Tuesday, July 29, 2014

Indonesia's Jarring Wealth Gap

The gulf between rich and poor has widened in Indonesia more than in any other developing country. It has grown by as much as 60 percent over the last decade, according to our comprehensive look at inequality in the country. While the rich get richer, around 40 percent of the country's 250 million people still live with less than $2 per day.

The last ten years in Indonesia following the departure of former President Suharto and the Asian financial crisis in 1997-1998 has seen dramatic change. Across Asia we've seen rapid growth, but this hasn't trickled down to the region's most impoverished people as much as one would hope - and Indonesia is a case in point. The country's economy has boomed since the 2000s, but this has benefited the rich more than the poor. The dramatic rise in inequality is even more spectacular when you consider that for many developing countries in Latin America, inequality is on the decline.

So what's the cause of Indonesia's rising inequality? Recent economic growth has been fuelled by a commodity boom - as world prices have increased, there's been a rise in exports such as coal and palm oil. Natural resource production demands capital investment, hence the commodity boom generally benefits the already rich.

Some argue that a burgeoning gap between rich and poor can be attributed to the rapid development of Indonesia's urban areas, such as the capital, Jakarta. But we found that inequality has risen across the country, and much of the increase is within provinces and districts.

We calculated different measures of inequality, such as the difference in what the richest and poorest in Indonesian society spent from 2003-2013 (ie the ratio of spending between the richest 10 percent and poorest 10 percent). Using this measure, we found an increase in inequality of over 60 percent. Using more standard measures of inequality, such as the Gini coefficient, we also found a rise in inequality of more than 30 percent during the same period.

At the same time, Indonesia's use of fiscal policy to address rising inequality during the last decade of economic growth has been ineffective. For instance, last year personal income tax contributed around Rp 102 trillion ($8.8bn) to the country's national budget. In contrast, fuel subsidies came to Rp 200 trillion ($17.2bn) - a tax break enjoyed by the richest 40 percent. Meanwhile, social spending was just Rp over 80 trillion ($6.9bn)

What could President Joko Widodo do in his first 100 days in office to address such issues? A more progressive budget to tackle inequality is possible - by channelling the fuel subsidy towards social spending.

There's good reason to have hope in the new president. Widodo's election win comes from his track record of innovative health and education policies as mayor of Solo and governor of Jakarta.

For instance, last year his Jakarta Smart Card initiative targeted more than 300,000 students from poor families at a cost of Rp 800 billion ($69m). It meant that a typical poor family of two young children in school received vouchers of Rp 360,000 ($31) per month - about a quarter of their household budget. The vouchers must be spent on education (getting the bus to school, books, uniform and so on). Evidence suggests that this policy alone could cut rising inequality in Jakarta by half.

Widodo's promise to expand the Jakarta Smart Card programme nationwide has appealed to the millions of Indonesians voting for him.

Indonesia can certainly afford to help its poorest. And if the new president wants economic growth to continue, he must tackle the growing gap between rich and poor. Research shows that rising inequality not only prolongs poverty, but also slows economic growth. Let's hope the new president lives up to expectations and is able to continue with his significant progressive track record.

Arief Anshory Yusuf is the Director of the Centre for Economics and Development Studies, Padjadjaran University, Indonesia

Andy Sumner is the Director of King's College London International Development Institute.

The article is based upon a research paper to be published in the forthcoming issue of the Bulletin of Indonesian Economic Studies.

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