Satish Chandra Mishra

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ECONOMIC INEQUALITY IN INDONESIA TRENDS, CAUSES,
AND POLICY RESPONSE
Satish Chandra Mishra
Managing Director Strategic Asia Indonesia
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Chapter 1 Introduction Understanding the
Context

• Measures of disparities (e.g Lorenz curves, Gini
  coefficients, Theil indices, poverty indicators
  and asset distribution statistics) may illustrate
  some general trend on inequality. But, they could
  also fail to capture important feature in
  Indonesias political-economy dynamics, and hence
  some underestimation of the trend.
• Low level of disparity in post independence
  years. Disparity in per capita expenditure is
  low and constant.
• These measures also fail to capture the impact of
  the changes in the political and governance
  system. For instance, intensive reform following
  democratization in the past decade does not seem
  to have an impact on income distribution.

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Chapter 2 Economic Inequality in Indonesia
Patterns and Trends
Measuring inequality in Indonesia
Consumer expenditure surveys suffer from a range
of shortcomings. Among others, respondent
downward bias in revealing their consumption
levels and frequency to the nature of the
consumption basket used in estimating household
consumer expenditure.
Estimate of Private Consumption Susenas
National Account, 1969-2002
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Economic Inequality in Indonesia Patterns and
Trends
Economic Inequality in Indonesia trends and
patterns
Economic Inequality over time
Household consumer expenditure surveys were
published since 1963. Despite some changes in
sample size, geographical and consumption basket
coverage, the calculated Gini coefficients are
widely used for a discussion of inequality trends
in Indonesia.
Gini Coefficient in Indonesia, 1964-2007
1 Changes in sample size and coverage are
described in appendix 1.
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Inter provincial inequality in Indonesia

• Two features are noticeable
• There is the relatively low dispersion of the
  provincial Gini around the Indonesia average.
• The inter-provincial distribution of the Gini
  coefficient remains relatively constant over
  time. (See 2.3 on page 17)

Majority of Indonesian provinces scored a
consumption Gini of between 0.3 and 0.36 while a
smaller number just hovered under the 0.3 mark.
(See Figure on the next slide)
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Economic Inequality in Indonesia Patterns and
Trends
Inter provincial inequality in Indonesia
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Inter provincial inequality in Indonesia
GDRP per capita across province in Indonesia, 2005
Note using 2000 constant prices Source BPS,
Gross Regional Domestic Product in Indonesia,
various years.
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Economic Inequality in Indonesia Patterns and
Trends
Inequality decomposed by rural-urban, education
and gender
By gender, the pattern is more striking. The
contribution of within group inequality was
around 97 in 1993. This is in contrast with the
between gender inequality which was only 3.
See, Akita (1999)
The rural-urban pattern reveals that only 24.5
is explained by inequality between the
areas. About 75 was accounted for by inequality
within households in rural and urban areas. See,
Akita (1999).
By educational groups, similar trend revealed.
The largest share of inequality is due to the
within the group. Only about one third, was due
to between the educational group inequality.
See, Akita (1999).
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Economic Inequality in Indonesia Patterns and
Trends
Income Distribution in Indonesia contrasts with
international experience
Economic Inequality in Selected Asian Countries
Gini index a measure of inequality between 0
(everyone has the same income) and 100 (richest
person has all the income) Source UNDP, Human
Development Report 1990-2005
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Economic Inequality in Indonesia Patterns and
Trends
Non-Income Inequality
The impact of economic growth, and more
critically of public service provision, was not
shared as equally as the household consumption
data would suggest. The case of Papua illustrates
the point. Papua was the third richest province
in Indonesia in terms of regional per capita
income. It was among the most disadvantaged
Indonesian provinces, ranked 29 out of 30 on the
human development scale (See Table 2.10). The
good news from non income data is that key non
income indicators such as life expectancy, adult
literacy and infant mortality improved sharply
during the last three decades of the 20th
Century.
Infant Mortality and Life Expectancy, 1960-2000
Source Indonesia National Human Development
Report 2001
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Chapter 3 Economic Inequality in Indonesia
Making sense of it all?
3.1 Indonesias economic transformation and
underestimation of inequality?
Economic diversification of Indonesia
Gross Domestic Product at Current Market Prices,
by Industrial Origin, 1968-2005 (billion rupiahs)

• Rapid structural transformation has made
• The share of agriculture in GDP dropped
  dramatically (just over a half to an eighth of
  the total).
• Mining and quarrying, which expanded quickly in
  the 1970s only to decline in the 1980s and
  beyond.
• Manufacturing contribution increased sharply.

