Indonesia’s income inequality: Trouble in paradise

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(illustration: IO/Rudraksha)

IO, Jakarta – The great ‘pie’ of economic growth should be enjoyed by all levels. It should help reduce poverty and support the rise of a middle class. However, World Bank data shows that within the past decade growth has only benefited the 20% richest people, while 80% of the population has been left behind. The increase of such living standard gaps and the ever-higher concentration of wealth in the hands of a handful of people result in Indonesia suffering from a high wealth gap level, which increases faster than that of its neighboring countries in East Asia. This means that most Indonesians actually do not enjoy economic growth, which is frequently an indicator of a government’s success.

The Gini Ratio is an index used to measure the income gap between the rich and the poor. The score of a Gini coefficient is from 0 to 1. A 0 Gini score shows perfect equality of income, i.e. everyone has the exact same income level. The higher the Gini Ratio, the wider the income gap is. According to data from the Central Agency of Statistics and the World Bank, Indonesia’s Gini Ratio has tended to rise within the past 10 years, with a slight decrease in 2017. To be specific, the 2007 Gini Ratio was 0.35. In 2011-2015, it was 0.41. In September 2017, the Indonesian Gini Ratio was 0.391, decreasing 0.002 points from the Gini Ratio in March 2017 at 0.393.

The policies are not pro-people
In his Independent Observer interview, senior economist Rizal Ramli said that the Gini Ratio depends strongly on the economic strategies selected. If economic strategies prioritize the rich and strong, the Gini Index will automatically increase. However, pro-people, pro-lower and middle-class economic strategies will automatically depress the Gini Index.

‘16 years ago, when I started as Minister of Economics during Gus Dur’s tenure, economic growth was -3% due to the 1998 crisis. Within 21 months, we managed to raise it to 4.5%. We also encouraged exports, so that they doubled within 21 months. We managed to keep rice prices stable for 2 years, with no imports. The people’s spending power did not decline. At the same time, we maintained the stability of other staples’ prices, including that of cooking oil. Gus Dur’s government raised public servant wages 125%. Conservative economic wisdom would have said, “The economy is in a poor condition, so don’t raise civil servant wages yet.” But we argued otherwise: when the economy is hard, civil servants also have a problem. So if we raise their wages, they will shop more, reversing the economic growth trend. The Gini Index is fairly straightforward: if the government has pro-lower-class strategies and maintains price stability, the Gini Index will automatically decline. During Gus Dur’s tenure, Indonesia had the lowest Gini Index in history at 0.31,’ said the man familiarly known as ‘RR’.

Post-Gus Dur era, Gini Ratio continued to rise. Rizal’s analysis finds that this is because most policies do not support lower to middle classes. For example, the Government allowed the import of many foodstuffs, during harvest period. ‘When farmers, such as sugarcane farmers, onion farmers, and rice farmers were in the midst of their harvests, imports were actually being made. This automatically depressed crop prices, increasing the Gini Index. Any pro-people government would have reduced the Gini Index, while a government that only pleases the big, the strong, and foreigners will definitely raise the Gini Index. It’s as simple as that,’ he said.

Commenting on the ever-widening gap of the Gini Ratio, Sugeng Bahagijo, Executive Director of the International NGO Forum on Indonesian Development, has his own ideas. He believes that the Gini Ratio has improved, but the people still perceive a gap. He believes that are two things that maintain the gap even now: first, regional governments’ fixed expenditures are in a bad shape. For example, money for a budget item set to be spent in January or February does not come until November, while regional work is executed by regional governments themselves. This means that the various budgeted items are not executed properly.

Second, there is no work training or apprenticeships. ‘So with training, if you could not use a computer, or speak English, or cook, you can do it now. Or for example, a 35-year-old mason who is a Junior High graduate but wants to earn his certificate can get access to it now. So we’re not talking about unemployed and completely unskilled people, but elementary school-junior high school graduates who want to upgrade themselves. The central government has not prioritized them, has not given strong support, especially HR support for work training,’ he said.

The third is a structural factor, i.e. taxation and transfers. Indonesia’s tax rate is quite low, about 13%-15%, while the average tax rate for developing countries is 20%-25% and for developed countries is 35%-50%.

