The Nexus of Economic Factors and Poverty in the Region s Economy

Transcription

1 Vol. 7, No. 1, 2016, The Nexus of Economic Factors and Poverty in the Region s Economy Imam Mukhlis 1, Timbul Hamonangan Simanjuntak 2 Abstract This study aims to give analysis for the effect of the economic growth rate, the minimum wage and unemployment on poverty in 38 districts / cities in East Java province during The method of data analysis used in this study is the selection of panel data model in form of a fixed effect model. The results provide the conclusion that the rate of economic growth has no significant effect on poverty levels in various districts / cities in East Java. Minimum wage variable has a regression coefficient of and significant. It means that a higher minimum wage would reduce poverty in the area. Meanwhile, the unemployment variable has a regression coefficient of It means that higher unemployment will further increase the level of poverty in the area. Based on the above results, the policy recommendations that can be given are: the creation of economic growth can be done through giving attention on the economic potential of local and regional resources, establishing communication with the various parties involved in determining the amount of the minimum wage so that the amount of the minimum wage can increase the productivity of its work, the expansion of employment opportunities in various sectors of economic and infrastructure development in the poverty centers in the districts. Keywords: Poverty, Panel Data, Fixed Effect Model, Economic Growth 1. Introduction Economic development is known as a process for increasing economic growth which is followed by changes that occur in the structure of economic life of society. These changes covers an increase in the level of welfare of the society s poverty; a decrease in the contribution of agriculture to the GNP and the increased contribution of industry and services sectors in the GNP; improvement of education and skills of the workforce; and the substantial technical progress originating in the country (Nafziger, 2006). With the increasing intensity of economic activities, the achievement of the welfare society will be realized. Poverty is a portrait of a society that is not able to achieve the level of welfare. This inability occurs because people do not have good access to use economic resources in their economic activities. Besides that, this incapacity also occurs because people do not have enough knowledge to understand the market. Therefore, people do not have the flexibility to conduct economic transactions. In public life, poverty is identified with low incomes. This low level of income will ultimately limit the public expenditure in the fulfillment of their needs. In its development, the level of poverty in various regions in Indonesia is related to the growing sectors of economic activity. This activity sector is a means for economic activities. The economic sector will provide fringe benefits to economic operators who run their business. Such remuneration is the wages received by workers in the production process to produce output. Growing sectors of economic activity, then it will be able to reduce the level of poverty and instead to encourage the prosperity of life In this regard, the dynamic development in East Java economy shows that regional economic growth is higher than the national economic growth. As an illustration, the rate of economic growth in East Java 1 Lecturer at Faculty of Economics, State University of Malang, Malang, East Java Province, ndonesia 2 Lecturer at Faculty of Economics, Maranatha Christian University, Bandung, West Java, Indonesia 2016 Research Academy of Social Sciences 14

2 province in 2014 was 5.86%. Whereas in the same year, Indonesia's economic growth rate was 5.21% (BPS, 2015). High level of economic growth in East Java is supported by trade hotels and restaurants; and the manufacturing sector. Both sectors turn to be the locomotive in supporting regional economic growth. Both contribution of the sector in Gross Domestic Product (GDP) in East Java in 2013 respectively was 31.98% and 27.61%. Along with the growing population and increasing purchasing power, the two sectors have a dynamic development. As a region with high economic growth rates, it turns out the other economic indicators of East Java Province that is also having high levels of poverty. Data in 2014 showed that the number of poor community reached million inhabitants. At national level, the total population is million inhabitants. The high number of poor people in East Java show was the presence of some people who are not able to access economic resources in order to meet their needs. This limit resulted in the inability of the community to meet their needs. As a result of the widespread poverty and economic inequality is also widening. Poverty is closely related to purchasing power, economic development, and employment opportunities. These three factors are becoming the subject of various empirical studies presented in the literature review. In a development process that is happening today, industrialization has