Source BPS, Statistics During 50 Years
Indonesian Independence 1998, BPS, Statistical
Year Book of Indonesia 2005/2006
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Urban Population in Indonesia, 1950-2007
As in many other countries of the region, the
continued diversification of production was
mirrored in the growth of the urban population.
Source UN Department of Economic and Social
Affairs, World population Prospects, the 2006
Revision Population database, UNFPA UNESCAP
(2008) and BPS (Population census and SUPAS)
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Real and Nominal Wages in Indonesia 1986-1999
Indonesian real wages were relatively constant
during the period of the economys structural
transformation.
Source Irawan, Ahmed and Islam (2000)
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Government policy and the evolution of inequality
in the New Order
Primary Enrolment in Southeast Asia, 1965-1990
The expected rise in inequality could have been
mitigated by government policy such as to raise
the incomes of households at the lower incomes
deciles compared to higher ones. This can be
done through a variety of ways ranging from
progressive taxation to public expenditure
allocations to pro-poor programs and to low
growth regions Indonesia scored some early
successes in the field of education and health
Source Indonesia-National Human Development
Report, 2001
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Asset concentration and implications for income
inequality

• Some of the most obvious can be summarised as
  follows
• Asset ownership and distribution in the most
  dynamic sector, manufacturing and mining
  industries, is still not known with any degree of
  certainty.
• Land is another key asset. It is yet another area
  where accurate estimates of the concentration are
  not available
• In the absence of reinvestment of profits into
  the business or redistributive taxes and
  subsidies by the state, asset concentration
  should trigger, with a lag, a rise in income
  inequality

Market Capitalisation Controlled by Top Ten
Families, 1996
Source Claessens, Djankov and Lang (1999)
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Underestimation of household consumption of the
rich

• In Indonesia this underestimation might be more
  marked than in other countries for two reasons
• The income stream generated from high asset and
  land concentration is largely unknown. Assets can
  be held under multiple identities and legal
  forms and the commodity basket used in the
  consumer surveys very inadequately reflects the
  actual consumption patterns of the rich,
  especially in urban areas (appendix 1).
• The consumption basket used in Susenas is
  designed to capture the consumption pattern of
  the median consumer, and excludes a wide range of
  consumer durables including automobiles, holidays
  abroad, health insurance in addition to transfers
  overseas for childrens education or medical
  expenses incurred abroad.

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Interpreting income inequality shifts during the
growth process

• Booth (1992) argued that
• Urban-rural disparities increased between 1969
  and 1978 only to decline there after.
• Real consumer expenditure growth was faster in
  urban Java than elsewhere between 1970 and 1976
  while regional income disparities increased
  through the 1970s due to the impact of oil on the
  regional GDP.
• Regional disparities in per capita consumption
  expenditures, corrected for regional price
  differences, actually widened between 1980 and
  1987.
• Ravallion and Huppi (1991) in a similar vein
  argued that poverty alleviation and
  under-nutrition in Indonesia continued to decline
  during the structural adjustment of the 1980s due
  to gains for the rural sector in the growth
  process
• Timmer (2004) argues that Indonesia enjoyed
  considerable pro-poor growth for much of the New
  Order period (1967-1996). This is because
• The green revolution that raised labour
  productivity and incomes.
• The establishment of BULOG (the food logistics
  agency) in stabilising food prices.
• Massive investment in irrigation and rural
  infrastrucure.

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3.2. Economic Inequality and Future Indonesian
Development

• A detailed discussion of Indonesias changing
  economic structure and its impact on future
  inequality is outside the scope of this paper. A
  number of observations however are in order
• The relatively easy development phase where
  labour intensive industries and agricultural new
  technology could deliver major employment and
  productivity gains seems to have come to an end
  by the end of the 1980s.
• Without a diversified manufacturing base, and
  with a less developed higher educational
  infrastructure, the major source of future
  economic growth in Indonesia is likely to consist
  of the exploitation and export of natural
  commodities.
• The globalisation of financial markets puts a
  brake on government fiscal and monetary policy.
• While this leaves room for smart interventions
  in health and education in which Indonesia has
  lagged behind many of its neighbours these are
  typically long gestation public expenditure
  interventions.

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CONCLUDING REMARK
The global and regional renewal of interest in
the scale and the dynamics of economic inequality
have as yet to create a resonance in Indonesia
The Indonesian development experience of since
the 1960s to the onset of the Asian economic
crisis in 1998 was one of high growth with
sustained poverty reduction Despite these
features of the Indonesian economy during the New
Order period, the stability of income
distribution is suspect if only because of the
immense structural change in the composition of
GDP as well as the labour transfers from rural to
urban areas that it brought about. In the later
phase of Indonesian industrial development in the
1980s and the 1990s one would have expected a
rise in inequality Future economic development
of Indonesia is unlikely to follow the relatively
easy path of the past. At the same time, the
policy space open to the Indonesian government to
reduce such a secular trend towards greater
inequality may be lower than in periods before
the era of globalized financial markets Going
back to the data base and its many biases would
not be a bad place to start
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THANK YOU