Few terms in the development jargon are as old as wealth inequality, the steep slope that makes improvements in life difficult for some and a smooth ride for others. Inequality is an issue that never dies and is as prevalent today in developed economies as it is in emerging countries like Indonesia, where it undermines improvements in food availability, sanitation, higher education and much more by making them unaffordable to the vast majority.
Just as in developed economies, inequality today is a bigger concern than in previous decades, when the fruits of economic growth were more equally distributed. In the early 1990s, Indonesia was applauded for its remarkable economic performance after sustaining an average annual growth of 7% over previous decades. This growth, which accompanied the diversification of the economy from agriculture to manufacturing, managed to significantly improve the living standards of Indonesians in terms of health and education, while at the same time, maintaining relatively low and stable income inequality, as measured by the Gini coefficient, of around 0.32 to 0.36.
It was at this time that Indonesia joined the group of eight “high-performing East Asian economies,” which was later termed the “Asian economic miracle.” However, the notion of this miracle was undermined in the late 1990s by the Asian financial crisis. Since the crisis and the eruption of social conflicts following it, the belief in the Indonesian miracle of low and stable economic inequality became unsustainable, as Indonesian economist Zulfan Tadjoeddin points out in a 2013 analysis.
Source: Yusuf A.A. et al 2013, Twenty years of expenditure inequality in Indonesia, 1993-2013, Working Paper in Economics and Development Studies, no. 201314, Department of Economics, Padjadjaran University
Tadjoeddin makes the point that despite statistical evidence, the New Order era widened economic disparities between the rich elite and the poor masses as well as between urban and rural areas and between western Indonesia and the much poorer eastern parts. By 1996, top-ten super-rich Indonesian families controlled 57.7% of stock market capitalization in the country – the highest proportion in East Asia.
Today, Indonesia’s top-40 entrepreneurs have built up assets equivalent to nearly one tenth of the annual GDP and indicators of inequality, including those tuned to paint a better picture, show persistent deterioration. The Gini coefficient, which has reached a record 0.41 in Indonesia, remains below that of Malaysia, Thailand and the Philippines but Christian von Luebke, a research fellow at the Asia-Pacific Research Center in Stanford University, argues that it would surpass those countries if the incomes of top earners were fully accounted.
Yudhoyonomics
According to a 2013 study by economists at Padjadjaran University in Bandung, West Java, inequality in Indonesia increased by 60% from 2003 to 2013 based on the ratio of spending between the richest 10% and poorest 10%. Using more standard measures of inequality, such as the Gini coefficient, the researchers found a rise in inequality of more than 30% during the same period.
When it comes to attributing blame, many economists point the finger at President Susilo Bambang Yudhoyono. Chris Manning and Riyana Miranti, from the Australian National University (ANU) and Canberra University, note that a comparison of countries with similar datasets suggests the increases in the Gini ratio in Indonesia during the Yudhoyono years was second only to China and higher than countries like India and Bangladesh.
One of the main factors for this increase, they argue, was the fiscal policies of Yudhoyonomics. During the former president’s two terms, fiscal policy targeting the expenditure side had only a weak effect on equity and during his second term he failed to initiate reforms in this area. The main hump in this area were fuel subsidies, which most economists decried for impeding key expenditure to create better jobs and raise incomes at the bottom end.
A lack of changes on the revenue side targeted towards higher-income groups was also seen as one of the failures. Income tax collection among higher-income groups remained ineffective during Yudhoyono’s rule and the tax-to-GDP ratio was as low as 12% – only a few percentage points lower than neighbors Malaysia or the Philippines but less than half that of other major developing economies, such as Brazil (34%), South Africa (26%) and China (22%).
Source: Yusuf A.A. et al 2013, Twenty years of expenditure inequality in Indonesia, 1993-2013, Working Paper in Economics and Development Studies, no. 201314, Department of Economics, Padjadjaran University
Say it as it is
Rising inequality is an uncomfortable reality for most governments around the world and the extent to which it has been acknowledged varies.
In Indonesia, Yudhoyono’s administration took a focus on poverty alleviation and was responsible for some of the main programs helping the poor today – setting up conditional cash transfer (CCT) programs, creating the National Health Insurance (JKN) and introducing the National People’s Empowerment Program (PNPM) to build infrastructure in villages. At the same time, Yudhoyono failed to introduce fiscal reforms to narrow the country’s wealth gap and, rhetorically, made few direct references to inequality.
He would most often mention inequality in international settings to highlight disparities “between nations and within nations,” as during his 2012 address to the UN General Assembly. On that occasion, Yudhoyono warned that inequality could create tension and, if left unaddressed, lead to radicalism and even violence.
Fast forward three years and President Joko Widodo is borrowing the same words, although this time applying them in a national context. Speaking at the Armed Forces (TNI) headquarters in East Jakarta on December 16, Widodo said inequality and poverty in Indonesia have been fueling social conflict, separatism, radicalism, extremism and even terrorism.
