indonesia- trends in income
TRANSCRIPT
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Economic Inequality inIndonesiaTrends, Causes and Policy Response
SATISH CHANDRA MISHRA
Introduction: Understandingthe Context
The subject of economic inequality has
undergone a renaissance through time. It
once enjoyed centre stage in the classical
economics of Ricardo and Marx, before
being moved to the sidelines with the
emergence of neo-classicism and its
emphasis on the efficiency of resource
allocation. However, the issue re-emerged
in a different form espoused by Keynes and
the politics of the New Deal.1
Economic inequality assumed a
paradoxical flavour with the emergence of
communist states of the USSR and later
China. The economics of the welfare state
recognized the popular appeal of universal
entitlement to basic public goods and
services in democratic regimes. However, its
politics carefully contained the more radical
elements of socialist thinking by resisting
wholesale nationalization of key industries
and banks which had become the opening
song of new socialist revolutions world-
wide. The utopian appeal of Marx and his
exhortation to create a society driven by the
slogan ‘to each according to his needs from
each according to his ability’, was
increasingly replaced by the language of
equality of opportunity, social inclusion and
human rights.
For developing countries, inspired by
the political weight and early successes of
the USSR, income distribution remained
a fascinating topic. Again there were some
Inequality and Social Justice in Asia140
interesting paradoxes. Many, if not most,
post-colonial governments were inherently
attracted to the idea of a ‘fair distribution’
of income, not only among different
segments of the population within their
borders but also across the global economy.
Equal opportunity for citizens was an
appealing concept for developing countries
struggling to build nation-states and create
the technical expertise needed to replace
departing colonial administrations and
businesses. The concept of equality was
equally important on a global level as
developing countries struggled to find a
place in the economic sun which shone
brightly for the rich industrialized countries
and dimly for the majority of less affluent
nations.
Lacking robust business enterprises and
technical expertise, post-colonial govern-
ments soon recognized that the more just
world that they sought could only be
realized through the agency of the state.
Even the much admired Soviet Union
could not escape the ironies of ‘primitive
socialist’ accumulation by which peasants
were starved to feed the cities and build the
economic scaffolding of the new socialism,
which included heavy industry and the new
cities which went with them.
Early models of development empha-
sized the ‘big push’ and capital accumulation
which only a modern industrial sector
could provide. Inequality was just a step in
the scheme of growth. The engine of
growth in the much quoted Lewis model
focussed on the transfer of labour from the
low productivity subsistence sector to the
high productivity modern sector. This
provided an early justification for the
statistical generalizations of economic
inequality during the process of develop-
ment, captured in the much revered
Kuznets U curve hypothesis by which
economic inequality was expected to rise
and then fall dur ing the course of
development.
The Kuznets U curve succeeded in
generating more than its fair share of
academic and policy related controversy.
First, there was the comforting conclusion
that economic inequality was just a passing
phase. Indeed, an acceleration of economic
growth it was argued could even shorten
the length of the shift from wider to
narrower economic inequality. Too much
preoccupation with radical programmes of
asset redistribution and nationalizations
were according to this view, considered
redundant and socially risky.
Second, a socially unacceptable rise in
economic inequality as predicted by the
Kuznets U curve might result in putting an
end to the economic reforms needed in the
early phases of development as political
support for such programmes evaporated.
Another problem envisaged was the
probable emergence of new economic and
political elites which could slow down the
process of income equalization in the
course of development. This second possible
implication of the Kuznets hypothesis raised
the possibility of deliberate government
policy to limit the rise in inequality. This
was achievable through a very diverse policy
mix ranging from progressive taxation on
one hand, to countervailing powers of
public enterprises and labour unions with
respect to business enterprises on the other.
The emergence and the remarkable
economic performance of the Asian
‘Miracle’ countries however, transformed
traditional views on economic inequality.
The presence of these Asian countries as
Economic Inequality in Indonesia 141
serious economic players in the global
market, from the late 1970s onwards
provided living proof (as opposed to
academic calculations from an army of
economic technicians), that growth does
not always have a negative impact on
income distribution. These were economies
which appeared to have achieved record
rates of high growth with low and stable
levels of economic inequality in a relatively
narrow span of just three decades.
The answer as provided by the World
Bank’s much quoted East Asian Miracle
study was an open economy, export
orientation, investment in human capital
and small states.2 These countries provided
a salutary lesson for the rest of the develop-
ing world. Economic protectionism, large
inefficient public enterprises backed by
dirigiste states operating behind high tariff
and non-tariff barriers were viewed as the
prime factors behind faltering growth, high
income inequality and corrupt bureau-
cracies. The conclusion therefore was that
the Kuznets U was not an inevitable feature
of economic growth. It could be avoided
by prudent macroeconomic policies and
appropriate public expenditure allocations
channelled towards raising human capital.
The ‘miracle’ in East Asia was not merely
high economic growth, which had
occurred in many other countries including
the USSR. Rather, it was their ability to
combine high economic growth with
seemingly stable and low inequality in
incomes. Such ‘growth with equity’
outcomes were attractive not only from an
economic standpoint of being able to
choose policies which could raise living
standards and lower poverty in short spans
of time but also were just as attractive in the
realm of politics. They seemed to have
provided evidence, in a world of falling
communist dominos, that small states, free
markets and investment in basic education
and health could provide the fastest and
most effective means of raising the majority
of the population above abject-poverty
levels.
The success of the East Asian economies
from the 1970s to the advent of the Asian
Economic Crisis of 1997-1998 generated
support for the view that economic growth
could be accelerated without having to
worry too much about economic
distr ibution. This conclusion came to
influence the perception of both donor
countries as well as many international
institutions. The political inference of this
view was easy to anticipate. If economic
growth could be income distr ibution
neutral it could also be neutral with respect
to political regimes. This was a comfortable
assessment at the time of the Cold War since
it allowed developed countries of the West
to support Asian dictatorships as long as they
were anti-communist. The logic was simple.
If growth was distribution neutral and
distribution could be managed by a mixture
of macroeconomic and social service
oriented policies, there was little to choose
between dictatorships and authoritarian
regimes in terms of their ability to raise the
absolute poor above the poverty line.
The fact that East Asian economies were
also largely comprized of small states was
the additional icing on the political cake. It
further boosted the intuitive appeal of the
Reagan–Thatcher theory on large
government and protected markets. Rolling
back the state through a mixture of fiscal
conservatism, pr ivatization and the
introduction of market-like budget
allocation mechanisms in public services, all
Inequality and Social Justice in Asia142
fitted well with this new brand of
conservatism; one which gave primacy to
economic growth and relegated economic
distribution to the back burner. Issues
related to income distribution and hence
economic inequality were either those
which would be settled during the growth
process itself (as advocated by Kuznets), or
in situations where governments could only
intervene at their own peril.
Gradually, the complexities of an
increasingly new globalized world began to
emerge. Factors such as capital market
liberalizations of the early 1990s and the
globalization of financial markets combined
with the rapid growth of world trade; the
collapse of the USSR and the botched
privatization of Russian public enterprises;
the instability of international capital
markets signalled by the Mexican Financial
Crisis (1994) and the Asian Financial Crisis
only four years later, reflected these
complexities. Further, it has also been
recognized that mechanical modelling of
growth and distribution linkages3 leaves out
a huge spectrum of the cause and effect of
country-based policymaking which affects
who gains control over what and how much
resource at any given moment in history.
This is illustrated in recent times by events
such as the anti-globalization protests in
Seattle and at WTO meetings later; the
collapse of many a third world dictatorship
in favour of multi party democracy; the
emergence of radical Islam, the rise of
China and India, and the current global
financial crisis emanating from sub-prime
mortgage defaults in the US, culminating
with the largest bail out in economic
history. Economic modelling has to a large
extent given way to a philosophical
discourse—from the distribution of income
to fairness and economic justice; from the
percentage of the population below the
poverty line to capabilities, freedoms and
deprivations; from planning and projections
to participation and voice; from technical
certainty to political complexity and finally
from human capital to human development,
social capital and trust.
In a rapidly changing and less ideolo-
gically certain world, economic injustice
and the need to arrive at a ‘fairer’ more
‘equitable’ division of resources has assumed
greater importance in policy formulation.
For example, the ‘hearts and minds’
campaign of an Iraq or an Afghanistan is
centred on a fairer allocation of resources
to local communities. Perceptions of
economic and social injustice also fuel fears
of social instability in India and China as
income disparities noticeably worsen. The
same is true of the politics of climate change
and the protracted negotiations around
agriculture subsidies in the Doha Round.
It is no longer the simple analytics of a
Kuznets U which is driving this new found
concern with an age old political economy
theme.
Instead, it is the competition for political
space, for a larger share of the global
economic pie and for the creation of a
physically safe world fr iendly to open
commerce and labour movements that are
central to this renewed fascination with the
fairness and social acceptability of a given
pattern of income distr ibution. The
frequency and escalation of social conflict
in many countries, combined with political
democracy have also strengthened calls for
‘socially inclusive’ growth, and a more
equitable sharing of environmental and
infrastructure related burdens.
The above discussion provides a
Economic Inequality in Indonesia 143
background that addresses some very
cr itical questions relevant to an
understanding of Indonesia’s political
economy and its prospects for the future.
The most obvious of these are summarized
below.
