I

t is easy for one to get caught up in stories of economic growth as a sole marker of a nation’s success. This is even more apparent in developing nations, such as Indonesia.

A member of the exclusive G20, Indonesia has continued on its trajectory of 6-7 percent economic growth despite the 2008 economic crisis and recent eurozone crisis, and growth is expected to continue well into the future.

But growth rates are just one benchmark of success. We must now ask ourselves the more difficult questions. How is the new-found wealth distributed? Why is it distributed in this way?

A look at Indonesia’s Gini index paints a telling picture. The Gini index is one way of portraying how income is distributed within a nation and is a measure between 0 and 1. A measure of 0 indicates a perfectly equal society – 43 percent of the population holds, 43 percent of the total household income within Indonesia. A measure of 1 indicates a most unequal society – 100 percent of total household income is held by a single person.

An analysis of Indonesia’s Gini index indicates a rise in income inequality at the same time that Indonesia has been experiencing economic growth. The Gini index has been rising since 1999, when the index read 0.31. The index read 0.37 in 2009, 0.38 in 2010 and 0.41 in 2011. At the same time, the economy grew 4.58 percent in 2009, 6.1 percent in 2010 and 6.5 percent in 2011.

We are now entering perilous territory. Academics consider any Gini index above 0.4 as dangerous to social stability as it may arouse discontent among the poor due to a rising income gap. This is further reinforced by data from the Central Statistics Agency (BPS) on the distribution of income. In 1999, the top 20 percent of income earners held 40.57 percent of total household income. In 2011, the top 20 percent held a staggering 48.42 percent of total household income. By contrast, the bottom 40 percent of income earners held 21.66 percent of total household income in 1999 and only 16.85 percent in 2011. The middle class is also affected, with the middle 40 percent of income earners holding 34.73 percent of total household income in 2011, down from 37.77 percent in 1999.

Meanwhile, inflation has been kept at around 4-5 percent annually since 2010 and poverty has declined from 13.33 percent of the population in 2010 to 12.49 percent in 2011. Unemployment has also decreased from 7.41 percent in February 2010 to 6.32 percent in February this year.

What this and the above statistics mean is that although more people are getting jobs and inflation has been kept relatively stable, the rich are still receiving a (much) greater proportion of the wealth in comparison to the poor and the middle class.

This is unhealthy for Indonesia. The increasing income gap between the rich and the poor only furthers the divide between these two groups and may lead to tensions or, even worse, conflict. In an especially diverse nation such as Indonesia, groups and individuals may associate particular ethnic groups with wealth and then target them during times of discontent, as we saw in 1998. Income inequality also threatens the unity of this nation, as can be seen by separatist talk in several provinces in the past.

Closing the income gap is therefore critical to maintaining social harmony and, hence, a more egalitarian approach to government policies must be conducted in the future. This is particularly important as Indonesia operates under a capitalist system. Under capitalism, only the most competitive firms survive, resulting in a few large firms in each industry. The advantages in capital and other economies of scale mean that it is extremely difficult for others to create their own successful enterprises, thus fostering income inequality.

Therefore, direct government involvement in closing the income gap is necessary. In this, several policies are present. One of the most important is education. In February this year, 55.51 percent of the labor force had either only completed or had never attended primary school, while 17.2 percent had completed senior high school (SMA).

This is terrible news. In today’s highly competitive environment, education is a wealth-creating asset since it allows one to access higher-paying jobs.

Education also broadens the horizons of individuals by exposing students to a world of opportunities through their studies. How can one be an engineer if he or she has never learned about electricity at school? Education also promotes rational decision making through sex education, for example.

It has been said that reducing the fertility rate is critical to increase the income of poorer families as it allows more focus by both parents upon their work. It also ensures that more impoverished children can enter school, since having fewer children within a family would mean that parents were able to pay more per child for their education.

Therefore, the government should pursue policies that target more students completing both primary and secondary education. This can be done through first making public education free (only public primary schools in Indonesia are free). Stricter labor laws that prohibit child labor or limits working time to a few hours a week should also be enacted. Also, stricter regulations must be enforced so that more students stay in school.

Second, infrastructure must be developed so that poorer communities have greater and easier access to the economy. Underdeveloped infrastructure means that businesses in poorer communities are unable to compete and grow due to inefficiency in time and higher transportation costs. Infrastructure development thus helps these businesses to compete by reducing costs and opening up access to other markets, such as neighboring towns. It also attracts large firms to the area, which provide business opportunities and jobs for the local populations. The overall result is an increase in income due to easier access to the economy.

Finally, government red tape and corruption must be cut to an absolute minimum in order to reduce the costs of small businesses and increase their efficiency. Red tape, or unnecessary government regulations, increases the costs of small businesses by forcing them to meet standards or checks irrelevant to safety or other precautions.

This slows down production and may even lead to higher unit costs as firms are forced to modify their products to meet these unnecessary regulations. Corrupt government officials also increase business costs, as permits are not released until officials are satiated with enough cash. Indeed, corruption is a significant barrier to entry for many small firms in Indonesia.

Cutting red tape and corruption are the hardest to do of the three policies proposed. In Indonesia’s case, many even consider it to be impossible. But reforms on corruption and red tape must continue so that it is easier for the poor to secure a greater proportion of the nation’s wealth through reductions in costs for their businesses. Reduced costs will help businesses to grow and this, in turn, will lead to more workers being employed, further helping to reduce the income gap.

Several other policies exist that can close the income gap. What is absolutely necessary is that the government of Indonesia recognizes that income inequality within the nation is reaching a dangerous point and policies must be enacted in order to attain a more egalitarian society. Otherwise, discontent, civil strife and even violence may halt the growth rates that are necessary for Indonesia’s future.

The writer is an undergraduate student at the University of Toronto.