Rising Income Inequality in Indonesia: the Social Threat

On the one hand, Indonesia has done a great job in expanding its economy in the post-Suharto era. Indonesia became a member of the G20 group of major economies in 2008 as its gross domestic product (GDP) expanded from USD $163.8 billion in 1999 to USD $888.5 billion in 2014. Meanwhile, the poverty rate of Indonesia fell from 24 percent in 1999 (the rate had risen drastically due to the impact of the Asian Financial Crisis in the late 1990s) to 11.1 percent in 2015. Robust economic growth added 45 million jobs to the Indonesian economy during this period.

On the other hand, income distribution inequality in Indonesia has been rising amid this period of economic expansion and poverty reduction. This implies that the richer segments of society have been benefiting more from the country's economic growth than the poorer segments. This situation is dangerous as it jeopardizes the country's social cohesion, as well as political and economic stability over the long term.

Rodrigo Chaves, World Bank Country Director for Indonesia, said in December 2015 that widening income inequality needs to be dealt with as countries with more equal wealth distribution tend to grow faster and more stably. He added that inequality is climbing faster in Indonesia than in most other Asian countries. This is a major cause for concern and alarm. The table below shows that, on average, Indonesia's Gini ratio climbed significantly between the 1990s and 2000s (similar to the case of China). Although the Philippines, Malaysia and Thailand currently have higher Gini ratios (implying higher income distribution inequality) than Indonesia, these countries show a declining trend compared to the previous decade, whereas Indonesia's Gini ratio has been rising.

Asian Countries with Highest Average Gini Ratio:

Country	Gini Ratio in  the 1990s	Gini Ratio in  the 2000s
China	34	45
Indonesia	30	39
Laos	32	38
India	34	39
Vietnam	37	37
Cambodia	39	38
Philippines	45	44
Malaysia	49	47
Thailand	46	41

^{Source: World Bank}

In its December 2015 report titled "Indonesia's Rising Divide", the World Bank advises the Indonesian government to tackle the following four drivers of inequality: (1) inequality of opportunity, (2) inequality in the labor market, (3) high wealth concentration, and (4) unequal resilience to shocks. These drivers can be combated through the implementation of the correct policies, such as policies that aim at improving local service delivery (enhance health, education and family planning programs), strengthening social protection, promoting better jobs as well as skills training opportunities for workers, implementing a fairer taxation system, and using tax revenue to reduce inequality.

Proportion of Total National Wealth Controlled by the Richest 1% of the Population:

Country	Proportion
Japan	17.9
Australia	21.1
France	21.4
Great Britain	23.3
Canada	24.4
Germany	28.1
Singapore	28.6
Norway	28.9
Denmark	29.3
Austria	29.3
Sweden	30.8
Switzerland	30.9
Taiwan	32.7
South Korea	33.9
China	37.2
USA	38.4
India	49.0
Indonesia	50.3
Russia	66.2

^{Source: World Bank}

It is also important to note that - although Indonesia managed to reduce its poverty rate to around 11 percent in 2015 - there is a very large group of people living just above the poverty line, implying that a relatively small (inflationary) shock can push these people into full poverty (from near-poverty). According to Statistics Indonesia there are around 29 million poor people in Indonesia in 2015. However, according to the World Bank the number of near-poor Indonesians (living just above the poverty line) numbers 68 million.

Indonesia's Labor Force & Unemployment Statistics:

	2011	2012	2013	2014	2015
Labor Force	119,399,375	120,320,000	120,170,000	121,870,000	122,380,000
- Working	111,281,744	113,010,000	112,760,000	114,630,000	114,820,000
- Unemployed	8,117,631	7,310,000	7,410,000	7,240,000	7,560,000
Unemployment (% of labor force)	6.6	6.1	6.2	5.9	6.2

Indonesian Poverty & Inequality Statistics:

	2007	2008	2009	2010	2011	2012	2013	2014	2015
Relative Poverty (% of population)	16.6	15.4	14.2	13.3	12.5	11.7	11.5	11.0	11.2
Absolute Poverty (in millions)	37	35	33	31	30	29	29	28	29
Gini Coefficient/ Gini Ratio	35	35	37	38	41	41	41	41	-

^{Source: Statistics Indonesia}

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