“We are not against the rich. We want our people to be rich. But if we have super rich and others struggling to eat, then there is a gap we need to close with our budget and policies in the field. Poverty and social inequality are dangerous, they fuel social conflict, separatism, radicalism, extremism and even terrorism,” said Widodo.
Widodo’s words also had a special political meaning, as he delivered the speech in front of senior government and military officials, including TNI chief Gen. Gatot Nurmantyo and Coordinating Minister for Security, Politics and Legal Affairs Luhut Panjaitan. Nurmantyo had in recent months blamed ‘proxy wars’ by non-state actors for domestic conflicts and crime in a series of public lectures to outline what the state and the TNI’s long-term focus should be.
Widodo also acknowledged the latest World Bank report on inequality published in December, which warned that growing inequality, if left unaddressed, could cause social tensions in Indonesia. This was also a significant move by Widodo, who months earlier had dismissed the World Bank in among a bag of unwanted international development entities. “The opinion that global economic issues can only be solved by the World Bank, the IMF and the ADB is an old-fashioned opinion that should be discarded,” he said during the opening of the 60th anniversary celebration of the 1955 Asia-Africa Conference last April.
The World Bank report said inequality has occurred even as Indonesia experienced sustained high economic growth and reduced the national poverty rate. Between 2003 and 2010, consumption per person for the richest 10% of Indonesians grew at over 6% per year after adjusting for inflation. But for the poorest 40%, consumption grew by less than 2% per year, the bank said.
Vice President Jusuf Kalla also mentioned the report during a speech at Paramadina University in Jakarta in January. “(War) in the Middle East stems from inequality. The Arab Spring started because of a Gini ratio of 0.45. We now have 0.41 and 0.43 in urban areas (in Indonesia). It’s a yellow light. Hopefully we can turn that into a green light, if not it could be a threat to the integrity of the nation,” Kalla said on January 13.
The vice president’s warning echoed that of influential union leader Said Iqbal, the president of the Confederation of Indonesian Workers Unions (KSPI). Iqbal last September urged the government to address inequality and said that if the Gini coefficient rises above 0.50, workers could start an insurrection in protests similar to the Arab Spring.
Cabinet Secretary Pramono Agung, Coordinating Minister for the Economy Darmin Nasution and Coordinating Minister for Maritime Affairs Rizal Ramli have also linked inequality to social instability in separate occasions over the past month.
The impact of inequality
Inequality, including control of capital, has a self-perpetuating nature. National daily Kompas, in an article on January 28, cited data from the National Land Agency that states that 0.2% of the population controls 56% of the nation’s land. It quoted Sri Palupi of the Institute for Ecosoc Rights as noting that Indonesia possesses no means of controlling the monopolization of land.
Furthermore, there is nothing to stop the rich simply buying up land and leaving it idle, expecting capital gain in the future. This excessive control of land by the rich tends to marginalize the poor, forcing them into the position of landless labor and exacerbating the drift to the cities.
Kompas cites the 2013 National Agricultural Land census, which found that 26.12 million households controlled an average of 0.89 hectares of land per family. A further 14.25 million households controlled less than half a hectare of land, whereas the minimum area to sustain a family was 2 hectares.
“If we want to be consistent in applying the Constitution, the government should strive to achieve a just distribution of economic assets, not the liberalization of economic assets that has occurred so far,” it quoted Sri Palupi as saying.
The daily cited the case of Banten province, where the declaration of a special economic zone (KEK) in the area of Tanjung Lesung, and plans for a toll road to the area, had seen land in the area snapped up by speculators, leading to a dramatic rise in the price of land from Rp500 to Rp1,000 per sq m to Rp100,000 per sq m. Most land in the area was now sitting idle.
Clearly, while local residents had cashed in on their land holdings by selling it to speculators, they had done so without any awareness of the plans for the area. They now found themselves landless and without incomes. Similar impacts had occurred in many other areas of the province, according to Kompas, where villagers were lured by the prospect of quick cash without being aware of the real value of their land.
Walking the talk?
So far the government has not offered any hints as to whether new policies to address inequality may be introduced in the short term. Kalla during his speech at Paramadina University said the government would address inequality by introducing taxes for wealthier Indonesians and giving out more loans to small businesses (KUR), as the government “cannot give everyone civil service jobs to raise their economic status to middle class.”
However, the International NGO Forum on Indonesian Development (INFID) has pointed out that the 2016 State Budget does not address the priorities identified by the nation’s leaders. INFID program manager Siti Khoirun Nikmah told news website GeoTimes in January that social spending for 2016 remains low at 2.4% of the budget, which she said is lower than spending on civil servant salaries.
Nikmah said the government is not meeting the objectives set by the National Mid-Term Development Plan (RPJMN) for the period 2015-2019, which calls for a “developed, equitable and democratic society based on law” as well as “better quality of life, progress and prosperity.”
