6

Economic Inequality in
Indonesia
Trends, Causes and Policy Response
SATISH CHANDRA MISHRA

Introduction: Understanding entitlement to basic public goods and

the Context services in democratic regimes. However, its
politics carefully contained the more radical
The subject of economic inequality has elements of socialist thinking by resisting
undergone a renaissance through time. It wholesale nationalization of key industries
once enjoyed centre stage in the classical and banks which had become the opening
economics of Ricardo and Marx, before song of new socialist revolutions world-
being moved to the sidelines with the wide. The utopian appeal of Marx and his
emergence of neo-classicism and its exhortation to create a society driven by the
emphasis on the efficiency of resource slogan ‘to each according to his needs from
allocation. However, the issue re-emerged each according to his ability’, was
in a different form espoused by Keynes and increasingly replaced by the language of
the politics of the New Deal.1 equality of opportunity, social inclusion and
Economic inequality assumed a human rights.
paradoxical flavour with the emergence of For developing countries, inspired by
communist states of the USSR and later the political weight and early successes of
China. The economics of the welfare state the USSR, income distribution remained
recognized the popular appeal of universal a fascinating topic. Again there were some
140 Inequality and Social Justice in Asia

interesting paradoxes. Many, if not most, ment, captured in the much revered
post-colonial governments were inherently Kuznets U curve hypothesis by which
attracted to the idea of a ‘fair distribution’ economic inequality was expected to rise
of income, not only among different and then fall dur ing the course of
segments of the population within their development.
borders but also across the global economy. The Kuznets U curve succeeded in
Equal opportunity for citizens was an generating more than its fair share of
appealing concept for developing countries academic and policy related controversy.
struggling to build nation-states and create First, there was the comforting conclusion
the technical expertise needed to replace that economic inequality was just a passing
departing colonial administrations and phase. Indeed, an acceleration of economic
businesses. The concept of equality was growth it was argued could even shorten
equally important on a global level as the length of the shift from wider to
developing countries struggled to find a narrower economic inequality. Too much
place in the economic sun which shone preoccupation with radical programmes of
brightly for the rich industrialized countries asset redistribution and nationalizations
and dimly for the majority of less affluent were according to this view, considered
nations. redundant and socially risky.
Lacking robust business enterprises and Second, a socially unacceptable rise in
technical expertise, post-colonial govern- economic inequality as predicted by the
ments soon recognized that the more just Kuznets U curve might result in putting an
world that they sought could only be end to the economic reforms needed in the
realized through the agency of the state. early phases of development as political
Even the much admired Soviet Union support for such programmes evaporated.
could not escape the ironies of ‘primitive Another problem envisaged was the
socialist’ accumulation by which peasants probable emergence of new economic and
were starved to feed the cities and build the political elites which could slow down the
economic scaffolding of the new socialism, process of income equalization in the
which included heavy industry and the new course of development.This second possible
cities which went with them. implication of the Kuznets hypothesis raised
Early models of development empha- the possibility of deliberate government
sized the ‘big push’ and capital accumulation policy to limit the rise in inequality. This
which only a modern industrial sector was achievable through a very diverse policy
could provide. Inequality was just a step in mix ranging from progressive taxation on
the scheme of growth. The engine of one hand, to countervailing powers of
growth in the much quoted Lewis model public enterprises and labour unions with
focussed on the transfer of labour from the respect to business enterprises on the other.
low productivity subsistence sector to the The emergence and the remarkable
high productivity modern sector. This economic perfor mance of the Asian
provided an early justification for the ‘Miracle’ countries however, transformed
statistical generalizations of economic traditional views on economic inequality.
inequality during the process of develop- The presence of these Asian countries as
Economic Inequality in Indonesia 141

serious economic players in the global provided evidence, in a world of falling

market, from the late 1970s onwards communist dominos, that small states, free
provided living proof (as opposed to markets and investment in basic education
academic calculations from an army of and health could provide the fastest and
economic technicians), that growth does most effective means of raising the majority
not always have a negative impact on of the population above abject-poverty
income distribution.These were economies levels.
which appeared to have achieved record The success of the East Asian economies
rates of high growth with low and stable from the 1970s to the advent of the Asian
levels of economic inequality in a relatively Economic Crisis of 1997-1998 generated
narrow span of just three decades. support for the view that economic growth
The answer as provided by the World could be accelerated without having to
Bank’s much quoted East Asian Miracle wor r y too much about economic
study was an open economy, export distribution. This conclusion came to
orientation, investment in human capital influence the perception of both donor
and small states.2 These countries provided countries as well as many international
a salutary lesson for the rest of the develop- institutions. The political inference of this
ing world. Economic protectionism, large view was easy to anticipate. If economic
inefficient public enterprises backed by growth could be income distribution
dirigiste states operating behind high tariff neutral it could also be neutral with respect
and non-tariff barriers were viewed as the to political regimes.This was a comfortable
prime factors behind faltering growth, high assessment at the time of the Cold War since
income inequality and corrupt bureau- it allowed developed countries of the West
cracies. The conclusion therefore was that to support Asian dictatorships as long as they
the Kuznets U was not an inevitable feature were anti-communist.The logic was simple.
of economic growth. It could be avoided If growth was distribution neutral and
by prudent macroeconomic policies and distribution could be managed by a mixture
appropriate public expenditure allocations of macroeconomic and social service
channelled towards raising human capital. oriented policies, there was little to choose
The ‘miracle’ in East Asia was not merely between dictatorships and authoritarian
high economic g rowth, which had regimes in terms of their ability to raise the
occurred in many other countries including absolute poor above the poverty line.
the USSR. Rather, it was their ability to The fact that East Asian economies were
combine high economic growth with also largely comprized of small states was
seemingly stable and low inequality in the additional icing on the political cake. It
incomes. Such ‘g rowth with equity’ further boosted the intuitive appeal of the
outcomes were attractive not only from an Reagan–Thatcher theor y on large
economic standpoint of being able to government and protected markets. Rolling
choose policies which could raise living back the state through a mixture of fiscal
standards and lower poverty in short spans conservatism, pr ivatization and the
of time but also were just as attractive in the introduction of market-like budget
realm of politics. They seemed to have allocation mechanisms in public services, all
142 Inequality and Social Justice in Asia

fitted well with this new brand of to fairness and economic justice; from the
conservatism; one which gave primacy to percentage of the population below the
economic growth and relegated economic poverty line to capabilities, freedoms and
distribution to the back burner. Issues deprivations; from planning and projections
related to income distribution and hence to participation and voice; from technical
economic inequality were either those certainty to political complexity and finally
which would be settled during the growth from human capital to human development,
process itself (as advocated by Kuznets), or social capital and trust.
in situations where governments could only In a rapidly changing and less ideolo-
intervene at their own peril. gically certain world, economic injustice
Gradually, the complexities of an and the need to arrive at a ‘fairer’ more
increasingly new globalized world began to ‘equitable’ division of resources has assumed
emerge. Factors such as capital market greater importance in policy formulation.
liberalizations of the early 1990s and the For example, the ‘hearts and minds’
globalization of financial markets combined campaign of an Iraq or an Afghanistan is
with the rapid growth of world trade; the centred on a fairer allocation of resources
collapse of the USSR and the botched to local communities. Perceptions of
privatization of Russian public enterprises; economic and social injustice also fuel fears
the instability of international capital of social instability in India and China as
markets signalled by the Mexican Financial income disparities noticeably worsen. The
Crisis (1994) and the Asian Financial Crisis same is true of the politics of climate change
only four years later, reflected these and the protracted negotiations around
complexities. Further, it has also been agriculture subsidies in the Doha Round.
recognized that mechanical modelling of It is no longer the simple analytics of a
growth and distribution linkages3 leaves out Kuznets U which is driving this new found
a huge spectrum of the cause and effect of concern with an age old political economy
country-based policymaking which affects theme.
who gains control over what and how much Instead, it is the competition for political
resource at any given moment in history. space, for a larger share of the global
This is illustrated in recent times by events economic pie and for the creation of a
such as the anti-globalization protests in physically safe world friendly to open
Seattle and at WTO meetings later; the commerce and labour movements that are
collapse of many a third world dictatorship central to this renewed fascination with the
in favour of multi party democracy; the fairness and social acceptability of a given
emergence of radical Islam, the rise of patter n of income distr ibution. The
China and India, and the current global frequency and escalation of social conflict
financial crisis emanating from sub-prime in many countries, combined with political
mortgage defaults in the US, culminating democracy have also strengthened calls for
with the largest bail out in economic ‘socially inclusive’ growth, and a more
history. Economic modelling has to a large equitable sharing of environmental and
extent given way to a philosophical infrastructure related burdens.
discourse—from the distribution of income The above discussion provides a
Economic Inequality in Indonesia 143

background that addresses some very ‘Indonesia is one of the most diverse and
cr itical questions relevant to an heterogeneous countries in the world.
understanding of Indonesia’s political The international debate of the 1950s and
economy and its prospects for the future. the 1960s on dualism originated in
The most obvious of these are summarized Indonesia, simulated by social and econo-
below. mic conditions in the colonial and early
First, is the fact that virtually all accounts independence eras; and ‘regionalism’—in
of income distribution in Indonesia during a variety of manifestations—has been a
much of the period after independence, preoccupation of all governments of
underscore both low levels of economic modern Indonesia. Its economy com-
dispar ity, as measured by per capita prises both the advanced technology of
consumption expenditure, and their relative modern cities of Java and highly capital-
constancy over time.4 This is applicable to intensive extractive and processing
both the aggregate gini coefficient for industries, as well as tribal groups in
Indonesia as a whole as well as the provincial isolated regions barely exposed to the
gini coefficient. The implication is that outside world. Its ecology ranges from the
high economic growth beginning in the intensive wet rice cultivation of ‘Inner
late 1970s combined with low income Indonesia’, supporting some of the most
inequality would have, even in the absence densely populated areas on earth, to lightly
of pro-equalizing policy measures produced settled regions in the Outer Islands in
sharply declining poverty rates. which swidden (slash and burn) agricul-
The East Asian Miracle and its ture is still predominant. In its culture and
subsequent variants also suggest that the religion the country is equally diverse
contribution of low initial levels of income containing about 300 ethnic groups and
and in some cases asset inequality,5 such as nearly as many languages. And its
through land reform in Taiwan, to the geography is such that some outlying
growth with equity achievements, lay at the regions are closer to (and in the past had
heart of the region’s economic miracle. An stronger economic ties with) neigh-
added feature of the Indonesian income bouring countries than with the national
distribution is the fact that the partitioning capital, Jakarta, and Java more generally’.6
of aggregate inequality into inter and
intraregional segments shows a relatively The constancy of economic distribution
minor contr ibution of inter reg ional against a backdrop of tremendous econo-
inequality compared to intraregional. mic and social diversity over a five decade
An obvious paradox in the Indonesian period requires a deep analysis. It cannot be
context lies in explaining how a diverse just explained by analysing the data
archipelago of over thirteen thousand in different ways to get time ser ies
islands managed to sustain persistently low distributions of the gini, its regional or
levels of economic inequality. A quotation sectoral partitioning or by engaging in a
from a well known work on Indonesian discussion of whether the Kuznets U is or
regional geography serves to highlight the is not applicable to the case of Indonesian
point: development.
144 Inequality and Social Justice in Asia

Additionally, the impact of the political data seems to imply against what the logic
and governance system on the distribution of the development process would indicate.
of income also needs to be studied. Indonesia has undergone one of the fastest
Following the economic collapse in 1998 rates of urban development in the world. It
and the transition to democracy, governance has a highly diverse geography and large
shortcomings in the Indonesian economic pockets of natural resource enclave
and political system have come under development. For much of its post-
scrutiny. Criticisms range from the systemic independence years it has been governed by
corruption and cronyism which became the authoritarian regimes without much public
hallmarks of the New Order system, to scrutiny or criticism. Its industrial sector is
significant differences in the administrative dominated by a very small number of super
capacity of regional gover nments to r ich ethnically distinct families. By
formulate and implement development developed country standards it has a small
policy. Add to these the enclave-based state and continues to keep its markets
investment in much of Indonesia’s natural open.
resource sector and one gets a picture of Important questions arise about how a
significant structural inequality in income country with over three decades or more
distribution. However, the central problem of record economic growth behind it
is that this picture is not supported by much manage to generate and maintain a
of the published data on economic relatively low level of economic inequality.
inequality. It is also important to understand how
There is also the issue of differences in Indionesia ensures that its economic
income distribution brought about by a distribution indices do not show significant
decade of intensive reform following the shifts over time despite the country
adoption of democracy. However, the undergoing a ser ies of financial and
advent of democracy, in the midst of economic shocks, natural disasters and at
Indonesia’s most severe economic crisis, least two major changes in its entire system
does not necessarily mean that the burden of government.
of poverty reduction and an improvement These are important questions, answers
of income distribution should be the to which could provide some indications of
responsibility of the new democracy. whether future economic growth in
Nevertheless, the impact of the new Indonesia will push it in the direction of
political system on the distribution of rising inequality, increasing interregional
income remains a focal issue in a country disparities, possible social conflict and severe
attempting to endorse the political strains on its new political system. This
leg itimacy of this new system of would not be surprising given the recent
government. record of rising global inequality and the
The Indonesian case study on economic sharp increases in inequality in the midst of
inequality continues to draw substantial economic transformations. A number of
interest, not only from the point of view of Asian economies, the economies of Eastern
data and its statistical variations, but more Europe and the former USSR, China and
so from resolving the gap between what the India, point to new challenges towards
Economic Inequality in Indonesia 145

producing equitable and inclusive deve- in particular gender biases in intra-

lopment in the future. The Indonesian household income distribution. Other
case study which is an example of one weaknesses relate to variations in inter
where we would expect high degrees of country or interregional prices in the
inequality, but detect relatively low levels of estimation of cross-sectional gini coeffi-
it, may make a significant contribution to cients, given the geographical differences in
the literature on the subject. relevant consumer prices.
Conceptually, the use of household
Economic Inequality in consumer surveys as a proxy for household
Indonesia: Patterns and Trends income faces both the problem of
respondent bias, in which higher income
Measuring Inequality in Indonesia households are reluctant to reveal their
Consumer expenditure surveys are the most income and savings levels. Added to this is
frequently used tool to assess income the fact of consumption smoothening
inequality. However, these surveys could through either debt or income transfers
be inaccurate owing to shortcomings within the extended family. The eventual
ranging from respondent bias in revealing result that is commonly observed is the
actual consumption levels and frequency to underestimation of total consumption
the nature of the consumption basket used estimates based on household consumer
in estimating household consumer expen- surveys compared to consumption estimates
diture. Additionally since surveys focus on derived from national income accounts.
households as opposed to individual This underestimation is generally quite
consumption there is a tendency to ignore significant (See Table 1 and Figure 1). A
the dimensions of intra-household equity, combination of these factors tends to

