Abstract Book - Endinamosis 2019:

The 3 rd International Conference on Rural Development and Community Empowerment

HOW VILLAGE FUND POLICY ALLEVIATE POVERTY AND

EMPOWERING INDONESIAN RURAL COMMUNITY

Dr.Eng. Bonivasius Prasetya Ichtiarto

Director of Public Relations and International Cooperation
Ministry of Village, Development Disadvantaged Region and Transmigration Republic of Indonesia, Jakarta,
Indonesia.
E-mail: drbonny69@gmail.com

Abstract. Poverty exists in rural as well as urban areas, but for certain economic, social and political aspects the
urban and rural poverty are different. The first and perhaps most significant distinction is that the urban poor depend
mainly on a cash income for survival, while in the rural areas, most poor households can still depend for their survival
(for instance for their daily meals) on their own crops or supports in any form from their relatives or neighbors. This
paper reviews the Village Fund policy and discusses its impacts on the effort of alleviating poverty and empowering
rural community in Indonesia. This paper presents data that suggests how Village Fund policy and its 4 priority
programs have contributed significantly in reducing current inequities and helped poverty reduction ef forts in poor
and underdeveloped villages. The paper will frame its analysis on the Village Law, which is a set of rules an d
regulations on the village governance that put into consideration how villages has developed into various forms, that
requires to be protected, and empowered to become strong, self -reliant, and democratic in order to create a solid
foundation in conducting the governance and development programs towards a just, and prosperous community.
Currently, the rural development is faced with another challenge of the Industry 4.0 era. The industrial revolution 4.0
is the fourth phase of the industrial revolution history, which is at its peak today with the birth of digital technology
that has a massive impact on human life throughout the world. The latest industrial revolution or fourth generation is
driving automation in all activity processes. Internet technology has become the basis for online trade transactions.
With the large amount of funding being allocated to villages, villages are expected, not only to leaving behind their
past poverty, but being ready and equipped enough to welcome the massive challenge of economic activities and
labor market transformation. Great attention in this regard should be given to rural communities who are generally
lack of sufficient education and skills that have put them in a very vulnerable position to exclusion due to lack of
opportunities to access employment.

Keywords: Village Fund; Poverty Alleviation

INTRODUCTION
As of March 2019, the number of poor in Indonesia is 25.14 million people or 9.41% from population. The wealth
disparity between urban and rural areas remained very high with the rate in rural areas almost two times that of the
rate in urban areas. The poverty rate in urban areas was at 6,69% and 12,85% in rural areas. While most of the poor
live in Java, poverty rate is far higher in Eastern Indonesia. In 2019, poverty was highest in the provinces of Papua
(27.53%), West Papua (22.17%), East Nusa Tenggara (21.09%), Maluku (17.69%), and Goron talo (15.52%).
Collectively, these provinces had fewer poor people than the number of poor in East Java, which had a poverty
incidence of 10.37% or 4.1 million poor people.
The poor also suffer the most from a lack of economic infrastructure, especially in disadvantaged region and remote
area. Investment in infrastructure is also needed to address high poverty rates in rural areas. Some 41% of district
roads and 24% of provincial roads throughout Indonesia are in bad condition. Development prospects are poo r f or
rural areas that lack good access to towns and markets. Poverty in some eastern provinces is directly linked to poor
infrastructure, which hinders farmers from accessing markets, limits economic opportunities, and constrains access to
essential social services.
 Abstract Book - Endinamosis 2019:
The 3 rd International Conference on Rural Development and Community Empowerment

Percentage and Number of Poor People by Island, March 2019

Percentage of Poor People Number of Poor People (in thousands)
Island
Urban Rural Total Urban Rural Total
(1) (2) (3) (4) (5) (6) (7)
Sumatera 8,28 11,37 10,03 2 096,64 3 754,65 5 851,29
Jawa 6,46 12,25 8,44 6 400,92 6 322,20 12 723,12
Bali & Nusa Tenggara 8,89 17,88 13,81 596,75 1 449,38 2 046,13
Kalimantan 4,25 7,46 5,93 331,26 642,93 974,19
Sulawesi 5,61 13,37 10,23 444,69 1 565,16 2009,85
Maluku & Papua 4,97 29,12 20,91 124,54 1 415,60 1 540,14
Indonesia 6,69 12,85 9,41 9 994,80 15 149,92 25 144,72
Source: processed from the National Social Economic Survey (Susenas), March 2019

