How Trade Policy Contribute to Poverty Alleviation in Developing Countries

(This Paper Accepted to be Presented in WTO Chair International Conference in Jordania, August 2012)


As one the 189 countries that signed Millennium Declaration on September 2000, Indonesia  have to take a part in realizing eight articles of Millennium Development Goals/MDGs) that was  agreed in that Declaration. The first thing want to be attained by MDGs is poverty alleviation (extreme hunger)  which remain the major problem  most of the countries in the word. This goal is a fundamental/basic goal that have to be attained to attain the other seven goals. This goal then formulated quantitatively with the clear description that by 2015, the proportion of the people whose income less than USD 1 per day decrease to become only half of the current proportion.

By the year 1990 in which the proportion of  Indonesian poor people at 20.6%, then according to the proportion of poverty MDGs, by 2015 the proportion must be reduced by half ie 10.3%. However, the Indonesian government  instructed the translation of the items purpose in extreme  poverty and another seven goals  to become more practical and derivatives  targets. The translation of these items produced three goals or targets  which the end of these is alleviate extreme poverty. The three targets are , first, reduce the proportion of people living below the poverty line by half between 1990-2015. Second, provides a fully productive and decent jobs, especially for women and young people. And the third one, reduce the proportion of people who suffer from hunger by half between 1990 and 2015. There have been many efforts and measures taken by the government to eradicate poverty and achieve the MDGs, but there are many shortcomings in the efficiency and effectiveness in these efforts due to lack of integration with related matters.

Development of Poverty Reduction in Indonesia

In some way, follow the standard MDGs using revenues of U.S. 1 Dollar per day as the poverty line, the government has been able to achieve the first MDG goal from 1996 until 2008.

Figure 1.1 Development of Extreme Poverty Reduction (U.S. $ 1/day) compared to the MDG target

Source: BPS (National Social Economic Survey) and the World Bank Report 2008

However, if using the national poverty line set by the Central Statistics Agency (BPS) to calculate the 32 basic needs, ranging from apparel, home to bus fares, the percentage of poor people is lower than the standard of the MDGs in 1990 and no improvement until 2008.

Figure 1.2  National Property 1990-2008

Resource : BPS (NSES)  many years and Official Statistics 2007

Figure 1.2 explained that the proportion of people living below the poverty line in 1990 amounted to about 15.1%. And in subsequent years there was no decline at all, but rather greater proportion of poor people. Following the financial crisis in 1998, there was a sharp rise in the poverty rate to 24.2%. Since then, the poverty rate continues to fall and then rise in 2006, one of the determinant factors cause a sharp increase is the prices of food and fuel. In 2008, the national poverty rate was 15.4%, or nearly 35 million people are poor. Based on these figures, it means the achievement of the MDGs Indonesia no progress at all.

Now we look at the other standards by using the criteria below poverty line U.S. 2 dollar per day. This criterion appears for the first criterion (U.S. 1 dollar / day) were considered too low to Indonesia because Indonesia United Nations has classified as a middle-income country with a poverty line of U.S. 2 dollars per day.

Using these criteria, the proportion of poor people in 1990 reached 17.7%, which means that in 2015, the proportion should be 35.5%. This target is still considered to be difficult to achieve due to the World Bank’s estimation, with a minimum income of U.S. 2 dollar per day, 50% of Indonesia’s population are poor. It is a great challenge to achieve the MDGs for Indonesia (UNDP, 2004).

Besides that, according to Hamid (2008), a high poverty rate was also followed by the rise of income inequality in society. A total of 20% of the population with the highest incomes in Indonesia enjoy at least 42% of national income in 2002 and this number increased to 44.79% in 2007. Meanwhile, 40% of the population with the lowest income enjoyed just 20.92% of national income in 2002 and dropped to just 19.10% in 2007. This is a strong indication that the achievement of the Indonesia’s MDGs in poverty reduction is still far from expectations.

Table 1.1 Indonesia’s Gini Index 2002-2007

Resource : Hamid (2008), Be Treated

Income inequality shown by the Gini ratio did not change significantly during the last eight years. According McConell et.all in BPKP (2007) inequality caused by : 1) The difference Capability, 2) Education and Training, 3) discrimination, 4) Risk Appetite and employment, 5) procurement of distribution of assets as a factor of production, 6) Power Market , 7) Luck and corruption. Income inequality did not change was in line with government’s lack of control and supervision against Corruption, Collusion and  Nepotism (CCN).


