Government Expenditure and Poverty in North Sumatera Province, Indonesia

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2 Government Expenditure and Poverty in North Sumatera Province, Indonesia Agus Edy Rangkuti* Business Administration, Politeknik Negeri Medan, Indonesia Abstract The purpose of this study is to discuss the relationship between the government expenditure and poverty in North Sumatera Province, Indonesia. In the discussion, the writer used causality test. This study used secondary data from Granger Causality test shows that there is a one way relation from government expenditure to poverty in North Sumatera Province. Key words : Government expenditure, Poverty, Granger causality test. 1. Introduction Poverty is the problem for every nation in this world, especially the developping countries, since poverty is a very complex and multidimensional problem. In other words, poverty is not a matter of money; many aspects have to be taken into consideration such as education, health and housing, clean water and nutrition. In Indonesia poverty alleviation has become the top priority for the government, since Indonesia is a very big country which consists of thousands of islands. The central government has distributed the poverty alleviation programs into local governments, such as province, regency, and city. North Sumatera Province is the largest province in Sumatera Island, and it is the fourth most populous province in Indonesia. The condition of the government expenditure and poverty in this province is as follows: Table 1. Government Expenditure and Poverty in North Sumatera Province YEAR GOVERNMENT EXPENDITURE (In Billion Rupiahs) POVERTY (in thousands people) , , , , , , , , , , , , , ,20 Source: North Sumatera in Figures From Table 1, we can conclude that the poverty is decreasing, however the government expenditure is increasing, though there was a poverty reduction in North Sumatera Province, it is not very significant compared to the government expenditure. 1.1 Research Question Poverty and government expenditure are two factors that can be found in every country. Most of the theories and 1

3 research findings mentioned the positive influence of government expenditure on poverty reduction, however the main question is whether the poverty reduction is significant or not. Hence, this research looks into: What is the causality relationship between poverty and government expediture in North Sumatera Province, Indonesia? 2. Theoretical Background 2.1 Poverty The concept of poverty is very diverse, ranging from mere incompetence to meet basic consumption needs and improve the situation, the lack of business opportunities, up to a broader sense that includes social and moral aspects. Asian Development Bank (2006) defines poverty into three categories: (1) human poverty, which is a lack of essential human capabilities, notably literacy and nutrition (2) income poverty, which is a lack of sufficient income to meet minimum consumption needs (3) absolute poverty, which is a degree of poverty below the minimal calorific requirement plus essential nonfood components. World Bank defines people whose life is supported by under $1 a day as poor. The local government institution, Indonesia Central Bureau of Statistics (2008) also defines its own poverty as the inability of people to fulfill their basic needs in terms of both food and non-food which are measured in the form of expenditure. While minimum food consumption is determined as 2,100 kcal per capita per day; non-food consumption is based on expenditure combination of 51 basic commodities. 2.2 Government Expenditure According to the Indonesia Budget Law (2008), government expenditure is the overall national expenditure which is used to finance central government expenditure and local government expenditure. Furthermore, this spending could be divided into three groups, based on organization, function, and type. Government spending based on function is the overall national expenditure which is used to employ general service function, security function, safety function, economic function, environmental function, house & social facility function, health function, tourism and culture function, religion function, education function, and social safety function. 2.3 Government Expenditure and Poverty Relations Hasibuan (2005) conducted a study on the role of budget revenues on poverty allevation. The study states that budget revenues had a negative correlation with the number of poor people. That is, the higher budget revenues, the number of poor people declines. The revenue budget is allocated to make poverty alleviation programs for both short-term and long term. According to the World Bank Report, the New Era of Poverty Alleviation in Indonesia (2006), that in addition to economic growth and social services, in targeting spending on the poor, governments can assist them in dealing with poverty (in terms of both income and non-income) with a few things. First, government spending can be used to help those who are vulnerable to income poverty through a modern social protection system that increases their ability to deal with uncertainty economy. Secondly, government spending can be used to improve human development indicators, so as to overcome poverty of non-income aspects. Rostow (1991) mentioned the connection between the development of government expenditure and the stages of economic development are distinguished between the initial stage, intermediate stage and advanced stage. In the early stages of economic development, the percentage of the total government investment is a great investment. Because at this stage the government should provide infrastructure, such as education, health, infrastructure, transport, and so on. In the middle stages of economic development, the government investment is needed to boost economic growth in order to take off, but at this stage the role of private investment is greater. The role of government remains large at the intermediate stage (because of the greater role of the private sector which generated a lot of market failure), to provide goods and services in greater number and better quality for the public. 2

