Inequality and Exclusion in Indonesia: Political Economic Developments in the Post-Soeharto Era.

AuthorTadjoeddin, Mohammad Zulfan
  1. Introduction

    Rising economic inequality is a universal concern. Global awareness of the problem was bolstered by the United Nations in its 2005 Report on the World Social Situation: The Inequality Predicament (UN 2005). Growing inequality across the globe has also brought the issue to the centre of attention of the world's two leading multilateral organizations, the International Monetary Fund (IMF) and the World Bank. They were previously reluctant to point to inequality directly and focused solely on poverty, but are now openly discussing the challenge and its consequences.

    Since the advent of neoliberal globalization in the early 1980s, intracountry inequality has been rising in most countries, not just in the advanced economies, but also the developing world. In advanced economies of the Western world, economic inequality has been seen as a contributing factor to the 2008 Global Financial Crisis (GFC) (Rajan 2010; Kumhof and Ranciere 2011), but at the same time, responses to the GFC have also contributed to the surge in inequality (Klein and Winkler 2019). Interestingly, rising economic inequality is also fuelling the more recent rise of right-wing populism of white supremacists. With a focus on the West, Piketty (2018) argues that the electoral results of parties with right-wing populism platforms are greater in countries that experienced higher increases in inequality and endured more severe consequences of the GFC--the phenomenon is well represented by President Trump's victory in the United States and the Brexit outcome in the United Kingdom. In the developing world, too, the rise of right-wing populism--as in the case of Hindu-nationalist sentiments in India and Islamisttransnationalist in Indonesia--and the resultant polarization of society, can partly be explained by rising economic inequalities.

    In advanced economies like the United States and United Kingdom, the surge in economic inequality has been characterized by the rise of earnings of the higher income groups while the income of the lower middle-class stagnates. This is captured by the trend of increasing per capita Gross Domestic Product (GDP) over time while median income remains the same. Such a trend has resulted in increasing income shares belonging to higher income groups while income shares of lower income groups actually decline. Such evidence suggests that the lower middle-income groups have been virtually excluded from the growth process.

    Another general phenomenon running parallel to the global rise in inequality is the increasing divergence between productivity and wage. This is akin to the declining labour share of income while, by contrast, income accruing to capital increases. In many countries (advanced economies as well as the developing world), the IMF's World Economic Outlook (2017) finds that the share of national income paid to workers has been falling since the 1980s, mainly due to the rapid progress in technology and global integration (IMF 2017). The report also indicates a strong association between rising inequality and declining labour income shares. Researchers have linked this to economic liberalization reforms such as privatization, and financial sector and labour market deregulations. Such reforms and technological developments have also led to a decline in unionization and lower labour bargaining power (Ciminelli, Duval, and Furceri 2018).

    Inequality is also seen in Indonesia. Ever since the Asian Financial Crisis (AFC) of 1997, economic inequality has been on the rise, while the labour share of income has fallen (Tadjoeddin and Chowdhury 2018). Echoing the global trend, in recent years, the country has also witnessed a rise in (Islamic) populism (Hadiz 2016; Kimura 2017; Ali-Fauzi 2018). Between 2000 and 2011, Indonesia's Gini coefficient of household expenditure increased by 32 per cent, reaching a record high of 0.41.' For this period, the Palma ratio--a new, increasingly popular measure of inequality--shows that expenditure inequality rose by 66 per cent (Yusuf 2014). (2) Only since 2015 has the Gini started to decline, albeit slowly. Given this background, this paper reviews the latest trends related to economic inequality in Indonesia using indicators based on income and wealth, and discusses related policy discourses.

    The rest of the paper proceeds as follows. The following section reviews the long-term patterns of inequality in Indonesia. The third section looks at the structural and spatial dimensions of inequality and the extent of exclusion in the country since the AFC. The subsequent section discusses the consequences of rising inequality and related policy initiatives, while the final section concludes.