Figure 1.3 Gini Ratio

Resource : Indonesia’s National Development Planning Agency, 2011

Poverty Alleviation Efforts in Indonesia

Efforts are being undertaken by the government to alleviate extreme poverty in order to achieve the MDGs. The effort has been taken since 1999 (National Development Planning Agency, 2007). The most famous program  is  cash transfer to the poor.  Many of the programs were not effective and   good result has not been achieved. This is caused by many things such as these programs were  not oriented to increase the potential and knowledge society, these only solve current problem and don’t concern about the future, ignore the sustainable effort for poverty alleviation.

Djumiarti (2005: 884) said that the lack of effectiveness of poverty alleviation programs is caused by a variety of factors including: (1) There is a tendency that poverty reduction strategy undertaken by the government focus  more in  the present-oriented program strategy doesn’t lead to a sustainable program, (2) Lack of continuity of policy, especially in goals, (3) centralization trend in the use of funds, (3) determination of the target group poverty program is loaded with vested interests of government officials, (4) Bias bureaucracy and the weak position of the poor, and (5) selection of businesses developed by the group targets tend only known by type of business, regardless of the prospects and the market.

The most powerful reason of the failure of these  program in poverty  alleviation is poverty has been  seen as economic phenomena by policy makers. At the end, this paradigm lead to the ruling out other factors that cause poverty so  the policy made is only seen from the economic sector  and don’t inline with other sectors. This discrepancies policy closed access of the poor to economic resources because of the policies taken. For example the policy to increase electricity tariff (TDL) and the highest retail price (HET), which reduces the absorption of labor in industry and agriculture.

For all this time, Indonesia’s government used instant way to alleviate poverty such as cash transfer to the poor and development fund to help them in establishing small business, but these program did not last long either of sustainability and the benefits gained by the poor. There was no synergy between these program and other sector that may take part in the emergence of poverty. One of the sector is trade policy. The relation between trade policy and poverty alleviation doesn’t relate directly, there is economic growth between them. Government pay much attention in trade policy to achieve high economic growth which is  still controversial whether the high economic growth provide benefit to the poor.

Growth and Poverty Alleviation

Holden and Prokopenko (2001) states that if income inequality increases, it is possible for a country to enjoy positive economic growth without any profit earned by the poor (the rich will get richer, while the revenue earned by the poor stagnate or even decline).

Further Dollar et al., (2001) found that economic growth will have a positive impact for the poor if only it encouraged an increase in good governance, the rule of good law, fiscal discipline, and openness to international trade that should be source of success in reducing poverty. So the relationship between economic growth and poverty reduction can not be seen directly, but there must be factors that support economic growth benefit the poor.

The reality is, after a period of crisis, in 1999-2006, economic growth in Indonesia, although it showed an increasing trend, but can not say-it was qualified. Lack of economic growth is indicated by the rate of unemployment is still relatively high and difficult / slow decline (persistent). During the period 1999-2006, the average of unemployment rate is actually positive at 0.56 percent per year. This indicates that the economic growth that occurred during the period was mainly occur or come from capital intensive sectors.

In addition, the lack of quality of economic growth is also reflected by the level of poverty (poverty, especially in rural areas) are also relatively persistent in the top 20% in the last eight years.

Figure  1.4Economic Growth, Poverty and Unemployment Year 1999-2006

Resource : Siregar and Wahyuniarti, no date

Trade Policy and Poverty Alleviation

Frankel and Romer (1999) stated that there were a relationship between trade policy and poverty which is measured by level of income. The relationship got from regression method between income per person on the ratio of exports or imports to GDP (and other variables) cross-country. Such regressions typically find a moderate positive relationship.

Trade policy reform is also affect poverty. This is because trade policy reform can both creates and destroys the markets. Winters (2000) said that extreme adverse poverty shocks are mostly associated with losing market access, while strong poverty alleviation can arise when markets are newly introduced for previously untraded or unavailable goods. Trade reform is also likely to have major effects on factor prices – of which wages is the most important for poverty purposes. If reform boosts the demand for labor-intensive products, it boosts the demand for labor and then either wages or employment will increase (or a combination of both, depending on whether wage increases bring forth increased labor supply).

However, whether this reduces poverty depends on whether the poor are strongly represented in the type of labor for which demand has risen. If the poor are mostly in completely unskilled families, while it is semi-skilled labor that receives the boost, poverty will be unaffected – or, indeed, worsened as unskilled wages fall. It also depends on where the wage rate is relative to the poverty line.

According to Bannister and Thugge (2001), trade can effect poverty by (1) changing the prices of tradable goods and improving access to new products; (2) changing the relative wages of skilled and unskilled labor and the cost of capital, thereby affecting the employment of the poor; (3) affecting government revenue from trade taxes and thus the government’s ability to finance programs for the poor; (4) changing incentives for investment and innovation and affecting economic growth; and (5) affecting the vulnerability of an economy to negative external shocks.

