Quality Growth
German economist Albert Otto Hirschman conceived and put forth the idea that an economic development model needs to be revised to incorporate social factors, engendering a paradigm shift in the field of development economics. The three main goals of economic development —reducing poverty, unemployment and inequality — can be achieved by doubling the per capita GDP.
Even though Indonesia enjoyed high economic growth from 1998 to 2021, this actually led to an increase in the Gini index/coefficient (a measure of income distribution across a population). In 2010, Indonesia’s economic growth hit 6.17 percent, up from 4.63 percent in the previous year, but the Gini index also increased from 36 to 40.5, indicating widening inequality. In that period, economic growth was driven by a commodity boom, particularly palm oil, which surged from US$741.15 per metric ton in 2009 to US$1,193.37 in 2011. (FIGURE 5)
Indonesia still strives to eradicate extreme poverty, which is defined as “a condition characterized by the inability of people to meet basic needs, namely food, clean water, proper sanitation, health, housing, education, and access to information on income and social services”. According to The World Bank, people living on a daily income of less than US$1.9 in Purchasing Power Parity (PPP) are classified as living in extreme poverty. In Indonesia, around 2.04 percent of the population are living in such conditions. Compare this to Vietnam (1.8 percent in 2018), Thailand (0.1 percent in 2019) or Malaysia, where extreme poverty is almost non-existent.
This phenomenon is also exacerbated by income inequality between high-income countries and low- and middle-income countries, which often means that policies in the latter may be influenced by the interests of developed countries, including in energy. Extreme poverty in Indonesia is the result of the pursuit of high economic growth without being accompanied by adequate social development, which goes to show that high economic growth may not necessarily lead to any significant reduction in poverty.
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To address this problem, Indonesia can take inspiration from Amartya Sen, who believes that economic growth is not the main goal of economic development, but rather the improvement of people’s quality of life is or prime importance. Therefore, a change in direction of development is necessary, to improve the quality of human capital. The direction of national development needs to be reset by focusing a higher priority to providing ease of access to education and health care for all, especially the poor and vulnerable. Programs in the form of scholarships and free medical treatment must be expanded.
To fund this program, the government needs a credible state revenue policy. Tax revenue should be focused on collecting more individual income tax, which currently only accounts for 0.7 percent of total tax revenue. The rate needs to be increased to at least 10 percent if Indonesia is to be a developed country. The same also applies for tax ratios, which are currently at 10.2 percent. To optimally finance social welfare programs, the tax ratio is ideally 15 percent.
People’s hopes rest on policies and programs that are in line with the national long-term development direction. Needless to say, the achievement of Golden Indonesia Vision 2045 hinges on the state’s ability to produce superior and equitable human resources.