pushed economic progress in many areas. However, progress causes negative effects in the form of poverty and inequality of income among the population. In this case, the developments in the sectors of economic activities (such as agriculture, industry, trade and services sectors) are also accompanied by developments in the wages of workers, economic activity and employment. As known, wage is a fundamental rights accepted by the worker on their efforts in producing the goods. In fact, the determination of the districts / cities in East Java has changed. Determination of the amount of wages is packaged in the value of the minimum wage determined by agreement between workers, employers and government. The amount of the wage rate changes can influence the person's ability to make ends meet. Meeting the needs of the higher life will have an impact on achieving the welfare of the increasingly high. Poverty levels can also occur due to developments in the sectors of economic activity that is not able to optimally absorb the growing number of workforce. Therefore, these conditions led to the occurrence of unemployment on human labor. Another factor that could be expected to affect the development of poverty is economic growth in the region. As we know, economic growth reflects the expansion of economic activities in various fields. The continued development of the economy in the region, of course, it will encourage the establishment of people's purchasing power. It will eventually be able to improve the welfare of society. Based on the above exposure, the study aims to analyze the effect of the minimum wage, unemployment, and economic growth on poverty levels in many districts/cities in East Java Province 2. Review of Literature Poverty is a multidimensional phenomenon. Inside, there is a process of economic activities that occur at the level under ideal conditions in the subsistence community. No matter where country in the world, they will be encountered poverty in the lives of its people. This shows that poverty is a life event that is characterized by the limitations on resources, limited economic resources, and the inability to meet the needs of the community life. In this case, according to the World Bank (2013) "Poverty can be defined as whether households or individuals have enough resources or abilities today to meet their needs." Theoretically, it can be found there are 2 types of poverty; absolute poverty and relative poverty. Absolute poverty is the conditions in which the basic needs cannot be met. Concrete example is the occurrence of hunger, lack of education, ill health and suffering. Meanwhile, the poverty is a relative living conditions and resources in the society in relations to others. Concrete example is the unequal distribution of resources and social equity. To overcome the problem of poverty in many countries, some economists put forward the theory of 'pro-poor growth'. In this case, Agenor (2005) and Akoum (2008) are some researchers who push their policy in the context of the 'pro-poor growth' to encourage people out of the cycle of poverty in his life. A policy framework that is built in the theory of pro-poor growth is to encourage higher economic growth so as to 15

3 I. Mukhlis & T. H. Simanjuntak facilitate economic players to improve their economic activities. In addition, also an improvement on aspects of workers' wages and a reduction in the unemployment rate can be used as a channel in the reduction of poverty. Otomoatis monetary policy and fiscal policy can be integrated in a systematic and coordinated in an effort to reduce poverty. In this case any pro-poor macroeconomic policy should aim at smoothing economic fluctuations, particularly, downturns (Epaulard, 2003). Various studies have been conducted to analyze empirically factors that affect poverty. Research conducted by the Son and Kakwani (2004) aims to analyze the relationship between economic growth and poverty reduction in 11 Asian countries. To measure the impact of economic growth on poverty levels, it used elasticity analysis tools. The result of the research results is the initial conditions of economic development and income inequality has a significant impact on poverty reduction. Research conducted by Dahlquist (2013) analyzed the effect of economic growth on poverty levels in Brazil. The main conclusion from the empirical results is indeed economic growth to reduce poverty in Brazil. Another study by Rupasingha and Goetz (2007) concluded that the social capital, inequality ethnicity and income, political competition local, federal grants, foreign-born population and spatial effects are determinants important in poverty in various regions of the United States (US Counties). Results of research conducted by Xhafaj and Nurja (2014) concluded that the household size, the educational level and gender of the household head, the zone (urban or rural) are statistically variables. It is significantly important for the explanation of economic status as well as expenditure of consumption. Therefore, the educational level and the household headed by females, reduce the probability of being poor, whereas