Lingering problems behind surging inequality
Abdul Manap Pulungan
Researcher at the Institute for Development of Economics and Finance (Indef)
Although Indonesia’s economic growth in recent years has resulted in the reduction of poverty and unemployment rates, inequality remains high.
In 2000, about 38.7 million people or 19.1 percent of the total population lived below the poverty line. In 2016, the number dropped to 27.76 million people, 10.7 percent of the population
The unemployment rate also dropped from 6.08 percent in 2000 to 5.61 percent in 2016. However, inequality remains high as indicated by the country’s Gini coefficient.
The Gini coefficient is the most popular gauge of inequality, which marks 0 as perfect equality and 1 as complete inequality. In some countries, the Gini coefficient is generated from income data, but in Indonesia it is based on expenditure data.
Determining the Gini coefficient with expenditure may produce an undervalued result since respondents tend to under report their expenditures.
Based on expenditure, Indonesia’s Gini ratio reached 0.308 in 1999 and rose to 0.41 during the period between 2011 and 2015. In 2016, the Gini ratio improved slightly to 0.39.
Since the Central Statistics Agency (BPS) does not provide data on population income distribution, income inequality can only be obtained from bank deposits.
As of December 2016, the amount of bank deposits reached Rp 4.8 quadrillion consisted of 199 million accounts. The number of accounts with nominal value lower than Rp 100 million totaled 195 million, about 98 percent of accounts. The 195 million figure only represents about 15 percent of the total value of the bank deposits.
The number of accounts with a nominal value of Rp 1 billion to Rp 5 billion were only about 500,000 or about 0.25 percent of the total. However, in term of nominal value, those accounts contributed 65 percent to the total.
A recent report released by Credit Suisse placed Indonesia as the fourth most unequal country, with a disparity rate of 49.3 percent.
According to the report, 1 percent of the richest people in Indonesia control 49.3 percent of the assets. Russia was ranked in first place (74.5 percent), followed by India (58.4 percent) and Thailand (58 percent).
The latest publication released by Oxfam Indonesia and the International NGO Forum on Indonesia Development (INFID) places Indonesia as the sixth worst country in terms of income inequality. Furthermore, the wealth of the four richest people is equal to the wealth of 100 million people.
The fundamental problems behind the increasing inequality are related to the imbalance of economic access between the richest and the poorest.
Economic resources are known as input of production, such as labor, capital, natural resources and technology.
In terms of labor, the richest people commonly have better educations and more advanced skill sets, making it easier for them to get jobs. They also tend to have better literacy of the latest technology.
On the contrary, the poorest population tends to have low education and is thus trapped in agriculture and informal sectors. In 2016, the agriculture sector had about 35 percent of the total labor force. In addition, the informal sector absorbed over 50 percent of the labor force. In terms of capital, the poorest population did not have collateral to access banking credit.
Furthermore, the richest people have easier access to government bureaucracy to tap into natural resource businesses. Since most business activities are related to natural resources, assets of wealthy people increased substantially during the commodity boom in 2008.
The rising inequality is also caused by the governments failure to maintain the price stability of peoples basic needs. The raising prices of staple foods have severely affected lower income groups because the purchasing of staple foods contribute approximately 50 percent to their total expenditure.
When food price is volatile, that income group will be vulnerable because it will erode their purchasing power.
Although, the majority of them work in the agriculture sector, there is no guarantee that they will not be affected by the fluctuation of food prices. In 2016, the nominal wages of farmers increased 3.47 percent year-on-year (yoy) while the volatile food inflation rose by 5.92 percent yoy.
The rise in food prices would result in an increase in the farmers spending on health and education, as well as spending on fertilizer, fuel and electricity.
It is necessary to enhance the quality of human resources. The government should focus not only on infrastructure investments but also on humans. Investing in humans embraces all aspects of the labor force, from funding to school curricula.
In terms of finances, the government has already allocated about 20 percent of the state budget to schools. However, many school buildings are still unfit for learning, including the schools laboratories and libraries.
Relating to the curricula, it is essential to adopt the link and match approach. That means that students learn from a theoretical framework but are also given practical skills.
The government should cooperate with business entities on internship programs so that newly graduated students will be able to meet market labor demands in their appropriate working fields, in relation to their skills and educational background.
To protect the poorest from falling deeper into poverty, the government should maintain its resources. The people working in agriculture have two main problems, namely the lack of land and financing.
Land ownership should be increased through agrarian reform. In addition, the Urban Land Use Plan has to stay on track in order to minimize the use of productive land.
Since the agriculture sector is categorized as high-risk, many banks are still reluctant to provide loans to the sector.
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