The effect of use-side gross domestic product on poverty level achievement in Indonesia

1. Introduction

The success of development carried out by a country, including Indonesia, can be seen from the welfare conditions of its people (Priharta and Gani, 2024). The problem of poverty is one of the development policy targets in every country so that the income gap becomes smaller. Poverty is a multidimensional development problem because the issues faced are not limited to matters relating to the cause-and-effect relationship of poverty but also involve preferences, values, and politics to overcome poverty (Margareni et al., 2016). Poverty alleviation has become a fundamental development objective and has become a measuring tool for assessing the effectiveness of the implementation of various types of development programs.

The economic development of a region is a series of activities carried out consciously and continuously to create better conditions. Within that framework, economic development also aims to spur development equity, increasing people’s welfare fairly and equitably.

Economic growth is a significant indicator in analyzing the economic development that occurs in a country. Economic growth shows how much economic activity will generate additional income for the community in a certain period because economic activity is a process of using factors of production to produce output, which is measured using the gross domestic product (GDP) indicator. Where in a formula Y=C+I+G+(X-M), economic growth can be created through consumption (C), investment (I), government spending (G), exports (X), and imports (M). When Consumption, investment, government spending, and net exports increase, income or economic growth also increases (Affandi, 2016). According to Tumimomor (2023), the government needs regular income to restore and prosper people’s lives.

GDP is the government’s total production (output). GDP is the value of goods and services produced in a country in a certain period. GDP is a concept used in calculating national income (Sukirno, 2004). In Indonesia, the GDP is calculated and released quarterly and consists of three main sectors: agriculture, industry and services. The agricultural sector includes crop production, animal husbandry and fisheries. The industrial sector includes producing goods, such as machinery, vehicles and building materials.

In contrast, the service sector includes trade, transportation, finance, and the public sector. GDP is the total added value generated by all business units in a particular country or the total value of final goods and services produced by all economic units. GDP at current prices illustrates the added value of goods and services calculated using prevailing prices yearly. In contrast, GDP at constant prices shows the added value of these goods and services calculated using prices prevailing in a particular year as a basis. GDP at current prices can be used to see shifts and economic structure, while constant prices determine economic growth from year to year.

Indonesia’s GDP always provides optimistic predictions that increase yearly. Based on a report from the Central Statistics Agency (BPS), GDP grew by 3.70% in 2021, higher than the 2020 achievement of 2.07%. Relatively high economic growth will significantly affect the level of poverty because, with a growing economy, there will be much production of goods and services produced by an area, which in turn will absorb labor so that the per capita income of the population is higher which in turn will reduce poverty. The poverty rate in an area (Mas’ud and Rochaida, 2022). Foreign parties such as the World Economic Forum (WEP) describe that the Indonesian economy has begun to be driven by an efficient economy from the originally factor-driven economy. The Economist even called him a candidate for a new world economic power (world leading economies).

However, if one looks closely, there are indications that this economic growth is artificial (bubble economics). It is indicated by Indonesia’s still high poverty rate, even though GDP growth is said to be good. Poverty has long been a problem for the Indonesian nation, and until now, it has not shown any signs of disappearing. Statistical figures continue to provide information that there are still many poor people. Based on BPS data, the number of poor people in Indonesia in September 2021 was 26.50 million (9.71%).

The economic development of a country can be seen from several economic indicators. One of them is poverty alleviation. Poverty is a worldwide humanitarian problem to date. Poverty in developing countries is a serious problem, considering that development indicators achieve optimal poverty reduction and economic growth. Poverty is a socioeconomic disease and quite a complex problem, even though most of them have succeeded in carrying out economic development. In general, tackling poverty is by using a strategy that leads to achieving the highest level of growth in production and national income.

Based on the description above, the researcher aims to determine how much influence the GDP has on the usage side based on the level of Consumption, investment, government spending, and net exports on the poverty level in Indonesia.

2. Literature Review

This section examines the understanding of the development of research hypotheses, research relationships and the conceptual framework of the research conducted.

