reduction.

3. Group 3 is for local government who has fiscal capacity below national average and who has percentage of human poor below national average. This group should allocate 8% of their budget for poverty reduction fund or should allocate middle allocation for poverty reduction.

4. Group 4 is for local government who has fiscal capacity above national average and who has percentage of human poor below national average. This group should allocate 10% of their budget for poverty reduction fund or should allocate high allocation for poverty reduction.

3. REVIEWING THE CONCEPT

3.1. Economic Development versus Poverty Reduction

Does economic development accord with poverty reduction? In New Order regime which was using trickledown effect concept, many poorer people has left behind in other word they are still poor. Trickledown effect itself is not clear concept and fertilizing cronyism and corruption at the end. New order regime was duplicating success story of economic development in East Asia countries such as Singapore, South Korea and Taiwan known as Asian Tiger. Key of success of Asian Tiger is government intervention through subsidize. Who`s got subsidize? Targeting industry who got subsidize. What criterion to subsidize an industry? There is no clear answer.

Moreover, China that assumes as the most phenomenon economic growth among developing countries has been leaving behind hinter land at poverty compares with coastal area. Economic development of China is focusing on some area in coastal area. It is logic regulation because since ship is the cheapest and automatically efficient transportation so that China economic development started from coastal area. No guarantee that hinter area will taste the trickledown effect of economic development of coastal area.

It is important to explain the economic development into relation of fiscal management. Fiscal power creates from economic development. When there is significant development of economic, fiscal power is starting into creation. That`s why I argue no guarantee of better economic development so that better poverty reduction.

3.2. Local Leader Commitment

Commitment from political leader in poverty reduction is one condition to be presence. Without political commitment, poverty reduction is becoming totally left behind. In democratic regime, the national issue is steered by politic which represent of people. So when local leader is perfidious from its mandate especially when its people is still in poor condition but the leader is focusing only for economic development the agenda for poverty reduction is totally left behind. This phenomenon is happened in Indonesia.

3.3. Social Factor

Resource allocation is important for the poor. But poverty reduction is sustainable effort. So social factor contribute as one factor to poverty reduction in not instant way. Education is to be believe as sustain effort for human to survive. Solomon is asked by God which one he prefers to receive from God: a kingdom, treasure or knowledge. Solomon replies he would like receive knowledge because knowledge is lasting forever. With knowledge he can get kingdom and treasure. Most of us also believe on education is capital. To be graduated from the poor, many countries do invest on education. Indonesia in its constitution has obligated to central government and local government to allocate 20% of budget for education.

4. SUMMARY

Poverty reduction is not all about allocating more money to the poor. Poverty reduction is comprehensive effort including economic factor, political factor and social factor. Economic factor refers to resource allocation. Political factor refers to how power leads the way for marginal people to be overcome form being poor. Social factor related to education which is capital for human being to be survived.

Fiscal instrument instead is one part of poverty reduction efforts that is part of economic factor. Precisely, fiscal instrument is the function of resource allocation. Indonesia as implemented decentralization needs to share the pain of poverty by mapping fiscal capacity and human poor percentage of city and municipal.

I argue that comprehensive implementation of three factors for poverty reduction is promising solution rather than focusing only on economic development. Because poverty is not simple matter. Poverty needs complex solution with comprehensive factors.

Summarized and Criticized Paper

Theorising Globalisation’s Social Impact: Proposing The Concept of Vulnerability, by Peadar Kirby, School of Law and Government, Dublin City University

Summarized and Criticized by Beny Trias Oktora, Master of Arts in International Development and Cooperation at Korea University, Graduate School of International Studies, Employed by the Ministry of Finance of the Republic of Indonesia and is pursuing PhD in Economics.

I.INTRODUCTION

Author is trying to compose and propose theory of globalization`s social impact with the concept of vulnerability. Author argued that in International Political Economics, discussion about the concept vulnerability for theory of globalization`s social impact is little used in the term of academia whereas using in the term of descriptive. Globalization`s impact in human being is broadly discussed and become central issue that arose pros and cons. Pros and cons in globalization are not bringing light but their opposing each other bringing tension and heat and also globalization. Author have found other concept that have already existed have failed to explain what obvious impact of globalization to human and it relation. The concept of vulnerability that author is proposing is the concept that has developed by Keohane and Nye in their work on ‘complex interdependence’ (1977, 2001). Author divided this article into 4 sections of his/her argumentation.

