Economic Inequality

An Overview

Growing economic inequality is one important problem for a developing country and Indonesia is no exception.

Recently becoming one of the government’s main concerns especially with the current President Joko Widodo whose policies to tackle economic inequality are already starting to produce results.

Indonesia's poverty rate has drastically decreased since 1999 due to the rapid economic growth the country experienced over the past few decades. Although this is a great achievement, countering this would be the rising income inequality rates. According to the World Bank Organization: "Growth over the past decade has primarily benefited the richest 20% and left the remaining 80% of the population - about 205 million people - behind."

According to many studies done by many different reputable organisations such as the Asian Development Bank Institute, the World Bank. They have concluded that the main causes of income inequality in Indonesia are

(i) unequal opportunities

Children from lower income households often have an unfair start in life, undermining their ability to succeed later. At least one-third of inequality in the country is caused by factors that an individual is unable to control.

(ii) unequal jobs

The labour market has a sharp divide between skilled and unskilled workers. The skilled will receive ever increasing wages for their qualities while the unskilled continue to receive low wages keeping them trapped in a cycle of low-productivity, and informal jobs, unable to access the necessary opportunities to develop or improve skills..

(iii) high wealth concentration

Often through corrupt means, a minority of Indonesians hold the majority of the country’s wealth leading to low-income households struggling to access the funds and facilities needed to climb the social ladder.

(iv) low resiliency

lower income households have a lower resistance to economic, social and political shocks(rise in inflation, natural disasters, financial crises, wars etc.) that can disrupt their quality of life as compared to wealthy households that can easily recover. This is due to decreased ability to earn income after the shock

Where we see the impact

The wealthy class

Corruption has been occurring in Indonesian politics, as much economic inequality also leads to political inequality and excessive control from the wealthy class. Professor Edward Aspinall, of the Australian National University, discussed how many political players in the field are from the wealthy class, integrating into the government system through connections with other wealthy clientele, often gaining their votes through 'targeted benefits to voters, rather than society-wide redistribution.

In the past 2 decades, only 20% of the Indonesian population has

experienced the benefits of economic growth such as higher

growth in incomes and consumption, etc. Meanwhile, the other

80% of the population has received little to no benefits.

Many of the country’s own citizens are aware of the level of

corruption within the government. In a poll conducted by Gallup,

the percentage of Indonesians who say that corruption is

widespread throughout the country’s government grew to 91% in 2011 from 84% in 2006. Meanwhile, the percentage of Indonesians indicating that there was extensive corruption within Indonesia’s businesses grew to 86% from 75%

The lower-economic class

How are we aware of the effects on those in poverty? A collaborative project hosted by an Indonesian NGO and the World Bank led a team of researchers into areas with high poverty (in cities like Jakarta too!), observed, and interviewed those who have felt the inequality's impact firsthand. Stories of bribery, such as police asking for a sum of money in order to be released from getting pulled over, and stories of community leaders mishandling money from the people, all point to the overlying issue of corruption that is majorly caused by economic inequality.

The pandemic’s effect on economic inequality:

Over the past 3 years of the pandemic, the income inequality

in Indonesia has actually dropped. During the first year of the

pandemic, wealth inequality had dropped as the rich earned

less from the stock market and the wealth share of both

middle and lower class people expanded due to the shrinking

of debts.

According to the latest global wealth report by Swiss

investment bank Credit Suisse, the richest 10% held around 66% of the wealth in 2020, down from 74.1% in 2019. Meanwhile, the wealth share of adults in both middle and lower classes expanded to 2.2% from 1.5% in the previous year. The portion of the poorest 40% also slightly expanding.

The gini ratio for wealth inequality in Indonesia was 0.777 in 2020 compared to the 0.833 in 2019 (a gini ratio between 0.7 is considered low and one above 0.8 is high). Meanwhile, the gini ratio for expenditure inequality was much lower at 0.385. This is because expenditure does not account for savings which rich people have a lot of and the poor barely have any.