TABLE 1: Estimate of Private Consumption, 1969–1993,

Rupiah Billion (current)
Year Susenas National Accounts Percentage of Susenas
to National Accounts
(1) (2) (1)/(2) × 100
1969/70 1,949 2,428 80.27
1976 7,223 10,500 68.79
1978 9,488 15,126 62.73
1980 14,814 25,595 57.88
1984 30,674 54,066 56.73
1987 44,617 71,988 61.98
1990 64,721 106,312 60.88
1993 98,015 175,078 55.98
1996 165,810 332,094 49.93
1999 337,778 813,183 41.54
2002 525,636 1,137,762 46.20

Source: BPS, National Accounts; BPS, Pengeluaran Untuk Konsumsi Penduduk Indonesia; and BPS,
Statistical Yearbook of Indonesia, various years.
146 Inequality and Social Justice in Asia

FIGURE 1: Estimate of Private Consumption: Susenas and

National Account, 1969–1993
Source: BPS, National Accounts; BPS, Pengeluaran Untuk Konsumsi Penduduk Indonesia; and BPS,
Statistical Yearbook of Indonesia, various years.

undermine the estimation of inequality not grounded in countries where government

only at a point in time or over a long time and pr ivate business have a powerful
period, but across geographical borders as relationship, which undermines future
well. governance and market reforms. In the
Apart from the weaknesses in consumer context of East Asia, the success of
surveys is the assessment of the broader issue economic growth with sustained poverty
of inequality in assets. This assumes reduction in Taiwan, is often attributed to
significant importance, if initial asset the success of the radical land reform
distribution is expected to influence the rate programme initiated by the Kuo Mintang
and duration of future economic growth, gover nment in the 1950s. Despite
or help to explain how particular countries Indonesia’s success in reducing poverty
can fall into an ‘inequality trap’. In such a dur ing the New Order per iod, the
scenario, an analysis of asset concentration implosion of the Suharto system of
at the beginning of the growth cycle and government7 following the Asian Economic
how it changes over time is likely to have Crisis of 1998 was largely attributed to the
an important bearing on determining inability of the political system to remove
policy choices to reduce such initial entrenched corruption and cronyism that
concentration of assets. primarily arose from acute wealth and asset
The political economy arguments concentration.
which usually are the foundation of the Non-income indicators of inequality,
concern with asset inequality are well such as access to health, education and legal
Economic Inequality in Indonesia 147

redress are equally important dimensions of indicators of inequality. Alternatively, if

inequality with an important bearing on the inequality within and across provinces is
degree and pattern of inequality in a given important, then the Theil index9 is likely to
social and political system. The focus on be the best inequality measure. The gini
income dimensions of inequality could coefficient, which focuses on the entire
eventually produce an overstatement of the distribution of income rather than on any
degree of equality, or vice versa, in a given part of it, is a popular measure for analysing
region. In order to present a complete cross countr y g rowth-distr ibution
picture of inequality, not only is the relationships.
statistical distribution of income and
expenditure needed, but more importantly, Economic Inequality Over Time
an assessment of the notions of equity or Household consumer expenditure surveys
fairness across individuals, ethnic groups and have been available in Indonesia since
gender. 1963.10 Despite some changes in sample
Finally, there is the broader question of size, geographical and consumption basket
what type of inequality matters most in a coverage, the gini coefficient derived from
country. If the removal of absolute poverty the SUSENAS (Survei Sosial Ekonomi
is the primary goal, then measures which Nasional/National Socio-Economic
show greater sensitivity to the distribution Survey) data is widely used for a discussion
of income accruing at the lower end of the of inequality trends in Indonesia.
distribution spectrum, such as the Atkinson Figure 2 illustrates two broad features of
Index8, are likely to be more appropriate the Indonesian inequality picture.The most

FIGURE 2: Gini Coefficient in Indonesia, 1964–2007

Source: BPS, series of Susenas data.
148 Inequality and Social Justice in Asia

outstanding feature is the relative constancy bottom 40 percent shifts only slightly from
of the overall gini, which barely changed in 19.4 percent in 1963 to 20.4 percent in
the 43 years from 1964 to 2007. The gini 1990 and to 20.2 percent in 2005.The top
coefficient of household expenditure which 20 percent enjoy a share of around 40 to
stood at 0.35 in 1964 rose fractionally to 42 percent in the same period with no
0.36 four decades later in 2007. Despite the noticeable trend.
Indonesian economy and society Rural economic inequality in Indonesia
undergoing a major transformation, the tends to be slightly lower than in urban
aggregate gini fluctuated only marginally areas. As indicated in Figure 2 the rural
within the range of 0.32 to 0.36. gini coefficient stood at around the average
The stability of income distribution is aggregate gini in 1963 but fell thereafter to
further illustrated in Table 2 which presents a low of 0.25 by the end of the 1980s only
the shares of household consumption to rise again to 0.27 by 2005. Inequality in
expenditure.The ratio of the top 20 percent urban areas was higher and close to the
to the bottom 40 percent of consumer national average.The influence of the urban
households barely moved from 2.07 in gini on the national aggregate grew over
1963, to 1.87 during the height of the Asian time pr imar ily due to the fact that
financial crisis in 1999 and the collapse of Indonesia’s urban population increased
the New Order gover nment, before rapidly over the four decades or more,
reverting to the same level of 2.1 by 2005. covered by the SUSENAS data.
This relatively constant trend is also As anticipated, the inaccuracies and
reflected in the movements of the shares of biases inherent in household consumer
total expenditure of the lowest 40 percent, surveys as well as the existence of alternate
middle 40 percent and top 20 percent of theories regarding the relationship of
households. The consumption share of the growth and distribution, has resulted in a
TABLE 2: Share of Expenditure Group
Year Bottom 40% Middle 40% Highest 20% Ratio H20/B40
1963 19.4 40.4 40.2 2.07
1964 18.6 37.9 43.4 2.33
1967 18.4 39.4 42.3 2.30
1970 19.9 39.3 40.8 2.05
1976 19.5 38.0 42.5 2.18
1978 18.1 36.6 45.3 2.50
1980 19.5 38.2 42.3 2.17
1981 20.5 37.4 42.1 2.05
1984 20.4 38.0 41.6 2.04
1987 21.2 37.6 41.2 1.94
1990 20.8 37.0 42.3 2.03
1993 20.4 36.9 42.8 2.10
1999 21.7 37.7 40.6 1.87
2002 20.9 36.9 42.2 2.02
2005 20.2 37.7 42.1 2.08

Source: Akita et al. (1999), and BPS. Statistical Yearbook of Indonesia, various years.
Economic Inequality in Indonesia 149

large body of literature on Indonesia’s discerned for individual provinces, the

consumer expenditure data.11 The debate overall picture is that the divergence of
over changes in economic inequality in provincial gini coefficients from the
Indonesia appears to be centred on the Indonesia average is very slight given the
quality of the data and the reliability of the relatively long time period of the survey.
estimates generated by the movements of This leads to the conclusion that similar to
the aggregate and sectoral gini during changes in the aggregate gini over time, the
particular growth periods and the trends in pattern of interprovincial inequality in
inequality across reg ions and across Indonesia tends to be noticeably constant
particular groups. There is thus, a need for and stable over the three decades depicted
a significant reworking of the commodity in the table.
baskets used in the SUSENAS and an The same conclusion is reached by
improvement in the conduct of the surveys. examining the distribution of income
Nevertheless there is a current consensus among the top 20 percent, middle 40
that Indonesia does exhibit long-term percent and the lowest 40 percent of
stability in the gini coefficient based on households. What is remarkable is the fact
consumer expenditure data. that even as late as 2005, the share of the
richest 20 percent of households in Jakarta
Interprovincial Inequality in stood at 41 percent, in fact lower than the
Indonesia Indonesia average of 42.2 percent. Given
Table 3 presents the gini index between that Jakarta is Indonesia’s only megacity and
1976 and 2005 for provinces in Indonesia. the centre of government as well as much
From the data, two salient trends are of its industry and high income services, the
noticeable. First, there is a relatively low share of its top 20 percent of households in
dispersion of the provincial gini around the total consumption would be expected to be
Indonesian average. Second, the inter- significantly higher than in the rest of
provincial distribution of the gini coeffi- Indonesia.
cient remains relatively constant over time. An examination of data however,
The coefficient of variation of the inter- presents a picture of Jakarta being more
provincial gini fell very slightly from around egalitarian compared to the rest of the
0.15 in 1976 to 0.12 in 2005.A similar trend country. Figure 3 highlights this conclusion
is displayed in the pattern of income showing that the majority of Indonesian
distribution in major urban centres such as provinces scored a consumption gini of
Jakarta and Yogyakarta. In Jakarta the between 0.3 and 0.36 while a smaller
provincial gini (0.29) rose from below the number hovered under the 0.3 mark. Given
national average (0.33) in 1984 to above it the diversity of Indonesian provinces in
by 1993 (0.42 compared to 0.34) and fell terms of geography, population density,
back to below national average by 2005 natural resource endowments, levels of
(0.27 compared to 0.36). In Yogyakarta, the urbanization and industrial development
gini remained close to the national average there is ver y little var iation in inter
for much of the period rising above it after provincial distribution of consumption.
1999. Although similar movements can be Moreover, the extent of the variation also
150 Inequality and Social Justice in Asia

TABLE 3: Gini Index and Interprovince Trend in Indonesia, 1976–2005

Province 1976 1984 1987 1990 1993 1996 1999 2002 2005
Nangroe Aceh 0.30 0.26 0.26 0.22 0.29 0.26 0.24 – 0.30
Darussalam
North Sumatera 0.28 0.26 0.29 0.25 0.30 0.30 0.25 0.29 0.33
West Sumatera 0.27 0.26 0.26 0.27 0.31 0.28 0.26 0.27 0.30
Riau 0.34 0.26 0.25 0.26 0.27 0.30 0.22 0.29 0.28
Jambi 0.29 0.20 0.23 0.23 0.24 0.25 0.24 0.26 0.31
South Sumatera 0.31 0.27 0.27 0.27 0.30 0.30 0.26 0.29 0.31
Bengkulu 0.31 0.21 0.22 0.26 0.28 0.27 0.25 0.25 0.35
Lampung 0.33 0.29 0.28 0.27 0.26 0.28 0.29 0.25 0.38
Bangka Belitung – – – – – – – 0.25 0.28
Riau Islands – – – – – – – – 0.27
DKI Jakarta – 0.29 0.29 0.31 0.42 0.36 0.32 0.32 0.27
West Java 0.30 0.30 0.30 0.32 0.30 0.36 0.29 0.29 0.34
Central Java 0.31 0.31 0.28 0.29 0.30 0.29 0.26 0.28 0.31
D.I. Yogyakarta 0.37 0.34 0.30 0.35 0.33 0.38 0.34 0.37 0.42
East Java 0.33 0.31 0.33 0.30 0.33 0.31 0.29 0.31 0.36
Banten – – – – – – – 0.33 0.36
Bali 0.23 0.29 0.33 0.30 0.32 0.31 0.27 0.30 0.33
West Nusa Tenggara 0.31 0.30 0.29 0.30 0.27 0.29 0.26 0.27 0.32
East Nusa Tenggara 0.38 0.31 0.28 0.30 0.25 0.30 0.27 0.29 0.35
West Kalimantan 0.32 0.25 0.26 0.28 0.30 0.30 0.27 0.30 0.31
Central Kalimantan 0.27 0.29 0.24 0.25 0.26 0.27 0.24 0.25 0.28
South Kalimantan 0.29 0.26 0.28 0.25 0.27 0.29 0.26 0.29 0.28
East Kalimantan 0.24 0.36 0.31 0.30 0.31 0.32 0.28 0.30 0.32
North Sulawesi 0.41 0.35 0.29 0.28 0.29 0.34 0.27 0.27 0.32
Central Sulawesi 0.38 0.30 0.27 0.25 0.29 0.30 0.29 0.28 0.30
South Sulawesi 0.35 0.35 0.27 0.30 0.27 0.32 0.30 0.30 0.35
Southeast Sulawesi 0.34 0.32 0.29 0.30 0.27 0.31 0.28 0.27 0.36
Gorontalo – – – – – – – 0.24 0.36
Maluku 0.38 0.30 0.30 0.27 0.30 0.27 0.24 – 0.26
North Maluku – – – – – – – – 0.26
Papua – 0.37 0.38 0.33 0.36 0.39 0.36 – 0.39
Indonesia 0.35 0.33 0.32 0.32 0.34 0.36 0.31 0.33 0.36
Standard Deviation 0.05 0.04 0.03 0.03 0.04 0.04 0.03 0.03 0.04
Coefficient of Varia- 0.15 0.14 0.12 0.11 0.13 0.12 0.12 0.10 0.12
tion (Std/Mean)

Source: BPS, Statistical Yearbook of Indonesia, various years; Bappenas (2001), Pembangunan Daerah
dalam Angka (Regional Development in Figures); and Strategic Asia staff calculations.
Economic Inequality in Indonesia 151

TABLE 4: Income Distribution by Classification, World Bank

and Gini Ratio, Indonesia, 2005
No. Provinces 40 Percent of 40 Percent of 20 Percent of Gini
Population Population Population Ratio
with Lowest with Moderate with Highest
Income Income Income
1. Nangroe Aceh Darussalam 21.56 *) 39.06 *) 39.39 *) 0.299 *)
2. Sumatera Utara 20.27 38.18 41.55 0.327
3. Sumatera Barat 21.45 39.31 39.24 0.303
4. Riau 22.88 38.39 38.73 0.283
5. Jambi 20.98 38.89 40.12 0.311
6. Sumatera Selatan 21.6 36.91 41.49 0.311
7. Bengkulu 20.08 34.69 45.23 0.353
8. Lampung 18.82 33.56 47.62 0.375
9. Kep. Bangka Belitung 21.57 41.57 36.85 0.281
10. Kep. Riau 22.32 43.31 34.37 0.274
11. DKI Jakarta 20.64 47.92 31.44 0.269
12. Jawa Barat 19.59 38.3 42.11 0.336
13. Jawa Tengah 22.31 36.52 41.17 0.306
14. DI Yogyakarta 15.41 32.66 51.93 0.415
15. Jawa Timur 19.79 34.67 45.54 0.356
16. Banten 18.79 36.36 44.85 0.356
17. Bali 20.12 34.97 44.9 0.33
18. Nusa Tenggara Barat 21.69 36.79 41.51 0.318
19. Nusa Tenggara Timur 19.91 35.6 44.5 0.351
20. Kalimantan Barat 21.98 36.19 41.83 0.31
21. Kalimantan Tengah 22.32 39.94 37.74 0.283
22. Kalimantan Selatan 22.45 41.04 36.51 0.279
23. Kalimantan Timur 19.78 39.06 41.16 0.318
24. Sulawesi Utara 20.03 39.27 40.7 0.323
25. Sulawesi Tengah 21.85 38.07 40.08 0.301
26. Sulawesi Selatan 19.55 35.51 44.94 0.353
27. Sulawesi Tenggara 18.91 35.43 45.66 0.364
28. Gorontalo 19.87 35.75 44.38 0.355
29. Maluku 24.53 38.07 37.4 0.258
30. Maluku Utara 24.69 37.72 37.59 0.261
31. Papua 17.14 35.69 47.17 0.389