the household size increases it. The minimum wage, the results of a study conducted by Gindling (2014) concluded that most empirical studies of the impact of minimum wages on poverty in developing countries conclude that increases in minimum wages reduce poverty. According to Saunders (2002), there is strong evidence that the higher the unemployment rate can be improved its risk of poverty and contribute also to the greater inequality. According to Khan (2007) there are some aspects that links between employment and unemployment, namely: (a) an increase in wage employment; (b) an increase in the real wage; (c) an increase is in self-employment; (d) an increase in productivity in self-employment; and (e) an increase of in the terms of exchange of the output of self-employment. In terms of the relationship between growth and poverty, then it is from the outset presented in the Kuznets hypothesis (1955). According to him the growth and inequality as "inverted U-shaped curve", where at the beginning of economic development and income distribution tends ugly this condition do not experience perkembanan until a country reaches middle-income category. According to Vijayakumar (2013) economic growth is important (pre-condition for development), but alone it does not necessarily reduce poverty. 3. Methodology This study takes the research object in the district / city in East Java province that consists of 38 regions in the period of The data used is secondary data, such as; the number of poverty (people), economic growth (percent), and the minimum wage (Rp) and the number of unemployed (people). The data was obtained from various data sources such as; The Central Statistics Agency (BPS) in East Java Province and the Bank of Indonesia. The general model of panel data can be written as follows: While the fixed effect model is : Y it = α i + β i + X it ε it (ui = 0), y = (α it + u i) + X ' it β + V it In which, Y is the dependent variable, X is the independent variable and ε is the error term. Notation i shows the distribution of the observed unit, t is the time of observation, α shows the magnitude of the constants and β notation indicates the amount of free variable coefficients. Fixed effect model on panel data is assumed that the slope coefficient is constant but the intercept varies throughout the individual units. In this study, the data panel model as described below: 16

4 While it s fixed effect model becomes: POV it = α i + β iec it β iue it +β imw it ε it POV it = (α it + u i) + β iec it β imw it +βiueit it Where POV is the poverty level, the EC is the rate of economic growth, MW is the minimum wage level, and the EU is tingka unemployment. 4. Results and Interpretations The results of data processing by using a fixed effect model on panel data can be written as: POV it= EC it MW it UE it + v it ( ) ( ) ( ) ( ) Figures in brackets show the value of the standard error. Adjusted R-squared magnitude of , F- Statistic is and the value of Durbin Watson Statistic is The estimation results above provide results that wage levels have significant negative effect on poverty. Besides, unemployment has also significant positive effect on poverty. Meanwhile, the economic growth does not significantly influence the poverty in various districts / cities in East Java. Coeficient determination is seen from Adjusted R2 value obtained from a panel regression model with fixed-effect model approach (FEM) in this study was This indicates that the value of POV (Poverty) diversity can be explained by macroeconomic variables (EC, MW, and EU) amounted to %. While the magnitude of the coefficient of the constant can be seen in the following sections: Region Table 1: Value Coefficient at Constant, Fixed Effect Model Region Constant Region Coeficient (C) Constant Coeficient (C) Constant Coeficient (C) Pacitan Pasuruan Sampang Ponorogo Sidoarjo Pamekasan Trenggalek Mojokerto Sumenep Tulungagung Jombang Kediri City Blitar Nganjuk Blitar City Kediri Madiun Malang City Malang Magetan Probolinggo City Lumajang Ngawi Pasuruan City Jember Bojonegoro Mojokerto City Banyuwangi Tuban Madiun City Bondowoso Lamongan Surabaya City Situbondo Gresik Batu City Probolinggo Bangkalan Although the value of the constant coefficient between the area vary, but in the regression model data panel fixed effect model, the average effect of each district / city assumed to be constant (fixed). Based on the results, if the above data indicates the rate of economic growth does not obtain any significant effect on poverty in various regions in East Java. Meanwhile, the minimum wage level and the unemployment rate have a significant effect on poverty in various districts / cities in East Java Province. The data suggests that economic growth is the district / city varies between 0.07 to 7.19 per cent in 2014 (BPS East Java Province, 2015). The highest growth occurred in Bangkalan, while the lowest growth experienced by Sampang. 17

