The difficulty of resolving the problem of poverty immediately after the Asian financial crisis of 1997–98 gave rise to thoughts about the necessity for a stronger focus on results, and on broad community participation, when devising poverty alleviation strategies. In 2005, with analysis showing that blanket subsidies were mainly benefiting the non-poor, the Indonesian government took the tough political decision to reduce fuel subsidies. This policy resulted in an average rise in fuel prices of 138 per cent over the year. To protect poor households from the impact of these price increases, the government reallocated the savings from the fuel subsidy reduction to four major poverty alleviation programs: an unconditional cash transfer program (Bantuan Langsung Tunai, or BLT); a grants program to provide operational support for primary schools (Bantuan Operasional Sekolah, or BOS); a health insurance scheme for the poor (Asuransi Kesehatan Masyarakat Miskin, or Askeskin); and a program to deliver infrastructure to almost 13,000 poor villages.

In 2007, the government redoubled its focus on poverty reduction by launching a conditional cash transfer program (Program Keluarga Harapan, or PKH) and integrating two community-driven development programs, the Kecamatan Development Program and the Urban Poverty Program, into the National Program for Community Empowerment (Program Nasional Pemberdayaan Masyarakat, or PNPM). Both PNPM and PKH involved the decentralisation of spending to the community level to increase the level of local participation and self-help.

Broadly speaking, the government's poverty reduction programs fall into three categories. The first is a cluster of programs targeting poor households and individuals. They include a subsidised rice scheme, a health insurance scheme and a scholarships scheme, as well as PKH. The second is a group of community-based programs for poor subdistricts and villages built around block grants and community facilitation. PNPM falls into this category. The third is a cluster of programs to support promising small and medium-sized enterprises by providing micro credit and other financial assistance.

This chapter focuses on the community empowerment program (PNPM) and the conditional cash transfer program (PKH). Both were designed to give communities the means to improve their own levels of welfare, in the belief that this would be a more effective way of identifying the vulnerable, tackling the lack of access to basic services and reducing disparities in poverty across regions.