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Economic growth and poverty reduction: the role of the agricultural sector in rural Indonesia

Kadir, Kadir and Amalia, Ratna Rizki (2016): Economic growth and poverty reduction: the role of the agricultural sector in rural Indonesia. Published in: Proceedings ICAS VII Seventh International Conference on Agricultural Statistics. Rome (2017)

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Abstract

Agricultural sector has emerged as the engine of economic growth in Indonesia. The sector is expected to contribute to poverty reduction in rural areas which is the largest contributor to poverty in Indonesia. Growth in the agricultural sector can induce the growth of the non-agricultural sector through linkages between the two sectors. Thus, the growth of the agricultural sector is not only a positive impact on poverty reduction through the rising of incomes in the sector, but it can also encourage non-agricultural activities in rural areas. This study aims to determine how much the growth of the agricultural sector impacts on the non-agricultural sector in rural areas and how much the growth of these two sectors impacts on poverty reduction in rural areas. Data used in this research is panel data from 2002 to 2008. Data are analyzed using simultaneous equations model estimation and the estimation of panel data regression model. The results of simultaneous equations model analysis show that growth in the rural agricultural sector by 1 percent will induce the growth of the rural non-agricultural sector at 1.35 percent. Meanwhile, the results of estimation of panel data regression model reveal that productivity growth in both the agricultural and the non-agricultural sectors in rural areas by 1 percent will reduce the rural poverty rate by 3.91 percent and 3.97 percent, respectively. Both these findings affirm that the agricultural sector is still the driving force of economic growth and is critical to the success of poverty alleviation in rural areas. In addition, the government also needs to develop the non-agricultural sector to support poverty alleviation efforts.

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