Poverty rate
According to the category set by the Statistics Indonesia (Badan Pusat Statistik – ‘BPS’), poor people are defined as those whose cash income is around USD 1.00 a day or Rp 361,990.00/month. BPS data does show that the number of chronically poor over the past 10 years has declined: in 2007 there were 37 million poor, while in September 2017 the number of poor people was 26.58 million people, for a decrease of 10.12%. However, if we use the poverty threshold set by the World Bank, which classifies Indonesians with an income of ≤ USD $1.90 per day as living below the poverty line, the number of poverty-stricken Indonesians is > 50 million people.

Rizal finds the USD 1.00 figure to be much too low. ‘When you do the math, the average income is not even USD 1.00, maybe only USD 0.90, and that’s extremely low. With that amount of income, you only have enough money to buy instant noodles, living with your family, with no money for transportation or health. If we use the USD 1.00 standard, poverty is slightly lessened, but if we use the USD 2.00, there are actually more poor people. 20% of the top people are relatively wealthy: they can eat good food, have enough money for their children’s school tuition, they can go on holidays, and they don’t need to fear going to the doctor. 40% below is in dire straits – any volatility in price or income, they can become poorer. The lowest 40% have never enjoyed independence – they can barely eat, they fear having to go to the doctor, they can’t go on holidays. That’s the social structure of our economy. And begging your pardon in time of crises, it goes on not only in Indonesia but all over the world: the top 10% become richer every day. During crises, asset prices drop, whether land or homes; they exploit the opportunity to buy cheap and then become richer yet. The middle to lower classes lose income,’ he said.

Sugeng says that there is a relatively small number of poor people with an income of USD 1 or USD $1.90 a day. He suggests that it would be more realistic to measure poverty using the minimum and maximum income of a nation. ‘For example, the minimum wage in Jakarta is Rp 3.5 million a month, while the maximum is Rp 100 million a month. Well, from the midpoint of Rp 10 million or lower it should be called ‘poor’, but the government might find it difficult to use this indicator because it’s too general. What must be noted is not the nominal amount, but how many of the people are included in healthcare. Because they cannot afford it, the government subsidizes them through a Beneficiary Fee (Penerima Bantuan Iuran – ‘PBI’) scheme. It would be better if the government sets store not on the nominal amount, but on who has and who doesn’t have social security, to make sure that they are included. Every citizen must have this. That ‘USD 1 income rate’ is an ancient debate. Nowadays, the debate is whether they have social security or not. With social security, the people can both mitigate risk and protect themselves from risk,’ he said.

Types of gap
The World Bank, through its report entitled Indonesia’s Rising Divide, mentions the four issues that widen the gap in Indonesia and potentially affect the living of its citizens, including the current and next generations.

The first is the gap of opportunity, which reduces the chance of poor children to succeed. With limited resources available, they are faced with the peril of suffering from malnutrition and stunting. In Indonesia, 37% of babies are born malnourished and grow with continued malnutrition until they are at least 2 years old. This influences the growth of their vital organs, such as their brains, which means that they will have lower cognitive ability and slower cognitive development. Education-wise, the families of poor children cannot afford to give them high education, so they go to elementary school and stay until junior high school at most.

The quality of education they can obtain also differs by region. For example, the World Bank states that 3rd graders in Java read 26 letters a minute faster than the children in Nusa Tenggara, Maluku, and Papua. In short, poor children do not have much access to anything that would allow them to have marketable skills, which would allow them to obtain a better-paying occupation. 60% of the current working-age citizens only graduated from elementary school and junior high school.

The second is the income gap in the working world. The work market is saturated with workers, both skilled and unskilled. Those with higher skills will receive better pay, but unskilled people who lack self-development opportunities will be stuck in informal, badly-paid, and less productive work. There is always a need for more skilled workers, but this is hard to meet because most Indonesian companies are small and medium-sized enterprises that cannot afford to train their employees properly.

Third is a high concentration of wealth: 10% of the population, i.e. the richest, control 77% of the entire nation’s wealth. Money generated by financial and physical assets only flows into the pockets of the rich, giving them ever more and more income. Corruption is a major reason for this concentration of wealth.

Fourth is unexpected shocks, such as dismissals and natural disasters. When this occurs, the rich will not have trouble dealing with them. On the contrary, poor and vulnerable households are threatened with collapse if there is any shock to the economy, health, socio-political condition, or they are afflicted by natural disasters. The poor generally cannot afford to be insured, thus relying on their friends and extended families for social security. As most of them are in the same condition, so any such shock tends to have wide-reaching consequences.