First, is the fact that virtually all accounts
of income distribution in Indonesia during
much of the period after independence,
underscore both low levels of economic
dispar ity, as measured by per capita
consumption expenditure, and their relative
constancy over time.4 This is applicable to
both the aggregate gini coefficient for
Indonesia as a whole as well as the provincial
gini coefficient. The implication is that
high economic growth beginning in the
late 1970s combined with low income
inequality would have, even in the absence
of pro-equalizing policy measures produced
sharply declining poverty rates.
The East Asian Miracle and its
subsequent variants also suggest that the
contribution of low initial levels of income
and in some cases asset inequality,5 such as
through land reform in Taiwan, to the
growth with equity achievements, lay at the
heart of the region’s economic miracle. An
added feature of the Indonesian income
distribution is the fact that the partitioning
of aggregate inequality into inter and
intraregional segments shows a relatively
minor contr ibution of inter reg ional
inequality compared to intraregional.
An obvious paradox in the Indonesian
context lies in explaining how a diverse
archipelago of over thirteen thousand
islands managed to sustain persistently low
levels of economic inequality. A quotation
from a well known work on Indonesian
regional geography serves to highlight the
point:
‘Indonesia is one of the most diverse and
heterogeneous countries in the world.
The international debate of the 1950s and
the 1960s on dualism originated in
Indonesia, simulated by social and econo-
mic conditions in the colonial and early
independence eras; and ‘regionalism’—in
a variety of manifestations—has been a
preoccupation of all governments of
modern Indonesia. Its economy com-
prises both the advanced technology of
modern cities of Java and highly capital-
intensive extractive and processing
industries, as well as tr ibal groups in
isolated regions barely exposed to the
outside world. Its ecology ranges from the
intensive wet rice cultivation of ‘Inner
Indonesia’, supporting some of the most
densely populated areas on earth, to lightly
settled regions in the Outer Islands in
which swidden (slash and burn) agricul-
ture is still predominant. In its culture and
religion the country is equally diverse
containing about 300 ethnic groups and
nearly as many languages. And its
geography is such that some outlying
regions are closer to (and in the past had
stronger economic ties with) neigh-
bouring countries than with the national
capital, Jakarta, and Java more generally’.6
The constancy of economic distribution
against a backdrop of tremendous econo-
mic and social diversity over a five decade
period requires a deep analysis. It cannot be
just explained by analysing the data
in different ways to get time ser ies
distributions of the gini, its regional or
sectoral partitioning or by engaging in a
discussion of whether the Kuznets U is or
is not applicable to the case of Indonesian
development.
Inequality and Social Justice in Asia144
Additionally, the impact of the political
and governance system on the distribution
of income also needs to be studied.
Following the economic collapse in 1998
and the transition to democracy, governance
shortcomings in the Indonesian economic
and political system have come under
scrutiny. Criticisms range from the systemic
corruption and cronyism which became the
hallmarks of the New Order system, to
significant differences in the administrative
capacity of regional governments to
formulate and implement development
policy. Add to these the enclave-based
investment in much of Indonesia’s natural
resource sector and one gets a picture of
significant structural inequality in income
distribution. However, the central problem
is that this picture is not supported by much
of the published data on economic
inequality.
There is also the issue of differences in
income distribution brought about by a
decade of intensive reform following the
adoption of democracy. However, the
advent of democracy, in the midst of
Indonesia’s most severe economic crisis,
does not necessarily mean that the burden
of poverty reduction and an improvement
of income distr ibution should be the
responsibility of the new democracy.
Nevertheless, the impact of the new
political system on the distribution of
income remains a focal issue in a country
attempting to endorse the political
leg itimacy of this new system of
government.
The Indonesian case study on economic
inequality continues to draw substantial
interest, not only from the point of view of
data and its statistical variations, but more
so from resolving the gap between what the
data seems to imply against what the logic
of the development process would indicate.
Indonesia has undergone one of the fastest
rates of urban development in the world. It
has a highly diverse geography and large
pockets of natural resource enclave
development. For much of its post-
independence years it has been governed by
authoritarian regimes without much public
scrutiny or criticism. Its industrial sector is
dominated by a very small number of super
r ich ethnically distinct families. By
developed country standards it has a small
state and continues to keep its markets
open.
Important questions arise about how a
country with over three decades or more
of record economic growth behind it
manage to generate and maintain a
relatively low level of economic inequality.
It is also important to understand how
Indionesia ensures that its economic
distribution indices do not show significant
shifts over time despite the country
undergoing a ser ies of financial and
economic shocks, natural disasters and at
least two major changes in its entire system
of government.
These are important questions, answers
to which could provide some indications of
whether future economic growth in
Indonesia will push it in the direction of
rising inequality, increasing interregional
disparities, possible social conflict and severe
strains on its new political system. This
would not be surprising given the recent
record of rising global inequality and the
sharp increases in inequality in the midst of
economic transformations. A number of
Asian economies, the economies of Eastern
Europe and the former USSR, China and
India, point to new challenges towards
Economic Inequality in Indonesia 145
producing equitable and inclusive deve-
lopment in the future. The Indonesian
case study which is an example of one
where we would expect high degrees of
inequality, but detect relatively low levels of
it, may make a significant contribution to
the literature on the subject.
Economic Inequality inIndonesia: Patterns and Trends
Measuring Inequality in Indonesia
Consumer expenditure surveys are the most
frequently used tool to assess income
inequality. However, these surveys could
be inaccurate owing to shortcomings
ranging from respondent bias in revealing
actual consumption levels and frequency to
the nature of the consumption basket used
in estimating household consumer expen-
diture. Additionally since surveys focus on
households as opposed to individual
consumption there is a tendency to ignore
the dimensions of intra-household equity,
in particular gender biases in intra-
household income distribution. Other
weaknesses relate to variations in inter
country or interregional prices in the
estimation of cross-sectional gini coeffi-
cients, given the geographical differences in
relevant consumer prices.
Conceptually, the use of household
consumer surveys as a proxy for household
income faces both the problem of
respondent bias, in which higher income
households are reluctant to reveal their
income and savings levels. Added to this is
the fact of consumption smoothening
through either debt or income transfers
within the extended family. The eventual
result that is commonly observed is the
underestimation of total consumption
estimates based on household consumer
surveys compared to consumption estimates
derived from national income accounts.
This underestimation is generally quite
significant (See Table 1 and Figure 1). A
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.
Inequality and Social Justice in Asia146
undermine the estimation of inequality not
only at a point in time or over a long time
period, but across geographical borders as
well.
Apart from the weaknesses in consumer
surveys is the assessment of the broader issue
of inequality in assets. This assumes
significant importance, if initial asset
distribution is expected to influence the rate
and duration of future economic growth,
or help to explain how particular countries
can fall into an ‘inequality trap’. In such a
scenario, an analysis of asset concentration
at the beginning of the growth cycle and
how it changes over time is likely to have
an important bearing on determining
policy choices to reduce such initial
concentration of assets.
The political economy arguments
which usually are the foundation of the
concern with asset inequality are well
grounded in countries where government
and pr ivate business have a powerful
relationship, which undermines future
governance and market reforms. In the
context of East Asia, the success of
economic growth with sustained poverty
reduction in Taiwan, is often attributed to
the success of the radical land reform
programme initiated by the Kuo Mintang
government in the 1950s. Despite
Indonesia’s success in reducing poverty
dur ing the New Order per iod, the
implosion of the Suharto system of
government7 following the Asian Economic
Crisis of 1998 was largely attributed to the
inability of the political system to remove
entrenched corruption and cronyism that
primarily arose from acute wealth and asset
concentration.
Non-income indicators of inequality,
such as access to health, education and legal
FIGURE 1: Estimate of Private Consumption: Susenas andNational Account, 1969–1993
Source: BPS, National Accounts; BPS, Pengeluaran Untuk Konsumsi Penduduk Indonesia; and BPS,
Statistical Yearbook of Indonesia, various years.
Economic Inequality in Indonesia 147
redress are equally important dimensions of
inequality with an important bearing on the
degree and pattern of inequality in a given
social and political system. The focus on
income dimensions of inequality could
eventually produce an overstatement of the
degree of equality, or vice versa, in a given
region. In order to present a complete
picture of inequality, not only is the
statistical distr ibution of income and
expenditure needed, but more importantly,
an assessment of the notions of equity or
fairness across individuals, ethnic groups and
gender.
Finally, there is the broader question of
what type of inequality matters most in a
country. If the removal of absolute poverty
is the primary goal, then measures which
show greater sensitivity to the distribution
of income accruing at the lower end of the
distribution spectrum, such as the Atkinson
Index8, are likely to be more appropriate
indicators of inequality. Alternatively, if
inequality within and across provinces is
important, then the Theil index9 is likely to
be the best inequality measure. The gini
coefficient, which focuses on the entire
distribution of income rather than on any
part of it, is a popular measure for analysing
cross country growth-distr ibution
relationships.
Economic Inequality Over Time
Household consumer expenditure surveys
have been available in Indonesia since
1963.10 Despite some changes in sample
size, geographical and consumption basket
coverage, the gini coefficient derived from
the SUSENAS (Survei Sosial Ekonomi
Nasional/National Socio-Economic
Survey) data is widely used for a discussion
of inequality trends in Indonesia.
Figure 2 illustrates two broad features of
the Indonesian inequality picture. The most
FIGURE 2: Gini Coefficient in Indonesia, 1964–2007
Source: BPS, series of Susenas data.
