The Dynamic Analysis of Inflation Rate and Farmers’ Welfare for Rural Poverty Reduction in Indonesia

This study aims to first analyse the relationship between inflation rate and farmers’ welfare improvement using VAR (Vector Auto-regression) model analysis based on quarterly data in the period 2000 – 2011. Second, it is to investigate the role of farmer well-being on rural poverty using the quadrant analysis based on quarterly data in the period 2008 – 2011. More precisely, we will use the data based on the NTP (Nilai Tukar Petani) index and on rural poverty rate to run this latter analysis. The result of our dynamic analysis using VAR model shows that inflation rate affects Indonesian farmers’ welfare significantly in the long run but not in the short run. This is in line with the characteristic of inflation rate in Indonesia as the long-term inflation rate that can stimulate the structuralmacroeconomic conditions. Therefore, the synergy of monetary instruments and real-sector-development policy on determining expected inflation rate is needed to improve the further farmers’ welfare in Indonesia. Moreover, we also find that domestic and international economic shocks, such as share of agriculture sector in GDP’s growth or real exchange rate, do influence the NTP index significantly. More precisely, the agriculture output growth and the inflation rate are positively influencing the farmer well-being while a depreciation of real exchange rate significantly reduces it. Therefore, our analysis stresses the fact that in order to improve further the farmers’ welfare in Indonesia, not only the inflation rate needs to be considered but also other monetary instruments and real-sector- development policies. Additionally, based on the quadrant analysis done for the period 2008-2011, we can see that there is an increase over time of the number of agriculture-based provinces (with high NTP index and low rural poverty rate) in Indonesia. The number of provinces in this particular quadrant had generally increased because of raise in the average of NTP index. This corresponds to provinces going from low NTP index and low poverty rate (quadrant II) to high NTP index and low poverty rate (quadrant I). Nevertheless, the rural poverty in Indonesia remained stable in 2011 with many provinces located in the normative quadrant (with high poverty rate and low NTP index) or in the transition provinces (with high poverty rate and high NTP index). To summarize, we find in our analysis that inflation rate influences significantly and positively the NTP index in the long run and the NTP index cannot affect poverty rate in the short run, or that beyond other factors of the farmers’ welfare are at play to reduce rural poverty rate. Relevance to Development Studies The analysis about the role of inflation rate and farmers’ welfare for rural poverty reduction in Indonesia is interesting. Indonesia is a significant country for development studies since it has many involvements in the agricultural sector development for a long time. These involvements and practices had caused dynamic deviations on the social-economic system especially in the rural poverty problem. The Indonesian government’s policy in the improveix ment of farmers’ welfare has played an important role on the development of agricultural sector. Hence, farmers’ welfare needs to be seen comprehensively for all stakeholders participating. The macro-level research through inflation rate mechanism of monetary policy in this study will give new perspectives about how the quality of famers’ welfare in Indonesia will be developed. Then, we can understand the significant role of agriculture sector on increasing farmers’ welfare for rural poverty reduction based on monetary framework in Indonesia.