INDONESIA - POVERTY RISES DESPITE SOUND MACROECONOMIC

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E.O. 12598: N/A
TAGS: EFIN EINV ECON ETRD ID
SUBJECT: INDONESIA - POVERTY RISES DESPITE SOUND MACROECONOMIC
ENVIRONMENT


A) Jakarta 13326


1. (SBU) Summary. In an embarrassment for the Yudhoyono
Administration, the incidence of poverty in Indonesia has risen over
the past year from 16 to almost 18 percent despite the return of
macroeconomic stability and GDP growth rates above five percent.
Most analysts attribute the increase in poverty to two factors: the
structure of poverty in Indonesia and how it is measured; and the
high price of rice. Forty-nine percent of the population earns less
than $2 a day and 17% earns less than $1.55 a day (the national
poverty line). Rice accounts for nearly a quarter of expenditures
for most low income Indonesians, and its wholesale price has risen
70 percent over the past two years in response to economy-wide
inflationary pressures, poor harvests, Government of Indonesia (GOI)
rice price policy, and GOI restrictions on rice imports. The 2007
budget targets poverty alleviation and reduction through a variety
of programs to encourage economic growth, increase employment and
provide better services to the poor. Nonetheless, the quickest way
to reduce poverty levels would be to increase employment, which is
unlikely without significant new investment, especially in labor
intensive sectors such agriculture, manufacturing and
infrastructure. With investment climate reforms proceeding at a
modest pace, few analysts expect the Yudhoyono Administration to
meet its own target of reducing the incidence of poverty to 8.2% of
the population by 2009. End Summary.

Macroeconomic Stability Fails to Reduce Poverty
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2. (U) The GOI successfully restored macroeconomic stability in
2006, following the economic "mini-crisis" of 2005 (reftel).
Forecasters predict that the Indonesian economy will expand by 5.5%
in 2006 and by close to 6.0% in 2007. Moreover, Bank Indonesia
expects that headline inflation will fall below 6% for the full year
2006, down from over 18% YoY in October and November 2005, when the
GOI reduced fuel price subsidies. The Rp/USD exchange rate has also
stabilized, remaining close to the 9000-9300 Rp/USD range for most
of the past nine months.


3. (U) Despite this hard won stability, both income and non-income
(i.e. access to social services and infrastructure) poverty among
Indonesia's population has risen over the past year. After
declining steadily in the years following Indonesia's 1998 economic
crisis, the poverty headcount rose from 16.0% in 2005 to 17.8% in

2006. Most analysts attribute the rise to two factors, the
structure of poverty in Indonesia, and the high price of rice, which
has risen steadily over the past two years in response to poor
harvests and GOI restrictions on rice imports.

Structure of Poverty in Indonesia is Key Challenge
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4. (U) According to a recent World Bank report, almost 17% of
Indonesia's population is living below the national poverty line of
$1.55 a day. However, another 32% of the population hovers near the
national poverty line, living on between $1.55 and $2 a day,
bringing the total percentage of poor and near poor to close to half
the population. According to the same report, there also is a high
degree of movement in and out of poverty over time in Indonesia.
More than 59% of Indonesians had been poor at some time during the
year in 2003, and over 38% of poor households in 2004 were not poor
in 2003. As a result, small changes in prices of consumer goods,
income, and employment rates have a very significant impact on the
official rate of poverty in Indonesia.


5. (U) The WB study also points out that large numbers of
Indonesians experience various forms of non-income poverty such as a
lack of access to adequate education, quality healthcare services
and other basic infrastructure. Indonesia continues to lag behind
other countries in the region in maternal health, child nutrition,
levels of education, and access to safe water and sanitation. For
example, Indonesia's maternal mortality rate (307 deaths in 1000,000
births) is three times that of Vietnam and six times that of China
and Malaysia.