Inequality and Social Justice in Asia148
outstanding feature is the relative constancy
of the overall gini, which barely changed in
the 43 years from 1964 to 2007. The gini
coefficient of household expenditure which
stood at 0.35 in 1964 rose fractionally to
0.36 four decades later in 2007. Despite the
Indonesian economy and society
undergoing a major transformation, the
aggregate gini fluctuated only marginally
within the range of 0.32 to 0.36.
The stability of income distribution is
further illustrated in Table 2 which presents
the shares of household consumption
expenditure. The ratio of the top 20 percent
to the bottom 40 percent of consumer
households barely moved from 2.07 in
1963, to 1.87 during the height of the Asian
financial crisis in 1999 and the collapse of
the New Order government, before
reverting to the same level of 2.1 by 2005.
This relatively constant trend is also
reflected in the movements of the shares of
total expenditure of the lowest 40 percent,
middle 40 percent and top 20 percent of
households. The consumption share of the
bottom 40 percent shifts only slightly from
19.4 percent in 1963 to 20.4 percent in
1990 and to 20.2 percent in 2005. The top
20 percent enjoy a share of around 40 to
42 percent in the same period with no
noticeable trend.
Rural economic inequality in Indonesia
tends to be slightly lower than in urban
areas. As indicated in Figure 2 the rural
gini coefficient stood at around the average
aggregate gini in 1963 but fell thereafter to
a low of 0.25 by the end of the 1980s only
to rise again to 0.27 by 2005. Inequality in
urban areas was higher and close to the
national average. The influence of the urban
gini on the national aggregate grew over
time pr imar ily due to the fact that
Indonesia’s urban population increased
rapidly over the four decades or more,
covered by the SUSENAS data.
As anticipated, the inaccuracies and
biases inherent in household consumer
surveys as well as the existence of alternate
theories regarding the relationship of
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
consumer expenditure data.11 The debate
over changes in economic inequality in
Indonesia appears to be centred on the
quality of the data and the reliability of the
estimates generated by the movements of
the aggregate and sectoral gini during
particular growth periods and the trends in
inequality across reg ions and across
particular groups. There is thus, a need for
a significant reworking of the commodity
baskets used in the SUSENAS and an
improvement in the conduct of the surveys.
Nevertheless there is a current consensus
that Indonesia does exhibit long-term
stability in the gini coefficient based on
consumer expenditure data.
Interprovincial Inequality inIndonesia
Table 3 presents the gini index between
1976 and 2005 for provinces in Indonesia.
From the data, two salient trends are
noticeable. First, there is a relatively low
dispersion of the provincial gini around the
Indonesian average. Second, the inter-
provincial distribution of the gini coeffi-
cient remains relatively constant over time.
The coefficient of variation of the inter-
provincial gini fell very slightly from around
0.15 in 1976 to 0.12 in 2005. A similar trend
is displayed in the pattern of income
distribution in major urban centres such as
Jakarta and Yogyakarta. In Jakarta the
provincial gini (0.29) rose from below the
national average (0.33) in 1984 to above it
by 1993 (0.42 compared to 0.34) and fell
back to below national average by 2005
(0.27 compared to 0.36). In Yogyakarta, the
gini remained close to the national average
for much of the period rising above it after
1999. Although similar movements can be
discerned for individual provinces, the
overall picture is that the divergence of
provincial gini coefficients from the
Indonesia average is very slight given the
relatively long time period of the survey.
This leads to the conclusion that similar to
changes in the aggregate gini over time, the
pattern of interprovincial inequality in
Indonesia tends to be noticeably constant
and stable over the three decades depicted
in the table.
The same conclusion is reached by
examining the distribution of income
among the top 20 percent, middle 40
percent and the lowest 40 percent of
households. What is remarkable is the fact
that even as late as 2005, the share of the
richest 20 percent of households in Jakarta
stood at 41 percent, in fact lower than the
Indonesia average of 42.2 percent. Given
that Jakarta is Indonesia’s only megacity and
the centre of government as well as much
of its industry and high income services, the
share of its top 20 percent of households in
total consumption would be expected to be
significantly higher than in the rest of
Indonesia.
An examination of data however,
presents a picture of Jakarta being more
egalitarian compared to the rest of the
country. Figure 3 highlights this conclusion
showing that the majority of Indonesian
provinces scored a consumption gini of
between 0.3 and 0.36 while a smaller
number hovered under the 0.3 mark. Given
the diversity of Indonesian provinces in
terms of geography, population density,
natural resource endowments, levels of
urbanization and industrial development
there is very little var iation in inter
provincial distribution of consumption.
Moreover, the extent of the variation also
Inequality and Social Justice in Asia150
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.
Inequ
ality and S
ocial Justice in
Asia
152
FIGURE 3: Interregional Inequality in Indonesia
Source: Data constructed from Selected Socio-Economic Indicators of Indonesia, 2007.
Economic Inequality in Indonesia 153
shows little or no discernible trend over
time.
Variations in regional GDP per capita
across provinces in Indonesia, represented
by Figure 4, however display a different
picture. Clearly per capita regional GDP in
Jakarta is far above both the national average
and several times that of the poorest
province Gorontalo.
Table 5 illustrates some broad geogra-
phical variations in per capita provincial
GDP. It also underscores the influence of
oil and gas as a source of interprovincial
income variation. The ratio of the highest
to the lowest provincial GDP was just over
seventeen in 1978 at the start of Indonesia’s
green revolution, falling to ten by the
outbreak of the Asian economic crisis
in1997 and rising again to its 1978 mark by
the beginnings of the post-crisis recovery
in 2004.
Differences in the distr ibution of
household consumption across income
deciles in rural and urban areas are presented
in Table 6. These estimates cover a twenty
year period from 1984 to 2005 and serve
to highlight yet another instance of the
constancy in the distribution of income, as
approximated by household consumption.
What is remarkable is the relatively equal
distribution of decile household consump-
tion in rural and urban areas across different
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.
Inequality and Social Justice in Asia154
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
read into specific estimates of consumption
across rural and urban areas except that they
seem to vary almost randomly. In several
cases urban consumption shares are lower
than rural ones showing lower income
inequality in urban than rural areas, while
in others the opposite was true. For
example, the share of consumption of the
7th decile in urban households was 9.39 in
2005 compared to 10.33 in rural house-
holds in the same decile. In the same year
the consumption share of the 9th decile
stood at 14.26 percent in rural areas com-
pared to 14.75 percent in urban households.
Indonesian data on household
consumption, used widely to estimate
income inequality, therefore, presents a
picture of a remarkable constancy of
income distr ibution over time, across
provinces and across rural and urban
households. However, a different story can
be constructed by examining per capita
provincial GDP, which exhibits a few,
resource rich provinces having per capita
incomes several times higher than those
with fewer resources.
Decomposition of Inequality AcrossProvinces and Sectors
Takahiro Akita et al. (1999) presents a
decomposition of income inequality in
Indonesia between and within urban and
rural areas and across provinces. The
findings are summarized in Table 7 and
clearly indicate an important trend. In both
categories, the contribution of between-
group inequalities to the total was
significantly lower than for within-group
inequality. Hence, in 1993, the percentage
share of between-groups Theil T was
around 18.8 percent compared to a rather
significant 81.8 percent for within group
Theil in Indonesian provinces. The same
picture applies to urban and rural house-
holds, as underscored by the fact that only
24.5 percent of the total income inequality
was accounted for by differences between
urban and rural areas, whereas the remain-
ing 75.4 percent was contributed by in-
equality within urban and rural households.
Decomposition by educational groups
and by gender in Akita et al. (1999) gene-
rates the same conclusion that the largest
share of inequality is generated from within
groups rather than between-groups. For
example, with respect to differences in
household consumption across various
educational groups, variations between
groups accounted for only 32.6 percent
while within-group inequality accounted
for the rest. In the case of decomposition
by gender, the contribution of within-
group inequality was even more pro-
nounced at 97 percent in 1993 compared
to only 3 percent for between-group
inequalities.
Takahiro Akita and Miyata (2007)
provide yet another set of decomposed
inequality estimates, for a wider spectrum
of categories including across educational
groups separately for rural and urban areas
using the SUSENAS data from the 1996,
1999 and 2002 surveys. Although the
numbers are different the overall conclusion
remains unchanged. This basically is that in
Indonesia, within-group inequality
accounts for the overwhelming share of
income inequality variations as opposed to
variations in inequality across groups.
Income Distribution in Indonesia:Contrasts with InternationalExperience
There is a sharp divergence between
changes and pattern of inequality in
Inequality and Social Justice in Asia156
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
countries in the region. Assuming that data
is reliable, inequality in Indonesia, in almost
all its variants, has remained stable over time
and across regions in the country. In
addition inequality was also low, hovering
between a gini of 0.32 to 0.36 for long
periods of time. The remarkable fact in the
case of Indonesia is that the movements of
the gini coefficient across income groups,
Economic Inequality in Indonesia 157
geographical areas and across urban and
rural areas exhibits the same trend of low
and near constant indices.
Figure 5 presents ADB (2007) compa-
risons of changes in inequality in the East
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).
Inequality and Social Justice in Asia158
picture of an almost unchanged gini stands
in sharp contrast to the situation in a range
of other developing countries in Asia.
Figure 6 also from the same source presents
data on changes in per capita expenditures
in 1993 PPP (Purchasing Power Parity)
FIGURE 6: Changes in per Capita Expenditures, Bottom 20 Percent andTop 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.