II. VULNERABILITY CONCEPT: USES, MEANING, AND APPLICABILITY

Robert O. Keohane and Joseph S. Nye have developed the concept of vulnerability in their work “Power and Interdependence” in 1977/2000. They introduced interconnectedness and interdependence in practice of international relation which are different of each other. While interconnectedness resulted no cost and interdependence resulted involving potential costs and requiring action to avoid incurring those costs. Interdependence is key points and crux to start explaining of vulnerability concept. Costs that arise from interdependence are analyzing within sensitivity and vulnerability. Sensitivity means that how country trying to form adaptation concerning threats whether came from economic or political and vulnerability means that country is trying to calculate what costs will generate from those threats and trying to formulate policies that hoping will vanquish those costs.

In the 21^st century when globalization became reality, the concept of interdependence that have developed before by Robert O. Keohane and Joseph S. Nye responded to attach globalization as one of others factors that sources of vulnerability in the world today. They analyzed that based on assumptions about state capacity and the availability of alternatives (indeed, it largely limits itself to the action of states or intergovernmental bodies) that fail to examine more fully the implications of the shifts in economic, political, social and cultural power entailed by globalization.

Recently and actually in 1990s, many intergovernmental organizations are using concept of vulnerability to measurement the impact of what major affairs that they are concerned in relation to globalization. For instance International Monetary Fund, after financial crisis that originated causing from the currency crises in Mexico, East Asia, Russia and Brazil in the 1990s led them to develop vulnerability indicators of what countries are vulnerable to such financial crises and to what extent. The Fund states that ‘timely and detailed data on international reserves, external debt, and capital flows strengthen the ability to detect vulnerabilities, giving policy makers enough time to put remedial measures in place’ (IMF, 2003). The bottom lines are vulnerability concept concerns on how threats on many aspects of human being assessed in order to minimize its bad impacts and the responsibilities are on government side.

Why government? Explicitly the concept have given government to do that job: making policy to handle possible events that have strong possibility and will be created harm to their people even though regular job are still tough. Should only government to do this difficult job? Can we create another agent to do this job that it form government and non government organization or pure non government organization? From my view this kind of job will work well if government including NGOs.

I am questioning author argumentation whether the concept of vulnerability seems to be applied to all problems that related to globalization especially in economic, politic, social and culture. Could the concept of vulnerability answer and be applied to all problems? It seems that all problems can be digested and plotted by the concept of vulnerability.

III. VALUE FROM VULNERABILITY CONCEPT

Relating to my doubting in previous section, author is examining what difference of vulnerability concept among others concepts that are trying to answer problems as impacts of globalization and this concept also provide additional value in analyzing that will be utilized to handle impacts of globalization. What is made this concept different? These what author is trying to explain are in terms of its analytical reach and also in terms of what it points to by way of policy responses. Common way to assess the impacts of globalization on society is analyzing the trend through number of poverty and inequality. Yet, using of trend of poverty and inequality in measuring positive and negative impacts of globalization are raising debates.

For those who are in pros position on globalization that have good impacts rather than bad impacts on society will show the story of succeeds countries who involved in globalization intensively such as China, India, Brazil, Hungary and Mexico (they are using flow of trade and investment). In the term of income per capita, many developing countries that copied some economic development strategy which are industrialized their economic development massively will double their income per capita. Many press media (which are well known as press media pros to liberalization of economic) also have been contributing in marketing this contribution that generated from globalization to better society. The pros more argued when they pointed to the countries who not involved in the globalization (means not liberalize their economy) are suffered such African countries and Ex-Soviet Union. However, using poverty and inequality in assessing the impact of globalization on livelihoods and well-being is unreliable for a number of reasons.

For the cons, there are several doubts on how to measure poverty. Wade doubted on World Bank measurement on poverty will capture the real number of poverty due to margin of error and changing in methodology and also the inconsistency showed by the Banks on number of poverty. On inequality, Wade has doubted on how to measure inequality so that estimates depend greatly on what one chooses to measure (for example, inequality within countries or between countries). He concludes: ‘The Bank’s argument about the benign effects of globalization on growth, poverty and income distribution does not survive scrutiny’ (Wade, 2003: 32).

Furthermore author stated that even if we had reliable measures of poverty and inequality over a long enough time period to allow credible trends be discerned, other more substantive difficulties remain since it is far from clear what distributional concepts tell us about people’s lives. Then author doubted on how the Banks measurement poverty based $ 1.08 that will have purchasing power parity and how those number can across all countries to meet basic people needs such as food, clothes and shelter. In Latin America, author provide alternative measuring poverty using meeting the basic needs of human. Interestingly, poverty estimates by the UN Economic Commission for Latin America and the Caribbean (ECLAC) using the canasta basica method are much higher for most of the region’s countries than are those of the World Bank (ECLAC, 2001: 51).

