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Jakarta Post

Reducing regional inequality

Inequality in Indonesia is a tough challenge, although income inequality remains relatively stagnant

Mamay Sukaesih (The Jakarta Post)
Jakarta
Wed, September 11, 2019

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Reducing regional inequality

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span>Inequality in Indonesia is a tough challenge, although income inequality remains relatively stagnant. According to Statistics Indonesia (BPS), the country recorded a Gini coefficient of 0.38 in March 2019, slightly higher than 0.37 in 2009.

Inequality in Indonesia is higher than in other Asian countries. According to the World Bank, Indonesia’s Gini coefficient is higher than the 0.365 recorded in Thailand, 0.356 in India, 0.353 in Vietnam and 0.321 in Japan in March. Moreover, most of the nation’s wealth is controlled by a mere handful of households in Indonesia.

The Credit Suisse Global Wealth Databook shows that 10 percent of Indonesian households control 75.3 percent of national wealth. In addition, regional inequality is on the rise. During the first half of 2019, Java still dominated the national economy with 59.2 percent of gross domestic product (in terms of real GDP), which is higher than the 57.3 percent recorded in 2010.

Meanwhile, regions outside Java together contributed 40.8 percent to the national economy in the first half of the year, with Sumatra contributing 21.1 percent, Kalimantan 8.4 percent, Sulawesi 6.1 percent, Bali-Nusa Tenggara 2.9 percent and Maluku-Papua 2.2 percent.

Aside from economic contributions, the poverty rate also illustrates regional inequality. The poverty rate in Java was 8.4 percent in February 2019, lower than the 10.7 percent recorded outside Java. The February 2019 poverty rate for Maluku-Papua was 20.9 percent, followed by Bali-Nusa Tenggara with 13.8 percent. The highest provincial poverty rate was recorded in Papua with 27.5 percent, while Jakarta recorded the lowest poverty rate of 3.5 percent.

Furthermore, regional inequality is also evident in human resources, with the BPS reporting that fewer employees in eastern Indonesia had education levels above junior high school than employees in western Indonesia in February 2019.

The widening regional inequality will affect the national economy by eventually leading to reduced economic growth. In the event that economic activities remain concentrated on Java, the island’s economic burden will continue to accumulate, leading to economic stagnancy due to its relatively limited resources.

An International Monetary Fund study also indicates that inequality inevitably hampers economic growth and adversely affects long-term economic prospects. Rising regional inequality only widens existing gaps to result in low human resource investment and political instability, which can hinder investment.

A study by the Jakarta-based SMERU Research Institute also shows that increasing inequality would result in serious repercussions for economic growth, including the declining role of economic growth in reducing poverty and an increase in social conflict.

Another consequence of increasing regional inequality is high logistics costs. One causal factor is an imbalance in interregional production and infrastructure. Logistic costs increase due to interregional disparities in infrastructure.

A World Bank study has found, for example, that shipping a 20-foot container from Tanjung Priok across Indonesian territory to Jayapura, to Padang and to Banjarmasin would cost approximately US$1,000, $600 and $650, respectively. In comparison, shipping a container from Tanjung Priok to Guangzhou, China, would cost around $400 and from Tanjung Priok to Singapore, around $185. Therefore, domestic shipping costs approximately three times the cost of international shipping.

The government continues to pursue measures to reduce regional inequality, but their results have not been optimal. Several pro-poor policies, like direct cash transfers and progressive tax, have not significantly impacted inequality. According to SMERU’s 2018 study, making large investments to pro-poor policies have a limited impact on reducing inequality for the medium term.

The government recently made a policy breakthrough in its decision to relocate the capital city from Jakarta to East Kalimantan to address regional inequality. Moving the capital requires huge funding of around Rp 466 trillion, of which Rp 253.4 trillion — or 54.4 percent — to be procured through public-private partnerships. The government has projected that relocating the capital will create new centers of economic growth outside Java.

A regional development strategy is critical to reducing regional inequality. The central and local governments need to spur regional development based on each region’s unique characteristics, potentials, conditions and resources.

The government should also map regional potential, including local economies’ developmental opportunities and challenges. As we know, eastern Indonesia has an abundance of natural resources. Therefore, development projects in eastern Indonesia like industrial estates should match the availability of natural resources in each region. Natural resource- based industries should also be developed in eastern Indonesia. Moreover, infrastructure should be integrated in regional development plans, which would thus require strong central-local coordination and synergy.

Another strategy for reducing regional inequality is developing the regions as new growth centers. Accelerating Industrial development is a must for each region, especially regions outside Java.

The government has initiated the development of several special economic zones (SEZ) and regional industrial estates (IE). According to the Committee for Accelerated Infrastructure Development (KKPPI), 29 SEZs and IEs are currently being developed as national strategic projects. Some are already operational, such as the Sei Mangkei SEZ, Tanjung Lesung SEZ, Palu SEZ, Lhokseumawe SEZ, Mandalika SEZ, Tanjung Buton IE, Kendal IE, the Dumau IE and the Java Integrated and Industrial Port Estate (JIIEP) in Gresik.

However, these special economic zones and industrial estates are not yet integrated. The next step should be to accelerate and integrate the infrastructure of special economic zones and industrial estates.

Indonesia needs to speed up structural transformation by fostering industrial development to reduce regional inequality.

The writer is senior regional analyst at Bank Mandiri.

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