Inequality in Indonesia has been slightly decreasing since 2014. During 2014 -2019 the Gini coefficient fall from
0.411 in 2014 to 0.382 by 2019. Rising inequality is reflected in a growing gap between the rich and the poor.
Increased inequality contributes to the slower pace of poverty reduction. Poverty generally falls with economic
growth, but the speed of poverty reduction depends on how equally growth is shared. If the pattern of growth benefits
the rich more than the poor, the pace of poverty reduction slows. Higher inequality can also lead to slower economic
growth and thus can further hamper poverty reduction efforts. The extent to which households in the bottom 40% are
unable to move into the middle class could weaken middle class–driven consumption growth. This may also reduce
economic growth through a number of other channels, such as low investments in human capital and decreased
entrepreneurial activity. Also, inequality of opportunity can impact on the ability of children to achieve their full
potential, hindering future growth, because they cannot access to education, health, and transportation services.
Poverty levels and rising inequality are both associated with a lack of good jobs in the economy. Some inequality is
due to circumstances beyond the control of an individual, such as gender, ethnicity, birthplace, and family
background, which is called multidimensional inequality.
Several programs in poverty alleviation in Indonesia try to face those problems above. Most programs are economic
program that directly giving to poor household, while other programs were created for education, health and
community such Village Fund (Dana Desa). Village Fund is a directly state budget to support villages in providing
their society with services related to the infrastructure, empowering, education, public health, economic development,
and enabling social participation to flourish in their communities.

THE VILLAGE LAW AND VILLAGE FUND POLICY

Since the enactment of Law number 6, 2014 on Village (Village Law), Indonesia gives more effort in placing village
and rural areas as the focal of national development. This law reflects the paradigmatic change of Indonesia’s national
development that has long neglected the role of village and rural areas as im portant players in the role of national
development. It is also concomitant to the vision of Jokowi’s nine priority programs (Nawacita) stating about
“developing country from periphery (Indonesian; Membangun dari Pinggiran). It means that to f oster the nation is
not necessarily starting from central areas, but from peripheral ones for the sake of national integration. The
formalization of this vision into state law bears an impression that the state of Indonesia has changed its centralistic
development policy and this is an obvious sign that indicates the state inclination to village and rural areas. In this
regard, the Ministry of Village has a strategic and undeniable role to play due to its main portfolio as the state agency
in the whole actions of village and rural area development. With Village Law, Indonesia actually provides not only
capital and fund, but also more space for village and rural areas to exercise their power and authority in creating
innovation for development.

Broadly speaking, the Village Law regulates principles such as Principles of Village Arrangement, Position and Type,
Village Arrangement, Village Authority, Village Government Administration, the Rights and Obligations of Village
and Rural Community Rights, Village Regulations, Village Finance and Assets, Village and Rural Area
 Abstract Book - Endinamosis 2019:
The 3 rd International Conference on Rural Development and Community Empowerment

Development, Village-Owned Enterprises, Village Cooperation, Village Community Institutions and Village
Customary Institutions, as well as Guidance and Supervision. In addition, the Law also regulates with s pecial
provisions that only apply to Indigenous Villages. As stated in Article 4, that the Village Arrangement aims as
follows:
• Recognition, means acknowledging and respecting the villages’ rights of origin.
• Togetherness, a spirit of participatory and collaborative on the basis of mutual respect between the institutions
at the village level and the village community itself in developing the village.
• Subsidiarity, disbursement of authority at the local level, and decision making at the local level to accommodate
the needs of the community.
• Diversity, giving recognition and respect for the existing Village with its diversity before and after the
formation of the Unitary Republic of Indonesia.
• Cooperativeness, a spirit of helping each other in developing the village.
• Kinship, a spirit and tradition of regarding each other as a family.
• Discussion, the decision-making process of any issue concerning the community should be discussed among the
relevant stakeholders.
• Democracy, the village community is organized in a governmental mechanism by or as approved by the
community where its dignity is acknowledged and guaranteed.
• Self-reliance, the community will ensure its own ability in fulfill their needs
• Participatory, inclusiveness of all members or representatives of the community
• Equality, each stakeholder is in an equal position in an activity
• Empowerment, an effort to enhance the community welfare through policy making, programs, and activities
that are in line with the needs of the community.
• Sustainability, the process of development planning and execution is coordinated, organized, integrated, and
sustainable.

