Indonesia: Rising Inequality Risks Long-Term Growth Slowdown

December 8, 2015

New World Bank Report Outlines Policy Options to Curb Income Disparity and Protect the Poor 

Jakarta, December 8, 2015: Inequality in Indonesia is climbing faster than in most of its East Asian neighbors, raising the concerns of many Indonesians, says a new World Bank report.

According to a 2014 survey on public perceptions of inequality, most Indonesians see ‘very unequal’ income distribution and urge government action to reduce inequality.  Over the last 15 years, the Gini coefficient – a measurement of inequality – has increased sharply in Indonesia, climbing from 30 in 2000 to 41 in 2013, where it remains now.

With the potential of creating social tensions, inequality constrains a country’s growth potential, according to the report Indonesia’s Rising Divide.

“Despite impressive economic growth and poverty reduction, equity in growth has been more elusive in Indonesia.  With the affluent racing ahead faster than the majority, in the long term Indonesia risks slower growth and weakened social cohesion if too many Indonesians are left behind. Their lost potential is Indonesia’s lost potential,” said Rodrigo Chaves, World Bank Country Director for Indonesia at the report launch attended by policy-makers.

Concern about the long-term implications of inequality influenced 60 percent of survey respondents to say that they are willing to accept lower economic growth in exchange for lower inequality.

In response, the Government is targeting to lower the Gini coefficient to 36 by the year 2019, and the example of countries such as Brazil show that public policy can help reduce inequality, particularly if the policies address the main drivers of inequality in Indonesia: inequality of opportunity, inequality in the labor market, high concentration of wealth, and unequal resilience to shocks.

“Indonesia can improve infrastructure in the provinces so that children in remote provinces have an equal start to life – through better health-care and education – that would determine their opportunities later in life. When these children enter the labor market, Indonesia can provide skills training to informal workers so that they are not trapped in jobs with low pay and little mobility. And many fiscal policy options are available that would improve revenue and redirect spending to programs that directly benefit the poor,” says Vivi Alatas, Lead Economist at the World Bank in Jakarta.

Specifically, social protection programs such as conditional cash transfers and education subsidies, as well as skills training for informal workers who missed out on a quality education, can help the poor and vulnerable climb out of hopeless situations.

Collecting more would also help bridge the income divide. Revenue from personal income tax currently makes up only 10 percent of tax revenues; a broader tax base would provide the revenue required for increasing spending on infrastructure, health and education, social assistance and social insurance.

“Government policies can reduce the frequency and severity of shocks, and ensure all households have access to adequate protection when shocks occur. These are long-term but needed investments for Indonesia,” says Matthew Wai-Poi, World Bank Senior Poverty Economist and lead author of the report.

Other options for government include:

  • Improving local service delivery. A key to a better start for the next generation lies in enhanced local service delivery, which can improve health, education and family planning opportunities for all.
  • Promoting better jobs, through greater investments in infrastructure, a more conducive investment climate and a less rigid regulatory approach.

Indonesia's Rising Divide was prepared with the generous contribution from Australia's Department of Foreign Affairs and Trade.

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