INDONESIA 18.81 36.4 44.78 0.363

Note: *) Susenas in NAD was done lately and the result was not included in national result.
Source: National Socio-Economic Survey, Module Consumption, 2005.
 152
Inequality and Social Justice in Asia
FIGURE 3: Interregional Inequality in Indonesia
Source: Data constructed from Selected Socio-Economic Indicators of Indonesia, 2007.
Economic Inequality in Indonesia 153

FIGURE 4: GDRP Per Capita Across Province in Indonesia, 2005

Note: using 2000 constant prices.
Source: BPS, Gross Regional Domestic Product in Indonesia, various years.

shows little or no discernible trend over green revolution, falling to ten by the
time. outbreak of the Asian economic crisis
Variations in regional GDP per capita in1997 and rising again to its 1978 mark by
across provinces in Indonesia, represented the beginnings of the post-crisis recovery
by Figure 4, however display a different in 2004.
picture. Clearly per capita regional GDP in Differences in the distr ibution of
Jakarta is far above both the national average household consumption across income
and several times that of the poorest deciles in rural and urban areas are presented
province Gorontalo. in Table 6. These estimates cover a twenty
Table 5 illustrates some broad geogra- year period from 1984 to 2005 and serve
phical variations in per capita provincial to highlight yet another instance of the
GDP. It also underscores the influence of constancy in the distribution of income, as
oil and gas as a source of interprovincial approximated by household consumption.
income variation. The ratio of the highest What is remarkable is the relatively equal
to the lowest provincial GDP was just over distribution of decile household consump-
seventeen in 1978 at the start of Indonesia’s tion in rural and urban areas across different
154 Inequality and Social Justice in Asia

TABLE 5: Regional Output Disparity in Indonesia, 1977–2005

1978 1988 1993 1997 2000 2004
Ratio using GDRP per capita
Highest to Lowest 17.14 16.30 12.49 10.18 18.39 17.57
Java-Bali and Outer Islands 0.60 0.83 0.99 1.09 – –
Western to Eastern 0.79 1.09 1.11 1.12 0.99 1.12
Ratio using GDRP without
Oil-Gas per capita
Highest to Lowest 4.55 7.50 9.61 9.37 13.92 15.83
Java-Bali and Outer Islands 0.93 1.13 1.24 1.30 – –
Western to Eastern 0.95 1.21 1.18 1.21 1.18 1.33

Note: using current market prices.

Source: Strategic Asia calculation based on BPS data, as cited from BPS-Gross Regional Domestic
Product in Indonesia and Indonesian Statistics, various years; Bappenas (2001) Pembangunan Daerah
dalam Angka (Regional Development in Figures).

TABLE 6: Rural-Urban Expenditure Group Share by Deciles, 1984–2005

Country Year Consumption Share by Deciles (%)*
1 2 3 4 5 6 7 8 9 10
Indonesia (Rural) 1984 3.78 5.20 6.16 7.08 8.04 9.09 10.33 11.94 14.38 24.00
Indonesia (Rural) 1987 4.28 5.52 6.37 7.20 8.07 9.03 10.19 11.68 14.02 23.64
Indonesia (Rural) 1990 4.45 5.56 6.50 7.38 8.24 9.17 10.27 11.72 14.08 22.63
Indonesia (Rural) 1993 4.46 5.72 6.58 7.40 8.27 9.21 10.34 11.76 13.95 22.31
Indonesia (Rural) 1996 4.27 5.52 6.38 7.22 8.10 9.07 10.22 11.71 14.03 23.48
Indonesia (Rural) 1999 4.50 5.88 6.76 7.60 8.44 9.38 10.45 11.81 13.84 21.34
Indonesia (Rural) 2002 4.55 5.74 6.57 7.37 8.21 9.14 10.25 11.67 13.87 22.63
Indonesia (Rural) 2005 3.90 5.23 6.14 7.02 7.94 8.97 10.20 11.79 14.26 24.55
Indonesia (Urban) 1984 3.25 4.63 5.61 6.59 7.61 8.78 10.15 11.96 14.78 26.64
Indonesia (Urban) 1987 3.53 4.65 5.64 6.62 7.62 8.73 10.06 11.84 14.82 26.49
Indonesia (Urban) 1990 3.46 4.44 5.38 6.32 7.33 8.46 9.86 11.76 14.99 28.00
Indonesia (Urban) 1993 3.44 4.38 5.31 6.23 7.24 8.36 9.76 11.66 14.92 28.70
Indonesia (Urban) 1996 3.18 4.12 5.04 5.98 7.00 8.16 9.60 11.58 14.97 30.37
Indonesia (Urban) 1999 3.47 4.62 5.47 6.30 7.21 8.26 9.56 11.31 14.22 29.58
Indonesia (Urban) 2002 3.49 4.54 5.41 6.31 7.30 8.43 9.81 11.67 14.66 28.38
Indonesia (Urban) 2005 2.87 3.94 4.81 5.74 6.74 7.92 9.39 11.39 14.75 32.45

Source: World Bank Poverty Monitor (http://iresearch.worldbank.org/PovcalNet/Jsp/index.jsp)

Note: * The income/consumption shares by deciles are based on estimated Lorenz curves. Households
are ranked by income or consumption per person. Distributions are population (household-size and
sampling expansion factor) weighted.
Economic Inequality in Indonesia 155

income groups. It is not clear what can be Theil in Indonesian provinces. The same
read into specific estimates of consumption picture applies to urban and rural house-
across rural and urban areas except that they holds, as underscored by the fact that only
seem to vary almost randomly. In several 24.5 percent of the total income inequality
cases urban consumption shares are lower was accounted for by differences between
than rural ones showing lower income urban and rural areas, whereas the remain-
inequality in urban than rural areas, while ing 75.4 percent was contributed by in-
in others the opposite was true. For equality within urban and rural households.
example, the share of consumption of the Decomposition by educational groups
7th decile in urban households was 9.39 in and by gender in Akita et al. (1999) gene-
2005 compared to 10.33 in rural house- rates the same conclusion that the largest
holds in the same decile. In the same year share of inequality is generated from within
the consumption share of the 9th decile groups rather than between-groups. For
stood at 14.26 percent in rural areas com- example, with respect to differences in
pared to 14.75 percent in urban households. household consumption across various
Indonesian data on household educational groups, variations between
consumption, used widely to estimate groups accounted for only 32.6 percent
income inequality, therefore, presents a while within-group inequality accounted
picture of a remarkable constancy of for the rest. In the case of decomposition
income distr ibution over time, across by gender, the contribution of within-
provinces and across rural and urban group inequality was even more pro-
households. However, a different story can nounced at 97 percent in 1993 compared
be constructed by examining per capita to only 3 percent for between-group
provincial GDP, which exhibits a few, inequalities.
resource rich provinces having per capita Takahiro Akita and Miyata (2007)
incomes several times higher than those provide yet another set of decomposed
with fewer resources. inequality estimates, for a wider spectrum
of categories including across educational
Decomposition of Inequality Across groups separately for rural and urban areas
Provinces and Sectors using the SUSENAS data from the 1996,
Takahiro Akita et al. (1999) presents a 1999 and 2002 surveys. Although the
decomposition of income inequality in numbers are different the overall conclusion
Indonesia between and within urban and remains unchanged.This basically is that in
rural areas and across provinces. The Indonesia, within-g roup inequality
findings are summarized in Table 7 and accounts for the overwhelming share of
clearly indicate an important trend. In both income inequality variations as opposed to
categories, the contribution of between- variations in inequality across groups.
g roup inequalities to the total was
significantly lower than for within-group Income Distribution in Indonesia:
inequality. Hence, in 1993, the percentage Contrasts with International
share of between-groups Theil T was Experience
around 18.8 percent compared to a rather There is a shar p divergence between
significant 81.8 percent for within group changes and pattern of inequality in
156 Inequality and Social Justice in Asia

TABLE 7: Inequality Decomposition by Province, 1987–1993

Province Theil T Theil L Gini
1987 1990 1993 1987 1990 1993 1987 1990 1993
Aceh 0.182 0.129 0.200 0.178 0.128 0.196 0.333 0.279 0.344
N. Sumatra 0.183 0.142 0.174 0.177 0.142 0.165 0.327 0.293 0.313
W. Sumatra 0.160 0.178 0.222 0.164 0.182 0.214 0.312 0.328 0.355
Riau 0.142 0.147 0.144 0.140 0.145 0.142 0.291 0.296 0.296
Jambi 0.127 0.112 0.135 0.124 0.113 0.130 0.277 0.262 0.285
S. Sumatra 0.182 0.180 0.207 0.172 0.167 0.192 0.322 0.313 0.341
Bengkulu 0.120 0.147 0.149 0.112 0.139 0.138 0.261 0.293 0.290
Lampung 0.184 0.173 0.158 0.175 0.166 0.153 0.329 0.319 0.307
Jakarta 0.188 0.210 0.235 0.181 0.201 0.235 0.333 0.352 0.379
W. Java 0.223 0.246 0.221 0.215 0.223 0.214 0.360 0.358 0.359
C. Java 0.183 0.194 0.198 0.179 0.189 0.189 0.330 0.336 0.340
Yogyakarta 0.226 0.317 0.256 0.220 0.275 0.243 0.363 0.378 0.378
E. Java 0.267 0.227 0.269 0.241 0.207 0.238 0.381 0.351 0.379
Bali 0.222 0.198 0.204 0.209 0.189 0.197 0.356 0.342 0.347
W. Nusa Teng. 0.202 0.234 0.192 0.197 0.208 0.183 0.345 0.354 0.337
E. Nusa Teng. 0.205 0.203 0.170 0.183 0.187 0.158 0.342 0.344 0.314
E. Timor 0.106 0.233 0.300 0.111 0.217 0.264 0.258 0.367 0.404
W. Kalimantan 0.166 0.177 0.200 0.153 0.166 0.184 0.310 0.319 0.337
C. Kalimantan 0.137 0.141 0.146 0.132 0.138 0.137 0.288 0.296 0.290
S. Kalimantan 0.178 0.148 0.168 0.169 0.145 0.166 0.321 0.295 0.318
E. Kalimantan 0.164 0.163 0.214 0.162 0.161 0.211 0.306 0.312 0.354
N. Sulawesi 0.171 0.141 0.165 0.170 0.141 0.160 0.322 0.294 0.311
C. Sulawesi 0.172 0.158 0.183 0.166 0.150 0.175 0.326 0.305 0.331
S. Sulawesi 0.169 0.201 0.172 0.164 0.199 0.173 0.318 0.348 0.321
S.E. Sulawesi 0.205 0.212 0.176 0.197 0.195 0.168 0.349 0.350 0.318
Maluku 0.212 0.123 0.186 0.196 0.119 0.181 0.350 0.277 0.334
Irian Jaya 0.306 0.225 0.246 0.302 0.225 0.249 0.426 371 0.389
All groups 0.247 0.245 0.266 0.232 0.227 0.243 0.372 0.361 0.378
W-group 0.205 0.204 0.216 0.197 0.193 0.201
(% share) (83.0) (83.3) (81.2) (84.9) (85.0) (82.7)
B-group 0.042 0.041 0.05 0.035 0.034 0.042
(% share) (17.0) (16.7) (18.8) (15.1) (15.0) (17.3)

Source: Akita et al. (1999), Inequality in the Distribution of Household Expenditure in Indonesia: A
Theil Decomposition Analysis.

Indonesia and in many other developing addition inequality was also low, hovering
countries in the region. Assuming that data between a gini of 0.32 to 0.36 for long
is reliable, inequality in Indonesia, in almost periods of time.The remarkable fact in the
all its variants, has remained stable over time case of Indonesia is that the movements of
and across regions in the country. In the gini coefficient across income groups,
Economic Inequality in Indonesia 157

geographical areas and across urban and Figure 5 presents ADB (2007) compa-
rural areas exhibits the same trend of low risons of changes in inequality in the East
and near constant indices. Asian region since 1990. The Indonesian

FIGURE 5: Changes in Gini Coefficient for Expenditure/Income Distributions,

1990s–2000s (percentage points)
Note: Years over which changes are computed are as follow: Armenia (1998–2003); Azerbaijan (1995–
2001); Bangladesh (1991–2005); Cambodia (1993–2004); PRC (1993–2004); India (1993–2004);
Indonesia (1993–2002); Kazakhstan (1996–2003); Korea (1993–2004); Lao PDR (1992–2002);
Malaysia (1993–2004); Mongolia (1995–2002); Nepal (1995–2003); Pakistan (1992–2004); Philippines
(1994–2003); Sri Lanka (1995–2002); Taipei, China (1993–2003); Tajikistan (1993–2003); Thailand
(1992–2002); Turkmenistan (1998–2003); and Viet Nam (1993–2004); Income distribution for Korea
and Taipei, China; expenditure distribution for the rest.
Source: Ali (2007).
158 Inequality and Social Justice in Asia

picture of an almost unchanged gini stands Figure 6 also from the same source presents
in sharp contrast to the situation in a range data on changes in per capita expenditures
of other developing countries in Asia. in 1993 PPP (Purchasing Power Parity)

FIGURE 6: Changes in per Capita Expenditures, Bottom 20 Percent and

Top 20 Percent – 1990s–2000s (in 1993 PPP dollars)
Note: Years over which changes are computed are as follow: Bangladesh (1991–2005); Cambodia
(1993–2004); PRC (1993–2004); India (1993–2004); Indonesia (1993–2002); Lao PDR (1992–2002);
Malaysia (1993–2004); Nepal (1995–2003); Pakistan (1992–2004); Philippines (1994–2003); Sri Lanka
(1995–2002); Thailand (1992–2002); and Viet Nam (1993–2004); numbers is parenthesis pertain to
annualized growth rates.
Source: Ali (2007).
Economic Inequality in Indonesia 159

dollars in selected Asian countr ies. 2004. As indicated by other comparative

Indonesia once again illustrates the relative indicators, Indonesia exhibits both low and
similar ity of g rowth in per capita relatively unchanging gini coefficients over
consumption in the bottom 20 percent and time.A comparison of economic inequality
the top 20 percent of the households. The between Indonesia and countries such as
growth of per capita expenditure was 2.09 India, China, Bangladesh and Thailand
percent per annum in the bottom 20 (Figure 7) for the two and half decades
percent compared to 1.95 in the top 20 spanning 1981 and 2004, again demons-
percent households. trates that Indonesia experienced the lowest
Table 8 presents movements of the gini change in income distribution amongst all
index in a range of countries across Asia, these countries.
Latin America and Africa between 1981 and The contrast with two neighbouring