The Village Law and all the ideal planning of village development, where the villages are the subject of development,
will be difficult to realized, mainly because most of the 74,957 villages in Indonesia do not have enough capital
resources to begin with. The Village Fund policy is a fiscal transfer, where each village will receive a minimum
amount of 800 million rupiahs annually as f iscal subsidy, which they will later use to finance their village
development programs that have been agreed and decided in a mechanism that ensure the involvement of each and
every villagers component. Based on the Village Rural Development and Transmigration Ministerial Regulation No.
5 of 2015, it is stated that the fund aims to improve the welfare of rural communities and the quality of human life, as
well as poverty reduction, through: the fulfillment of basic needs; (2) the development of rural infrastructure; (3) the
potential development of local economies; and (4) the use of natural resources in an environmentally sustainable
manner. Each village is given autonomy to determine the use of this funding, which is then formally proposed in an
expenditure plan. This scheme is part of Jokowi’s vision to develop Indonesia “from the periphery”, by f ocusing on
more marginalized regions of Indonesia. It aims to close the infrastructure gap between rural and urban areas, improve
rural access to vital community services, and boost social welfare. The amount of Village Fund received by each
village will vary according basic allocation as a principle of equality and equity (77%), affirmative allocation for
disadvantaged region (3%), and multi variable allocation (20%). The respective weight of the formula-based variables
is 10 percent based on population, 50 percent for the poverty rate, 15 percent for the area width, and 25 percent for the
geographic constraints level of the village. The distribution of Village Fund is conducted in three phases; Phase I in
April 40% by submit Village regulation (Perdes) and Village income and consumption budget plan (RAPBDes),
Phase II in August 40% by submit realization of Village Fund usage in previous year, and Phase III in Octob er 20%
by submit progress report of Village Fund usage in phase 1 and phase 2.
 Abstract Book - Endinamosis 2019:
The 3 rd International Conference on Rural Development and Community Empowerment

MVDDRT is responsible to support, assist and supervise villages in using their Village Fund and bring the village to
be resilience. In order to achieve the objective, the Ministry has come up with 4 priority programs to accelerate village
development.
• Rural Flagship Product (Prukades): implemented by creating rural economic clusters. Economic clusters are
landscape-based development where villages with similar natural conditions may also have the same product
advantages. The program encourages farmers to produce a flagship product and focus on the cultivation of a
particular commodity that is potential to their area. With Prukades, village only produce one or two potential
commodities, so the demanded economic scale is met. Prukades also welcomes the possibility of investors to
work together and partner with village communities. The investment can be in the commodity processing
cooperation, cultivation cooperation, as well as product marketing cooperation.
• Village-Owned Enterprise (BUMDes): a business entity that has all or most of its capital owned by the village
through direct participation originating from village revenue, which was separated to manage assets, services,
and other businesses to the maximum possible extend of prosperity for the village community. The
establishment and development of BUMDes is a promising prospect for strengthen ing and empowering the
village economic institutions. BUMDes can also free farmer from middle men because they can sell their
commodities through BUMDes.
• Water Reservoir (Embung Desa): since 82% of the Indonesian population relies in the agricultural sector, thus
require the assurance of water for agricultural cultivation. The construction of village reservoir can also support
farmers to dramatically increase production. Inside the reservoir itself can also be used for cultivation of various
types of fish. Embung can also be designed attractively and be integrated with tourist support facilities. This can
bring up new tourism potential in the village.
• Village Sports Facility (Raga Desa): This program aims to build village sports infrastructure so that village
youth can do useful activities. If the village sports activities are already active, then it can be encouraged by
establishing a sort of Village League which provides competition in various sports.
 Abstract Book - Endinamosis 2019:
The 3 rd International Conference on Rural Development and Community Empowerment