2.1. Poverty

According to Ibrahim et al. (2024), poverty is a condition that is deficient in meeting minimum needs, so it does not feel like a decent life. The Central Bureau of Statistics 2021 uses the ability to fulfill basic needs (basic need approach) to measure poverty (Kurniawan et al., 2022). With this approach, poverty is seen as an economic inability to meet basic food and non-food needs measured from the expenditure side. In other words (Badawi et al., 2024), poverty is seen as an economic inability to meet basic food and non-food needs. The measure of poverty, according to (Suparmono, 2004), in a simple and commonly used way, can be divided into two meanings:

a. Absolute Poverty

A person is classified as absolutely poor if his income is below the poverty line and insufficient to meet his basic needs. This concept is intended to determine a minimum income level sufficient to meet physical needs for food, clothing and housing to ensure survival. The main difficulty in absolute poverty is determining the composition and level of minimum needs because these two things are influenced by not only customs but also climate, the level of progress of a country, and other economic factors. However, people need goods and services to satisfy their physical and social needs to live decently (Saputra et al., 2023).

b. Relative Poverty

A person belongs to the relatively poor group if he has been able to meet his basic needs but is still far lower than the condition of the surrounding community. Based on this concept, the poverty line will change if the people’s living level changes, so the concept of poverty is dynamic or will always exist.

2.2. Gross Domestic Product use side

GDP is the market value of a country’s final goods and services in a certain period (Parkin, 2018). The value of goods and services referred to here is the added value generated by the economic unit concerned. Added value is obtained from the difference between the output produced and the input used by the economic unit. The resulting output is income from selling goods or services, while the input is the expenses or costs used to obtain output (Harjunawati and Hendarsih, 2020).

GDP figures are obtained through three approaches, namely the production approach, income approach, and expenditure approach. The production approach calculates GDP by adding up the added value of goods and services produced by various production units in the territory of a country in a certain period. The income approach calculates GDP by adding up the remuneration received by the production factors participating in a country’s production process in a certain period, namely wages and salaries, land rent, interest on capital and profits. This value is calculated before deducting income tax and other direct taxes. The GDP approach also includes depreciation and net indirect taxes, namely indirect taxes minus subsidies. In the expenditure approach, GDP is calculated by adding up all components of final demand: household consumption expenditure and non-profit private institutions, government consumption expenditure, formation of gross domestic fixed capital, changes in inventories, and net exports. Net exports are the difference between exports and imports.

GDP on the usage side (expenditure) explains the value of goods and services produced in the domestic area (output) to be used as the final Consumption for society. Specifically, what is meant by final Consumption is the use of products in the form of goods or services whose purpose is not to be further processed (consumed), which is realized in the form of final household consumption (including non-profit institutions that serve households) and of government, formation of gross fixed capital (PMTB), changes in inventory and exports.

a. Consumption

Consumption is spending on goods and services carried out by households to meet the needs of those who shop (Sitanggang, 2015). The amount of Consumption each person issues is influenced by the diversity of his needs. The diversity of needs that must be met encourages a person to make primary and secondary consumption choices. Household consumption is usually one of the references for calculations in macro analysis, where, for several reasons, household consumption spending is used because household consumption has provided a significant income for a country’s income. So, it can be concluded that the higher the public Consumption, the more the economic growth of a country will also increase (Hidayah et al., 2024; Sudirman and Alhudhori, 2018)

b. Investment

Based on economic theory, investment means purchasing (and producing) capital goods that are not consumed but used for future production (produced goods). Investments that increase from year to year will cause the absorption of the working workforce to be even more significant because, with high investment, the production process will increase and require more and more of the workforce to work. Some economists believe that investment formation can increase production factors or economic growth and provide employment opportunities for the community (Ain, 2019).

c. Government Spending

The course of the economy is regulated through government action, with the community as a liaison so that requests occur where facilities and infrastructure are the targets of community requests, which may not all be fulfilled, and this is what is called government spending (Fitria, 2020). If government expenditure is more significant, there will be an increase in per capita income, which will also positively impact achieving economic growth and vice versa.

d. Export Net

Indonesia is a country that adopts an open economy mechanism while trading with other countries by exporting and importing. If the value of exports is higher, imports will contribute income through foreign exchange. In other words, trade is in surplus. The difference between exports and imports is net exports (Putra, 2022).