TABLE 8: Gini Index* in Selected Cross-Region Countries, 1981–2004

Country 1981 1984 1987 1990 1993 1996 1999 2002 2004
Bangladesh 25.88 26.14 28.85 28.56 28.27 33.00 33.42 33.42 33.42
China-Rural 24.99 26.69 29.45 30.57 32.13 33.62 35.39 38.02 38.09
China-Urban 18.46 17.08 20.20 24.78 28.47 29.09 31.55 33.46 33.98
India-Rural 31.57 30.06 30.13 29.49 28.59 29.02 29.52 30.04 30.46
India-Urban 34.21 33.33 35.57 35.06 34.34 35.08 35.96 36.85 37.59
Pakistan 33.35 33.35 33.35 33.23 30.31 28.65 33.02 30.39 31.18
Indonesia 33.29 33.29 33.12 34.65 34.36 36.55 31.73 34.30 34.30
Lao PDR 30.40 30.40 30.40 30.40 30.40 37.00 37.00 34.67 34.67
Malaysia 48.63 48.63 47.04 46.17 47.65 48.84 49.15 49.15 49.15
Philippines 41.04 41.04 40.63 43.82 42.89 46.16 46.09 44.48 44.48
Sri Lanka 32.47 32.47 32.47 30.10 32.30 34.36 33.24 40.18 40.18
Thailand 45.22 44.63 43.84 45.03 46.22 43.39 43.53 41.96 41.96
Viet Nam 35.68 35.68 35.68 35.68 35.68 35.58 35.52 37.55 34.41
Argentina-Urban 44.51 44.51 44.51 45.35 45.35 48.58 49.84 52.52 51.28
Brazil 57.57 57.88 59.31 60.68 59.82 59.98 59.19 58.75 56.99
Chile 56.43 56.43 56.43 55.52 55.47 55.06 55.55 54.92 54.92
Colombia 59.13 56.12 53.11 52.46 54.27 56.96 57.92 58.83 58.83
Peru 45.72 45.72 45.10 43.87 44.87 46.24 49.82 54.65 52.03
Mozambique 44.49 44.49 44.49 44.49 44.49 44.49 45.58 47.11 47.11
Namibia 74.33 74.33 74.33 74.33 74.33 74.33 74.33 74.33 74.33
Nigeria 38.68 38.68 38.68 42.71 44.95 46.50 45.33 43.60 43.60
Zambia 60.05 60.05 60.05 60.05 52.61 49.79 53.44 50.74 50.74
Zimbabwe 56.17 56.17 56.17 56.17 52.81 50.12 50.12 50.12 50.12

Note: * Gini index: A measure of inequality between 0 (everyone has the same income) and 100 (richest
person has all the income).
Source: World Bank Poverty Monitor (http://iresearch.worldbank.org/PovcalNet/Jsp/index.jsp).
160 Inequality and Social Justice in Asia

FIGURE 7: Economic Inequality in Selected Asian Countries, 1981–2004

Source: World Bank Poverty Monitor (http://iresearch.worldbank.org/PovcalNet/Jsp/index.jsp).

large economies is illustrated in Figures inequality is shown, as one might expect

8 and 9, which present a picture of from theory, in China, the fastest growing
unambiguously rising inequality in both economy in the region. Indonesia on the
urban and rural households. Interestingly other hand, despite a 7 percent average
the shar pest increase in urban rural growth in the 1990s; a record fall in output

Years
FIGURE 8: Rural Gini Index in China and India, 1981–2004
Economic Inequality in Indonesia 161

Year
FIGURE 9: Urban Gini Index in China and India, 1981–2004
Source: World Bank Poverty Monitor (http://iresearch.worldbank.org/PovcalNet/Jsp/index.jsp)

following the Asian Economic Crisis which data, but it was relatively evenly distributed
was then followed by five years of amongst the poor segments of the
reasonably fast recovery (2007) with GDP population. The result was the economic
growth averaging around 6.4 percent, TABLE 9: Indonesia Economic
showed ver y little movement in the Indicators, 1964–2007
aggregate or provincial gini coefficients.
Movements in GDP growth, gini Year GDP Growth Poverty Gini Index
indices and the incidence of poverty in 1964 3.5 – 0.35
Indonesia are illustrated in Table 9 and 1969 7.1 60.00* 0.35
Figure 10. Although there might be 1976 6.9 40.08 0.34
superior ways of presenting the data (for 1978 7.7 33.31 0.38
1980 7.9 28.56 0.34
example, by estimating trends in each
1981 7.4 26.85 0.33
variable for the period between 1964 and 1984 6.0 21.64 0.33
2007), the general conclusion is quite 1987 3.9 17.42 0.32
straight forward. Low levels of economic 1990 7.2 15.08 0.32
inequality during periods of high economic 1993 6.5 13.67 0.34
1996 8.0 17.65 0.36
growth allowed Indonesia to reduce
1999 0.8 23.43 0.33
absolute poverty substantially (Figure 11) 2002 4.5 18.20 0.34
from the 1970s onwards. The clustering of 2005 5.7 15.97 0.33
the near-poor close to the poverty line, is 2006 5.5 17.75 0.36
consistent with the fact that the share of 2007 6.3 16.58 0.36
household consumption changed relatively Source: BPS (1997) Statistics during 50 years
little between the bottom 20 percent and Indonesian Independence; and BPS Statistical
the bottom 40 percent. Not only was Yearbook of Indonesia, various years.
inequality low according to Indonesian Note: * Poverty data 1969 was estimated.
162 Inequality and Social Justice in Asia

FIGURE 10: Economic Growth, Poverty and Inequality in Indonesia, 1964–2007

Source: BPS National Income Statistics and Susenas Consumption data.
Note: Gini Index and poverty rate are using 1993 data = 100.

FIGURE 11: Poverty in Indonesia, 1976–2007

Source: Constructed from BPS data, various edition.
Economic Inequality in Indonesia 163

FIGURE 12: Global Inequality and its Components, 1820–1992

Source: Bourguignon and Morrisson (2002) and World Bank (2005).

miracle for which Indonesia and several construct specific case studies within
other countries in the region eventually provinces or sectors.
came to well known.
Finally Figure 12 illustrates another Non-Income Inequality
distinction between Indonesia and the This paper has focused pr imar ily on
behaviour of economic inequality in the variations in measures of inequality based
world as a whole. Francois Bourguignon on household consumption which serves as
and Morrison (2002) decompose long- a proxy for household income. However,
ter m global inequality trends. Their indicators produced in Indonesia’s human
estimates show that a large part of the development reports of 2001 and 2004
differences in cross-country inequality is describe variations in a range of non-
explained by cross-country variations income variables across the provinces.
(around 60 percent of the total) with the As reflected in Table 10, there is a
rest being attributed to within-country significant difference in provincial rankings
shifts in inequality. Economic inequality in based on regional GDP per capita and those
Indonesia shows a completely different based on ranking in Human Development
pattern with the largest part of inequality Index (HDI) terms.The difference between
variations being generated by within-group the g ross regional domestic product
(province, sector, educational groups, (GRDP) and the HDI ranks ranged from
gender, etc.) as opposed to across groups, +17 to –26 among 30 Indonesian provinces
which account for only a small proportion in 2002. The case of Papua illustrates the
of inequality. To understand the dynamics point. Although Papua was the third
of g rowth and distr ibution and the richest province in terms of regional per
direction of causation one needs to capita income, it was among the most
164 Inequality and Social Justice in Asia

TABLE 10: Comparison of per Capita GRDP and HDI, 2002

GRDP GDRP Rank HDI HDI GRDP Rank
US$ PPP Rank – HDI Rank
D.I. Yogyakarta 1,581 20 70.8 3 17
Maluku 950 28 66.5 12 16
North Sulawesi 1,695 17 71.3 2 15
Jambi 1,270 23 67.1 10 13
Bengkulu 1,188 24 66.2 14 10
Central Java 1,340 22 66.3 13 9
Lampung 1,085 27 65.8 18 9
Riau 2,050 13 69.1 5 8
West Sumatera 1,714 16 67.5 8 8
North Maluku 1,094 26 65.8 19 7
South East Sulawesi 948 29 64.1 26 3
Central Kalimantan 2,321 8 69.1 6 2
East Nusa Tenggara 756 30 60.3 28 2
DKI Jakarta 7,705 2 75.6 1 1
West Java 1,680 18 65.8 17 1
Gorontalo 1,117 25 64.1 24 1
North Sumatera 2,357 7 68.8 7 0
South Sulawesi 1,340 21 65.3 21 0
South Sumatera 1,769 15 66.0 16 –1
East Kalimantan 9,242 1 70.0 4 –3
Bali 2,497 6 67.5 9 –3
Banten 2,727 5 66.6 11 –6
East Java 1,641 19 64.1 25 –6
Bangka Belitung 2,083 11 65.4 20 –9
Central Sulawesi 2,053 12 64.4 22 –10
Nangroe Aceh Darussalam 3,051 4 66.0 15 –11
South Kalimantan 2,092 10 64.3 23 –13
West Kalimantan 1,975 14 62.9 27 –13
West Nusa Tenggara 2,290 9 57.8 30 –21
Papua 4,180 3 60.1 29 –26

Source: BPS, Bappenas and UNDP, Human Development Report (2004), p.12.

disadvantaged Indonesian provinces, ranked pronounced within provinces than across

29 out of 30 on the human development provinces.According to Indonesia’s Second
scale. Human Development Report in 2004,
Significant differences in HDI scores within the Province of Papua, HDI indices
existed across districts within each province ranged from 47 in Jayawijaya, to 73 in the
and are reflected in Figure 13. Interdistrict port city of Sorong. A range of variation
variations in HDI performance were more higher than that shown in interprovincial
Economic Inequality in Indonesia 165

FIGURE 13: Range of HDI Values within Provinces, 2002

Note: The diamond represents the weighted average for the province, and the line links the lowest
and highest values.
Source: BPS, Bappenas and UNDP, Human Development Report, 2004.

comparisons. The implication that can be equally as suggested by household

drawn is that HDI indices, affected consumption data. In the Indonesian
considerably by the access and quality of context, however, broad judgements on the
public services, might be more diverse behaviour of inequality are not possible
within provinces than across them.Another based on aggregate data. What needs to be
equally apparent trend is that HDI conducted are case studies at the local level
underwent a marked decline in a number to highlight barriers and bottlenecks
of districts in sharp contrast to improve- towards more equally shared quantity and
ments of HDI in most districts. This leads quality of economic growth.
to the theory that clearly the impact of The good news from non-income data
economic growth and more critically of is that key non-income indicators such as
public service provision was not shared as life expectancy, adult literacy and infant
166 Inequality and Social Justice in Asia

FIGURE 14: Infant Mortality and Life Expectancy, 1960–2000

Source: BPS, Bappenas and UNDP (2001).

mortality improved sharply during the last relatively unchanged distribution of income
three decades of the 20th Century (Figure at all income levels of households over a
14). However, the disturbing fact is that relatively long period of time. Achieving
interdistrict variations in these indicators this would be difficult in a country with low
still remains ver y high and in some levels of economic growth and/or structural
provinces and districts there is a noticeable change. It would also be surprising in an
gap between rankings based on per capita economy where relative constancy in
income and per capita HDI. Clearly the income distribution has been accompanied
dynamics of economic inequality, poverty by significant GDP growth, structural shifts
reduction and non-income indicators of in the composition of output, rapid
well-being are much more complicated and migration from rural to urban areas, and a
require careful local level scrutiny. situation where the economy has enjoyed
early capital account mobilization and a
Economic Inequality in Indonesia: relatively small state.
Making Sense of it All How much confidence can be placed on
The vast body of statistical evidence the results of consumer household surveys
reproduced in the previous sections clearly in the context of such a rapid historical
illustrates the rather distinct nature of transformation needs to be examined. Of
income inequality in Indonesia both over equal importance is the analysis of
time and across sectors and regions. Taking movements in the gini, particularly in times
the data at face value, would suggest that of economic boom and in the midst of
Indonesia has managed to maintain a economic crises.
Economic Inequality in Indonesia 167

Indonesia’s Economic and beyond, was over shadowed by the

Transformation and contribution of manufacturing. The weight
Underestimation of Inequality of the manufacturing sector continued to
grow till the onset of the Asian economic
Economic Diversification of
Indonesia
TABLE 11: Agriculture and
The Indonesian development story is just Manufacturing Sector Contribution,
four decades old. In that time it moved from 1971–2007
being an overwhelmingly rural, low-
income economy to a diversified middle- Agricultural Manufacturing
income countr y. Some of the main Year GDP Employ- GDP Employ-
contours of this development are spelt out Share ment Share ment
Share Share
in Figures 15 and 16 and Tables 11 and 12.
Figure 15 presents the main features of 1971 44.0 64.2 8.8 6.5
1980 24.0 54.8 13.0 8.5
Indonesian economic development
1990 17.9 56.0 19.4 10.2
between the mid-1960s and 2005. Within 1997 16.1 41.2 26.8 12.9
this time-period, the sectoral contribution 1998 18.1 45.0 25.0 11.3
to GDP from agriculture declined from just 2002 15.7 44.3 30.7 13.2
over a half to an eighth of the total. Mining 2007 13.8 41.2 27.4 12.4
and quarrying, which expanded rapidly in Source: BPS & Bank Indonesia, various
the 1970s, but declined sharply in the 1980s publications and years.

