Kadin Indonesia-Jetro, 2006 www.kadin-indonesia.or.id 1 AID AND POVERTY REDUCTION: THE INDONESIAN EXPERIENCE TULUS TAMBUNAN Kadin Indonesia – Jetro (2006) INTRODUCTION In the beginning of the ‘new order’ (NO) regime in 1966, the average Indonesian earned only roughly US$50 a year; about 60% of adult Indonesian could not read or write; and close to 65% of the country’s population lived in absolute poverty. Facing this condition, the new order government launched five-year economic development plans, with the first plan started in 1969, and made several crucial economic policies in the 1970s and 1980s, including liberalization in investment, capital account, banking and external trade. During the new order government, industry and agriculture were two priority sectors. To support development of national industry, the government adopted two subsequent strategies. Started first with an import-substitution based industrial development strategy, focusing on labor- intensive industries such as textile and garments, footwear, wood products, and food and beverages, followed latter by assembling industries of automotive, and then gradually shifted to an export promotion strategy by reducing some import tariffs and export restrictions, also focusing on labor-intensive industries. To support agriculture, the government adopted modernization or intensification of agriculture, known as the ‘green revolution’, as the main strategy. This strategy which was marked by the adoption of better of agricultural inputs [such as fabricated fertilizers and improved seeds], new technologies [including modern irrigation system], modern marketing, and mechanized processes of production, along with massive public investments in rural areas. The main aim of this strategy was twofold: to boost agricultural productivity and thus to achieve the goal of rice self-sufficiency, and to increase real income per capita in rural areas, and thus to reduce rural poverty and hence national poverty. All these steps had generated a sustained rapid economic growth in the 1980s up to 1997, just before the Asian financial crisis occurred. During that period, the growth strategy accompanied with government’s efforts to reduce the poor with special designed measures, which included labour intensive (particularly for unskilled workers) projects (such as construction of village road and technical irrigation); more access to primary education and health care facilities for the poor families through government subsidies; development of backward villages through Inpres Desa Tertinggal (IDT) program under the Presidential Instruction for development of isolated/under- developed villages; and development of micro and small sized enterprises. Together with these ‘pro-poor’ policies, the rapid and sustained economic growth has not only led the real income per capita to increase, but also the poverty incidence (people living under current official poverty line as percentage of total population) to fall substantially.