1. RESULTS & ACHIEVEMENT

Over the past 4 years, Indonesian rural development program has shown very promising progress. In 2018, MVDDRT
succeeded in exceeding the Mid-Term National Development Plan targets by successfully elevated over 6,518
Disadvantaged Villages into Developing Villages and 2,665 Developing Villages into Self -Reliant Villages. Impact of
Village Fund can also be seen in decreasing poverty rate from 11,25% of the population in 2014 to 9,14% in 2019.
There are still poor people in the rural areas but the decline in numbers is faster than that of the urban areas. This is
because the Village Fund and the Village Fund Allocation directly target the villages and rural community.
By 2018, the numbers of village poor decreased by 1.29 million people or double the reductio n in the numbers of
urban poor of 500,000 people. For the first time after the 1998 reform, the poverty rate fell to a single digit to 9.82%,
and the decline in villages was twice as large as in the cities. The village fund also had a significant influence on
increasing the income per capita of the village community. In the last four years, village per capita consumption has
risen by almost 50%, from Rp 572,000 to Rp 804,000 per capita per month . It has also contributed in the success of
reducing the stunting rate from 37.2% to 30.8%, and latest survey has shown that as many as 85 percent of Indonesian
people were satisfied with the Village Fund program.

The Gini Ratio in March 2019, by 0.382, down 0.002 points compared to the Gini Ratio in September 2018 which
amounted to 0.384 and decreased by 0.007 points compared to the March 2018 Gini Ratio of 0.389. The Gini Ratio in
urban areas in March 2019 was recorded at 0.392, an increase compared to the Gini Ratio in September 2018 which
was 0.391 and decreased compared to the Gini Ratio in March 2018 which was 0.401. Meanwhile, the Gini Ratio in
rural areas in March 2019 was recorded at 0.317, down compared to the September 2018 Gini Ratio of 0.319 and the
March 2018 Gini Ratio of 0.324. Based on the World Bank's inequality measure, the distribution of expenditure in the
lowest 40 percent group is 17.71 percent. This means that population expenditure in March 2019 is in the category of
low inequality. If broken down by region, in urban areas the figure is 16.93 percent, which means it is classif ied as a
category of moderate inequality. Meanwhile, for rural areas, the figure was recorded at 20.59 percent, which means it
is classified in the category of low inequality.

The data shows that economic equality has improved, since the inequality rate measured from the expenditure side is
indeed difficult to reduce. This is even more difficult than encouraging economic growth accompanied by poverty
reduction. This ratio is an indicator for equity. If growth occurs, usually the poverty level and unemployment rate will
not be so difficult to decrease or unemployment will go down. This made the achievement was something to be
proud, to have economic growth accompanied by a decline in the Gini ratio, it is an achievement that not all countries
can do.
 Abstract Book - Endinamosis 2019:
The 3 rd International Conference on Rural Development and Community Empowerment

The Village Fund also contributes in decreasing unemployment rate in rural areas by 1,21% from August 215 to
February 2018. 30 percent of village funds in 2018 or around Rp 18 trillion are used for cash-intensive programs.
Such large fund is expected to absorb around 5-6.6 million workers. Thus, there will be an increase in purchasing
power to nearly Rp 100 trillion in rural areas. According to data from the Central Statistics Agency (BPS), before the
implementation of Village Fund (2012-2014) the annual average decrease in unemployment was 0.095%, whereas
after the implementation of Village Fund (2015-2017) the average decline was 0.34% per annum. The f act that the
construction of village roads is mostly carried out through the Cash for Work (Padat Karya Tunai/cash intensive
work) program which automatically provides additional income to the village community. Not only village roads,
Village Funds have also built thousands of other basic infrastructures such as MCK, Polindes, Posyandu, Bridges,
irrigation, PAUD, and so on. These Infrastructure development from Village Funds has had a significant influence on
reducing poverty in the village.

