The Effects of Growth and Change in Inequality on Poverty Reduction in Indonesia

In this study I want to analyze how much the changing on economic growth and inequality is affecting the changing on poverty reduction; is it true that in order to reduce the number of poverty incidences in Indonesia, the appropriate things should be done is only increasing the economic growth in this case is increasing the average income. Due to fulfil those objectives, I estimate poverty elasticity to growth and inequality for twenty five provinces in Indonesia using the headcount and Gini ratio data and per capita GRDP for each twenty five provinces on year 2001 and 2005. Used formula was developed by Besley and Burgess (Besley and Burgess 2003) and one formula for estimating trade off between economic growth and inequality by Wodon (Wodon 1999). The first conclusion that can be retrieved from those data are high increase in per capita GRDP followed by small change in the Gini ratio will affect faster reduction on the headcount ratio. Secondly, the time specification effect does not give any impact on the linkage of the change in headcount ratio, Gini ratio, and per capita GRDP for twenty five provinces in Indonesia in year 2001 and 2005. And, the last, if the value of Gini ratio increase by 1%, it should be compensated by 3.418% of the change in per capita GRDP otherwise, that increasing will harm the poor because they will receive less the gain from economic growth.