  2. Inequality in Indonesia

    Before reviewing the recent rise in economic inequality in Indonesia, one needs to revisit history, and focus on inequality witnessed during the three decades of high economic growth (1966-98). Following the deep political and economic crises during me height of the Cold War in the mid-1960s, General Soeharto led Indonesia with his authoritarian and centralistic New Order regime for the next thirty years. After the implementation of a successful economic stabilization programme in the late 1960s, and other liberalization measures from the mid-1980s until the mid-1990s, Indonesia recorded high economic growth--averaging about 7 per cent per annum. The three decades of high growth resulted in a rapid decline in me poverty rate (by national poverty line)vfrom over 60 per cent in 1966 to around 11 per cent in 1996--and increase in shared prosperity, while inequality remained low and stable. During this period, the most common measure of inequality, the Gini coefficient, stayed almost constant, fluctuating slightly between 0.32 and 0.35. The period also saw a speedy convergence of regional incomes across the country's provinces (Hill 2000). The combination of high growth and stable and low inequality made Indonesia a part of the "East Asian miracle" (World Bank 1993). This was achieved through centralizedauthoritarian equalization policies centred on agricultural and rural development, as well as investments in basic health and education across the archipelago.

    The notion of low and stable inequality during the New Order administration, based on the expenditure Gini coefficient, however, has been questioned as it may not have captured the true nature of economic inequality prevalent in the country. The Gini coefficient of household expenditure is, in fact, a conservative measure; it has been found to underestimate the true level of economic inequality for a number of reasons. First, in collecting household expenditure data, the super-rich households tend to be missed out due to difficulties in reaching them during the survey. Second, expenditure inequality is always lower than income inequality because of the smoothing effect of expenditure through savings and borrowings during good and bad times, as well as the flow of social assistance from communities or the state during bad times. (3) It should also be noted that, in most cases, expenditure is only a fraction of income, and that me share of income spent on expenditure tends to be larger when income is low.

    Third, wealth inequality in Indonesia has been assessed to be very high. In 1996, during the peak of the New Order economy and just before the AFC, the top ten families in Indonesia controlled close to 60 per cent of the country's market capitalization (Claessens, Djankov, and Lang 1999). This figure was higher than the corresponding statistics for the Philippines, Thailand, Hong Kong, Korea, Singapore, Malaysia, Taiwan and Japan. Surprisingly, the trend continues even today. In 2011, the average wealth of the forty richest Indonesians was the highest in Southeast Asia, and their combined wealth equalled 10.2 per cent of the country's GDP (Winters 2013). Credit Suisse (2016) reports that Indonesia is the fourth most unequal nation in the world, with 49.3 per cent of the country's wealth controlled by the top 1 per cent of the population. Furthermore, the Gini coefficient of land holdings--based on the agricultural census--is around 0.60 (Winoto 2009; Karimi 2014).

    2.7 Overall Inequality Trend and the Political Economy Context

    Based on the expenditure Gini coefficient, it can be observed that the AFC brought Indonesia's longterm inequality to a historic low in 1999 (Figure 1). Since then, however, the level of inequality has risen significantly, reaching its peak in 2011, at 0.41. The Gini stabilized around the figure for a couple of years, before declining, albeit slowly, since 2015. Notably, it also shows mat wage (earnings) inequality has been consistently higher than expenditure inequality in the country.

    The long-term household expenditure Gini coefficient (since 1976) is collected from the Central Statistical Agency (BPS, Statistics Indonesia), and is based on the National Socioeconomic Survey (Susenas, or Survei Sosial Ekonomi Nasional). The wage/earnings Gini, on the other hand, is calculated from the National Labour Force Survey (Sakernas, or Survei Angkatan Kerja Nasional). Both surveys are administered by the BPS. It should be noted that the wage/earnings Gini is only available since 2001 because of the consistent coverage of earnings data across different employment types--self-employed, regular employment and casual employment.

    How can we explain the sharp rise of inequality during the first decade of the new millennium? As in the case of elusive quest for growth a la Easterly (2001), rising inequality is a by-product of economic progress, and it is difficult to isolate a single factor that is solely responsible for its surge.

    Among the combination of factors, the first is the dealignment between productivity and wages, i.e., the continued increase in labour productivity (measured as GDP per worker) with stagnant real wages in the first decade of the new millennium (Tadjoeddin 2016). This...

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