Indonesia once again illustrates the relative
similar ity of growth in per capita
consumption in the bottom 20 percent and
the top 20 percent of the households. The
growth of per capita expenditure was 2.09
percent per annum in the bottom 20
percent compared to 1.95 in the top 20
percent households.
Table 8 presents movements of the gini
index in a range of countries across Asia,
Latin America and Africa between 1981 and
2004. As indicated by other comparative
indicators, Indonesia exhibits both low and
relatively unchanging gini coefficients over
time. A comparison of economic inequality
between Indonesia and countries such as
India, China, Bangladesh and Thailand
(Figure 7) for the two and half decades
spanning 1981 and 2004, again demons-
trates that Indonesia experienced the lowest
change in income distribution amongst all
these countries.
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).
Inequality and Social Justice in Asia160
large economies is illustrated in Figures
8 and 9, which present a picture of
unambiguously rising inequality in both
urban and rural households. Interestingly
the sharpest increase in urban rural
inequality is shown, as one might expect
from theory, in China, the fastest growing
economy in the region. Indonesia on the
other hand, despite a 7 percent average
growth in the 1990s; a record fall in output
FIGURE 7: Economic Inequality in Selected Asian Countries, 1981–2004
Source: World Bank Poverty Monitor (http://iresearch.worldbank.org/PovcalNet/Jsp/index.jsp).
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
was then followed by five years of
reasonably fast recovery (2007) with GDP
growth averaging around 6.4 percent,
showed very little movement in the
aggregate or provincial gini coefficients.
Movements in GDP growth, gini
indices and the incidence of poverty in
Indonesia are illustrated in Table 9 and
Figure 10. Although there might be
superior ways of presenting the data (for
example, by estimating trends in each
variable for the period between 1964 and
2007), the general conclusion is quite
straight forward. Low levels of economic
inequality during periods of high economic
growth allowed Indonesia to reduce
absolute poverty substantially (Figure 11)
from the 1970s onwards. The clustering of
the near-poor close to the poverty line, is
consistent with the fact that the share of
household consumption changed relatively
little between the bottom 20 percent and
the bottom 40 percent. Not only was
inequality low according to Indonesian
TABLE 9: Indonesia Economic
Indicators, 1964–2007
Year GDP Growth Poverty Gini Index
1964 3.5 – 0.35
1969 7.1 60.00* 0.35
1976 6.9 40.08 0.34
1978 7.7 33.31 0.38
1980 7.9 28.56 0.34
1981 7.4 26.85 0.33
1984 6.0 21.64 0.33
1987 3.9 17.42 0.32
1990 7.2 15.08 0.32
1993 6.5 13.67 0.34
1996 8.0 17.65 0.36
1999 0.8 23.43 0.33
2002 4.5 18.20 0.34
2005 5.7 15.97 0.33
2006 5.5 17.75 0.36
2007 6.3 16.58 0.36
Source: BPS (1997) Statistics during 50 years
Indonesian Independence; and BPS Statistical
Yearbook of Indonesia, various years.
Note: * Poverty data 1969 was estimated.
data, but it was relatively evenly distributed
amongst the poor segments of the
population. The result was the economic
Inequality and Social Justice in Asia162
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
miracle for which Indonesia and several
other countries in the region eventually
came to well known.
Finally Figure 12 illustrates another
distinction between Indonesia and the
behaviour of economic inequality in the
world as a whole. Francois Bourguignon
and Morrison (2002) decompose long-
term global inequality trends. Their
estimates show that a large part of the
differences in cross-country inequality is
explained by cross-country variations
(around 60 percent of the total) with the
rest being attributed to within-country
shifts in inequality. Economic inequality in
Indonesia shows a completely different
pattern with the largest part of inequality
variations being generated by within-group
(province, sector, educational groups,
gender, etc.) as opposed to across groups,
which account for only a small proportion
of inequality. To understand the dynamics
of g rowth and distr ibution and the
direction of causation one needs to
construct specific case studies within
provinces or sectors.
Non-Income Inequality
This paper has focused pr imar ily on
variations in measures of inequality based
on household consumption which serves as
a proxy for household income. However,
indicators produced in Indonesia’s human
development reports of 2001 and 2004
describe variations in a range of non-
income variables across the provinces.
As reflected in Table 10, there is a
significant difference in provincial rankings
based on regional GDP per capita and those
based on ranking in Human Development
Index (HDI) terms. The difference between
the gross regional domestic product
(GRDP) and the HDI ranks ranged from
+17 to –26 among 30 Indonesian provinces
in 2002. The case of Papua illustrates the
point. Although Papua was the third
richest province in terms of regional per
capita income, it was among the most
FIGURE 12: Global Inequality and its Components, 1820–1992
Source: Bourguignon and Morrisson (2002) and World Bank (2005).
Inequality and Social Justice in Asia164
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
29 out of 30 on the human development
scale.
Significant differences in HDI scores
existed across districts within each province
and are reflected in Figure 13. Interdistrict
variations in HDI performance were more
pronounced within provinces than across
provinces. According to Indonesia’s Second
Human Development Report in 2004,
within the Province of Papua, HDI indices
ranged from 47 in Jayawijaya, to 73 in the
port city of Sorong. A range of variation
higher than that shown in interprovincial
Economic Inequality in Indonesia 165
comparisons. The implication that can be
drawn is that HDI indices, affected
considerably by the access and quality of
public services, might be more diverse
within provinces than across them. Another
equally apparent trend is that HDI
underwent a marked decline in a number
of districts in sharp contrast to improve-
ments of HDI in most districts. This leads
to the theory that clearly the impact of
economic growth and more critically of
public service provision was not shared as
equally as suggested by household
consumption data. In the Indonesian
context, however, broad judgements on the
behaviour of inequality are not possible
based on aggregate data. What needs to be
conducted are case studies at the local level
to highlight barr iers and bottlenecks
towards more equally shared quantity and
quality of economic growth.
The good news from non-income data
is that key non-income indicators such as
life expectancy, adult literacy and infant
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.
Inequality and Social Justice in Asia166
mortality improved sharply during the last
three decades of the 20th Century (Figure
14). However, the disturbing fact is that
interdistrict variations in these indicators
still remains very high and in some
provinces and districts there is a noticeable
gap between rankings based on per capita
income and per capita HDI. Clearly the
dynamics of economic inequality, poverty
reduction and non-income indicators of
well-being are much more complicated and
require careful local level scrutiny.
Economic Inequality in Indonesia:Making Sense of it All
The vast body of statistical evidence
reproduced in the previous sections clearly
illustrates the rather distinct nature of
income inequality in Indonesia both over
time and across sectors and regions. Taking
the data at face value, would suggest that
Indonesia has managed to maintain a
relatively unchanged distribution of income
at all income levels of households over a
relatively long period of time. Achieving
this would be difficult in a country with low
levels of economic growth and/or structural
change. It would also be surprising in an
economy where relative constancy in
income distribution has been accompanied
by significant GDP growth, structural shifts
in the composition of output, rapid
migration from rural to urban areas, and a
situation where the economy has enjoyed
early capital account mobilization and a
relatively small state.
How much confidence can be placed on
the results of consumer household surveys
in the context of such a rapid historical
transformation needs to be examined. Of
equal importance is the analysis of
movements in the gini, particularly in times
of economic boom and in the midst of
economic crises.
FIGURE 14: Infant Mortality and Life Expectancy, 1960–2000
Source: BPS, Bappenas and UNDP (2001).
Economic Inequality in Indonesia 167
Indonesia’s EconomicTransformation andUnderestimation of Inequality
Economic Diversification ofIndonesia
The Indonesian development story is just
four decades old. In that time it moved from
being an overwhelmingly rural, low-
income economy to a diversified middle-
income country. Some of the main
contours of this development are spelt out
in Figures 15 and 16 and Tables 11 and 12.
Figure 15 presents the main features of
Indonesian economic development
between the mid-1960s and 2005. Within
this time-period, the sectoral contribution
to GDP from agriculture declined from just
over a half to an eighth of the total. Mining
and quarrying, which expanded rapidly in
the 1970s, but declined sharply in the 1980s
and beyond, was over shadowed by the
contribution of manufacturing. The weight
of the manufacturing sector continued to
grow till the onset of the Asian economic
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.
TABLE 11: Agriculture and
Manufacturing Sector Contribution,
1971–2007
Agricultural Manufacturing
Year GDP Employ- GDP Employ-
Share ment Share ment
Share Share
1971 44.0 64.2 8.8 6.5
1980 24.0 54.8 13.0 8.5
1990 17.9 56.0 19.4 10.2
1997 16.1 41.2 26.8 12.9
1998 18.1 45.0 25.0 11.3
2002 15.7 44.3 30.7 13.2
2007 13.8 41.2 27.4 12.4
Source: BPS & Bank Indonesia, var ious
publications and years.
Inequ
ality and S
ocial Justice in
Asia
168
FIGURE 16: Economic structure in Indonesia, 1951–2000
Source: Daan Marks, The Service Sector in Indonesia’s National Accounts, 1951–2000 (2005).
