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Rising inequality a ticking timebomb in Indonesia

Unveiling Indonesia’s 2018 budget in his State of the Nation address last month, President Joko “Jokowi” Widodo emphasised the importance of ensuring economic equality and social justice for the people. The president is concerned about the progress of poverty reduction and increasing income disparity despite various government efforts to tackle these problems.

Rising inequality a ticking timebomb in Indonesia

Indonesian President Joko Widodo delivering his State of the Nation address last month. He has promised to reduce poverty, although there have been doubts about whether his efforts have been successful so far. Photo: AP

Unveiling Indonesia’s 2018 budget in his State of the Nation address last month, President Joko “Jokowi” Widodo emphasised the importance of ensuring economic equality and social justice for the people. The president is concerned about the progress of poverty reduction and increasing income disparity despite various government efforts to tackle these problems.

Rising inequality is seen as a “time bomb” which weakens social cohesion and makes the country more prone to social unrest. According to a survey by Statistics Indonesia (BPS) in March this year, the number of poor people has increased.

There are 27.7 million poor (defined as those with per capita expenditure of less than S$37 per month) in Indonesia, an increase of 6,900 people from the number in September last year. Moreover, inequality has been relatively unchanged despite many subsidies (eg electricity, housing, healthcare) and social assistance programmes (eg scholarships, cash transfers, village funds, rice for the poor, low-interest credit for Small and Medium Enterprises) provided to the poor in order to reduce income disparity.

The Gini ratio, which is a measure of income inequality (zero represents perfect equality and one represents complete inequality), is still high and has not changed much from 0.394 in September last year to 0.393 in March this year.

To his credit, Mr Widodo has managed to bring down the ratio from 0.41 when he first became the President to 0.397 in March last year.

During his election campaign, Mr Widodo had promised to reduce the poverty rate to 7-8 per cent by 2019 (it is now 10.6 per cent) and to reduce inequality, targeting a Gini ratio of 0.36 by the end of 2019. In view of this, his focus has shifted from achieving higher growth to lower but more sustainable and inclusive growth.

The proposed budget reflects the government’s efforts to improve social equality, as the spending on poverty alleviation and social assistance programmes will be increased by 28 per cent to 293 trillion rupiah (S$30.3 billion), or around 13 per cent of total spending.

Mr Widodo’s move is clearly aimed at building public support leading up to the 2019 general and presidential elections. According to a nationwide survey commissioned by Iseas — Yusof Ishak Institute, less than half of Indonesians agreed that the Jokowi Administration had improved conditions for the poor in comparison to the previous administration under Susilo Bambang Yudhoyono (SBY).

This suggests that there are doubts about the success of Mr Widodo’s poverty eradication programmes so far.

The survey also revealed two other areas of concern among Indonesians — lack of ease in finding jobs and rising costs of living.

Indeed, a study by Sarah Dong and Chris Manning published in the Bulletin of Indonesian Economic Studies found that total employment growth in the first two years of the Jokowi Administration was slower than it was during the period under SBY. This is partly because of slower economic growth and structural changes in the economy. The latter affects the share of employment in different sectors.

To tackle this issue, under the proposed 2018 budget, the government has increased spending allocation for relevant ministries — such as the Ministry of Education, the Ministry of Manpower and the Ministry of Industry — to support vocational education and training, a national apprenticeship programme, a skill development fund and a job-matching programme.

However, most of the programmes were meant to address technical skill shortages and mismatches, while lacking a holistic view that addresses systemic problems. For instance, due to technological advancement, more investments are flowing into capital-intensive sectors rather than labour-intensive ones. This means the labour market needs more highly skilled labour, which cannot be sufficiently supplied locally without substantial retraining and upgrading of skills.

As for the public unhappiness that costs have gone up, this is partly due to the removal of fuel and electricity subsidies over the last few years.

In particular, the government’s removal of electricity subsidies from January to July this year has affected around 19 million households, including not only the middle-income but also the poor. Given this, the government must find measures to minimise the inflationary-effect of the electricity tariff adjustment, including by controlling the price of volatile food and transportation fares.

To be sure, the survey shows that the majority of respondents are optimistic about Indonesia’s economy.

Most expect the economic conditions in the country to improve in a year, and more importantly, most expect their households’ economic conditions to be better too.

This finding demonstrates strong public perception that Mr Widodo’s handling of the economy will bring real benefits, not only for the economy in general, but more specifically for individual households. However, public perception may change quickly if the outcome of the implementation of key economic and social programmes (infrastructure, connectivity, energy, social assistance, etc) does not match people’s expectations.

For effective implementation, the government must work seriously to remove long-standing bureaucratic constraints that delay the process of budget disbursement.

What is also important is the country’s capacity to collect tax, as tax revenue realisation has reached only around 82-83 per cent of the target in the last two years. Weak tax revenue limits the government’s fiscal strength and its ability to meet big spending commitments. This increases the risk that some of the key infrastructure, poverty alleviation, and social assistance programmes may be scaled down or even put on hold, thus undermining the Indonesian government’s effort to improve social equity.

ABOUT THE AUTHOR:

Dr Siwage Dharma Negara is Fellow and Assistant Coordinator of Indonesia Studies Programme at ISEAS Yusof Ishak Institute.

Its Indonesia National Survey Project findings will be released at a public seminar on September 7.

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