Inequality in Indonesia and Role of Agriculture Sector

Frans B. M. Dabukke
ICASEP Researcher & Economist at Food and Agribusiness Center

IO – In recent years BPS reported that the inequality of income of the population in Indonesia successfully reduced. In 2014, the inequality, measured by the Gini Ratio is 0.414 and lowered to 0.391 in the last year of 2017. This figure is still limited picture and only a general description of the nominal value of income inequality (as measured by household expenditures), and not yet indicated the degree or direction of the household income structure of who enjoy the effects of prosperity progress. Especially in describing the distribution of prosperity. It should be explored and counted more with other indicators and or ratios.

If the gini ratio published by the government is further analyzed and count its dispersion ratio, the ratio between the percentage of population with the highest income (expenditure) with the lowest percentage of the population with income (expenditure), the result is opposite. The ratio between the percentage of the highest income population with the lowest percentage of income population is rise or more unequal. In 2014, the population with the lowest income (below Rp 150 thousand per capita per month) is 0.17 percent while the highest income (above Rp 1.5 million per capita per month) is 11.86 percent. The ratio of the highest percentage of the highest income population compared to the lowest percentage of the population is about 69.75 times. This ratio in 2015 and 2016 even increased considerably to about 122.89 times and jumped to 548.67 times.

The above facts show that in recent years the highest income-group are increasingly more dominant in our economic structure. And its dominance is high. Although along to that, it is still needed to be understood how is with the lowest income-group population.

BPS data show that the percentage of population with expenditure below Rp 150 thousand per capita a month from 2014 to 2016 is indeed decreasing, from 0.17 percent then 0.11 percent and 0.03. Or the average decreases by about 0.07 percent a year. Meanwhile the highest income population increased by about 3.8 percent a year. The difference gap in the dominance of income structure (expenditure) means even more lagging.

According to Credit Suisse’s review mentioned in the World Bank Report entitled Increasing Inequality in 2016, 1 percent of Indonesia’s wealthiest population holds a wealth of over 50 percent of the population. Evenmore, 10 percent of Indonesia’s richest population holds over 77 percent of national wealth. And this trend is still ongoing. The Forbes Asia report on Indonesia’s Richest People also shows the concentration and dominance of the country’s wealthiest people against national wealth.

The inequality of income described above is evenmore challenging when it is extended to conditions of inequality in land tenure and credits in Indonesia. Various international agencies reported that for example in oil palm plantations and our coal mining businesses, is only controlled by a few companies, and those companies and ownership of its shares are overseas-based. By controlled by foreign companies, most of the added value also means are not return or stay in Indonesia. Likewise with credit especially commercial credit, credit recipients’ inequality is also high. Most commercial credits, both public and private banking financial institutions, are only accepted and granted to a very small number of companies.

In the World Bank Report, it is also recognized that the gini ratio of Indonesia is still relatively high compared to other countries in Asia, both ASEAN and East Asia, except Malaysia. And reminded of potential problems that will arise if the conditions of inequality are stagnant in the medium and long term. Includes the potential risks of social turmoil triggered by political turmoil that is often unpredictable and controlled by the government.

Deeper analysis of the gini ratio indicators as above is often forgotten and neglected. Those information and facts are necessary to complete interpretation and understanding of the condition of economic inequality of a society or nation. The problem of inequality in both income, land and mining resources, credit / financing and others remains an unresolved basic problem in our national development.

Agriculture still dominates the sector with poor low-income populations
Gini ratio and dispersion ratios are determined by the relative growth of income (assumed as expenditure though not always the same) for each income group (expenditure), and this income is certainly determined by the work and or business and or economic activities (sectors) acted by each population in the income group concerned. The lowest and relatively low income groups are generally associated with the agricultural sector and the informal sector in both the agricultural and non-agricultural sectors.

BPS data show that about 50 percent of poor households are those employed in the agricultural sector. About 30 percent work in other sectors. And about 15 percent are not at all working. Per capita gross income in the agricultural sector proportionate to gross domestic product per capita agricultural sector employed in agriculture is among the lowest in comparison with industry, trade and services sectors. In addition, the growth rate of the agricultural sector is also relatively low compared to the industrial sector, trade and services. Therefore, efforts and steps to improve the national economy have to rely on accelerated development of agriculture sector.

The acceleration of agricultural sector development needs to be directed to also encourage a large informal sector in the agricultural sector, in addition to other informal sectors in trade and services of UMKM. The informal sector outside the agricultural sector is quite dominant where our poor (household) population is. The agricultural sector must be able to improve the welfare of farmers and their families in real terms and even able to grow higher than the current achievement, through increasing the real income of farmers and members of their families. It is not enough just to increase the production of farmer-produced commodities because of many other factors that often inhibit the increase of farmer’s income from the increase of production.

The challenge of equality development programs and their results by an accelerated agricultural development are how the redistribution of basic resources for agricultural farming, i.e. wider access and cultivation of land, easier access to and guaranteed extension services and assistance, and access to financing support and easy access and effective technology and agricultural innovation for farmers. Also how a support policy of profit guarantee (through support of farmers’ harvest prices) from government is effective in its implementation.

Efforts and steps to increase the level of education and skills of farmers and members of their families also urged. So that farmers and their families can be more productive, creative, and able to compete and overcome various obstacles in the farm.

The Most-Weak Run Faster To Catch Up The Upmost-Group
In order for the incidence of economic imbalances to be reduced quickly and sustainably and equitably then fundamentally it must begin by making the poorest and the lowest of income-group can run faster than the current conditions to catch up with higher income-groups. To be able to run faster, the poorest and the lowest incomes-group should be free from the pitfalls or poverty pressures, such as the suffering of severe illness, the suffering of food and nutrition especially for children of toddlers and schools, the suffering of debt bondage, the suffering of school dropouts, suffering without school/formal education, and other social sufferings. For then the low income community can be healthier, more productive, family are in better school, and able to invest socially through the education of children of future generations.

Only then with effective support of government policies and programs together with private business actors in assisting family businesses in productive assets such as land and or household appliance production machinery, MSME microfinance support, market support and institutional empowerment can be expected these lower community groups rise rapidly and pursue other community groups. With the middle and high income-group, the government can optimize its role and position as regulator, facilitator and promotion.

For that reason, it is a must a strong alignment from government with clear and measurable direction and vision related to empowerment and strengthening of the lower groups. With also a belief in the possibility of the objectives to be achieved, that the lower, low income, and lagging groups which is the majority of the nation’s components and the country is able to compete, grow and even win the competition both domestically and in the global world.

The most optimal and sustainable and equitable economic sector or business to achieve the target above one of them is the acceleration of agricultural development to produce and export national food. Another alternative is the acceleration of SMEs business sector in micro and small trade. Both sectors or economic enterprises are able to provide a field of business and work is very large and massive to lower community groups as well as absorbing unemployment. It is also easy to be accessed and controlled by the lower groups both from skill aspect, education, financial needs, and the requirement of controlling their natural resources. And because they are small and the numbers are massive, institutional organizations, values ​​and norms, new social and cultural characteristics and empowering policy support are needed.