The Effects of Location and Sectoral Components of Growth

This study extends the literature on the relationship between economic growth and poverty reduction by differentiating growth and poverty into their sectoral compositions and locations. We find that growth in the rural services sector reduces poverty in all sectors and locations. However, in terms of elasticity of poverty, urban services growth has the largest for all sectors except urban agriculture. We also find that rural agriculture growth strongly reduces poverty in the rural agriculture sector, the largest contributor to poverty in Indonesia. This implies that the most effective way to accelerate poverty reduction is by focusing on rural agriculture and urban services growth. In the long run, however, the focus should be shifted to achieving robust overall growth in the services sector.