Employment Creation and Poverty Reduction through Agricultural and Rural Development A Political Economic Analysis of Fiscal Policy

Abstract

The problems of poverty and unemployment are more severe in rural than in wban areas. These problems are difficult to solve if development strategy lacking emphasis on agricultural and rural sector. The government, via fiscal policy, can directly or indirectly affect the development of agricultural and rural sector, which in turns reduces poverty and unemployment. This study aims at analyzing the impacts of government expenditures on poverty and unemployment within a political-economy framework. To reach this objective, a simultaneous equations model containing 22 structural equations and 9 identity equations, is constructed and estimated using the 2SLS method. Simulations of a set of policy scenarios are undertaken based on estimated parameters of the model. Estimated parameters of the model suggest that government regime affects significantly GDP and poverty. Political economy of the Post New- Order regime tends to bring about decreases in agricultwal and nonagricultural GDP, resulting in increases in mral and wban poverty. Results of the simulation analysis indicate that an increase in government expenditure on infrastructure can improve the growth and labor absorption, which then reduce unemployment. A policy mix between government expenditure on agricultural development and wage policy is potential to decrease the number of poor people in rural areas.