Econ
omic In
equality in
Indon
esia169
TABLE 12: Structure of Provincial GDP Sector-wise (in percent)
1975 1990 2004 StructuralChange
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 58.7North 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 50.9West 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 41.9Riau 2.8 91.2 6.0 2.2 5.4 81.4 13.2 6.5 16.9 67.7 15.4 30.9 46.8 109.5Jambi 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 43.8South 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 24.8Bengkulu 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 34.1Lampung 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 43.6Sumatra 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 39.7West 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 77.1Central 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 58.9Yogyakarta 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 49.9East 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 62.1Bali 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 66.4Java-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 54.0Central 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 29.3South 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 63.0East 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 67.2Kalimantan 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 59.3Central 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 36.9South 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 50.2Southeast 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 36.1Sulawesi 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 82.6East 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 55.9Maluku 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 54.4Papua 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 27.4Eastern 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
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.
Inequality and Social Justice in Asia170
crisis in the late 1990s before stabilising at
approximately 27-28 percent of GDP. The
broad shift is captured in Table 11 which
illustrates the sharp and the sustained
decline in the importance of agriculture in
GDP and the rise of manufacturing and
services over the half a century following
independence.
As in many other developing countries,
the structural shift in GDP is only partially
mirrored in the composition of employ-
ment. Agr icultural employment fell
continuously from around 64 percent of
total to around 41 percent today while the
share of manufacturing employment rose
steadily in the same period from a mere 6.5
percent at the start of the growth period to
around 12.4 percent in 2007. Figure 16
from Marks (2005) illustrates the scale of
Indonesian economic diversification with
the decline in agriculture and the rise of
industry and services. The interprovincial
picture presented in Table 12, clearly shows
that while the scale of the structural shift
varied across provinces, the move away from
agriculture to non-agriculture was evident
in most of the country.
As in many other countries of the
region, the continued diversification of
production was mirrored in the growth of
the urban population. Figure 17 illustrates
the extent of the population shift between
1950 and 2007. The share of the urban
population rose steadily from just over 12
percent at the start of the period to nearly
50 percent of the total by 2007.
Although the rate of urbanization may
to some extent reflect the impact of change
in Java where much of industry and
population was concentrated and where
population densities in the rural sector were
already among the highest in the world.
However, the magnitude of the structural
shift in both production and population
tends to indicate a pattern of development
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
the early literature on the growth-
inequality relationships.
Further evidence of the Lewis dual
economy type development in Indonesia is
provided by real wage data presented in
Figures 18 and 19. Although some
controversy exists over the scale of the real
wage increase during the New Order
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.
Inequality and Social Justice in Asia172
tended to be relatively constant during the
per iod of the economy’s structural
transformation. This is in alignment with
the observation of a large number of near
poor bunched around the subsistence based
poverty line, the absence of independent
wage bargaining structures and the fact that
the first phase of Indonesian economic
growth in the 1970s and early 1980s was
basically relatively unskilled and labour
intensive.
With regard to inequality, two broad
conclusions are possible. The first is that
Indonesian economic development
mirrored the classic pattern of labour
movement at a relatively constant real wage
between the subsistence and modern
sectors. Secondly, despite the geographical
diversity of the country and the importance
of oil and gas in some provinces, this overall
pattern of dual economy growth present.
Government Policy and the Evolutionof Inequality in the New Order
In the absence of any major redistribution
of income at the beginning of the deve-
lopment process, a structural transformation
of the economy should have resulted in a
shift of income distribution in favour of
profits and capital accumulation and away
from labour at the early stages of the growth
process. Other things being equal, this
should have led to growing inequality in
household incomes during the New Order
era with its record economic growth and
tight control over trade unions and labour
oriented political groups.
The expected rise in inequality could
have been mitigated by government policy
such as raising the incomes of households
in the lower incomes deciles. This could
have been implemented in diverse ways
ranging from progressive taxation to public
expenditure allocations to pro-poor
programmes and to low growth regions.
The degree to which this actually happened
during the New Order remains highly
controversial but there are particular
features of Indonesia’s growth process that
might have limited the expected rise in
inequality.
Controlling inflationary pressures
through conservative monetary and fiscal
policies on the one hand and raising the
supply and the access to food grains on the
other undoubtedly helped to prevent
erosion in the economic welfare of low
income households. Indonesia’s success (in
contrast to many other oil exporting coun-
tries, such as Nigeria) in saving windfalls
from the oil price boom in the mid-1970s
and redirecting these towards infrastructure
and public services such as education and
health, is well known. The impact of these
policies is likely to have been propor-
tionately greater on lower income house-
holds. This combined with the fact that the
first phase of growth in the 1970s and early
1980s was labour intensive and export
oriented, only adds to the argument that
Indonesia’s economic growth was widely
shared. Sharp declines in absolute poverty
followed and further provided evidence of
Indonesia’s economic miracle in those
years.
Indonesia also scored some early
successes in the field of education and
health. Its remarkable success in raising
primary education enrolment compared to
even the miracle economies of south-east
Asia is presented in its first National Human
Development Report for 2001 (Figure 20).
In 1965 Indonesia’s gross primary enrol-
ment ratio stood at around 68 percent
Economic Inequality in Indonesia 173
FIGURE 20: Primary Enrolment in Southeast Asia, 1965–1990
Source: BPS, Bappenas, and UNDP (2001).
compared to around 80 percent for
Thailand and over 90 percent for Malaysia.
By the end of the 1980s, Indonesia enjoyed
the highest pr imary enrolment ratios
amongst neighbouring countries. This was
reflected in a sustained rise in Indonesia’s
public expenditure devoted to education
from 1970 to 1990 (Figures 21 and 22).
Although achievements in the health
sector were more modest, they were
nevertheless significant. For example, the
country succeeded in effecting a sharp
reduction in infant mortality rates, from an
unacceptably high 130 per thousand live
births at the beginning of the 1960s to
around 50 by the mid-1990s. The result was
a marked improvement in life expectancy
which moved up from 40 years in 1960 to
60 years by 2000.
Sustained economic growth, relatively
low initial rates of income inequality, rising
public expenditure on primary health and
education and a fiscal policy which was able
to keep inflation in check all contributed
to sustaining a rise and preventing a fall in
the share of consumption in lower-income
households. A substantial increase in job
opportunities in the urban sector, were
availed of by thousands of young female
workers who entered the workforce in
textile and garment factories en masse. The
reduction in absolute poverty noted in the
economic literature on Indonesia is a
testimony to its several successes in its first
Inequality and Social Justice in Asia174
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
oriented growth. Although such trends in
poverty reduction were not reflected in an
improvement of the overall income
distribution, they nevertheless played a
pivotal role in preventing a rise in ‘relative
inequality’ by raising the incomes of the
poor at a faster rate than the rich in the early
phase of development. This further
underscores the fact that economic growth
in Indonesia seemed to be widespread and
shared by some of its poorest households.
Asset Concentration andImplications for Income Inequality
With respect to income distribution in the
upper ranges, the picture is considerably less
clear for a wide variety of economic and
political reasons. However, there are several
factors that contributed to asset concen-
tration and income inequality. These are
summarized below.
First, asset ownership and distribution
in the country’s most dynamic sector of,
manufacturing and mining industries, still
remains ambiguous. Claessens et al. (1999),
in a much quoted paper, estimated the
extent of market capitalization by top ten
families in a number of Asian countries.
Their data summarized in Figure 23
illustrates the acute concentration of assets
in Indonesia which tops the list relative to
other East Asian countr ies. Market
capitalization in the hands of the top ten
families accounted for as much as 57.7
percent of the total in Indonesia compared
to 46 percent in Thailand, 24.8 percent in
Malaysia, 18.4 percent in Taiwan and around
2.4 percent in Japan.
Information on the ownership and
control structure of Indonesian corpora-
tions remains blurred even in the present
day. Indonesian conglomerates were held
together since their inception in a web of
cross-holdings and inter-linked director-
ships. Market capitalization data taken from
capital market directories is frequently
misleading and provides only a very
FIGURE 23: Market Capitalization Controlled by Top Ten Families, 1996
Source: Claessens, Djankov and Lang (1999).
Inequality and Social Justice in Asia176
approximate mapping of the structure of
ownership and the concentration of assets.
In addition, the well-known interlocking of
commercial, military and political interests
in public and government favoured
enterprises makes even a near accurate
estimation of asset concentration during the
New Order exceptionally difficult.
Open capital markets complicate the
problem of estimating asset concentration,
since rich households and large businesses
often invest in both financial and physical
assets overseas. While quantitative data on
the concentration of non-agricultural
ownership and control is rare, qualitative
sources confirm Claessens hunch of marked
asset concentration in Indonesia during the
New Order. There is little to suggest that
the structure of ownership has changed
significantly in the brief period since the
advent of democracy following the 1999
elections.
Land is another key asset. It is however,
yet another area where accurate estimates
of concentration are difficult to access. This
is not only because a considerable part of
total land holdings remain uncertified but
also because the practice of share cropping
blurs the distinction between income
generated from ownership and from
renting. Whatever data is available tends to
suggest a r ising inequality in land
ownership. Tables 13 and 14 record a
steadily rising gini coefficient in both Java
(where it rose from 0.45 in 1973 to around
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
in 2003.
While asset concentration may not
necessarily translate into income inequality
in the absence of reinvestment of profits
into the business or redistributive taxes and
subsidies by the state, asset concentration is
likely to trigger, with a time lag, a rise in
income inequality. Brasukra Sudjana and
Satish Mishra (2004) argue that the extent
of asset and income redistr ibution in
Indonesia was historically very small. It
follows that asset concentration is likely to
be reflected over time in rising income
inequality. The absence of such trends in
household consumer surveys, therefore,
reveal a significant underestimation of
consumer expenditure and incomes of
households in the upper income bracket.