Alternative Policies in Poverty Alleviation

For all this time, Indonesian government applied the tariff barriers for the international trade without considered readiness of domestic industries. It may applied due to compliance with international regulatory, but I think before it can be applied, government should make sure that the Indonesian domestic industries are ready for it. So, the domestic product can compete with the imported product from develop countries. This is because if domestic product that mostly owned or did by middle class and poor people aren’t prepared by government, they can collapse, then increase unemployment and finally, increase the rate of the poor.

Poverty alleviation can not be seen only from the economic sector because poverty has many dimensions and is closely related to other sectors. Hence, the measures taken in order to alleviate poverty should be able to synergize related matters as described above, namely good governance, economic growth that can reach the poor (quality growth), pro poor trade policy as well as an efficient financial sector so it can be reached by the poor.

The main principle of poverty alleviation policies in general consists of three main issues,: 1) sustainable and pro-poor economic growth, 2) improvement of good governance, 3) social development (Hamid, 2008). Then, three principles are divided into the goal or target short-term, medium term and long term.

Gupta et al., (1998) added that poverty reduction should involve the supervision or control of the other factors that affect poverty and income inequality, namely: (1) support of natural resources, (2) the productivity of capital, (3) educational attainment, especially for poor people, (4) unequal access to education, and (5) the distribution of land.

Indonesian Institute of Sciences emphasized the importance of the asset approach to poverty alleviation in Indonesia. Asset approach encourages us to see that the lack of productive assets owned by the poor makes them difficult to break out of the poverty trap. Furthermore, this approach will allow an important breakthrough in the new policies and the fight against poverty. Assets here was not only the assets that are financial but also include human capital (human capital), social capital, and other physical assets that can be accumulated, stored, and cashed at times necessary. The new strategy aims to completely eradicate the poor escape from poverty and not just alleviate the difficulties faced by the poor that are ad hoc and unsustainable. Furthermore, this perspective is useful when looking at those who are at risk of persistent poverty in which cash assistance can not overcome the structural barriers that have been preventing them to participate in economic activity, which in turn is also a key obstacle to prosperity.

Government can learn from Mexico where poverty alleviation programs based on geographic targets (geographic targeting). Since 1988, this strategy is reinforced by the introduction of the National Solidarity Program, which is a social safety net programs that mobilize all national resources potential. The point of this program involves a variety of focused efforts to reduce regional disparities. This proved successful, because Mexico has reduced regional disparities in the country at 2.1% per year (Szekely, 1997).


  1. Dollar, David dan Aart Kraay, 2001, Growth Is Good for the Poor, World Bank Policy Research Working Paper 2587 (Washington,DC: The International Bank for Reconstruction and Development)
  2. Djumiarti. Titik, 2005, Strategi Pengentasan Kemiskinan : Potret Keberhasilan Pembangunan, (Poverty Reduction Strategies: Building Successful Images) “Dialogue” JIAKP, Vol. 2, No. 3, September 2005 : 884-897.
  3. Hamid. Edi Suandy, 2008, “Targets and Strategies of Poverty Alleviation in Indonesia”, Paper Presented in 33rd FAEA Annual Conference, Tay-Ho Hotel,Hanoi-Vietnam.
  4. Holden.Paul and Prokopenko.Vassili., 2001, Financial Development and Property Alleviation: Issues and Policy Implication for Developing and Transition Country, IMF Working Paper, WP/01/160
  5. Liu, Minquan dan Yimen Ying, 2010,  “Human Development in East and Southeast Asian Economies: 1990-2010” United Nations Development Programme Human Development Reports Research Paper, July 2010.
  6. State Minister for National Development Planning , 2008, Let Us Speak Out for MDGs( MDGs Reports ) 2008.
  7. ___________________, 2010, Reports of the Achievement of The Millennium Development Goals Indonesia 2010 (MDGs Reports) 2010.
  8. Holden.Paul and Prokopenko.Vassili., 2001, Financial Development and Property Alleviation: Issues and Policy Implication for Developing and Transition Country, IMF Working Paper, WP/01/160
  9. Frankel, Jeffrey A. and David Romer.1999.  “Does Trade Cause Growth?”. The American Economic Review, Vol. 89, No. 3, (Jun., 1999), pp. 379-399
  10. Gupta .Sanjeev, Davoodi.Hamid, dan Alonso.Rosa , 1998, Does Corruption Affect Income Inequality and Poverty? IMF Working Paper, WP/98/76.
  11. Winters, L Alan. 2000. Trade, Trade Policy And Poverty: What Are The Links? Discussion Paper No. 238 February 2000, Centre for Economic Policy Researc
  12. Bannister, Geoffrey J. and Kamau Thugge. 2001. International Trade and Poverty Alleviation, A quarterly magazine of the IMF, December 2001, Volume 38, Number 4
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