Income distribution inequality is a problem in Indonesia, one that can jeopardize social, political and economic cohesion in Southeast Asia's largest economy. When looking at the Gini ratio, which is the coefficient that measures the degree of inequality in income distribution, we see a sharp rise in income inequality in Indonesia in the post-Suharto era. Thus, democracy and decentralization created an environment that allowed for rising inequality. While in the 1990s Indonesia's Gini ratio stood at an average of 0.30, it rose to an average of 0.39 in the 2000s, and remained stable at 0.41 in the years 2011-2015 before easing slightly to 0.40 in 2016.
If over the past decade the fruits of Indonesia's economic growth have indeed only been enjoyed by the richest 20 percent of Indonesian society (this is claimed by the World Bank in a report that was released in December 2015), it implies that 80 percent of the population (or 200 million people in absolute terms) are left behind. If this situation continues, or aggravates, it could lead to rising discontent among this large group of Indonesians, hence jeopardizing social cohesion. In case of social conflicts it surely would disrupt the country's political and economic stability. A World Bank survey already showed that most Indonesians consider income distribution in their country "very unequal" or "not equal at all".
Another important reason for governments to combat a high degree of inequality within their boundaries is that countries with more equal wealth distribution tend to grow faster and more stably compared to those countries that exhibit a high degree of inequality. Also within Indonesia, this pattern is found: regions with a higher level of inequality than the national average have 1.6 times more likelihood of experiencing social troubles. Therefore, the focus should not only be on the overall national average but also on the eradication of inequality among the various regions within the country.
So what should the Indonesian government do to combat income distribution inequality? The main strategy would be to increase employment opportunities for Indonesians. For example by boosting the development of labor-intensive sectors (particularly the agriculture sector and manufacturing industry). Attracting direct investment in labor-intensive industries is also crucial and therefore the government should continue to focus on improving the nation's investment climate through deregulation, cutting red tape, and through fiscal incentives.
Meanwhile, in order to combat inequality among the regions, the government needs to focus on the development of new economic growth centers outside the island of Java. To realize this target it will require great spending on infrastructure development (and an attractive investment climate to boost private sector participation). Lastly, education should be improved as higher educated tends to lead to higher incomes.
Indonesian Poverty & Inequality Statistics:
(% of population)
Source: Statistics Indonesia (BPS)
It is fair to mention that the Indonesian government, under the leadership of President Joko Widodo, has implemented various measures to boost investment (for example through the series of economic policy packages) and has significantly raised state funds for the infrastructure budget. These are good very good signs indeed but they still need to crystallize fully. Over the past couple of years foreign direct investment growth in Indonesia has been sluggish (in rupiah terms FDI indeed grew rapidly but that is related to the weaker rupiah exchange rate).
Moreover, the central government's fund transfers (from the state budget) to the regional governments should also become a tool to combat local inequality. It has often been said that these regional funds are not being used properly in the regions (a large part of funds in fact remain unused) due to weak governance or weak vision of local authorities.
Lastly, we note that Indonesia's Gini ratio is also related to the movement of commodity prices. The rising trend of the nation's Gini ratio in the 2000s came amid the commodities boom, while the ratio stabilized after commodity prices collapsed in 2011. Rising or falling commodity prices particularly affects the top 20 percent of the Indonesian population.
Asian Countries with the Highest Average Gini Ratio:
|Gini Ratio in
|Gini Ratio in
Source: World Bank