Two decades of economic growth benefited only the richest 20%. How severe is inequality in Indonesia?

High inequality is bad for society because people on lower incomes may have no access to basic goods and services.

Two decades of economic growth benefited only the richest 20%. How severe is inequality in Indonesia?

A World Bank report in 2015 rang alarm bells for Southeast Asia’s largest economy. Despite Indonesia managing to more than halve its poverty rate since 1999, inequality has been rising fast since 2000. That’s because the richest 20% have enjoyed much higher growth in incomes and consumption than others.

But President Joko “Jokowi” Widodo’s policies to tackle inequality are producing results.

Economic growth and rising inequality

Indonesia is currently the third-fastest-growing economy among the G20 economies. The latest statistics suggest that Indonesia’s gross domestic product (GDP) per capita increased on average at 4% a year from 2000 to 2017. This is bettered only by China and India, which grew by 9% and 5.5% per year, respectively.

However, Indonesia’s economic growth spurred a rising inequality. This is reflected in the country’s Gini index – which measures inequality from 0 (perfect equality) to 100 (perfect inequality).

World Bank estimates reveal that Indonesia’s Gini index increased to 39.0 in 2017 from 30.0 in the 1990s.

Gini index by country, the 1990s and recent. Gini index between 40 and 50 indicates high income inequality, and above 50 corresponds to severe income inequality. Sources: World Bank, CIA, *Hong Kong (Census & Statistics Department), *Singapore (Statistics Singapore), *Indonesia (Statistics Indonesia), *Australia (OECD Data)

Data obtained from Indonesia’s Central Statistics Agency show inequality rose rapidly in the early 1990s.

Inequality declined following the Asian financial crisis as the crisis hit the rich. However, the gap between the haves and the have-nots began to widen fast under the administrations of Megawati Soekarnoputri and Susilo Bambang Yudhoyono (SBY).

The Gini index rose to 41.0 in 2014 under SBY from 31.0 in 2001 under Megawati’s administration.

Indonesia’s Gini index, 1990-2017. Statistics Indonesia

Consumer class-driven inequality

The 2015 World Bank report stated that Indonesia’s economic growth was enjoyed by only the top 20%. This group is identified as the consumer class. These people earn a net annual income of more than US$3,600 and spend about $10 to $100 a day on food, transport and household supplies.

Today, at least 70 million people in Indonesia fall within this consumer class bracket. It is projected that by 2030 this group will reach 135 million people, representing half of the population.

Since 2000 Indonesia’s consumer class has grown stronger thanks to two decades of economic growth. Their incomes are rising as their high educational qualifications meet the increasing demand for skilled workers. These people play a vital role in raising tax revenues and in demanding greater responsiveness, transparency and accountability.

On the other side, people with lower education struggle to find productive employment. They are trapped in low-paying jobs. Some work in farming and fisheries in rural areas, others work in the informal sectors – market coolies, domestic workers, drivers, etc. As their wages increase more slowly than for skilled workers, the income gap widens.

Inequality and human development

High inequality is bad for society because people in the lower-income group may have no access to basic goods and services such as food, health and education. This can slow down the process of human development – measurable by the Human Development Index (HDI).

The index measures a country’s average achievements in three basic dimensions of human development: health, education and income to support a decent standard of living. There are four human development categories: very high (greater than 80), high (between 70 and 80), medium (between 60 and 70) and low (below 60).

Based on the HDI value released by the United Nations Development Programme (UNDP), Indonesia is in the category of medium human development.

However, the bigger gap between the rich and the poor in Indonesia seems to have slowed down improvements in its HDI.

Data from Human Development Reports showed that throughout the 2000s Indonesia’s HDI improved on average by 0.92% per year, from 60.4 in 2000 to 66.2 in 2010. The Gini index during that period was between 31.0 and 38.0.

From 2010 to 2014, Indonesia’s HDI grew much more slowly at 0.78% per year as, under SBY’s administration, inequality was higher. During SBY’s second presidential term, the Gini index rose to 41.0.

Economists believe that a country must rely on two key drivers to get the best outcomes in human development: economic growth and declining inequality. Indonesia is seeing these two things happening under Jokowi’s administration.

Under Jokowi, the Gini index has dropped below 40.0 to 38.9 as of March 2018. This decrease has led to greater human development. The latest data show that Indonesia’s HDI is now 70.8. It has shown stunning growth of 1.3% a year since 2015.

The progressive trend is also happening at the provincial level. Statistics show that 15 provinces are below the national average, but 14 of them are in the category of medium HDI.

Fifteen provinces below national HDI, 2014 and 2017. Source: Statistics Indonesia and UNDP

Poorer provinces also showed rapid improvements in health, education and standard of living. Between 2014 and 2018 Papua recorded the fastest human development progress, followed by West Nusa Tenggara and West Sulawesi. Their HDI increased at 1.4%, 1.2% and 1.1% per year respectively.

Tackling inequality

The government has been addressing inequality issues with various policies.

Between 2004 and 2014, SBY’s administration focused on rapid poverty reduction. Total spending on pro-poor programs increased to 7% in 2014 from 5.7% in 2011. In tackling inequality, SBY’s programs aimed at empowering the people through education, health and micro finance support.

Jokowi’s administration decided to continue SBY’s legacy. From 2015 to 2018, the country’s spending on poverty reduction programs increased from 9% to 12.8%. Different from SBY’s approach to tackling inequality, Jokowi prioritises development of not only the people but also infrastructure. I think this is why Jokowi is better at handling inequality than SBY.

Infrastructure development aims to improve connectivity and reduce logistic costs within the archipelago. Jokowi is giving extra attention to 30 priority projects, including Palapa Ring project, Trans Sulawesi railway and Trans Papua road project.

In 2014, Jokowi introduced the Smart Indonesia Program to address education disparity. The program gives cash to poor students aged between 6 and 21 to ensure they complete school. As of October 2017, over 17.9 million smart cards, of the target of 19.7 million, have been distributed.

Jokowi also revitalised vocational education. He involved industry players to contribute to curriculum development for vocational and technical schools. Private companies will offer training and internship opportunities for students and teachers.

This reform aims to develop skill sets that reflect market demand, thus further strengthening Indonesia’s workforce.

On the right track

Rising inequality can reduce the quality of human life, social cohesion and economic growth. Inequality, in this case, is strongly related to unequal access to opportunities and services.

Jokowi’s approach to development has evidently considered this issue, which led his administration to pursue a combination of infrastructure and human resources development.

As connectivity such as transportation and communication improves and more people in the rural areas have equal access to public services, inequality will further decline. Hence, Indonesia is moving in the right direction in the way it manages and reduces inequality.

Tackling inequality remains a challenge for Indonesia. We should also draw attention to local governments. Their roles are now crucial to ensure funds and programs are handled optimally to boost economic growth and job creation in rural areas.