Underestimation of RicherHousehold Consumption
The underestimation of consumption of
upper-income households remains a major
drawback afflicting household consumer
expenditure surveys. In Indonesia this
underestimation tends to be more pro-
nounced relative to other countries for two
reasons. First, the income stream generated
from high asset and land concentration is
largely unknown given the fact that assets
can be held under multiple identities and
legal forms and because the commodity
basket used in the consumer surveys very
inadequately reflects the actual consump-
tion patterns of the rich, especially in urban
areas (refer to Appendix 1). Second, the
consumption basket used in SUSENAS is
designed to capture the consumption
pattern of the median consumer, and thus
excludes a wide range of consumer durables
including automobiles, holidays abroad,
health insurance in addition to transfers
overseas for children’s education or medical
expenses incurred abroad.
The net implication is the consumption
pattern of the richer households is not
approximated by the commodity baskets
used in the SUSENAS consumption
modules. Further, this underestimation is
likely to become more pronounced over
time as the economy becomes more diverse;
the size of the higher productivity non-
agr icultural sectors increases and the
number of households in the upper-income
bracket also rises. Based on this logic, the
larger the proportion of wealthier house-
holds in the economy the greater the
underestimation of household consump-
tion as a proxy for household income.
In fact, this is likely to be the most
plausible explanation for the constancy in
Indonesia’s income distribution indices
despite the country’s rapid economic
transformation. Some evidence for such a
possibility is presented by UNSFIR (2004).
A reworking of the gini coefficients
assuming a different composition of the
consumer basket which includes high-value
items, leads to a dramatic r ise in the
aggregate gini (Figure 24).12
Clearly, the underestimation of higher-
income household consumption is a serious
flaw in the Indonesian income distribution
statistics, and merits greater attention than
it has received over the years. One reason
for overlooking the flaws in the data is the
fact that government policy has tended to
focus on absolute poverty reduction
through a mixture of social welfare
expenditure and export oriented growth.
Redistribution of income away from the
rich towards the poor has by and large been
absent in the policy agenda. During the first
Inequality and Social Justice in Asia178
two decades of economic growth in the
1970s and 1980s, the availability of surplus
labour and labour intensive agricultural and
industrial production, combined with the
windfall gains from the first oil boom, eased
the political pressure to conduct an asset
redistribution programmes of the kind that
was experienced in Taiwan. In later years,
the involvement of the military in business,
not only in timber and illegal logging, but
also natural commodity exports combined
with its dominance in politics made any
serious redistribution agenda politically
unpalatable.
Interpreting Income Inequality Shiftsduring the Growth Process
Given the rather average and aggregate
estimates of economic inequality in
Indonesia following independence,
especially in the New Order period and
later, many observers have shifted the focus
to more localized swings in income
distribution. Thus, Anne Booth (1992)
argued that urban-rural disparities increased
between 1969 and 1978, but declined
thereafter. Similarly, real consumer
expenditure growth was faster in urban Java
than elsewhere between 1970 and 1976,
while regional income disparities increased
in the 1970s due to the impact of oil on the
regional GDP. Finally, regional disparities in
per capita consumption expenditure,
corrected for regional price differences
actually widened between 1980 and 1987.
Martin Ravallion and Monika Huppi
(1991) in a similar vein argued that poverty
alleviation and under-nutr ition in
Indonesia continued to decline during the
structural adjustment phase of the 1980s
due to gains enjoyed by the rural sector in
the growth process. Peter Timmer (2004)
argues that Indonesia enjoyed considerable
pro-poor growth for much of the New
FIGURE 24: Official (SUSENAS) and Corrected Gini Index, 1976–2002
Source: BPS data, calculation by UNSFIR.
Economic Inequality in Indonesia 179
Order period from 1967 to 1996. The
advent of the Green Revolution and the
establishment of the food logistics agency—
BULOG—contributed towards stabilizing
food prices which combined with invest-
ment in irrigation, and the introduction of
high-yielding seed varieties raised labour
productivity and incomes in rural areas. This
is likely to have been an important factor
behind the observed fall in rural gini
coefficients in the 1970s.
Although such interpretations of
income inequality and the incidence of
poverty in particular episodes of economic
growth or in specific regions or a given
sector all shed valuable light on the
complexity of Indonesian economic
development, they fail to deliver any
significant policy message for the future. In
particular, such disaggregated and disparate
case studies, decompositions and reworking
of official data only contribute to the lack
of clarity which surrounds the question of
economic inequality in Indonesia. Clearly,
the first step towards a programme for
equitable development in Indonesia is the
production of reliable and sufficiently
detailed data on income distribution and its
components at both national and district
levels, which remain the twin hubs of policy
making in today’s Indonesia.
Economic Inequality and FutureIndonesian Development
The outbreak of the Asian Economic Crisis
in 1998 resulted in a dramatic transfor-
mation in fortunes. Not only did the
country endure its worst economic crisis in
half a century, but the country also
underwent a significant change in the
structure of its economic and political
institutions. The crisis coincided with a
time when the global economy was
undergoing a fundamental shift, where
foreign exchange and financial flows grew
substantially faster than international trade.
Indonesia enjoyed both good policy and
good luck in the first one and a half decade
of its development during the 1970s and the
1980s. Growth was primarily generated by
the Green Revolution and labour intensive
textiles and footwear industr ies. This
contributed towards raising the income of
rural households and progressively lowering
the incidence of absolute poverty. With
relatively low levels of asset inequality, a tiny
industrial sector and the absence of a
landlord class that predominated in India or
Philippines, the acceleration of economic
growth actually resulted in a secular decline
in poverty.
This picture began to change with the
diversification of the economy first with oil
revenues followed by the growth of the
manufacturing sector. The Asian economic
crisis reversed the growth engine and led
to a major restructur ing of most of
Indonesia’s banks, as well as many of its
corporations. The advent of multi-party
democracy and the retreat of the military
from politics, set the stage for fracturing the
symbiotic relationship between business
and politics that had characterized the
Suharto government. It led to an increased
political awareness of the major ity
population and enhanced the political
attractiveness of pro-poor and pro-equity
policies. The question is whether
Indonesia’s impressive record on growth,
equality and poverty reduction is likely to
be sustained under the changing conditions
of the domestic democracy and inter-
national globalization. If not it is ques-
tionable whether income inequality will
Inequality and Social Justice in Asia180
FIGURE 26: Unemployment Rate in Selected Asian Countries, 1990–2007
Source: ADB Key Indicators 2008.
FIGURE 25: Poverty and Unemployment Rate Post-Crisis
Source: BPS, Labour Force Situation Report and Indonesian Statistics, various years.
Economic Inequality in Indonesia 181
follow the rising trend so familiar in other
Asian countries.
Although a detailed discussion of
Indonesia’s changing economic structure
and its impact on future inequality is outside
the scope of this paper, a number of
observations are warranted.
Firstly, the relatively easy development
phase where labour intensive industries and
new agricultural technology could deliver
major employment and productivity gains
ended by the late 1980s. The Asian Crisis
combined with the sharp fall in output that
followed, resulted in changing foreign trade
and production patterns. This in turn led to
a continued evolution in the structure of
output, especially in manufactur ing.
Textiles, garments and footwear have all
come under competitive pressure from low
wage economies of Asia, such as China,
Bangladesh and Viet Nam in particular.
Indonesia’s manufacturing base remains
narrow, focussed on assembly rather than
manufacturing. Trade patterns have also
tended to dr ift away from the high
technology markets of the US and Europe,
to trade in commodities and palm oil with
China and ASEAN countries.
Some evidence of this structural change
is provided by the behaviour of employ-
ment and poverty indicators with respect
to fluctuations in GDP. Figures 25 and 26
present data on open unemployment and
poverty incidence in Indonesia after the
Asian Economic Crisis. While there are no
detailed estimates of the response of
employment and poverty elasticities to
changes in economic growth, it is clear
that the resumption of economic
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/ ).
Inequality and Social Justice in Asia182
employment as well as absolute poverty
percentages.
The phenomenon of jobless growth
(Figure 27) much in evidence in China
points to a new phase in economic develop-
ment against the backdrop of a global
marketplace. There is little reason to assume
that Indonesia will not face the same
structural pressures as it moves on to a
higher growth path. In both China and
India one of the consequences of this
unbalanced growth has been a secular rise
in inequality.
Secondly, without a diversified manu-
facturing base and with a less developed
higher educational infrastructure, the major
source of future economic growth in
Indonesia is likely to focus on the exploi-
tation and export of natural commodities.
Such economic activity is not only likely
to be confined to a few favoured districts,
but is additionally likely to be both capital
intensive and conflict prone. Thus, future
economic growth is likely to be enclave
focussed, inequality prone and would
require local government protection. Such
growth is set to be very different from the
broad based agricultural growth of the
1970s and early 1980s.
Thirdly, the globalization of financial
markets, in effect, acts as a brake on
government fiscal and monetary policy.
Major departures from neighbour ing
country macroeconomic policies could
trigger capital flight and lower investor
confidence. There are limits to the
government’s ability to tax and spend on
social welfare and other inequality
dampening programmes. Without an oil
bonanza or its equivalent raising the
revenue/GDP ratio will be difficult. Equally
difficult is getting consensus from district
governments to direct revenues at poor
districts and away from the richer ones.
