Regional Productivity Growth, Poverty Reduction, and Income Inequality: Evidence from Peripheral and Poor Provinces in Indonesia

Abstraksi

This paper investigates the impact of productivity growth on income and poverty, and gauge the function played by the income redistribution in that relationship. Indonesia sustains stagnant economic growth, and indicates inequality reduction driven by the middle income group rather than the low income group with a dynamic progress of productivity growth at sub-national level. Stagnant economic growth in the midst of capital inflows and high job creation is an indication of weakening productivity. Using Indonesia’s cross-provincial data to conduct comparative regional analysis, we selected provinces which are in the peripheral and at the highest poverty gap index and inequality. We argue that productivity growth has impactful effect on income and poverty. Income distribution plays an important role in intervening productivity growth to increase income and at the end to reduce poverty. Economic growth that is associated with progressive and redistributive policies will reduce poverty more than growth without redistributive policies. Thus, there are several measures that development practitioner needs to advocate such as increasing access to credit, strengthening property rights, improving the delivery of public services and the quality of subsidy to support the next medium term plan and mainstreaming productivity as main issue.