2.3. The relationship between Gross Domestic Product on the usage side and the achievement of the poverty level

Economic growth is closely related to a country’s production increase, known as a country’s per capita income. Therefore, economic growth is closely related to GDP, or if the context is within the scope of the area, it is called Burrito Regional Domestic Product (PDRB) (Suliswanto, 2012). According to Damanik and Sidauruk (2020), GRDP can reduce the poverty rate; if the GRDP value is high, domestic development can be optimized, and community prosperity can be achieved by reducing the poverty rate. A high GRDP value indicates that the economy in a region is good, and vice versa. Several studies have shown that economic growth and poverty are closely related.

The new growth theory emphasizes the importance of the government’s role, especially in increasing human capital development. Improving the quality of human resources can be shown by increasing one’s knowledge and skills. Increasing knowledge and skills will boost one’s work productivity, which will help reduce poverty. Economic growth is related to the increase in a country’s production. Therefore, economic growth is closely related to the GDP or gross regional domestic product if it is within the region’s scope.

Several studies have found that economic research, HDI, and poverty are closely related. Asian Development Bank (2008) states that dynamic economic growth has dramatically reduced poverty. Research conducted by Jayadi and Brata (2016) on the impact of economic growth on reducing the number of poor people. The research results found that economic growth significantly reduced the number of poor people, although with a relatively small magnitude, such as inflation, population, and share of the agricultural and industrial sectors. In addition, Nurmi (2021) state that the availability of quality human resources is essential for sustainable economic development.

2.4. Conceptual framework

Based on the central issues and theoretical foundations described, the conceptual framework is contained in Figure 1, and a hypothesis is formulated as a temporary conclusion to the problems posed, namely as follows.

H1: Consumption expenditure has a significant effect on the poverty level.

H2: Government spending has a significant effect on the poverty level

H3: Private investment spending has a significant effect on the poverty level

H4: Export net expenditure has a significant effect on the poverty level

Figure 1: Conceptual Framework

Source: Author’s construction

3. Methodology

The section discusses the research carried out in relation to research data, data analysis, and research methods carried out so that research analysis and discussion can be carried out.

3.1. Data collection

The approach in this research is quantitative because it is presented with numbers. It follows the opinion of Suharsimi (2013) that quantitative research is a research approach that requires many numbers, starting from data collection, interpretation of the data, and the appearance of the results. This research was conducted using an associative paradigm. The type of data used in this research is secondary data, which means that researchers obtain data from various relevant agencies according to research purposes. This study uses the documentation method sourced from the Central Statistics Agency regarding data on poverty rates, GDP, and economic growth by taking populations in 34 provinces in Indonesia. The data used is in the form of panel data from 2009 to 2021. Panel data is a combination of time series and cross-section data.

3.2. Data analysis

This study uses the independent variable (X) and the dependent variable (Y). The independent variables used are consumption expenditure (C), government expenditure (G), private investment expenditure (I), and net export expenditure (X-M). In contrast, the dependent variable is the poverty rate (PM).

The data analysis technique used to solve the problems in this study is a quantitative analysis technique with the help of the Eviews 9 program in the form of panel data. This research is proposed as empirical research to determine the effect of government spending, Consumption, investment, and net exports on poverty levels in Indonesia. The panel data analysis aims to determine whether the model adheres to standard, fixed, and random effects. The first thing to do is choose which model is the best among the three models by conducting the Chow and Hausman tests. The Chow test was conducted to test the common effect and fixed effect models, while the Hausman test was conducted to test whether the data were analyzed using a fixed effect or a random effect. The test was carried out with Eviews 9. The guidelines that will be used in concluding the Chow test are as follows.

The significant test in this study was carried out through the t-test and F-test. The t-test determines whether each independent variable significantly influences the dependent variable. F-testing or model testing determines whether the analysis results are significant, or the suspected model is appropriate.

4. Results and discussion

This section discusses the results and discussion of research that has been tested as well as understanding related to the research conducted.