While Indonesia continues to have an
impressive anti-poverty PNPM programme
in place, its volume and reach may be
inadequate in the context of internationally
transmitted financial or export market
shocks. In particular, if inequality rises in
tandem with the experience of other Asian
countries the same pace of future economic
growth might deliver a lower rate of poverty
reduction.
Fourthly, while this leaves room for
‘smart’ interventions in health and educa-
tion, an area in which Indonesia has lagged
behind many of its neighbours, these are
typically long gestation public expenditure
interventions. These interventions also
require a fairly comprehensive reform of the
civil service in these sectors and the forging
of unfamiliar partnerships with civil society
and private sector service providing organi-
zations. While Indonesian officials are now
required to allocate at least 20 percent of
the total government budget on education
by Constitutional law, regional govern-
ments have yet to spend this budget fully
or in ways which improve the quality of
education.
The above reasons suggest that while
Indonesian economic development may
follow the pattern already set by many of
its neighbours and experience higher
growth with rising inequality its policy
choices remain limited. Additionally,
because the country continues to lack a
reliable set of data, to project future trends
in inequality, public policy tends to place
less importance on dampening inequality as
compared to reducing absolute poverty.
As Indonesia’s inequality predicament
becomes more apparent and as the potential
Economic Inequality in Indonesia 183
for regional conflict around competing
claims to Indonesia’s natural commodities
begins to surface, inequality is likely to
emerge as a central issue on the policy
horizon.
Conclusions and PolicyRecommendations
Economic Inequality in Indonesia
Renewed global and regional interest in the
scale and the dynamics of economic
inequality has yet to create a resonance in
Indonesia. This is partly attributable to the
reliability of data on income distribution.
Indonesian consumer surveys tend to
overstate the consumption of poorer
households and severely underestimate the
consumption of the rich. The net result is
an unusual uniformity in gini coefficients
generated from such data both over time
and across regions and sectors.
An important argument is that the
observed statistical uniformity of the
income gini in Indonesia contradicts both
development experience, as well as statistical
common sense. Given the enormous
structural changes that occur red in
Indonesia over the forty year period of 1968
to 2008, it would be reasonable to expect
significant shifts in the measured gini. The
fact that official statistical sources failed to
reveal such variations in expected inequality
provides the basis for taking a closer and
more analytical look at the way the use of
household expenditure data to approximate
the calculation of income inequalities in
Indonesia has tended to lend a bias to such
estimates. The time is opportune to initiate
a policy dialogue on inequality by ques-
tioning what the official figures tell us. This
study plans to focus on the factors which
are likely to lead to an a priori expectation
that income inequality may have risen over
time. Additionally, this study will also
attempt to make adjustments in the
estimation of income inequality which take
into account the underlying structural
changes over time.
Industrial diversification, rapid urbani-
zation, geographical concentration of
natural resource investment, the acute
concentration of industrial assets in the
hands of an ethnic minority, the close and
symbiotic relationship between military,
civil service and private business and the
political dictatorship which stifled any civil
society protest over the inequality issue, and
the physical liquidation of the left in the
1960s, has kept inequality off the policy
agenda. The first task is to ensure that it is
back on the front burner of development
policy. Therefore, re-assessing the measure-
ment of inequality is an important step in
that direction. An even more critical step is
an analysis of how rapid growth and
associated structural shifts in output,
employment, skill and technology base and
a wholesale change in governance systems
is likely to impact on levels and evolution
of inequality.
That theory must be synchronized with
measurement, is a key factor that has been
absent in Indonesian development debates.
The global fascination with the Asian
miracle and the belief by governments and
international agencies in the uniqueness of
the Asian model undermined any serious
cr itical thinking of the issue in the
Indonesian context. As both India and
China are now discover ing, sustained
economic growth in the context of a
globalized free markets can create major
imbalances. The very fact that income
Inequality and Social Justice in Asia184
inequality levels in China (once the envy
of countr ies attempting to promoted
balanced growth and poverty reduction) are
now approaching levels similar to those in
Brazil, long derided as representing one of
the worst cases of income inequality, over
a short span of 20 years, illustrates the need
to anticipate the direction and speed of such
future movements in inequality rather than
celebrating the spurious observed constancy
of inequality measures.
The Indonesian case, much like the
Chinese one, is interesting in that the early
phase of development did distribute the
benefits of economic growth relatively
widely. A combination of labour intensive
industrial technology, principally in textiles,
labour augmenting green revolution in rice,
and the dramatic transfer of agricultural
labour at a relatively low and controlled
wage to urban industry in a textbook
Lewisian process did for a while keep
inequality relatively constant. Indonesian
data tends to support this conclusion, but
only for a decade or so after the Green
Revolution from the mid-1970s onwards.
By the time the Asian Economic Crisis of
the 1998 arrived, Indonesia had all the signs
of an economy where future directions of
inequality would be very different from
what it had enjoyed in the very early years
of its development.
Government policy of the early New
Order period did help in alleviating poverty
and keeping inequality levels relatively
constant, partly by conserving and
redirecting the oil price windfalls of the
mid-1970s.13 Additionally, Indonesia’s
achievements in basic health, primary
education and literacy as well as in
infrastructural development which eased
the outward migration of labour from rural
areas should not be discounted. However,
the latter half of the New Order period
from the mid-1980s, was characterized by
a pervasively corrupt bureaucracy, the
establishment of pocket banks by leading
conglomerates and by a concentration of
power in Suharto’s inner family circle
immune from any countervailing power in
the military. The destruction of the
communists and the fusion of all political
tendencies into a single overarching
machine (the GOLKAR) reaching down to
the smallest village as well as the practice
of military and police personnel running
their own businesses, most pronounced in
the forestry sector, all point to structural
conditions for a rise in income inequality
over time. The fact that land reform, a
major contributor to the decline of rural
landlordism in China and later Taiwan, was
never taken seriously in Indonesia and that
property taxation remains one of the lowest
in the world till today illustrates the refusal
of the state to initiate a direct approach to
income redistribution. A few approaches
which were tried, such as transmigration,
simply fuelled local resentment and conflict
and eventually resulted in actually widening
the gap between the rich and the poor in
concerned provinces such as Papua,
Kalimantan and the Maluku regions.
Looking ahead, it can be argued that
future economic development in Indonesia,
in the absence of a countervailing policy to
promote equity, is likely to be inequality
enhancing rather than inequality
dampening, for the following reasons.
First, the momentum of urbanization
has run its course although the urban
population is still expected to continue
rising over the coming decade and a half.
This, combined with a liberalized wage
Economic Inequality in Indonesia 185
bargaining mechanism will tend to generate
an upward pressure on real wages owing to
the emergence of labour shortages in key
sectors.
Second, regional inequality is also set to
rise both due to the widely differing
resource and human capital endowments of
specific regions as well as the fact that future
foreign investment is likely to be channelled
towards those states rich in natural resources
such as energy, plantations and minerals.
State capture of local governments by large
domestic and foreign corporations also
cannot be ruled out within such a scenario.
Third, Indonesia has now entered its
second major economic shock in less than
ten years. The ILO and other agencies have
indicated that such crises have traditionally
been accompanied by both a rise in formal
unemployment as well as an increase in the
size of the informal economy. Although
the extent to which such informalization
of the economy generates new patterns of
intersectoral inequality remains to be
studied, it nevertheless signals the emer-
gence of new economic forces which
militate against the thesis of a relatively
constant degree of economic inequality in
Indonesia in the early 21st Century.
Additionally, globalization has been
accompanied in many countries by rising
wage inequality between skilled and
unskilled labour and inequalities between
exporting and domestic market oriented
regions. Also, the fact that changes in
income inequality can occur much faster in
open capital and commodity markets
suggests that the vision of a future Indonesia
much less equal than what both the data
suggest, and what economic logic would
dictate, becomes more plausible.
As a consequence future economic
development of Indonesia is unlikely to
follow the relatively easy path of the past.
Both employment and poverty elasticities
with respect to growth seem to be falling
and new investments probably in the natural
resource sector are likely to be more capital
intensive and region focussed. Inequality
may well follow the path already familiar in
many other Asian countries as documented
in the ADB report from 2007.
From a public policy perspective how-
ever, the critical question is regarding what
democratic governments can do in practice
about containing the expected rise in
inequality on the one hand, and actually
promoting equitable development on the
other.
Economic Inequality in Indonesia:Arriving at Public PolicyRecommendations
One key issue in arriving at policy recom-
mendations to contain a rise in or to reduce
existing levels of income inequality is that
in the era of globalized financial markets, the
policy space open to the government to
effect inequality reducing measures is likely
to be severely limited. For example, the
government’s ability to tax and spend for
social welfare programmes will be
constrained by fears of capital flight and
lower investment flows. Its ability to enforce
national priorities and standards on regional
governments will be limited by local
political support for directly elected
regional executive heads. The lack of a
social consensus on the limits to inequality
naturally hinders agreement on when
government needs to act to contain the
trend towards higher inequality.
Box 1 presents a summary of steps taken
by successive Indonesian governments
towards promoting equality and reducing
poverty during the post-independence
Inequality and Social Justice in Asia186
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
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...
Year Policy/Program Information Evaluation
Contd...
Inequality and Social Justice in Asia188
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...
Year Policy/Program Information Evaluation
Contd...
Economic Inequality in Indonesia 189
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...
Year Policy/Program Information Evaluation
Contd...
