Analysis of Economic Growth, Poverty, and Investment Indonesia: A Two-Stage Least Square Approach

Poverty, investment, and economic growth are critical factors shaping development in emerging economies like Indonesia. Understanding their interactions is key to designing effective, inclusive, and sustainable policies. This study investigates the relationship between poverty, economic growth, investment, and socio-economic variables in Indonesia from 2015 to 2023. The hypothesis tested is that poverty negatively impacts economic growth, while investment and human development positively influence both growth and poverty reduction. Additionally, government spending is expected to contribute to growth, and social conditions such as education and life expectancy are predicted to foster investment. The study also examines the role of population growth, which may support economic expansion under favorable conditions but worsen poverty if economic opportunities are insufficient. Using the Two-Stage Least Squares (2SLS) method to address potential endogeneity, the results reveal that poverty significantly hinders economic growth by limiting consumption, productivity, and national output, primarily due to restricted financial access and weak human capital. In contrast, government expenditure, especially on infrastructure, healthcare, and education, positively impacts growth. Population growth contributes to economic expansion but depends on improvements in human capital and labor absorption. Surprisingly, investment and human development show no significant impact on growth, probably due to inefficiencies and regional disparities. For poverty reduction, economic growth and life expectancy are crucial, while high population growth without economic opportunities exacerbates poverty. The findings highlight the importance of integrated policies focusing on governance, education-labor market alignment, and regulatory reform for sustainable development.