The results of the World Bank’s gap research match the results of a study performed by the International NGO Forum on Indonesian Development (INFID) on gap perception. According to this study, the social gap index in 2017 rose to that of 2016. In 2017, the social gap index was 5.6, which means that citizens generally feel that 5-6 fields in Indonesia have gaps. 84% of 2,250 respondents think that there is a gap in at least 1 field.

In comparison with other areas, the highest gap occurs in Eastern Indonesia. The main gap perceived by the people is the income gap: 54.2% of the people feel that their income is insufficient and lower than expected, and only 40.1% consider their income to be sufficient or exceptional.

Other than income, there are 9 other gap factors, i.e. job opportunities, housing, physical wealth, family welfare, educational opportunity and level, quality of housing environs, political and legal involvement, and health.

Mitigating the gap
The ever-widening gap between the rich and the poor reveals an increase in the number of poor population. Rizal has pet trick that he believes would work in reducing poverty. First, policies must be pro-people. Simplest among this would be to keep food prices low. ‘Food prices nowadays continue to rise. Even when they are stable, they are stuck at a high level. So maintaining the stability of the price of food and other necessities, at least the middle to lower classes don’t get any poorer. It would be better if there were efforts to create as many job opportunities as possible,’ he said.

Second, try to raise wages, in this case civil servant wages, because it makes a lot of difference. ‘If you give money to a rich person, they would only spend 10% at most, they would save and invest the remaining 90%. Medium to lower people, especially if they are poor, would save 97% of their money as soon as they get some, consumption rate is above 95%. This will help revive the economy, because if they can afford to buy they will, industries will continue to run. But conservative economists refuse to do this, because they prefer paying off debt to raising wages. The creditors are their masters. They would prefer to cut budgets here and there in order to pay off creditors,’ he said.

Meanwhile, Sugeng admits that the gap is more keenly felt in the cities than in the village. ‘This is because the village young are flocking to the city. 60% will prefer to live in the city because of lack of job opportunities in the village. This is why the government creates the Village Fund, to help grow the rural economy,’ he said. Sugeng believes that the gap can be decreased if the state is fully present. In this case, the special role of the government is to support and create qualified HRs. ‘It’s necessary for the infrastructure to run, but we must also note the HR that operates it,’ he said.

He then complained about the size of the funds managed by the Ministry of Labor of the Republic of Indonesia. ‘The Ministry of Labor only has 3 trillion in its budget, while it must administer to over 100 State Work Training Agencies (Balai Latihan Kerja – ‘BLK’). On the other hand, Jakarta, which is only a province, obtains 70 trillion even though it only has 6 BLKs. This is an example of misallocated spending,’ he said. Sugeng also believes that the Educational Fund Management Agency (Lembaga Pengelola Dana Pendidikan – ‘LPDP’) also needs to have allocations made for the Ministry of Labor and the Ministry of Industry. Sugeng believes that LPDP should not function just for holders of Bachelor’s, Master’s, and Doctorate degrees, but also for instructors, apprentices, and vocational-level people.

Another scheme for improving HR capability is the training development fund (TDF) or skill development fund (SDF) scholarships. TDF/SDF supports the work of the Ministry of Labor and the Ministry of Industry in administering to workers and improving workers’ capacity. This fund is created using a collection from companies, industries, and the government, and it is used to perform work training, vocation training, and apprenticeships. ‘Malaysia, Singapore, and many other countries have this TDF/SDF, but there is nothing like this in Indonesia. Everything here is about the market nowadays. ‘”If I have spending power, if I can afford to, I can take part in an apprenticeship.” This will not do at all – the state must intervene,’ Sugeng said.

Sugeng does not forget about social security. He finds BPJS Ketenagakerjaan (Employment Social Security) not integrated with the policies of Jakarta. ‘BPJS Ketenagakerjaan is important, because it protects against work accidents, death, old age, pensions, and housing,’ he said. He also mentions that the government has not provided any unemployment security. ‘Indonesia’s income from taxes is still low, at 13%-15%. But while resolving this issue, we must pioneer unemployment security,’ he said.

Another way to mitigate the gap is asset ownership. There must be a property-ownership system, wherein all citizens must possess an asset. ‘We have something called ‘employee ownership’. So employees are given a share, and we can encourage this tendency using BUMNs,’ he said. Yet another way is to provide a major housing subsidy. ‘The final idea is through implementing basic incomes. All Indonesian children are given savings, which they can draw upon as needed. Finland is testing this scheme,’ he said. (Dessy Aipipidely)