6. (U) Finally, regional disparities hamper Indonesia's ability to
stem increases in poverty. According to the World Bank study,
although the largest number of poor in Indonesia lives in the
densely populated islands of Java and Bali, the incidence of poverty
in those areas is relatively low at 15.7% of the population. In
contrast, more remote areas such as Papua are home to only 3% of

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Indonesia's poor, but the incidence of poverty in Papua is 38.7%.
In addition, access to services varies greatly across Indonesia,
with more remote areas suffering disproportionately. As a result,
one-size-fits-all poverty programs have limited success in reducing
the number of poor among disparate sections of the country.

Spike in Rice Prices Impacts Poverty Headcount
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7. (SBU) Because a large portion of Indonesia's population is
vulnerable to falling into poverty, the steady increase in
Indonesia's retail rice prices has had a significant impact on
poverty rates in Indonesia. Rice accounts for nearly a quarter of
expenditures of most low income Indonesians, making it the single
most important commodity in the fight against poverty. According to
the leading Jakarta rice distributor, wholesale rice prices rose 27%
from November 2005 to November 2006. This jump followed a 33%
increase in the price of rice during the previous twelve months.
Poor harvests, restrictions on rice imports, and failed government
policies are responsible for the sharp increase in the price of
rice. (Note: While rising fuel prices drove the dramatic increase
in headline inflation in 2005 and 2006, many analysts believe the
increase in fuel prices did not directly impact poverty rates in
Indonesia, because the poor received cash transfers to compensate
for the higher prices. In addition, middle and upper income
Indonesian's are the most significant consumers of fuel in the
country. End Note.)


8. (SBU) The GOI sets a minimum rice price at which local
cooperatives can purchase rice on behalf of the State Logistics
Board BULOG. Rice farmers may sell their stock to BULOG, through
cooperatives, or to private sector wholesalers. In practice most
farmers sell to private distributors, which generally offer more
attractive prices. However, few rice farmers benefit much from
increases in the retail price of their crop. In 1998, the GOI
increased the floor price for wholesale rice without an accompanying
increase in the floor price for wet paddy rice paid to farmers. The
resulting gap has made it difficult for farmers to afford to
purchase retail rice, since retail rice prices track wholesale
prices. In addition, since most rice farmers in Indonesia are
small-scale, they lack the capacity to store the rice they produce
and must sell their rice when supplies are higher instead of taking
advantage of the natural increase in prices during the non-harvest
season when supplies are lower. Wholesalers are the winners in this
system--they buy at low prices from farmers during the harvest
season, and sell high into the tight market that results from the
import ban as well as GOI price policy for wholesale and wet paddy
rice.


9. (SBU) BULOG is required to maintain a stock of rice for
distribution to the poor or victims of natural disasters at
subsidized prices. BULOG also releases its stock at the behest of
the government under the Rice Market Operation (MO) policy, in order
to stabilize prices. The GOI currently prohibits BULOG from
importing rice unless its stock falls below 1,000,000 tons.
However, in late 2006 the GOI's MO policy has failed to bring price
relief. As a result, the price of rice continues to rise, jumping
close to 8% during the first three weeks of December because stocks
of rice in general have been depleted and planting has been delayed.
Drought is also expected to delay the 2007 rice harvest until April
or May on Java Island, where about half of the rice in Indonesia is
produced.

GOI Infighting Over Rice Import Ban Ebbs
--------------


10. (SBU) Minister of Trade Mari Pangestu and other GOI Ministers
have supported lifting a GOI ban on rice imports from countries like
Thailand and Vietnam to help stabilize prices. Until recently,
however, Minister of Agriculture Anton Apriyantono, a member of the
Prosperous Justice Party (PKS),has largely stymied Pangestu's
efforts. The PKS, a member of the GOI coalition government, is a
conservative, Islamist grouping, with a relatively small, but
growing rural political base. Anton, with support from rice
distributor and growers groups, argued vehemently over the past two
years that there was no shortage in Indonesia's rice stocks and that
allowing rice imports would hurt local farmers that could not
compete with lower import prices. At times, Anton and others have
even gone as far as to intimate that Pangestu's ethnic-Chinese
lineage was behind her interest in allowing rice imports (many rice
traders are Chinese Indonesians).