Inequality and Social Justice in Asia190
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...
Year Policy/Program Information Evaluation
Contd...
Economic Inequality in Indonesia 191
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...
Year Policy/Program Information Evaluation
Contd...
Inequality and Social Justice in Asia192
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.
Contd...
Year Policy/Program Information Evaluation
period. These measures reflect the chang-
ing philosophy and mood of the times from
direct support for indigenous entrepreneurs
in the Benteng Programme of the 1950s to
the basic health and education programmes
of the 1970s, to conditional cash transfers
of the current administration.
These programmes reflect a rather
meander ing and haphazard approach
towards inequality moving from directly
focusing on redistribution of assets to
attempts to reduce the proportion of the
population below the poverty line. On the
whole, programmes such as INPRES and
rural credit programmes of the New Order
were attempts to pull people out of abject
poverty, rather than change the distri-
bution of income for the economy as a
whole. In fact, the asset data, especially in
manufacturing, the fastest growing sector in
the 1980s and 1990s was characterized by
the sharpest concentration of assets.
Overall, with the exception of the early
Sukarno years, the primary policy concern
of the New Order governments was the
containment of absolute poverty. This
policy worked well in the first easy phase
of growth, resulting in a relatively broad
sharing of economic growth. However, by
the time of the launch of major structural
changes in the economy, the political mood
had shifted away from income redistri-
bution or concern for equality to the
prior ity of achieving rapid economic
growth as the core legitimizing principle of
a consolidated authoritarian regime.
Given the high probability of rising
inequality within an open economy
operating under a globalized market place,
the principal question facing the govern-
ment is the formulation of an appropriate
policy agenda to tackle inequality. Given the
neglect of inequality as a policy concern in
the past and the serious data problems
Economic Inequality in Indonesia 193
which bedevil measurement of inequality
in Indonesia at present, it may be premature
to arrive at a well formulated policy package
to contain inequality. Nevertheless, a
number of preliminary recommendations
can be made as key steps towards the
formulation of a more comprehensive
policy towards income inequality. The
central elements of such a policy are
summarized below:
• A social consensus on the degree of
income inequality tolerable in the
country and its key components.
Such a consensus will help successive
governments to define indicators
and activities which maintain
inequality within a targeted range.
One immediate option is to ensure
that such equality targets are
enshr ined in the design of the
2009–2014 medium term develop-
ment plans. Clearly, much public
consultation needs to go into such
target setting but such a process helps
to highlight the fact that concepts of
inequality are as much a matter of
political and ethical preference as
technical economic targets.
• A determined effort to reduce asset
concentration in industry and
services by a tighter application of
anti-trust law as well as by pre-
venting the creation of new
monopolies through de facto state
guarantees. This in effect would
entail the unravelling of the structure
of ownership and control in business
in Indonesia, an area in which no
reliable information is available. It
would also require the promotion of
more competition in indusry. This
can be facilitated by promoting and
encouraging new start up firms and
joint ventures with foreign firms.
• A sharp upward revision in taxes
related to property to bring these to
levels on par with similar economies
in other parts of the world.As a first
step it would be necessary to make
land and property registration
mandatory. A second step would be
to commission a special study on the
appropriate bench mark and how
such taxes can be collected in the
future.
• A renewed concern for raising
human development achieve-
ments of the past by improving the
quality of essential public services
and inclusive access to them by all
segments of the community. This
will not only assist in ensuring the
upward social mobility of poor
households but also provide them
with a minimum base of skills which
can be upgraded in the work place.
• Careful monitor ing of inter-
regional economic inequality with
the DAK, and special financial grants
have to be made to assist the
backward and the most disadvan-
taged regions. One model would be
to use the Fiscal Commission
approach common in India where
special quasi-judicial grants are made
to provincial governments in case
particular emergencies and special
needs arise. Another measure is to
augment the capacity of regional
governments to budget and plan
public expenditure and thus improve
project delivery, a matter of some
concern at present when many
regional governments are unable to
spend budgets allocated to them.
Inequality and Social Justice in Asia194
The above menu of policy measures has
the merit of shifting attention back to
inequality and away from an exclusive
concern with absolute poverty issues. The
two are clearly intertwined. Policy
approaches of the past have tended to focus
on only one aspect of the problem, that of
absolute poverty. The arguments put forth
provide a basis for a rebalancing of the
agenda towards a joint concern for poverty
and inequality, something that lies at the
heart of the human development and
capability approaches to development.
APPENDIX 1Measurement of ConsumerExpenditure in Indonesia:Comments on the SUSENASData
The National Socio-Economic Surveys
(SUSENAS) was conducted for the first
time in 1963 in order to collect data on the
demographic and socio-economic
characteristics of household members,
which include education, age, employment
status, consumption expenditure and living
condition. Since then, these surveys have
been undertaken regularly. The SUSENAS
was intended to cover all of Indonesia, but
the early surveys did not include all
provinces. It was not until 1982 that all
provinces including East Timor were
covered. The first SUSENAS in 1963
covered only five Java provinces and selected
16,000 households as a sample.
Since 1986, SUSENAS have used a
combined stratified/two-stage random
sampling technique with the main sampling
frame consisting of a list of enumeration
areas which are formed by breaking down
every village into smaller geographical units
with about 200 to 300 homogeneous
households. The selection of a sample of
households is made by classifying
enumeration areas into strata, choosing
several enumeration areas from each
stratum, and then selecting households from
each of the selected enumeration areas. In
the SUSENAS, province, urban/rural, and
expenditure categories are regarded as strata.
Since 1993 the SUSENAS have been
fielded yearly and is representative at the
level of the district (Kabupatan/Kota). Each
survey has a sample size of about 200,000
households (close to 900,000 individuals).
However, prior to 1993 only samples of
about one-quarter the size are available and
the survey is not representative at the
district level. The survey instrument con-
tains a core questionnaire, which collects
information about demographic characte-
ristics of all household members, their edu-
cation, labour market activities, and health.
Since its inception, SUSENAS have
placed an emphasis on collecting household
consumption data in order to estimate the
incidence of poverty and the degree of
inequality. There are two kinds of
consumption items in the questionnaire:
food and non-food items. There are
altogether 203 items in the food category
and a total of 103 items in the non-food
category. The Central Bureau of Statistics
has also been trying to collect household
income data in the SUSENAS, but due to
the relative inaccuracy of the data, it has not
published the results regularly.
In the context of decentralization, the
importance of poverty measurement at the
distr ict level is gaining importance in
Indonesia. Local level planners need local
level information that is timely and accurate.
BPS has started to calculate and make
available district level poverty estimates
based on the core, but these estimates are
Economic Inequality in Indonesia 195
subject to large variance as sample sizes at
the district level very small. As a result, some
districts have funded enriched sampling of
the SUSENAS to improve their poverty
estimates.
The SUSENAS provides reliable
information on changes in welfare on a
consistent basis. But it must be noted that
the picture presented is static, based on a
measurement of one point in time. Poverty
is dynamic and vulnerable households can
move in and out of poverty as a result of
local or widespread shocks such as personal
illness, natural disasters, or major changes in
prices of basic commodities. These inter-
temporal changes are not captured by the
SUSENAS. BPS has attempted to develop
current indicators of poverty using existing
and frequently reported data collected for
other purposes. Real wage data has been
found to be well correlated with changes
in monetary poverty. Real wage data is
reported for the national level and provides
policymakers with useful early information
about potential changes in welfare. Leading
indicators of poverty are also needed at the
district level where local governments are
responsible for providing social safety net
support. In 2005, a pilot effort was under-
taken with BPS assistance to devolve the
collection and analysis of nominal and real
wages to five trial districts. Given the decen-
tralization context coupled with the size
and heterogeneity of Indonesia in terms of
geography, markets, and access, local infor-
mation for local level decision-makers is
imperative.
While sample statistics descr ibing
changes of welfare for populations are
readily available, there is also a need for tools
to identify poor individuals. Traditional
means-testing based on employment status
and reported incomes are not viable where
the formal sector accounts for only 30
percent of the labour force and do not take
into account the dynamic nature of poverty.
BPS plans to pilot a household listing in
2005 which considers both individual and
household characteristics and the target
number of poor to be identified based on
national and regional poverty estimates.
The challenge will be to create flexible rolls
that are based on generally accepted criteria
that can be developed and maintained at a
reasonable cost.
In the surveys, however, it is widely
believed that, non-food expenditures are
progressively understated by larger-income
households, especially in urban areas, and
thus expenditure inequalities are
underestimated if they are measured based
on the SUSENAS data. Secondly, it is
reported that there is a wide discrepancy
between the total household expenditure
estimated based on the SUSENAS data and
the total private consumption expenditure
from the national accounts. Thirdly, it is
said that the survey months covered in the
SUSENAS are different from one survey to
another, and thus care should be taken
when interpreting the SUSENAS time-
series data of consumption expenditure.
Data Basket
• Food (cereals, tubers, fish, meat, eggs
and milk, vegetables, legumes, fruits,
oil and fats, beverage stuffs, spices,
miscellaneous food items, prepared
food and beverages, alcoholic
beverages, tobacco and betel)
• Non-food (Housing and household
facility, goods and service, education
cost, health cost, (clothing, footwear,
and headgear), durable goods, taxes
and insurances, parties and
ceremonies)
Inequality and Social Justice in Asia196
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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-
Inequality and Social Justice in Asia206
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).