Do International Remittances Reduce Poverty in Indonesia?

Loh, Hui Teng (2021) Do International Remittances Reduce Poverty in Indonesia? Final Year Project (Bachelor), Tunku Abdul Rahman University College.

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Abstract

Remittances flow in low- or middle-income countries have become the largest external funding source in 2019, exceeding Foreign Direct Investment (FDI). Genereally, an increase of income through remittances tends to improve the economic status of the migrant’s household. As such, remittances have been reported as a tool for fighting poverty in some countries such as Indonesia, however there are limited study on the impact of remittances to poverty in Indonesia. The main objective of this paper is to examine the impact of remittances on poverty in the short run and long run in Indonesia from 1990 to 2019. This study has employed two measures of poverty includes the poverty headcount ratio at $3.20 and $5.50 a day (% of population) as dependent varibale. Other variables considered include economic growth, inflation, exchange rates and financial crisis. The Autoregressive Distributed Lag (ARDL) test and an Error Correction Model based on ARDL approach was employed to examine the cointegration between the variables. The study found that remittances, economic growth and exchange rate have a positive relationship whereas inflation have a negative relationship with poverty in Indonesia. This study have concluded that Indonesia should avoid over-reliance on remittances as that might retard economic growth since it reduce the motivation of labour supply. Hence, the government should impose some programs to encourage employment to reduce the dependency of remittinces in order to reduce poverty.