5 I. Mukhlis & T. H. Simanjuntak Variations in the level of economic growth across the region can contribute to the development of poverty in various regions in East Java. Poverty happens and spread in various districts / cities in East Java with varied poverty rates. In this case, one of the indicators of poverty is the level of income per capita of the population. Per capita income is closely related circuitry in the development of regional economic growth. Based on data showing that economic growth in the districts / cities in East Java experienced variations. Variations in economic growth across the region could provide new problems such as income inequality. This condition led to poverty in various districts / cities in East Java. There is no significant economic growth on poverty in East Java can also be caused by equitable development factors and results in the development in the area. In this case, the dynamics in the regional economy of East Java has not entirely cause trikle down effect to the welfare of the community life. The essense of development is still not fully felt by the whole society. In this case, the diversity of the area topographically separated by the sea, the mountains, and the mainland led to the economic performance of each region is not the same. The vortex of the economy is in urban areas with its leading sector trade activities, services, construction and manufacturing industries. Velocity of money in the area is high, resulting in a value added economy also high. While suburban and rural area is often lagging behind in the provision of public infrastructure for the fulfillment of the public welfare. Low levels of velocity of money cause the intensity of low economic activity and as a result, the poverty rate can be increased. Significant effect of minimum wage on poverty shows that the instrument wage is still an important policy to improve the lives of people. The findings in this penelitna accordance with the conclusions in a study conducted by Gindling (2014) that increases in minimum wages reduce poverty. In this case the reward is one of the important components in the form of income per capita. The increase in these revenues can increase purchasing power in order to meet community needs. In this case, the amount of minimum wage changes from year to year. Until 2014, the amount of the minimum wage involves 3 kind of parties: employers, workers / employees, and government. In this case the wage setting mechanism is set in the regulation in the form of Act No. 13 of 2003 on Manpower. From year to year the minimum wage in various districts / cities in East Java has increased in accordance with the demands of subsistence of workers and economic conditions. During the level of the minimum wage in the districts / cities in East Java in the range of Rp. 600, Rp.2,195, (BPS East Java Province, 2015). As known in various areas such as Sidoarjo, Mojokerto, Pasuruan, Gresik, Surabaya, Kediri, Probolinggo, Jombang, Lamongan is kantorng-based business bag manufacturing industry. These areas inhabited factory workers with wage rates under the terms of the tri party. In this case the minimum wage rate changes are expected to improve the welfare of people in the industry-region and also in other areas. This is because the imposition of wage applies to all districts / cities in East Java in accordance with local regulations specified in the determination of wages in each region. In this case the increase in the minimum wage may increase people's purchasing power. The increase in purchasing power is going to be a demand drive that could lead to a multiplier effect in the local economy. In this condition the poverty level can diturunakn through mechanisms for determining minimum wages in the area. The development of a dynamic economy in East Java is also accompanied by the expansion of employment opportunities in the various sectors of economic activity. As known in regional macroeconomics, East Java is the biggest contributor to the development cake to two in the national economy, after Jakarta, with a contribution of per cent in The value of GDP based on current price reached Rp. 1, trillion, while GDP at constant prices in 2010 amounted to Rp. 1, trillion. The value added generated in East Java cannot be separated from the role 38 districts / cities with geographical and socio-cultural conditions of different regions. East Java's economy is supported by three main business field, the category of agriculture, forestry and fisheries; processing industry category, as well as the category of wholesale and retail trade, repair of cars and motorcycles. These three categories accounted for per cent (2014) of the total GDP in East Java. Construction became a new idol in the economy of East Java. As the field of business supports the economy, construction contributed 9.47 per cent in 2014 (BPS East Java Province, 2015). 18