FIGURE 15: Gross Domestic Product at Current Market Prices, by Industrial Origin,
1968–2005 (billion rupiahs)
Source: BPS (1997) Statistics During 50 Years Indonesian Independence; BPS, Statistical Year Book
of Indonesia 2005/2006.
 168
Inequality and Social Justice in Asia
FIGURE 16: Economic structure in Indonesia, 1951–2000
Source: Daan Marks, The Service Sector in Indonesia’s National Accounts, 1951–2000 (2005).
 Economic Inequality in Indonesia
TABLE 12: Structure of Provincial GDP Sector-wise (in percent)
1975 1990 2004 Structural
Change
A I S M A I S M A I S M 3- 9-
sector sector
Aceh 47.3 22.8 29.9 3.5 17.9 66.4 15.7 28.7 23.9 50.2 26.0 18.3 54.8 58.7
North Sumatra 41.0 18.8 40.3 6.3 34.5 25.8 39.7 18.2 24.5 33.5 42.0 25.4 33.0 50.9
West Sumatra 43.7 16.5 39.8 9.5 31.9 18.8 49.3 12.1 24.4 22.6 53.0 12.2 38.7 41.9
Riau 2.8 91.2 6.0 2.2 5.4 81.4 13.2 6.5 16.9 67.7 15.4 30.9 46.8 109.5
Jambi 50.0 17.8 32.2 9.2 34.3 20.8 44.8 14.4 29.2 33.0 37.9 11.8 41.5 43.8
South Sumatra 20.9 47.3 31.8 19.1 18.1 44.8 37.1 19.7 19.8 54.8 25.4 22.6 15.0 24.8
Bengkulu 53.5 6.6 39.9 1.9 34.1 17.9 48.0 3.0 40.1 10.5 49.5 4.0 26.8 34.1
Lampung 56.4 9.1 34.5 7.3 41.9 14.9 43.1 10.9 37.4 22.7 39.9 11.8 38.0 43.6
Sumatra 21.8 56.4 21.8 6.4 21.9 48.2 29.9 15.7 22.8 46.8 30.4 23.1 19.2 (n.a.)
Jakarta 1.7 23.0 75.3 15.5 1.1 37.9 61.0 26.4 0.1 27.5 72.4 15.9 8.9 39.7
West Java 34.6 22.4 43.0 8.0 21.6 39.5 38.9 20.4 12.3 53.8 33.9 42.6 62.7 77.1
Central Java 43.6 13.2 43.2 9.5 30.5 30.2 39.3 24.9 19.9 40.5 39.6 32.6 54.5 58.9
Yogyakarta 41.6 14.2 44.2 8.9 28.8 16.9 54.3 10.3 16.6 24.8 58.6 14.7 49.9 49.9
East Java 42.9 13.1 44.0 11.7 25.5 27.9 46.6 21.0 17.5 37.4 45.1 29.6 50.7 62.1
Bali 47.8 11.9 40.5 3.0 34.7 11.7 53.6 5.3 20.7 15.4 63.9 9.0 54.1 66.4
Java-Bali 33.8 17.4 48.8 10.6 20.6 33.1 46.3 22.1 11.6 39.0 49.5 29.2 44.5 (n.a.)
West Kalimantan 51.3 13.7 35.1 10.5 27.6 23.5 48.9 18.7 27.3 29.9 42.8 19.8 47.9 54.0
Central Kalimantan 53.9 10.0 36.0 3.9 36.4 20.4 43.2 9.8 41.7 14.5 43.7 9.0 24.5 29.3
South Lalimantan 40.9 7.0 52.2 4.7 26.1 23.9 50.0 16.9 25.3 38.5 36.2 15.5 63.0 63.0
East Kalimantan 13.4 62.1 24.5 5.0 9.3 71.2 19.5 31.3 6.4 79.5 14.1 37.5 34.7 67.2
Kalimantan 28.1 40.3 31.6 6.0 16.7 53.0 30.3 25.6 14.9 61.5 23.6 29.7 42.3 (n.a.)
North Sulawesi 45.1 8.5 46.4 4.4 35.4 12.0 52.6 5.7 21.0 32.6 46.4 9.2 48.3 59.3
Central Sulawesi 63.8 6.8 29.4 1.2 42.3 16.3 41.4 5.9 45.3 38.4 7.7 38.9 36.9
South Sulawesi 53.0 5.1 41.9 3.6 42.3 16.7 41.0 7.8 33.5 27.3 39.1 13.5 44.4 50.2
Southeast Sulawesi 43.8 23.2 33.0 1.3 40.2 14.8 45.0 2.3 41.1 19.3 39.6 6.2 13.0 36.1
Sulawesi 51.4 7.3 41.3 3.5 40.8 15.5 43.7 6.6 33.7 25.7 40.5 10.9 36.9 (n.a.)
West Nusa Tenggara 60.8 7.0 32.2 2.4 48.0 10.5 41.6 2.8 24.7 44.8 30.5 3.4 75.5 82.6
East Nusa Tenggara 69.1 4.9 26.1 2.3 50.0 6.9 43.1 1.9 42.5 11.2 46.3 1.6 53.2 55.9
Maluku 63.3 5.3 31.4 1.1 32.8 24.7 42.4 14.4 36.5 12.6 51.0 8.1 53.7 54.4
Papua 20.3 63.9 15.9 0.5 18.1 57.3 24.6 2.4 10.0 60.1 20.9 5.6 10.1 27.4
Eastern Indonesia 45.9 30.0 24.1 1.3 34.2 29.7 36.1 5.3 26.4 42.6 30.9 4.5 39.0 (n.a.)
Indonesia 30.9 31.6 37.5 8.2 21.9 37.9 40.3 19.6 15.8 42.4 41.8 26.3 30.3 56.0

169
Note: Based on current prices: A = Agriculture; I = Industry; S = Service; M = Manufacture, which is a subset of I.
Source: Hal Hill, Indonesia’s Changing Economic Geography, ANU, 2008.
170 Inequality and Social Justice in Asia

crisis in the late 1990s before stabilising at that while the scale of the structural shift
approximately 27-28 percent of GDP. The varied across provinces, the move away from
broad shift is captured in Table 11 which agriculture to non-agriculture was evident
illustrates the sharp and the sustained in most of the country.
decline in the importance of agriculture in As in many other countries of the
GDP and the rise of manufacturing and region, the continued diversification of
services over the half a century following production was mirrored in the growth of
independence. the urban population. Figure 17 illustrates
As in many other developing countries, the extent of the population shift between
the structural shift in GDP is only partially 1950 and 2007. The share of the urban
mirrored in the composition of employ- population rose steadily from just over 12
ment. Ag r icultural employment fell percent at the start of the period to nearly
continuously from around 64 percent of 50 percent of the total by 2007.
total to around 41 percent today while the Although the rate of urbanization may
share of manufacturing employment rose to some extent reflect the impact of change
steadily in the same period from a mere 6.5 in Java where much of industry and
percent at the start of the growth period to population was concentrated and where
around 12.4 percent in 2007. Figure 16 population densities in the rural sector were
from Marks (2005) illustrates the scale of already among the highest in the world.
Indonesian economic diversification with However, the magnitude of the structural
the decline in agriculture and the rise of shift in both production and population
industry and services. The interprovincial tends to indicate a pattern of development
picture presented in Table 12, clearly shows discussed at length by Lewis and later

FIGURE 17: Urban Population in Indonesia, 1950–2007

Source: UN Department of Economic and Social Affairs, World Population Prospects, the 2006 Revision
Population Database, UNFPA and UNESCAP (2008); and BPS (Population Census and SUPAS).
Economic Inequality in Indonesia 171

Kuznets, which was the source of much of provided by real wage data presented in
the early literature on the growth- Figures 18 and 19. Although some
inequality relationships. controversy exists over the scale of the real
Further evidence of the Lewis dual wage increase during the New Order
economy type development in Indonesia is period, Indonesian real wages on average

FIGURE 18: Real and Nominal Wages in Indonesia, 1986–1999

Source: Irawan, Ahmed and Islam (2000) Labour Market Dynamics in Indonesia, Analysis of 18 Key
Indicators of the Labour Market (KILM) 1985–1999. Jakarta: International Labour Office.

FIGURE 19: Real and Nominal Wages in Indonesia, 2000–2007 (1995 constant prices)
Source: ILO, Labour and Social Trends in Indonesia, 2008.
172 Inequality and Social Justice in Asia

tended to be relatively constant during the ranging from progressive taxation to public
per iod of the economy’s structural expenditure allocations to pro-poor
transformation. This is in alignment with programmes and to low growth regions.
the observation of a large number of near The degree to which this actually happened
poor bunched around the subsistence based during the New Order remains highly
poverty line, the absence of independent controversial but there are particular
wage bargaining structures and the fact that features of Indonesia’s growth process that
the first phase of Indonesian economic might have limited the expected rise in
growth in the 1970s and early 1980s was inequality.
basically relatively unskilled and labour Controlling inflationary pressures
intensive. through conservative monetary and fiscal
With regard to inequality, two broad policies on the one hand and raising the
conclusions are possible. The first is that supply and the access to food grains on the
Indonesian economic development other undoubtedly helped to prevent
mirrored the classic pattern of labour erosion in the economic welfare of low
movement at a relatively constant real wage income households. Indonesia’s success (in
between the subsistence and modern contrast to many other oil exporting coun-
sectors. Secondly, despite the geographical tries, such as Nigeria) in saving windfalls
diversity of the country and the importance from the oil price boom in the mid-1970s
of oil and gas in some provinces, this overall and redirecting these towards infrastructure
pattern of dual economy growth present. and public services such as education and
health, is well known. The impact of these
Government Policy and the Evolution policies is likely to have been propor-
of Inequality in the New Order tionately greater on lower income house-
In the absence of any major redistribution holds.This combined with the fact that the
of income at the beginning of the deve- first phase of growth in the 1970s and early
lopment process, a structural transformation 1980s was labour intensive and export
of the economy should have resulted in a oriented, only adds to the argument that
shift of income distribution in favour of Indonesia’s economic growth was widely
profits and capital accumulation and away shared. Sharp declines in absolute poverty
from labour at the early stages of the growth followed and further provided evidence of
process. Other things being equal, this Indonesia’s economic miracle in those
should have led to growing inequality in years.
household incomes during the New Order Indonesia also scored some early
era with its record economic growth and successes in the field of education and
tight control over trade unions and labour health. Its remarkable success in raising
oriented political groups. primary education enrolment compared to
The expected rise in inequality could even the miracle economies of south-east
have been mitigated by government policy Asia is presented in its first National Human
such as raising the incomes of households Development Report for 2001 (Figure 20).
in the lower incomes deciles. This could In 1965 Indonesia’s gross primary enrol-
have been implemented in diverse ways ment ratio stood at around 68 percent
Economic Inequality in Indonesia 173

compared to around 80 percent for which moved up from 40 years in 1960 to

Thailand and over 90 percent for Malaysia. 60 years by 2000.
By the end of the 1980s, Indonesia enjoyed Sustained economic growth, relatively
the highest primary enrolment ratios low initial rates of income inequality, rising
amongst neighbouring countries. This was public expenditure on primary health and
reflected in a sustained rise in Indonesia’s education and a fiscal policy which was able
public expenditure devoted to education to keep inflation in check all contributed
from 1970 to 1990 (Figures 21 and 22). to sustaining a rise and preventing a fall in
Although achievements in the health the share of consumption in lower-income
sector were more modest, they were households. A substantial increase in job
nevertheless significant. For example, the opportunities in the urban sector, were
country succeeded in effecting a sharp availed of by thousands of young female
reduction in infant mortality rates, from an workers who entered the workforce in
unacceptably high 130 per thousand live textile and garment factories en masse.The
births at the beginning of the 1960s to reduction in absolute poverty noted in the
around 50 by the mid-1990s. The result was economic literature on Indonesia is a
a marked improvement in life expectancy testimony to its several successes in its first

FIGURE 20: Primary Enrolment in Southeast Asia, 1965–1990

Source: BPS, Bappenas, and UNDP (2001).
174 Inequality and Social Justice in Asia

FIGURE 21: Education and Health Expenditure, 1969–1998

(as percent of development expenditure)
Source: BPS, Bappenas and UNDP (2001).

FIGURE 22: Primary School INPRES Budget, 1974–1998

Source: MoF, Financial Notes, various years.
Economic Inequality in Indonesia 175

phase of labour intensive and public service manufacturing and mining industries, still
oriented growth. Although such trends in remains ambiguous. Claessens et al. (1999),
poverty reduction were not reflected in an in a much quoted paper, estimated the
improvement of the overall income extent of market capitalization by top ten
distribution, they nevertheless played a families in a number of Asian countries.
pivotal role in preventing a rise in ‘relative Their data summar ized in Figure 23
inequality’ by raising the incomes of the illustrates the acute concentration of assets
poor at a faster rate than the rich in the early in Indonesia which tops the list relative to
phase of development. This further other East Asian countr ies. Market
underscores the fact that economic growth capitalization in the hands of the top ten
in Indonesia seemed to be widespread and families accounted for as much as 57.7
shared by some of its poorest households. percent of the total in Indonesia compared
to 46 percent in Thailand, 24.8 percent in
Asset Concentration and Malaysia, 18.4 percent in Taiwan and around
Implications for Income Inequality 2.4 percent in Japan.
With respect to income distribution in the Information on the ownership and
upper ranges, the picture is considerably less control structure of Indonesian corpora-
clear for a wide variety of economic and tions remains blurred even in the present
political reasons. However, there are several day. Indonesian conglomerates were held
factors that contributed to asset concen- together since their inception in a web of
tration and income inequality. These are cross-holdings and inter-linked director-
summarized below. ships. Market capitalization data taken from
First, asset ownership and distribution capital market directories is frequently
in the country’s most dynamic sector of, misleading and provides only a very

FIGURE 23: Market Capitalization Controlled by Top Ten Families, 1996

Source: Claessens, Djankov and Lang (1999).
176 Inequality and Social Justice in Asia

approximate mapping of the structure of the structure of ownership has changed

ownership and the concentration of assets. significantly in the brief period since the
In addition, the well-known interlocking of advent of democracy following the 1999
commercial, military and political interests elections.
in public and gover nment favoured Land is another key asset. It is however,
enterprises makes even a near accurate yet another area where accurate estimates
estimation of asset concentration during the of concentration are difficult to access.This
New Order exceptionally difficult. is not only because a considerable part of
Open capital markets complicate the total land holdings remain uncertified but
problem of estimating asset concentration, also because the practice of share cropping
since rich households and large businesses blurs the distinction between income
often invest in both financial and physical generated from ownership and from
assets overseas. While quantitative data on renting. Whatever data is available tends to
the concentration of non-agricultural suggest a r ising inequality in land
ownership and control is rare, qualitative ownership. Tables 13 and 14 record a
sources confirm Claessens hunch of marked steadily rising gini coefficient in both Java
asset concentration in Indonesia during the (where it rose from 0.45 in 1973 to around
New Order. There is little to suggest that 0.72 in 2003) and non-Java provinces where

TABLE 13: Inequality on Land Holdings, 1963–2003

Java Outside Java National
Average Land Land Average Land Land Average Land Land Land Theil
Holdings (ha) Gini Holdings (ha) Gini Holdings (ha) Gini Index
1963 0.70 – 1.90 – 1.10 – 0.29
1973 0.60 0.45 1.50 – 1.00 0.55 0.28
1983 0.58 0.49 1.38 0.48 0.98 0.50 0.23
1993 0.47 0.56 1.19 0.48 0.83 0.64 0.23
2003 0.30 0.72 0.80 0.64 0.70 0.72 0.26

Source: Land Theil Index from Frankema and Marks (2007); Average land holdings from data from
1963 to 1983 taken from Statistics during 50 years Indonesian Independence, 1993 and 2003 taken
from UNSFIR (2004); data for Land Gini from Ministry of Agriculture paperwork, based on Agriculture
Census, various years.