4 3. Research Method This study examines the causal relationship between government spending and poverty in North Sumatra by using the Granger Causality test method over the period The analytical method used in this research is the Granger Causality Test. Granger Causality Analysis was conducted to see the inter-relationship between the government spending and poverty in the province of North Sumatra. Prior to estimate the testing, stationary test and Unit Root test should be performed. 4. Research Results North Sumatra Province is located in the western part of Indonesia, located on the lines North Latitude and East Longitude. In the north, the boarder of North Sumatra province covers the province of Aceh, the east with the State of Malaysia in the Straits of Malacca, the South border covers the province of Riau and West Sumatra, and the west boarder covers the Indian Ocean. The surface area of North Sumatra Province is km 2, of which mostly are the mainland of Sumatera island and a small portion is located on the island of Nias, and several other small islands in the western and the eastern coasts of Sumatera island. Based on the extensive area by district / city in North Sumatra, the largest area is Langkat district that is km 2, or about 8.58 percent of the total area of North Sumatra, followed by Mandailing Natal with an area of km 2, or 8.40 percent. While the smallest area is Sibolga city which is of km 2 or about 0.06 percent of the total area of North Sumatra. 4.1 Description of Government Expenditure and Poverty The North Sumatera province government expenditure and poverty from can be projected as follows: LGOVEX LPOV Figure 1. Government Expenditure and Poverty of North Sumatera Province Source: Research Data (2016) From Figure 1, we can see that the increase of government expenditure can manage to reduce the poverty in North Sumatera Province. However, there was a slight difference during the period The poverty increased due to the cut in government expenditure. This was caused by the monetary crisis in Indonesia during that period. 3

5 4.2 Unit Root Test Before estimating the data, the data must meet the unit root test requirement; the government expenditure and poverty can be seen as follows: Government Expenditure Table 2. Unit Root Tests Poverty Null Hypothesis: D(LGOVEX) has a unit root Null Hypothesis: D(LPOV) has a unit root Exogenous: Constant Exogenous: Constant Lag Length: 0 (Automatic based on SIC, MAXLAG=9) Lag Length: 0 (Automatic based on SIC, MAXLAG=9) t-statistic Prob.* t-statistic Prob.* Augmented Dickey-Fuller test statistic Test critical values: 1% level % level % level Augmented Dickey-Fuller test statistic Test critical values: 1% level % level % level *MacKinnon (1996) one-sided p-values. *MacKinnon (1996) one-sided p-values. Source: Research Data (2016) From Table 2, we can see the data is stationary at the level of 1 st difference. After we have met the requirement for causality test, we continue to estimate the data with Granger Causality Test and the result is as follows: Table 3. Pairwise Granger Causality Tests Date: 06/09/16 Time: 20:28 Sample: Lags: 2 Granger Causality Test Null Hypothesis: Obs F-Statistic Prob. LPOV does not Granger Cause LGOVEX LGOVEX does not Granger Cause LPOV Source: Research Data (2016) For this data, we cannot reject the hypothesis that LGOVEX does not Granger the cause of LPOV but we do reject the hypothesis that LPOV does not Granger the cause of LGOVEX. Therefore it appears that Granger causality runs one-way from LGOVEX to LPOV and not the other way; or we can say the government expenditure has managed to reduce poverty in North Sumatera Province during Conclusion There is a one way causality relationship from government expenditure to poverty in North Sumatera Province, Indonesia. 4

6 6. Reference Central Bureau of Statistics (2008). Analisi dan Perhitungan Tingkat Kemiskinan. BPS Jakarta. Gujarati, Damodar N (2004). Basic Econometrics, Fourth Edition, McGraw Hill Company Hasibuan, Agus, (2005). Peran Anggaran Terhadap Pengurangan Angka Kemiskinan di Indonesia. Ekonomi dan Bisnis Vol 12, No. 2 Indonesia National Budget (2008), National and Spending Budget. Ministry of Finance. World Bank (2006). Era Baru Dalam Pengentasan Kemiskinan di Indonesia. World Bank Institute worrking paper. 5