The Prukades program has proven to increase rural investment and economic self-reliance. All this time, the village
commodities have suffered from several disadvantages such as small economic scale, limited access to the market,
lack of vertical integration, and lack of available post-harvest industry. Prukades tries to offer solution to these
problems by creating village products clustering, creating vertical integration, and inviting the involvement of private
sector for post-harvest industry. It has shown considerable impact on how the village economic productivity can be
improved, a more efficiency in management, as well as reducing production cost and maximizing profit f or village
people.

One particular example is happened in Pandeglang Regency with the Ministry of Village, Ministry of Agriculture and
other private parties successfully created business model where it has growing areas up to 50.000 HA, the average
productivity 5 Tons/HA and the production reached 250.000 Tons. The result and profit of the product even exceeded
Pandeglang Regency regional income and its regional budget income. Thus, the number of disadvantaged villages is
reduced from 156 to 74 villages.

As of 2018, 343 Prukades have been developed in 148 Districts. They have cultivate d 3,2 million hectares of areas
using 20 million Labor forces with IDR 47 Trillion in potential investment from 30 major private or state -owned
companies as off-takers.
These numbers represent the steep increase in BUMDes (Villlage-Owned Enterprise) also plays a signif icant role in
the poverty alleviation efforts. as of December 2018, 61% of villages have had their village-owned enterprises
(BUMDes), or 45,549 BUMDes were established. This number increased sharply from 2014 where there were only
1,022 BUMDes. There are at least 145 BUM Desa with an over IDR 1 billion of annual turnover in Indonesia . They
mostly operates in the financial services, where 89%, or around 129 BUMDes, have financial services business
(Savings and Loans), only around 16 BUM Desa (11%) whose business is not a service finance, they can vary in the
form of trade, photocopying services, buying and selling LPGs, etc. One of them, is in Pujon Kidul Village, Pujon
District, Malang Regency, where the BUMDes manages village tourism activities, is able to generate revenue of IDR
1.3 billion, and is now targeted to increase its revenue to IDR 2.5 billion.

2. CONCLUSION & REMARKS

Although the numbers and figures of Indonesian rural development are mostly promising, there are still plenty of
room for improvement. Although the Gini Ratio is declining, but it still has plenty of room for improvement, because
for chronic poverty, it will need special handling. Community empowerment and economic independence can
accelerate the village economy.

BUMDes also still shows several aspects to be improved, one of which is assessing the village's potential to be
managed as a business asset. It takes a strong commitment from the village head and his citizens, in building
BUMDes. The village community may have the ability, if given the trust, authority, and assistance, and the national
and local government need to continue to provide assistance to enable them to analyze the potential of villages,
capture opportunities and development, as well as the synergy of the potential with BUMDes, so that the potential in
each village can mutually support the needs of the community.
 Abstract Book - Endinamosis 2019:
The 3 rd International Conference on Rural Development and Community Empowerment

Historically speaking, village and rural areas has had special place in the history of nation-state building of Indonesia.
Village and rural areas have been considered as the main factors of national development especially because of
agricultural characteristics of this country. With the enactment of the State Law No. 6/2014, village and rural areas
meet a momentum to develop, elevate and progress towards its ideals. All in all, every development program will
need synergy and cooperation among line ministries, local governments, private sectors, and active participation of
Village communities.

Reference:
• Law 6/2014 on Village (Village Law), 2014
• 2014 – 2019 Mid-Term National Development Plan, National Planning Agency (BAPPENAS), 2014
• Minister of Village Regulations 4/2015 on the Establishment, Organizational, Management, and Dissolution of
BUMDes
• Buku Pintar Dana Desa (Village Fund Smart Book), Ministry of Finance (Kementerian Keuangan, 2017
• Indonesian Poverty Profile, Central Statistics Agency (BPS), No. 07/01/Th. XXII, 2019
• Indonesian Poverty Profile, Central Statistics Agency (BPS), No. 56/07/Th. XXII, 2019
• Web-based reference:
- www.prukades.kemendesa.go.id
- http://datin.kemendesa.go.id/simpora/rep_bumdessmry.php
- https://www.bps.go.id/subject/168/potensi-desa.html#subjekViewTab3