Another difficult matter is to define poverty because time after time its definition growing. Traditional definition is capturing how people can eat, wear cloth and have home to shelter. Now the definition has been broaden in including risk of society when deal with globalization. The concept is developed by the German sociologist, Ulrick Beck, who developed the notion of the ‘risk society’ (Beck, 1992). Regarding to the new advanced of many dimensions of people life and the most significant are industrialization, new technology and developing countries fueling their industry to meet economic growth affected to risk of society such pollution, climate change, and income gap between people in developing countries that in the bottom line will raise risk to society. Some scholars argued that society risk is not complete also have limitations so they are developing another concept that related to ability of human to cope with those risks. They called the coping mechanism. This leads to consideration of a third concept, human security. Introduced by the UNDP in its 1994 Human Development Report, it has come into widespread use and overlaps in many ways with the concept of vulnerability being proposed here. It takes the focus off the nature of the risks we face and puts it back on their impacts.

When human security can be lead to misperception because the concept based on security matters that tends to be military things and some of bias understanding. Vulnerability, on the other hand, is a surer concept, not only because it comes with a precise definition but also because it is inherently a relational concept and would only lend itself with difficulty to being commodified. Unlike security, the concept of vulnerability does not express a state to be achieved (the state of being secure or, in the root Latin meaning, to be sinecura or without care) but rather expresses the common human condition of being wounded which is its root meaning. It therefore points, not to the attempt to make ourselves invulnerable which is unattainable, but to strengthen the means by which we might cope with the threats to which we are vulnerable. While it is not impossible to envisage the term vulnerability being used to justify protecting ourselves gainst others (in ways similar to those outlined in the previous paragraph), the concept itself points beyond the state of reduced vulnerability that might thereby be achieved to a focus on the fact that vulnerability constitutes an essential part of the human condition and requires shared or communal responses. Vulnerability can be said to be less easily reducible to an individualistic interpretation or use, as it necessarily points to collective responses to the threats to human well-being which it identifies. The concept of vulnerability therefore gives far more precise and unambiguous expression to a relational understanding of the roots of social order. By definition, vulnerability and a relational conception of security both theorize the roots of social order and human well-being as resting in a sense of belonging to society in a way that satisfies both material and psychological needs and offers security to the individual as part of the collectivity.

The concept of vulnerability as I have observed to complete and give more it strength for human and people, it is better to include not only traditional premiere aspects like economic, politic and social but also to day world big issues such as climate change and human rights. Because many countries sometimes have willingness to develop their economic by accelerated their industry without respect to environment and human rights as long as they can grow their economic.

IV. KARL POLANYI VIEWS

Karl Polanyi’s oeuvre helps highlight the significance for society of growing vulnerability. His central concern is with the damage, indeed violence, caused to society by the inroads of the market mechanism deriving both from the threats which this unleashes for the human person, society and nature, and from the erosion of the norms, values and practices, and their various institutional expressions, through which nature, society and ultimately human livelihood were protected as the normal practice of human societies throughout history (2001 [1944]). Then Polanyi is providing framework to analysis what main vulnerable to human and society. This framework identifies the relationship of the market to society as the central causal mechanism at work. In doing this, it underlines the significance that economic liberalisation plays in the growing vulnerability of the financial, economic, social, cultural, political, environmental and personal spheres through increased threats to human well-being and reduced mechanisms to cope with these. The principal value of Polanyi’s framework, however, is that it offers an explanation that identifies how and why the market has these effects through his central categories of the market economy and the market society, namely the ways in which both the economy and society are made dependent on the self-governing market mechanism.

In defining poverty Polanyi also has very appropriate definition and also conception to solve poverty. His view based on two main ideas: Firstly, in identifying the value of social belonging as being much more important to the individual’s well-being than income alone, he offers an understanding that is close to Sen’s emphasis on people’s status in society and the requirement that they can appear in public without shame (Sen, 1999). Secondly, in identifying market liberalisation as the cause of such social dislocation, he directly challenges dominant approaches to addressing poverty through providing market opportunities for the poor.

Furthermore, Polanyi also provide description of what institutional should do. Polanyi identifies very concretely what are the institutional mechanisms needed to ensure that the economy is embedded in society, that the generation of wealth serves the good of society. These, for Polanyi, are the essential features of a just society. He identified three such mechanisms, or forms of integration as he called them. These serve to create interdependence between the different elements of the economic process, from material resources and labour to the transportation, storage, and distribution of goods, submerging economic processes in social relationships. They are reciprocity, redistribution and exchange.

V. CONCLUSION

Author has explained excellently and chronological provide some arguments to address his/her ideas. Concept of vulnerability has its crux and developed from years behind and many scholars spent their times to developed theory that closely related to social impacts of globalization. In IPE, globalization become well sounded then before in growing of the concept of vulnerability. Karl Polanyi has contributed appropriately to development of theory relating to globalization and his theory also contributing in mixing with socialist ideas with previous theory that mostly came from western part or capitalist ideas.