TABLE 14: Numbers of Agricultural Households by

Land Area Ownership, 1983–2003
1983 1993 2003
Household Share (%) Household Share (%) Household Share (%)
< 0.5 Ha 6,412,246 42.26 10,631,887 53.93 14,028,589 56.41
0.5–0.99 Ha 3,671,243 24.19 4,348,303 22.06 4,578,053 18.41
1.0–1.99 Ha 2,922,294 19.26 3,132,145 15.89 3,460,406 13.91
> 2.0 Ha 2,168,315 14.29 1,601,409 8.12 2,801,627 11.27

Source: BPS, Agriculture Census, various years.

Economic Inequality in Indonesia 177

the gini rose from 0.48 in 1983 to 0.64 health insurance in addition to transfers
in 2003. overseas for children’s education or medical
While asset concentration may not expenses incurred abroad.
necessarily translate into income inequality The net implication is the consumption
in the absence of reinvestment of profits pattern of the richer households is not
into the business or redistributive taxes and approximated by the commodity baskets
subsidies by the state, asset concentration is used in the SUSENAS consumption
likely to trigger, with a time lag, a rise in modules. Further, this underestimation is
income inequality. Brasukra Sudjana and likely to become more pronounced over
Satish Mishra (2004) argue that the extent time as the economy becomes more diverse;
of asset and income redistribution in the size of the higher productivity non-
Indonesia was historically very small. It agr icultural sectors increases and the
follows that asset concentration is likely to number of households in the upper-income
be reflected over time in rising income bracket also rises. Based on this logic, the
inequality. The absence of such trends in larger the proportion of wealthier house-
household consumer surveys, therefore, holds in the economy the greater the
reveal a significant underestimation of underestimation of household consump-
consumer expenditure and incomes of tion as a proxy for household income.
households in the upper income bracket. In fact, this is likely to be the most
plausible explanation for the constancy in
Underestimation of Richer Indonesia’s income distribution indices
Household Consumption despite the country’s rapid economic
The underestimation of consumption of transformation. Some evidence for such a
upper-income households remains a major possibility is presented by UNSFIR (2004).
drawback afflicting household consumer A reworking of the gini coefficients
expenditure surveys. In Indonesia this assuming a different composition of the
underestimation tends to be more pro- consumer basket which includes high-value
nounced relative to other countries for two items, leads to a dramatic r ise in the
reasons. First, the income stream generated aggregate gini (Figure 24).12
from high asset and land concentration is Clearly, the underestimation of higher-
largely unknown given the fact that assets income household consumption is a serious
can be held under multiple identities and flaw in the Indonesian income distribution
legal forms and because the commodity statistics, and merits greater attention than
basket used in the consumer surveys very it has received over the years. One reason
inadequately reflects the actual consump- for overlooking the flaws in the data is the
tion patterns of the rich, especially in urban fact that government policy has tended to
areas (refer to Appendix 1). Second, the focus on absolute poverty reduction
consumption basket used in SUSENAS is through a mixture of social welfare
designed to capture the consumption expenditure and export oriented growth.
pattern of the median consumer, and thus Redistribution of income away from the
excludes a wide range of consumer durables rich towards the poor has by and large been
including automobiles, holidays abroad, absent in the policy agenda. During the first
178 Inequality and Social Justice in Asia

FIGURE 24: Official (SUSENAS) and Corrected Gini Index, 1976–2002

Source: BPS data, calculation by UNSFIR.

two decades of economic growth in the to more localized swings in income

1970s and 1980s, the availability of surplus distribution. Thus, Anne Booth (1992)
labour and labour intensive agricultural and argued that urban-rural disparities increased
industrial production, combined with the between 1969 and 1978, but declined
windfall gains from the first oil boom, eased thereafter. Similarly, real consumer
the political pressure to conduct an asset expenditure growth was faster in urban Java
redistribution programmes of the kind that than elsewhere between 1970 and 1976,
was experienced in Taiwan. In later years, while regional income disparities increased
the involvement of the military in business, in the 1970s due to the impact of oil on the
not only in timber and illegal logging, but regional GDP. Finally, regional disparities in
also natural commodity exports combined per capita consumption expenditure,
with its dominance in politics made any corrected for regional price differences
serious redistribution agenda politically actually widened between 1980 and 1987.
unpalatable. Martin Ravallion and Monika Huppi
(1991) in a similar vein argued that poverty
Interpreting Income Inequality Shifts alleviation and under-nutr ition in
during the Growth Process Indonesia continued to decline during the
Given the rather average and aggregate structural adjustment phase of the 1980s
estimates of economic inequality in due to gains enjoyed by the rural sector in
Indonesia following independence, the growth process. Peter Timmer (2004)
especially in the New Order period and argues that Indonesia enjoyed considerable
later, many observers have shifted the focus pro-poor growth for much of the New
Economic Inequality in Indonesia 179

Order period from 1967 to 1996. The time when the global economy was
advent of the Green Revolution and the undergoing a fundamental shift, where
establishment of the food logistics agency— foreign exchange and financial flows grew
BULOG—contributed towards stabilizing substantially faster than international trade.
food prices which combined with invest- Indonesia enjoyed both good policy and
ment in irrigation, and the introduction of good luck in the first one and a half decade
high-yielding seed varieties raised labour of its development during the 1970s and the
productivity and incomes in rural areas.This 1980s. Growth was primarily generated by
is likely to have been an important factor the Green Revolution and labour intensive
behind the observed fall in rural gini textiles and footwear industries. This
coefficients in the 1970s. contributed towards raising the income of
Although such inter pretations of rural households and progressively lowering
income inequality and the incidence of the incidence of absolute poverty. With
poverty in particular episodes of economic relatively low levels of asset inequality, a tiny
growth or in specific regions or a given industrial sector and the absence of a
sector all shed valuable light on the landlord class that predominated in India or
complexity of Indonesian economic Philippines, the acceleration of economic
development, they fail to deliver any growth actually resulted in a secular decline
significant policy message for the future. In in poverty.
particular, such disaggregated and disparate This picture began to change with the
case studies, decompositions and reworking diversification of the economy first with oil
of official data only contribute to the lack revenues followed by the growth of the
of clarity which surrounds the question of manufacturing sector.The Asian economic
economic inequality in Indonesia. Clearly, crisis reversed the growth engine and led
the first step towards a programme for to a major restructur ing of most of
equitable development in Indonesia is the Indonesia’s banks, as well as many of its
production of reliable and sufficiently corporations. The advent of multi-party
detailed data on income distribution and its democracy and the retreat of the military
components at both national and district from politics, set the stage for fracturing the
levels, which remain the twin hubs of policy symbiotic relationship between business
making in today’s Indonesia. and politics that had characterized the
Suharto government. It led to an increased
Economic Inequality and Future political awareness of the major ity
Indonesian Development population and enhanced the political
The outbreak of the Asian Economic Crisis attractiveness of pro-poor and pro-equity
in 1998 resulted in a dramatic transfor- policies. The question is whether
mation in fortunes. Not only did the Indonesia’s impressive record on growth,
country endure its worst economic crisis in equality and poverty reduction is likely to
half a centur y, but the countr y also be sustained under the changing conditions
underwent a significant change in the of the domestic democracy and inter-
structure of its economic and political national globalization. If not it is ques-
institutions. The crisis coincided with a tionable whether income inequality will
180 Inequality and Social Justice in Asia

FIGURE 25: Poverty and Unemployment Rate Post-Crisis

Source: BPS, Labour Force Situation Report and Indonesian Statistics, various years.

FIGURE 26: Unemployment Rate in Selected Asian Countries, 1990–2007

Source: ADB Key Indicators 2008.
Economic Inequality in Indonesia 181

follow the rising trend so familiar in other Bangladesh and Viet Nam in particular.
Asian countries. Indonesia’s manufacturing base remains
Although a detailed discussion of narrow, focussed on assembly rather than
Indonesia’s changing economic structure manufacturing. Trade patterns have also
and its impact on future inequality is outside tended to dr ift away from the high
the scope of this paper, a number of technology markets of the US and Europe,
observations are warranted. to trade in commodities and palm oil with
Firstly, the relatively easy development China and ASEAN countries.
phase where labour intensive industries and Some evidence of this structural change
new agricultural technology could deliver is provided by the behaviour of employ-
major employment and productivity gains ment and poverty indicators with respect
ended by the late 1980s. The Asian Crisis to fluctuations in GDP. Figures 25 and 26
combined with the sharp fall in output that present data on open unemployment and
followed, resulted in changing foreign trade poverty incidence in Indonesia after the
and production patterns.This in turn led to Asian Economic Crisis.While there are no
a continued evolution in the structure of detailed estimates of the response of
output, especially in manufactur ing. employment and poverty elasticities to
Textiles, garments and footwear have all changes in economic growth, it is clear
come under competitive pressure from low that the resumption of economic
wage economies of Asia, such as China, growth has had little impact on both

FIGURE 27: GDP Growth and Unemployment in China (percentage)

Note: GDP is using constant price 2000.
Source: Labour and Social Trends in ASEAN 2007; ADB Key Indicators 2006, and IMF-International
Financial Statistic (http://www.imfstatistics.org/imf/ ).
182 Inequality and Social Justice in Asia

employment as well as absolute poverty governments to direct revenues at poor

percentages. districts and away from the richer ones.
The phenomenon of jobless growth While Indonesia continues to have an
(Figure 27) much in evidence in China impressive anti-poverty PNPM programme
points to a new phase in economic develop- in place, its volume and reach may be
ment against the backdrop of a global inadequate in the context of internationally
marketplace.There is little reason to assume transmitted financial or export market
that Indonesia will not face the same shocks. In particular, if inequality rises in
structural pressures as it moves on to a tandem with the experience of other Asian
higher growth path. In both China and countries the same pace of future economic
India one of the consequences of this growth might deliver a lower rate of poverty
unbalanced growth has been a secular rise reduction.
in inequality. Fourthly, while this leaves room for
Secondly, without a diversified manu- ‘smart’ interventions in health and educa-
facturing base and with a less developed tion, an area in which Indonesia has lagged
higher educational infrastructure, the major behind many of its neighbours, these are
source of future economic growth in typically long gestation public expenditure
Indonesia is likely to focus on the exploi- interventions. These interventions also
tation and export of natural commodities. require a fairly comprehensive reform of the
Such economic activity is not only likely civil service in these sectors and the forging
to be confined to a few favoured districts, of unfamiliar partnerships with civil society
but is additionally likely to be both capital and private sector service providing organi-
intensive and conflict prone. Thus, future zations.While Indonesian officials are now
economic growth is likely to be enclave required to allocate at least 20 percent of
focussed, inequality prone and would the total government budget on education
require local government protection. Such by Constitutional law, regional govern-
growth is set to be very different from the ments have yet to spend this budget fully
broad based agricultural growth of the or in ways which improve the quality of
1970s and early 1980s. education.
Thirdly, the globalization of financial The above reasons suggest that while
markets, in effect, acts as a brake on Indonesian economic development may
government fiscal and monetary policy. follow the pattern already set by many of
Major departures from neighbour ing its neighbours and experience higher
country macroeconomic policies could growth with rising inequality its policy
trigger capital flight and lower investor choices remain limited. Additionally,
confidence. There are limits to the because the country continues to lack a
government’s ability to tax and spend on reliable set of data, to project future trends
social welfare and other inequality in inequality, public policy tends to place
dampening programmes. Without an oil less importance on dampening inequality as
bonanza or its equivalent raising the compared to reducing absolute poverty.
revenue/GDP ratio will be difficult. Equally As Indonesia’s inequality predicament
difficult is getting consensus from district becomes more apparent and as the potential
Economic Inequality in Indonesia 183

for regional conflict around competing are likely to lead to an a priori expectation
claims to Indonesia’s natural commodities that income inequality may have risen over
begins to surface, inequality is likely to time. Additionally, this study will also
emerge as a central issue on the policy attempt to make adjustments in the
horizon. estimation of income inequality which take
into account the underlying structural
Conclusions and Policy changes over time.
Recommendations Industrial diversification, rapid urbani-
zation, geographical concentration of
Economic Inequality in Indonesia natural resource investment, the acute
Renewed global and regional interest in the concentration of industrial assets in the
scale and the dynamics of economic hands of an ethnic minority, the close and
inequality has yet to create a resonance in symbiotic relationship between military,
Indonesia. This is partly attributable to the civil service and private business and the
reliability of data on income distribution. political dictatorship which stifled any civil
Indonesian consumer surveys tend to society protest over the inequality issue, and
overstate the consumption of poorer the physical liquidation of the left in the
households and severely underestimate the 1960s, has kept inequality off the policy
consumption of the rich. The net result is agenda. The first task is to ensure that it is
an unusual uniformity in gini coefficients back on the front burner of development
generated from such data both over time policy.Therefore, re-assessing the measure-
and across regions and sectors. ment of inequality is an important step in
An important argument is that the that direction. An even more critical step is
observed statistical uniformity of the an analysis of how rapid growth and
income gini in Indonesia contradicts both associated structural shifts in output,
development experience, as well as statistical employment, skill and technology base and
common sense. Given the enor mous a wholesale change in governance systems
structural changes that occur red in is likely to impact on levels and evolution
Indonesia over the forty year period of 1968 of inequality.
to 2008, it would be reasonable to expect That theory must be synchronized with
significant shifts in the measured gini. The measurement, is a key factor that has been
fact that official statistical sources failed to absent in Indonesian development debates.
reveal such variations in expected inequality The global fascination with the Asian
provides the basis for taking a closer and miracle and the belief by governments and
more analytical look at the way the use of international agencies in the uniqueness of
household expenditure data to approximate the Asian model undermined any serious
the calculation of income inequalities in cr itical thinking of the issue in the
Indonesia has tended to lend a bias to such Indonesian context. As both India and
estimates.The time is opportune to initiate China are now discovering, sustained
a policy dialogue on inequality by ques- economic growth in the context of a
tioning what the official figures tell us.This globalized free markets can create major
study plans to focus on the factors which imbalances. The very fact that income
184 Inequality and Social Justice in Asia

