Innovation-Driven Economic Development for Inclusive Well-being: Assessing Household Resilience to Economic Shocks

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In modern economies, innovation is a critical driver of economic growth and societal well-being. The capacity of an innovation-driven economy to enhance household resilience, particularly in the face of economic shocks, is essential for equitable prosperity. This study investigates the determinants necessary for households to better withstand and recover from economic disruptions, highlighting the importance of inclusive economic strategies.

The Role of Innovation

Innovation is fundamental to rising living standards. Productivity growth, which is vital for increasing real wages and per capita income, largely stems from continuous innovation. The McKinsey Global Institute and Boston Consulting Group emphasize that innovation surpasses other inputs, such as capital and labor, in driving productivity growth. Harvard economist Elhanan Helpman also supports this view, noting that innovation is a significant driver of productivity and, consequently, cross-country income variations. An innovative economy fosters regional vitality, quality of life, and social inclusion. However, it is crucial to prepare households for sudden economic downturns, as seen during the COVID-19 pandemic.

Household Wealth as a Financial Buffer

Traditional measures of household well-being, such as income, have limitations. Income can be understated due to various factors, while expenditure often overestimates living standards. Household wealth—encompassing property, savings, and other assets—provides a more accurate measure of financial stability and resilience during crises. However, household wealth must account for debts, which can reduce overall net wealth. Analyzing household wealth across different income classes reveals varying impacts of demographic, educational, and economic factors on financial stability.

Quantile Regression Analysis

The study, "The Determinants of Household Net Wealth in Indonesia: Application of Quantile Regression," uses quantile regression to explore how household wealth is influenced by various factors across different wealth classes. Unlike ordinary least squares (OLS) methods that provide an average estimate, quantile regression offers a comprehensive view of the relationship between household characteristics and net wealth, capturing variations across the distribution.

Findings and Implications

1. Household Size: In urban areas, larger household sizes negatively impact net wealth, with significant effects observed in higher quantiles. In rural areas, this negative impact is evident in lower quantiles. Larger households may face financial challenges due to higher living costs and reduced wealth accumulation. To address this, reinforcing family planning programs and improving access to healthcare services are essential.

2. Education: In both urban and rural areas, higher levels of education positively impact household wealth. The effect is more pronounced in higher quantiles, suggesting that education increases earning potential and financial stability. Investments in education, including increased government spending and improved access to quality education, can enhance household wealth, particularly for lower-income households.

3. Intergenerational Transfers: Financial assistance from older generations positively influences household wealth. Transfers of money can enhance financial stability, allowing families to invest in property and other assets. To maximize the benefits of intergenerational transfers, government subsidies and direct transfers can alleviate financial stress and promote wealth accumulation.

4. Employment in Agriculture: Agricultural employment negatively impacts net wealth, especially in rural areas. The benefits of agriculture are often concentrated among wealthier individuals who own land and access technology, while poorer households, lacking land, face economic disadvantages. To address this inequality, policies should focus on land redistribution, increased access to technology, and improved financial services for smallholders.

Conclusion

Household net wealth is crucial for financial resilience during crises. However, wealth accumulation varies across different income classes, leading to disparate abilities to cope with economic shocks. Tailored interventions are necessary to address these disparities, ensuring that economic development and innovation benefit all societal levels and contribute to inclusive well-being. By focusing on education, family planning, and equitable economic policies, societies can enhance household resilience and achieve sustainable prosperity (TS).

 

A longer version of this article is presented at Business, Economics, and Sustainability Sciences (BESS) 2024: Innovation-Driven Economic Development to Achieve an Inclusive Well-being. Malang, 27-28 August 2024

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