The government’s nine-point Nawacita goals also include “improving human quality of life.” The National Development Planning Agency (Bappenas) also believes that the UN’s Sustainable Development Goals (SDGs), including goal no. 10 of “reducing inequality within and between countries,” are already reflected by the RPJMN.
“To support a reduction in inequality, the government needs to improve access to capital for small and medium enterprises,” said Nikmah. To do so, the government should increase the budget allocation for social expenditures and social security as well as expand and continue work apprenticeship programs.
Micro, small and medium enterprises absorb the highest amount of labor and for that reason, Nikmah said, the government should investment in them. She estimated that 30% more jobs could be created in such enterprises with enough investment and the right policies. To its credit, the government has ordered a reduction in the interest rate for low-level loans (KUR) from 12% to 9% in an attempt to generate more economic activity at the grassroots.
INFID executive director Sugeng Bahagijo also said the government should invest more in work training centers (BLK). He said BLKs in Indonesia lack funding for the right personnel, unlike in other countries like the US.
President Joko Widodo distributing Indonesia Health Cards (KIS) Source: Poskota News
Budgets don’t lie
Without the right fiscal policies in place, the only way for the government to effectively reduce or slow down rising inequality is social spending. The World Bank, in its November report ‘Indonesia’s rising divide,’ praises the government for reinforcing conditional cash transfer programs such as the Prosperous Family Card (KKS), education scholarships for the poor distributed through the Indonesia Smart Card (KIP) and free access to healthcare for holders of Indonesia Health Cards (KIS).
As explained in one of our previous analyses, these programs are having a positive effect and improved data collection appears to be ensuring that most targeted households can access their benefits. The programs, particularly the KKS, were inspired by Brazil’s silver bullet to fight inequality – the Bolsa Familia program that gained former President Luiz Inácio Lula da Silva near cult status for maintaining economic growth and redistributing it.
Bolsa Familia cost Brazilian taxpayers less than half a percentage point of the country’s $2.3 trillion annual GDP – an approximate $11.5 billion per year. This contrasts with the budget allocation given to the Indonesian Social Affairs Ministry this year of Rp15.3 trillion – roughly $1.08 billion.
Out of that amount, only a fraction is invested in the KKS conditional cash-transfer program, the PKH, which is handled by the Social Affairs Ministry. Out of the 2.4% of social spending referred to by Nikmah, the Social Affairs Ministry’s budget makes up 1.9% with the remaining 0.5% invested in social assistance programs by other ministries.
The number of participants in Bolsa Familia is also proportionally bigger than the PKH in Indonesia, with around 25% of households, or around 14 million, compared to 5% in Indonesia, or around 3 million households, according to the World Bank. Official estimates by the Indonesian Secretariat of the National Team for the Acceleration of Poverty Reduction (TNP2K) put that figure at around six to seven million households.
The money received by Brazilian families is conditioned by several factors – children’s school attendance, vaccinations and medical check-ups, among other requirements. Currently, the KKS does not require Indonesian families to meet any requirements other than being below certain poverty levels to receive the PKH or other occasional cash transfers to mitigate the effects of higher inflation.
Trapped?
Recent protests in Brazil against incumbent President Dilma Roussef to denounce corruption, inequality and unemployment show that even when social spending works other factors such as slower growth may offset it. The protests in Brazil are relevant reminders for Indonesia that no matter how much you invest in reducing inequality, sustained economic growth is necessary to create jobs, improve services and create infrastructure.
Weaker growth in Indonesia has resulted in slower job creation, with recent employment rising only just enough to absorb the increase in working age population. As a result of slower economic growth, net new jobs rose by only 0.2% in the year to August 2013 and by 1.6% in the year to August 2014, according to the World Bank. The employment increase in 2013 and 2014 only just equaled the increase in the working age population and there are indications that in 2015 new jobs fell short of the increase in working age population – a trend expected to continue. The economy grew at 4.73% in the third quarter of 2015, significantly below the 7% considered by most economists as enough to create jobs for the estimated 2 million new entrants to the workforce each year.
Higher unemployment and under-employment will accelerate the growth in inequality and while the government is committed to accelerating spending in infrastructure to propel the economy, no effective measures are being introduced to narrow human development gaps or increase the income of the poorest households at the same or higher rate as the richer ones.
With the 2016 state budget already in place, Indonesia will need to wait another year for an increase in social spending. President Widodo appears to be counting on economic improvements this year to be able to increase social spending in 2017.
A government official involved in poverty eradication programs told Concord Strategic that no new policies to directly tackle inequality are expected in the short-term. However, the official said Widodo has shown interest in Brazil’s Bolsa Familia program and intends to increase the budget of its Indonesian twin, the KKS.
In addition, fiscal adjustments to increase tax collection from companies and wealthier individuals are also necessary. Indonesia needs to optimize tax collection, expand tax rate brackets and enforce more transparency and accountability at the Directorate General of Taxation.