As for the analysis of Economic Growth and the Poor Population in Indonesia, the results of the research carried out are described in the following section.

4.1. Economic growth and poor population in Indonesia

From 2009 to 2021, the Indonesian economy experienced strong economic growth with an average of 4.63%. In 2020, the COVID-19 pandemic caused Indonesia to experience a contraction in economic growth of 2.07% from 5.02% in 2019. The leading cause of the decline in economic growth in Indonesia is inseparable from the impact of handling the spread of the Coronavirus, which has begun to affect all aspects of life, including economic activities in Indonesia, both in terms of production, distribution and consumption sector, foreign trade (exports and imports). as well as investment activities (Akhmad, 2022). The government has implemented various methods as part of a program to recover the Indonesian economy, which has declined due to COVID-19. It was proven by economic growth, which again increased by 3.7%.

Even though Indonesia’s economic growth has increased again, the poverty rate is still relatively high. The development of economic growth in 2009 – 2021 can be seen in Figure 2. Meanwhile, the development of the poverty rate in 2009 – 2021 can be seen in Table 1.

Figure 2: Economic Growth in Indonesia in 2009 – 2021

Source: Author’s calculations based on Badan Pusat Statistik (2021-a)

Table 1: Number of Poor Population in Indonesia in 2009–2021

Source: Author’s calculations based on Badan Pusat Statistik (2021-b)

Based on Table 1, it can be seen that the percentage of poor people in Indonesia has decreased from 2009 to 2021. The percentage of poor people in 2009 showed a figure of 14.43%, with a total poor population of 26.92 million people, which continued to fall from year to year and reached a percentage of 10.76% in 2021, with a total poor population of 25.37 million souls. It shows that Indonesia’s poverty percentage decreased by 3.67%. The highest number of poor people during this period was in 2010, with a total of 31.06 million people, with a percentage of 13.78%.

The decline in the percentage and number of poor people in Indonesia during this period could have occurred due to several factors, including economic growth. Soleh (2015) states that economic growth can positively impact poverty reduction if the economic growth is pro-poor. According to him, the poverty rate can increase on a small scale if the poor only benefit a little from the total benefits arising from this economic growth. If economic growth favors the rich compared to the poor, this condition is said to provide opportunities for an increase in the poverty rate due to increased income inequality.

The economy can grow when the production of goods and services increases from the previous year (Dewi, 2010). Achievements in economic growth should also pay attention to the achievements of other development benchmarks. A reduced unemployment rate and an equal distribution of wealth should have followed rapid economic growth. The leading sector, an area’s growth point, is expected to impact people’s welfare by creating new job opportunities to reduce the unemployment rate and equalize income distribution. It is based on the theory of the trickle-down effect, which was first developed by Yeung (2017). The Trickle-Down Effect is an impact that is expected to appear in an indirect strategy of economic development to equalize welfare, which emphasizes the emergence of economic growth.

4.3. Panel Regression Model Conformity Test Results

To reduce poverty, the government often takes steps to increase economic growth by expecting a trickle-down effect. An increase in economic growth is closely related to an increase in GDP.

Therefore, panel data analysis is carried out to determine the magnitude of the influence of GDP on poverty. Several model selection tests can be carried out to determine the best model (Baltagi, 2005; Gujarati, 2012; Widarjono, 2009). Following are the results of the Chow test in this study.

Table 2: Chow test results

Source: Author’s calculations

Based on the test results shown in Table 2, it is known that both the p-value > and chi-square values for both models are significant (p-value > 5%). It follows the test criteria that have been described, and it can be seen that the results of the Chow test, namely the chi-square cross-section of 0.0643, more significant than 0.05, so it can be concluded that this study used the Common Effect and no longer needed the Hausman test to select the fixed effect. Model or random effect model as a suitable regression model.

4.4. Panel Data Regression Results

The random effect model isused, so the analysis results obtained each year are interpreted in Table 4.