inequality levels in China (once the envy areas should not be discounted. However,
of countries attempting to promoted the latter half of the New Order period
balanced growth and poverty reduction) are from the mid-1980s, was characterized by
now approaching levels similar to those in a pervasively corrupt bureaucracy, the
Brazil, long derided as representing one of establishment of pocket banks by leading
the worst cases of income inequality, over conglomerates and by a concentration of
a short span of 20 years, illustrates the need power in Suharto’s inner family circle
to anticipate the direction and speed of such immune from any countervailing power in
future movements in inequality rather than the militar y. The destruction of the
celebrating the spurious observed constancy communists and the fusion of all political
of inequality measures. tendencies into a single overarching
The Indonesian case, much like the machine (the GOLKAR) reaching down to
Chinese one, is interesting in that the early the smallest village as well as the practice
phase of development did distribute the of military and police personnel running
benefits of economic growth relatively their own businesses, most pronounced in
widely. A combination of labour intensive the forestry sector, all point to structural
industrial technology, principally in textiles, conditions for a rise in income inequality
labour augmenting green revolution in rice, over time. The fact that land reform, a
and the dramatic transfer of agricultural major contributor to the decline of rural
labour at a relatively low and controlled landlordism in China and later Taiwan, was
wage to urban industry in a textbook never taken seriously in Indonesia and that
Lewisian process did for a while keep property taxation remains one of the lowest
inequality relatively constant. Indonesian in the world till today illustrates the refusal
data tends to support this conclusion, but of the state to initiate a direct approach to
only for a decade or so after the Green income redistribution. A few approaches
Revolution from the mid-1970s onwards. which were tried, such as transmigration,
By the time the Asian Economic Crisis of simply fuelled local resentment and conflict
the 1998 arrived, Indonesia had all the signs and eventually resulted in actually widening
of an economy where future directions of the gap between the rich and the poor in
inequality would be very different from concer ned provinces such as Papua,
what it had enjoyed in the very early years Kalimantan and the Maluku regions.
of its development. Looking ahead, it can be argued that
Government policy of the early New future economic development in Indonesia,
Order period did help in alleviating poverty in the absence of a countervailing policy to
and keeping inequality levels relatively promote equity, is likely to be inequality
constant, partly by conserving and enhancing rather than inequality
redirecting the oil price windfalls of the dampening, for the following reasons.
mid-1970s. 13 Additionally, Indonesia’s First, the momentum of urbanization
achievements in basic health, primary has run its course although the urban
education and literacy as well as in population is still expected to continue
infrastructural development which eased rising over the coming decade and a half.
the outward migration of labour from rural This, combined with a liberalized wage
Economic Inequality in Indonesia 185

bargaining mechanism will tend to generate follow the relatively easy path of the past.
an upward pressure on real wages owing to Both employment and poverty elasticities
the emergence of labour shortages in key with respect to growth seem to be falling
sectors. and new investments probably in the natural
Second, regional inequality is also set to resource sector are likely to be more capital
rise both due to the widely differing intensive and region focussed. Inequality
resource and human capital endowments of may well follow the path already familiar in
specific regions as well as the fact that future many other Asian countries as documented
foreign investment is likely to be channelled in the ADB report from 2007.
towards those states rich in natural resources From a public policy perspective how-
such as energy, plantations and minerals. ever, the critical question is regarding what
State capture of local governments by large democratic governments can do in practice
domestic and foreign corporations also about containing the expected rise in
cannot be ruled out within such a scenario. inequality on the one hand, and actually
Third, Indonesia has now entered its promoting equitable development on the
second major economic shock in less than other.
ten years.The ILO and other agencies have
indicated that such crises have traditionally Economic Inequality in Indonesia:
been accompanied by both a rise in formal Arriving at Public Policy
unemployment as well as an increase in the Recommendations
size of the informal economy. Although One key issue in arriving at policy recom-
the extent to which such informalization mendations to contain a rise in or to reduce
of the economy generates new patterns of existing levels of income inequality is that
intersectoral inequality remains to be in the era of globalized financial markets, the
studied, it nevertheless signals the emer- policy space open to the government to
gence of new economic forces which effect inequality reducing measures is likely
militate against the thesis of a relatively to be severely limited. For example, the
constant degree of economic inequality in government’s ability to tax and spend for
Indonesia in the early 21st Century. social welfare prog rammes will be
Additionally, globalization has been constrained by fears of capital flight and
accompanied in many countries by rising lower investment flows. Its ability to enforce
wage inequality between skilled and national priorities and standards on regional
unskilled labour and inequalities between governments will be limited by local
exporting and domestic market oriented political support for directly elected
regions. Also, the fact that changes in regional executive heads. The lack of a
income inequality can occur much faster in social consensus on the limits to inequality
open capital and commodity markets naturally hinders agreement on when
suggests that the vision of a future Indonesia government needs to act to contain the
much less equal than what both the data trend towards higher inequality.
suggest, and what economic logic would Box 1 presents a summary of steps taken
dictate, becomes more plausible. by successive Indonesian governments
As a consequence future economic towards promoting equality and reducing
development of Indonesia is unlikely to poverty during the post-independence
186 Inequality and Social Justice in Asia

BOX 1: Policy Responses Impacting Inequality

Year Policy/Program Information Evaluation
Soekarno era
1950 Benteng (Fortress) To promote the deve- Indigenous importers with
Programme lopment of indigenous inadequate financial
entrepreneurs faster, resources continued to
Djuanda, the Minister serve as agents for ethnic
of Welfare, in April Chinese businessmen (Ali-
1950 issued a regula- Baba business).
tion which gave priority Indonesia’s experience
to indigenous busi- with its first affirmative
nessmen to import programme to promote a
goods from abroad. To strong and self-reliant
facilitate this import indigenous business class
trade, indigenous busi- proved to be a failure and
nessmen were given in the second half of the
easy access to cheap 1950s came to an
credit inglorious end
1960 Land reform The Basic Agrarian It is very difficult to
Law 1960 was a key estimate how much land
part of Soekarno’s has been redistributed
concept on Indonesian under this law, because
socialism and indeed after 1965 there is
one of the few pieces evidence that landlords
of socialistic legislation took back land that had
that was ever enacted been confiscated or
in the Guided Economy squatted on by labourers.
Period. Soekarno’s Implementation of this
landredistribution policy remain blurred (no
programme record data). But, at that
time land distribution was
usually used as an agenda
of the Indonesia
Communist Party (PKI)
and as a result triggered
rural horizontal conflict
between landlords and
PKI’s members
1964 BIMAS programme Agriculture intensifica- Not yet implemented due
and slogan ‘Panca tion programme by to political-economy
Usaha” using better ways on instability
farming (use of fertili-
zer, improved water
control, selected
seeds, etc.)
New Order era (Soeharto)
1966–1968 BIMAS programme Involved students from After 1974, production
with credit support agricultural studies growth tended to decline
from BRI to farmers fields as the BIMAS intensi-
fication programme ran
Contd...
Economic Inequality in Indonesia 187

Contd...
Year Policy/Program Information Evaluation
into problems. Credit
default increased
moderately
1967 BULOG establish- To control rice price, In 1969, BULOG was also
ment distribution, and made responsible to
import authorities manage rice buffer stock
(Presidential Decree No
11/1969)
Repelita I Emphasized food
(1969-1970 to production, infra-
1973-1974) structure rehabilita-
tion and government
capacity building
(civil service admini-
stration)
1969 Inmas programme Rice intensification
programme carried
out by former BIMAS
participants, but with-
out government credit
1969-70 Kabupaten Public To encourage
Works Programme Kabupaten authorities
to carry out labour-
intensive public works
with financial assistance
from the central govern-
ment through per
capita subsidies
1969 and after Irrigation Develop- Government preferred On Pelita I, government
ment scheme to increase land pro- completed the building of
ductivity to improve irrigation infrastructures
farmer income (rural on almost 1.5 million Ha
income) rather than paddy land. Inflation was
distribution of assets/ well-controlled (moderate
land level) as a result of rice
price stability (food
availability). Agriculture
sector (include irrigation)
budget accounted for
almost one-third overall
government budget
1970 INPRES funding Government system, To reduce disparity/
system which allows direct inequality on human
grants from the center development, per capita
to the regions GDRP and income
(allocated at different distribution interprovince
levels, i.e. Provincial,
District and Village
Contd...
188 Inequality and Social Justice in Asia

Contd...
Year Policy/Program Information Evaluation
Repelita II Emphasized
(1974-1975 to employment and
1978-1979) distributional
equity as well as
economic growth
1970s Puskesmas deve- Government policy to
lopment improve public
services on health
1974 INPRES primary Government policy to
school increase primary school
enrolment rate and
decrease illiteracy rate,
in order to improve
human capital
1978 Establishment of To increase womens
State Ministry of participation on
Women’s Role national development
agenda
Repelita Government 8 roads to equality: Most of scholars believe,
(1979-1980 to launched jargon regional development, this jargon was the
1983-1984) “Trilogy of Develop- access to health and government’s answer to
ment”: growth, stabi- education services, political instability,
lity and equality; employment opportunity regional dissatisfaction
and also 8 roads to equality on minimum and social unrest which
equality needs (food, clothes steadily increased during
and housing), law Pelita II (1973–1978)
access, etc.
Repelita III was to
focus on agriculture
sector to achieve
food self sufficiency,
and to boost manu-
facturing industry
1979 Income-Generating Joint project of Ministry First phase evaluation
Project for the of Agriculture and BRI showed that the average
Marginal/Landless to increase income of real income of the
Farmers (P4K) small farmer self-help participating small-farmers
groups and organizing had increased by approxi-
them to gain access to mately 40 percent
formal credit for funding
their business
Repelita IV Focus to maintain food
(1984-1985 to self-sufficiency and to
1988-1989) encourage machinery
industry

Contd...
Economic Inequality in Indonesia 189

Contd...
Year Policy/Program Information Evaluation
1980s Government policies Peningkatan Peranan Training and socialization
to increase female Wanita Tani (P2WT) about new agricultural
income technology
Peningkatan Peranan Support rural women in
Wanita dalam Industri small medium industry
Kecil (P2WIK) (household industries)
Peningkatan Peranan To improve skill and
Wanita menuju literacy rate of women, to
Keluarga Sehat dan socialize the significance
Sejahtera (P2W-KSS) of family reproductive and
health system for women
from poor family
Repelita V Focus on agricultural
(1989-1990 to sector, maintain food
1993-1994) self-sufficiency,
export promotion,
employment opportu-
nities, agro-industry
and machinery
1993 The Inpres Desa Established via Presi- The actual amount of the
Tertinggal (IDT) dential Decree to IDT grant per capita basis
programme accelerate poverty might be too small; The
reduction in left behind allocation of IDT grants
villages. IDT consisted with equal amount per
of fund—Rp 20 million/ village was problematic,
village—given to the due to the disparity on
communities to manage population density on each
and execute income- village
generating activities.
1993 Increasing access Promoting income BKK scheme serves 41
to credit via Badan earnings opportunities percent of the villages in
Kredit Kecamatan for the poor Central Java
(BKK) Scheme
1995 Takesra/Kukesra Appeal to companies
with post-tax income
of Rp 100 million or
more to contribute up to
2 percent of their after-
tax income to help
launch a new savings
and loan programme
aimed to assist families
who were still below
the poverty line
1996 School-feeding Programme to provide Expected to serve 29.28
Programme in supplementary food to million school students
IDT village primary school students
in IDT villages
Contd...
190 Inequality and Social Justice in Asia

Contd...
Year Policy/Program Information Evaluation
Post Soeharto (Reformation Era)
1998 Special Market OPK commenced by In December 1998, nearly
Operations (OPK) as distributing 10 kg of 9.3 million households
part of social safety rice each month to were beneficiaries. Budget
net programme eligible households at for Social Safety Net
subsidized price of reached Rp 9 trillion
Rp 1000/kg.
1998 Employment Gene- Programme to provide Padat Karya has grown
ration (Padat Karya income support to the to include 13 sub-
Programme) unemployed and the programmes involving
poor; obtain production 8 executing agencies and
of benefits in the form reaching more than 300
of lasting social capital, districts
including people’s skills
and enterprise
1998 SME schemes Government allocated Budget on 1998-99 was
Rp 20 trillion to provide Rp147.2 billion or 0.9
SMEs with technical percent to GDP
assistance and access
to credit
Propenas era Economic develop- Sustainable develop- Inconsistency of national
(2000–2004) ment with ‘Ekonomi ment, poverty reduction, programmes, due to
Kerakyatan’ principle employment creation, political instability and
social justice, public systemic transition
participation, equal,
regional autonomy
principle, etc.
1999, 2001 Regional Autonomy According to this law, Regional disparities were
and after Law established natural-resource-rich likely to increase. Balanc-
provinces will have ing funds mechanism was
largest share for natural started via DAU, DAK and
resources revenue Dana Bagi Hasil
2003 State Finance Law Policymaking process
No 17/2003 was changed
Bappenas no longer
has budgetary rights
2004 Law on National It regulates planning Planning, budgeting,
Development and budgeting process monitoring, and policy-
Planning System in short and medium making on national
established term development became
more complex
Middle Term To achieve economic • Government target on
Development stability which will economic develop-
Plan (2004– provide employment ment: poverty
2009) opportunities and reduction, agriculture
Contd...
Economic Inequality in Indonesia 191

Contd...
Year Policy/Program Information Evaluation
minimum needs revitalization, manu-
availability, and also facturing competitive-
to built strong foun- ness, improved non
dation for sustain- oil-gas export, improved
able development investment climate,
(vision) support to SMEs,
labour market, macro-
economic stability
• Government target on
reducing regional
inequality: village
development and
regional disparities
reduction focused on
less developed region
• Government target to
improve HDI: provide
basic access to
health, education, and
social protection;
increasing population
control; and religious
aspect on develop-
ment
Long-Term Indonesia yang There are 2 missions Reduction on inequality
Development Maju, Mandiri dan which strongly related and regional income
Plan (2005– Adil (vision). with equity: (a) Develop- disparity; food availability
2025) ment is equal for all and for all; and to serve and
social justice; and improve public housing
(b) social welfare to and infrastructure.
achieve national Improved human capital;
competitiveness and infrastructures
development agenda;
employment opportunities;
non discriminative
development agenda,
reduce poverty rate;
spatial development
Government Social Protection Programmes under this Programmes target to 19.1
Work Plan and Support Cluster cluster: Raskin (Rice for million households
2009 the Poor), Jaskesmas,
BLT (Bantuan Langsung
Tunai), Programme to
Increase Farmer Wel-
fare and Programme
Keluarga Harapan
(Family Hope Plan)
Contd...
192 Inequality and Social Justice in Asia