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11. (SBU) The most recent dramatic spike in rice prices and a World
Bank report recommending the GOI lift its import ban have apparently
provided the GOI with enough political cover to ease the ban and
allow some imports. Coordinating Minister Boediono told a group of
donors and business representatives on December 18 that the GOI is
working to stabilize rice prices and will "do whatever it takes" to
normalize the situation. On December 26, the GOI announced plans to
import 500,000 tons of rice during January and February 2007 in an
effort to distribute 600,000 tons of rice to the poor over the next
few months. Nevertheless, the unusually long dry season in 2006
delayed rice planting and most observers expect this year's harvest
to be poor, putting renewed pressure on rice prices.

Limited Employment Growth Keeps Poverty Rates High
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12. (U) As noted above, analysts expect Indonesia's economy to
expand a healthy 5.5% this year. However, growth in labor intensive
industries, such as agriculture and manufacturing, have failed to
keep pace, keeping unemployment levels high and contributing to high
rates of poverty (reftel). According to BPS, the unemployment rate
in Indonesia has remained steady in 2006, at roughly 10%.

Increasingly Pro-Poor Policies But Challenges Remain
-------------- --------------


13. (U) In order to address income and non-income poverty issues and
meet its ambitious poverty reduction goal of 8.2% by 2009, the GOI
has proposed a 2007 fiscal budget that focuses on economic growth,
increased employment, and poverty reduction. The GOI increased the
2007 budget for the Ministry of Health and the Ministry of Education
by 20% and 10% respectively in an effort to improve health and
education services provided to the poor. In addition, the 2007
spending policies for almost all line ministries include some
element of pro-poor policies, including assistance to labor
intensive industries, and subsidies for kerosene, fertilizer, and
seed purchases. The GOI also increased its total social assistance
budget from Rp 36.9 trillion ($4.1 billion) in 2006 to Rp 49
trillion in 2007 ($5.4 billion). Of the Rp 49 trillion budgeted for
general social assistance, the GOI allocated Rp 47 trillion ($5.2
billion) to social assistance for the poor, compared to only Rp 26.5
trillion ($2.9 billion) in 2006.


14. (U) The GOI also will replace its current unconditional cash
transfer program with a Rp 4 trillion conditional cash transfer
program in 2007. The new program, which focuses on maternal and
child health and education, will require recipients to provide
evidence that they used the funds to obtain the intended health and
education services. For example, children receiving educational
stipends will be required to maintain an attendance record of 85% or
higher. Finally, in addition to the recently announced GOI
initiative to import 500,000 tons of rice for poor families listed
above, the 2007 budget includes a Rp. 6.8 trillion rice subsidy
program targeted at providing subsidized rice to roughly 16 million
poor households.


15. (SBU) Comment: Although the Yudhoyono Administration is working
hard to improve the pro-poor orientation of the budget, the total
amount of funds for poverty alleviation is small and most GOI
anti-poverty programs will take years to roll out. As a result, the
SBY Administration is unlikely to meet the poverty reduction goals
it announced as part of its 2005-09 Medium Term Development Plan
without sustained growth in agriculture and other labor intensive
sectors. In fact, the primary motivation behind SBY's very
prominent biofuels initiative is just this--to increase employment
in rural areas through the development of massive palm oil
plantations and their associated infrastructure. The GOI will also
need to follow through more aggressively in implementing promised
investment climate reforms to increase private investment throughout
the economy. In addition to increasing employment, the best short
term policy option available to drive down poverty rates would be to
allow sufficient rice imports so that retail rice prices fall to
more reasonable levels, a message the GOI seems to finally be
learning.

HEFFERN