Table 3: Model of the Influence of Household Expenditure, Government, Private Investment, and Net Exports on Poverty in Indonesia in 2009-2021

Source: Author’s calculations

A constant with a value of -0.289248 indicates that if all the independent variables are equal to zero (0), Consumption is denoted by C -0.289248. A constant with a value of 0.002857 indicates that if all independent variables are equal to zero (0), then Government Expenditure is denoted by G -0.002857. A constant of -0.287529 indicates that if all independent variables are equal to zero (0), then Private Investment is denoted by I -0.287529. A constant with a value of -0.017483 indicates that if all independent variables are equal to zero (0), then Net Exports is denoted by XM -0.017483.

Table 4: The Effect of Each Variable on Poverty in Indonesia

Source: Author’s calculations

From the results of the panel data regression in Table 4, it can be concluded that partial household expenditure has a positive effect on the poverty rate (C), government expenditure (G), private investment (I), and net exports (XM) have a negative and significant effect on the related variables (poverty), it is just a different level of significance. Next, find out the contribution of the independent variable to the dependent variable by looking at the coefficient of determination (R2) value. The coefficient of determination R2 is (64.21%), indicating that 64.21% of the poverty variable will be explained by the independent variables: household expenditure, government, private investment and net exports. In contrast, the remaining 35.79% of the poverty variable will be explained by other variables not discussed in this study. This model has also passed the autocorrelation and multicollinearity tests.

According to the findings of testing hypothesis 1, consumption spending has a detrimental impact on the poverty rate. It is shown that the low level of household consumption affects the poverty level. It is a representation that low household consumption causes a country’s economic level not to work because people’s purchasing power cannot increase a country’s macro income. The results of this study support previous research that has been conducted (Rusdiansyah, 2014; Sudirman and Alhudhori, 2018).

According to the findings of testing hypothesis 2, government spending had a detrimental impact on the poverty rate. It proves that the government spending that occurs can achieve per capita income. The results of this study confirm that high government spending in the 2009-2021 period has seen an increase in the number of people living at the poverty level. The important thing that needs to be seen is that the percentage has decreased. However, government spending can stem the number of people at the poverty level to change their economic capacity (Fitria, 2020). It is presumed that the people who were recorded at the poverty level from the previous year received an increase in the economy while the population continued to grow. The government can overcome the complexity of these conditions so that spending, suspected to be used for per capita income, tends to stimulate the community to improve their household economy.

According to the findings of testing hypothesis 3, private investment has a detrimental impact on the poverty rate. High private investment can trigger an increase in public spending. Private parties that invest in the business expansion can trigger state revenues. With so many businesses popping up, it will create more jobs and decrease poverty (Saraswaty et al., 2023). The emergence of private investment is expected to stimulate the continuity of economic development, absorb labor, and reduce poverty to improve people’s welfare and distribute it evenly.

Based on the results of testing hypothesis 4, it was found that net exports affect the level of poverty. This study’s results align with previous studies, which show that export activities are beneficial in creating new opportunities abroad. Export activities can create opportunities to open overseas markets to become more global, grow investment, and widen domestic reach (Putra, 2022). Labor capacity is needed to fulfill export production capacity to create broad employment opportunities. It can be concluded that net exports open up opportunities to reduce unemployment, increase people’s incomes, alleviate poverty, and, as a whole, encourage people’s welfare.

The probability value can be used to determine the variable significantly impacting the poverty level during the study period. The independent variable with the lowest probability value is the variable with the most dominant influence on the dependent variable. Based on the calculation results in Table 4, it can be concluded that the variable that has the most dominant influence on the amount of poverty is government spending.

5. Conclusion

Based on recent research on the Indonesian economy, it has experienced a relatively good increase in economic growth. However, this has yet to have a significant effect on poverty reduction in Indonesia. This study’s findings indicate that poverty is not only solved by increasing economic growth. Thus, improving the quality of human resources will influence poverty reduction significantly.

This study used quantitative methods to collect secondary poverty and GDP data from the Central Bureau of Statistics (BPS). This study aimed to determine the effect of use-side GDP on achieving the poverty rate in Indonesia. Therefore, poverty that must be solved is poverty that befalls individuals. This concept provides for aspects of production, services, and others, so an effort must be made to guarantee their basic needs and encourage them to fulfill them. Achieve this by creating a fair and even economic distribution in society.