6 The expansion in economic activity can encourage an increase in the rate of employment in the area. In this case the formal employment opportunities can be created in sectors of economic activity that have a high economic growth. This economic activity can certainly encourage the emergence of a multiplier effect and spillover effects to other economic activities. This can cause sectoral linkages to strengthen the fundamentals of the local economy. The dynamics in the economic growth of this can lead to the expansion of employment opportunities in the various sectors and in various districts / cities in East Java. The expansion of employment opportunities can provide a wider space for the community in implementing this activity as was economy.it which may ultimately reduce the level of unemployment that occur. The results of this study confirm the findings of research conducted by Saunders (2002), which concluded that the higher unemployment can be improved its risk of poverty and contribute also to the greater inequality. Various attempts have been made the central government and local governments in order to overcome poverty. Such efforts related to improving the quality of life of human resources, empowerment of entrepreneurs and encourage the development of economic activities of local excellence. Various programs such as; national community empowerment program (PNPM) independent, small loans, credit farming, construction of homes uninhabitable, development projects labor intensive, rice aid for the poor, health insurance, scholarships for poor students and cash transfers to the community less fortunate. Yet, these efforts still need to improve the quantity and quality of its activities to promote empowerment and poverty reduction. 5. Conclusions and Recommendations The research findings provide the conclusion that the rate of economic growth does not significantly effect to the amount of poverty in the districts / cities in East Java. Meanwhile, the magnitude of the minimum wage and the number of unemployed had a significant negative and positive influence significantly on the amount of poverty in the districts / cities in Java imur. The result of this study indicates that the problem of poverty in the area is related to the ability of people's purchasing power and employment. Their employment opportunities that are expanding will be able to trigger the creation of new purchasing power from the society. This condition can certainly improve prosperity and poverty reduction in people's lives. Based on these results, it can be delivered several policy recommendations in development in the region such as: the creation of economic growth that can be done with attention to the economic potential of local and regional resources, establishing communication with the various parties involved in determining the amount of the minimum wage so that the amount of wages the minimum could increase the productivity of its work, the expansion of employment in the various sectors of the economy and infrastructure development on the center of poverty in rural area. References Agénor, P. R.,(2005). The Macroeconomics of Poverty Reduction, The Manchester School, Vol.73, No. 4, pp Akoum, I. F.(2008). Globalization, Growth, and Poverty: the Missing Link, International Journal of Social Economics, Vol. 35, No. 4, pp Dahlquist, Matilda, (2013). Does Economic Growth reduce Poverty? An Empirical Analysis of the Relationship between Poverty and Economic Growth Across Low- and Middle-income Countries, Illustrated by the Case of Brazil, Bachelor Thesis, Soderton University, download dari tanggal 19 Januari 2016 Epaulard, A.(2003).Macroeconomic Performance and Poverty Reduction, International Monetary Fund, IMF Working Paper No. 03/72. Gindling, T.H.(2014). Does increasing the Minimum Wage Reduce Poverty in Developing Countries?, IZA World of Labor, May, 30 19

7 I. Mukhlis & T. H. Simanjuntak Khan, Azizur Rahman, (2007). Growth, Employment and Poverty: An Analysis of the Vital Nexus Based on Some Secent UNDP and ILO/SIDA Studies, DESA Working Paper No. 49, United Nations Department of Economic and Social Affairs Kuznets, S.(1955).Economic Ggrowth and Inequality,American Economic Review, 45(1), pp Nafziger, E. Wayne, (2006). Economic Development, fourth edition, Cambridge;Cambridge University Press Rupasingha, Anil, and Stephan J. Goetz, Social and Political Forces as Determinants of Poverty:A Spatial Analysis, The Journal of Socio-Economics, 36 : Saunders, Peter, (2002).The Direct and Indirect Effects of Unemployment on Poverty and Inequality, Discussion Paper No. 118 December, The Social Policy Research Centre University of New South Wales Son Hyun H dan Nanak Kakwani, (2004). Growth And Poverty Reduction:Initial Conditions Matter, Working Paper Number 2, August, International Poverty Centre, United Nations Development Programme, pp.1-29 The World Bank, (2013).Poverty Reduction & Equity Choosing and Estimating Poverty Indicators,accessed November 27, 2013 from: upk:435055~pagepk:148956~pipk:216618~thesitepk:430367~iscurl:y~iscurl:y~iscurl:y ~iscurl:y~iscurl:y~iscurl:y,00.html Vijayakumar, Sinnathurai, (2013).An Empirical Study on the Nexus of Poverty,GDP Growth, Dependency Ratio and Employment in Developing Countries, Journal of Competitiveness, Vol. 5, Issue 2, June, pp , Xhafaj, Evgjeni and Ines Nurja, (2014). Determination Of The Key Factors That Influence Poverty Through Econometric Models, European Scientific Journal, Vol.10, No.24, August , Produk Domestik Bruto Kabupaten/Kota Menurut Lapangan Usaha Tahun , Publikasi BPS Propinsi Jawa Timur, Oktober