Contd...
Year Policy/Program Information Evaluation
Social Empower- PNPM Mandiri (National Each kecamatan which
ment Cluster Programme on Social included in this programme
Empowerment) was the will have Rp 3 billion/year
focus of this cluster as government support.
The target is to cover
5720 kecamatan
SMEs Empower- Focus to improve busi-
ment Cluster ness climate such as
ease to do business,
special tax for SMEs,
and Kredit Usaha
Rakyat (People Busi-
ness Credit)
Sources: Booth, Anne (ed),1992. The Oil Boom and After: Indonesian Economic Policy and
Performance in the Soeharto Era. Oxford University Press. Booth, Anne and Peter McCawley (ed),
1981. World Bank, 1994. Thee Kian Wee, 2004. ‘Indonesia’s First Affirmative Policy: The Benteng
Programme in the 1950s’. Paper presented at the Workshop on the Economic Side of Decolonization,
Yogyakarta, 18-19 August 2004. National Law on RPJP, RPJM and Propenas. Financial Statement,
Ministry of Finance, various years. Pidato Repelita, various periods. Sjahrir, 1986, Ekonomi Politik
Kebutuhan Pokok: Tinjauan.

period. These measures reflect the chang- Overall, with the exception of the early
ing philosophy and mood of the times from Sukarno years, the primary policy concern
direct support for indigenous entrepreneurs of the New Order governments was the
in the Benteng Programme of the 1950s to containment of absolute poverty. This
the basic health and education programmes policy worked well in the first easy phase
of the 1970s, to conditional cash transfers of growth, resulting in a relatively broad
of the current administration. sharing of economic growth. However, by
These programmes reflect a rather the time of the launch of major structural
meander ing and haphazard approach changes in the economy, the political mood
towards inequality moving from directly had shifted away from income redistri-
focusing on redistribution of assets to bution or concern for equality to the
attempts to reduce the proportion of the priority of achieving rapid economic
population below the poverty line. On the growth as the core legitimizing principle of
whole, programmes such as INPRES and a consolidated authoritarian regime.
rural credit programmes of the New Order Given the high probability of rising
were attempts to pull people out of abject inequality within an open economy
poverty, rather than change the distri- operating under a globalized market place,
bution of income for the economy as a the principal question facing the govern-
whole. In fact, the asset data, especially in ment is the formulation of an appropriate
manufacturing, the fastest growing sector in policy agenda to tackle inequality. Given the
the 1980s and 1990s was characterized by neglect of inequality as a policy concern in
the sharpest concentration of assets. the past and the serious data problems
Economic Inequality in Indonesia 193

which bedevil measurement of inequality encouraging new start up firms and

in Indonesia at present, it may be premature joint ventures with foreign firms.
to arrive at a well formulated policy package • A sharp upward revision in taxes
to contain inequality. Nevertheless, a related to property to bring these to
number of preliminary recommendations levels on par with similar economies
can be made as key steps towards the in other parts of the world.As a first
formulation of a more comprehensive step it would be necessary to make
policy towards income inequality. The land and property registration
central elements of such a policy are mandatory. A second step would be
summarized below: to commission a special study on the
appropriate bench mark and how
• A social consensus on the degree of such taxes can be collected in the
income inequality tolerable in the future.
country and its key components. • A renewed concern for raising
Such a consensus will help successive human development achieve-
governments to define indicators ments of the past by improving the
and activities which maintain quality of essential public services
inequality within a targeted range. and inclusive access to them by all
One immediate option is to ensure segments of the community. This
that such equality targets are will not only assist in ensuring the
enshr ined in the design of the upward social mobility of poor
2009–2014 medium term develop- households but also provide them
ment plans. Clearly, much public with a minimum base of skills which
consultation needs to go into such can be upgraded in the work place.
target setting but such a process helps • Careful monitor ing of inter-
to highlight the fact that concepts of regional economic inequality with
inequality are as much a matter of the DAK, and special financial grants
political and ethical preference as have to be made to assist the
technical economic targets. backward and the most disadvan-
• A determined effort to reduce asset taged regions. One model would be
concentration in industry and to use the Fiscal Commission
services by a tighter application of approach common in India where
anti-trust law as well as by pre- special quasi-judicial grants are made
venting the creation of new to provincial governments in case
monopolies through de facto state particular emergencies and special
guarantees. This in effect would needs arise. Another measure is to
entail the unravelling of the structure augment the capacity of regional
of ownership and control in business governments to budget and plan
in Indonesia, an area in which no public expenditure and thus improve
reliable information is available. It project delivery, a matter of some
would also require the promotion of concern at present when many
more competition in indusry. This regional governments are unable to
can be facilitated by promoting and spend budgets allocated to them.
194 Inequality and Social Justice in Asia

The above menu of policy measures has households. The selection of a sample of
the merit of shifting attention back to households is made by classifying
inequality and away from an exclusive enumeration areas into strata, choosing
concern with absolute poverty issues. The several enumeration areas from each
two are clearly intertwined. Policy stratum, and then selecting households from
approaches of the past have tended to focus each of the selected enumeration areas. In
on only one aspect of the problem, that of the SUSENAS, province, urban/rural, and
absolute poverty. The arguments put forth expenditure categories are regarded as strata.
provide a basis for a rebalancing of the Since 1993 the SUSENAS have been
agenda towards a joint concern for poverty fielded yearly and is representative at the
and inequality, something that lies at the level of the district (Kabupatan/Kota). Each
heart of the human development and survey has a sample size of about 200,000
capability approaches to development. households (close to 900,000 individuals).
However, prior to 1993 only samples of
about one-quarter the size are available and
APPENDIX 1 the survey is not representative at the
Measurement of Consumer district level. The survey instrument con-
Expenditure in Indonesia: tains a core questionnaire, which collects
Comments on the SUSENAS information about demographic characte-
Data ristics of all household members, their edu-
The National Socio-Economic Surveys cation, labour market activities, and health.
(SUSENAS) was conducted for the first Since its inception, SUSENAS have
time in 1963 in order to collect data on the placed an emphasis on collecting household
demographic and socio-economic consumption data in order to estimate the
characteristics of household members, incidence of poverty and the degree of
which include education, age, employment inequality. There are two kinds of
status, consumption expenditure and living consumption items in the questionnaire:
condition. Since then, these surveys have food and non-food items. There are
been undertaken regularly. The SUSENAS altogether 203 items in the food category
was intended to cover all of Indonesia, but and a total of 103 items in the non-food
the early surveys did not include all category. The Central Bureau of Statistics
provinces. It was not until 1982 that all has also been trying to collect household
provinces including East Timor were income data in the SUSENAS, but due to
covered. The first SUSENAS in 1963 the relative inaccuracy of the data, it has not
covered only five Java provinces and selected published the results regularly.
16,000 households as a sample. In the context of decentralization, the
Since 1986, SUSENAS have used a importance of poverty measurement at the
combined stratified/two-stage random district level is gaining importance in
sampling technique with the main sampling Indonesia. Local level planners need local
frame consisting of a list of enumeration level information that is timely and accurate.
areas which are formed by breaking down BPS has started to calculate and make
every village into smaller geographical units available district level poverty estimates
with about 200 to 300 homogeneous based on the core, but these estimates are
Economic Inequality in Indonesia 195

subject to large variance as sample sizes at the formal sector accounts for only 30
the district level very small.As a result, some percent of the labour force and do not take
districts have funded enriched sampling of into account the dynamic nature of poverty.
the SUSENAS to improve their poverty BPS plans to pilot a household listing in
estimates. 2005 which considers both individual and
The SUSENAS provides reliable household characteristics and the target
information on changes in welfare on a number of poor to be identified based on
consistent basis. But it must be noted that national and regional poverty estimates.
the picture presented is static, based on a The challenge will be to create flexible rolls
measurement of one point in time. Poverty that are based on generally accepted criteria
is dynamic and vulnerable households can that can be developed and maintained at a
move in and out of poverty as a result of reasonable cost.
local or widespread shocks such as personal In the surveys, however, it is widely
illness, natural disasters, or major changes in believed that, non-food expenditures are
prices of basic commodities. These inter- progressively understated by larger-income
temporal changes are not captured by the households, especially in urban areas, and
SUSENAS. BPS has attempted to develop thus expenditure inequalities are
current indicators of poverty using existing underestimated if they are measured based
and frequently reported data collected for on the SUSENAS data. Secondly, it is
other purposes. Real wage data has been reported that there is a wide discrepancy
found to be well correlated with changes between the total household expenditure
in monetary poverty. Real wage data is estimated based on the SUSENAS data and
reported for the national level and provides the total private consumption expenditure
policymakers with useful early information from the national accounts. Thirdly, it is
about potential changes in welfare. Leading said that the survey months covered in the
indicators of poverty are also needed at the SUSENAS are different from one survey to
district level where local governments are another, and thus care should be taken
responsible for providing social safety net when interpreting the SUSENAS time-
support. In 2005, a pilot effort was under- series data of consumption expenditure.
taken with BPS assistance to devolve the
collection and analysis of nominal and real Data Basket
wages to five trial districts. Given the decen- • Food (cereals, tubers, fish, meat, eggs
tralization context coupled with the size and milk, vegetables, legumes, fruits,
and heterogeneity of Indonesia in terms of oil and fats, beverage stuffs, spices,
geography, markets, and access, local infor- miscellaneous food items, prepared
mation for local level decision-makers is food and beverages, alcoholic
imperative. beverages, tobacco and betel)
While sample statistics descr ibing • Non-food (Housing and household
changes of welfare for populations are facility, goods and service, education
readily available, there is also a need for tools cost, health cost, (clothing, footwear,
to identify poor individuals. Traditional and headgear), durable goods, taxes
means-testing based on employment status and insurances, parties and
and reported incomes are not viable where ceremonies)
196 Inequality and Social Justice in Asia

References Akita, Takahiro and Armida S. Alisjahbana,

‘Regional Income Inequality in Indonesia
ADB, Indonesia: Country Gender Assessment,
and the Initial Impact of the Economic
2006.
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End Notes
1. Also see Kaldor (1956).
2. World Bank’s main report on The East Asian Miracle: Economic Growth and Public Policy (1993) provided a
glowing account of the achievement of the East Asian region arguing that a combination of conservative
macroeconomic policy, export-led growth and investment in human capital had succeeded in triggering nothing
short of an economic miracle in these countries.
3. As Bruno, Ravallion and Squire (1998) point out, the relationship between distribution and growth is anything
but simple, questioning a frequent assumption that countries might face a trade-off between growth and equity.
They write ‘there does not appear to be any intrinsic overall trade off between long-run efficiency and equity. In
particular, policies aimed at facilitating accumulation of productive assets by the poor, when adopted in a relatively
non-distorted framework, are also important instruments for achieving higher growth. The problem should not
be posed as one of choosing between growth and redistribution’ (p. 138).
4. Stability in patterns of economic inequality is not unusual however. As Bruno, Ravallion and Squire (1998) in a
study of inequality in 45 countries point out, inequality rankings across countries remain highly stable over
time. The rank correlation coefficient for gini indices in these countries between the 1960s and 1980s was 0.85.
At the same time around 87 percent of total inequality in these countries was explained by inter-country variations
in inequality and only 6 percent accounted for by in-country differences. Just as significant is the fact that in-
206 Inequality and Social Justice in Asia

country gini indices showed little variation over time. Only 17 out of 45 countries had a significant trend in gini
indices, either positive or negative, and out of these 12 countries exhibited very small time trends less than
plus/minus 0.4 percent.
Ravaillon (2001) and (2007) argues against taking such averages of the gini coefficients for granted and the
need to examine periods of changes in the gini and the in-country determinants of such shifts in inequality. The
idea that growth is distributional neutral as implied by the constancy of gini across countries with very different
growth patterns does not preclude the need for detailed country level accounts of factors which might account
for a given distribution of income, a sentiment echoed by Kanbur (2004).
5. There is by now a large volume of literature on the impact of initial patterns and extent of inequality on subsequent
growth and poverty reduction. One strand using a political economy approach (Alesina and Perotti, 1993, and
Alesina and Rodrik, 1994, and Alesina, 1998, tends to focus on the link between initial inequality and the political
pressures for redistribution generated by the median voter. This results in increases in capital tax rates which
discourage investment and future growth. The other strand relies on the power of a wealthy elite to obtain
differential treatment through lobbying and, therefore, over investment in assets, e.g. land owned by the elite
(Persson and Tabellini, 1994). The same logic applies in models which focus on the power of lobbies to thwart
the implementation of stabilization reforms which might change the distribution of income. The implication of
such models is, however, that the economic system is caught in an inequality trap in which initial inequalities
in income distribution are perpetuated into the future. This partially explains the stability in gini coefficients in
some economies over time.
The other strand is the impact of asymmetric information on the supply of credit to the poor who are, therefore,
prevented from making productive investments into schooling and health such as to escape from the ranks of
the poor (Bannerji and Newman, 1993).
6. Hill (1991), p. 3.
7. See Mishra (2000) for a comparison between Indonesia’s systemic collapse in the late 1990s and the situation
in former USSR following the fall of the Berlin Wall in 1990.
8. The Atkinson Index is one of the few inequality measures that explicitly incorporate normative judgements about
social welfare (Atkinson 1970). The index is derived by calculating the so-called equity-sensitive average income
(ye), which is defined as that level of per capita income which if enjoyed by everybody would make total welfare
exactly equal to the total welfare generated by the actual income distribution.
9. While less commonly used than the Gini coefficient, the Theil index of inequality has the advantage of being
additive across different subgroups or regions in the country. The Theil index, however, does not have a
straightforward representation and lacks the appealing interpretation of the Gini coefficient. The Theil index is
part of a larger family of measures referred to as the General Entropy class.
10. Changes in sample size and coverage are described in Appendix 1.
11. Akita and Lukman (1995), Akita, Lukman and Yamada (1999), Asra (1989,1999, 2000), Booth (1992, 2000),
Booth and Sundrum (1981), Boediono (1990), Alatas and Bourguignon (2005), Sujdana and Mishra (2004),
Alisjahbana (2001), Dhanani and Islam (2000), Hughes and Islam (1981), Kadarmanto and Kamiya (20040,
Ravaillon and Huppi (1991), Resososudarmo and Vidyatama (2006), Skoufias, Suryahadi and Sumarto (2000),
Suryahadi and Sumarto (2003), Suryahadi, Sumarto and Pritchett (2003), Suryadarma et al. (2005, 2006),
Tjiptoherijanto and Remi (2001), Uppal and Handoko (1986), Yoneda (1985) and Yusuf (2007), Frankema and
Marks (2007).
12. Anne Booth (1992) writes, ‘A serious criticism of the consumer expenditure survey data is that they consistently
show a lower rate of growth in the 1970s for Indonesia as a whole than the household consumption component
of the national income accounts. This is widely considered to be due to progressively greater understatement
of non-food expenditures by wealthier households, especially in urban areas (p. 330).
13. For a much quoted comparison between Indonesia and Nigeria see Bevan et al. (1999).