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November 2011

Poverty Rises, Inequality Gap Widens

Wealth of 40 richest Indonesians equivalent to 60 million peoples
Key Points:
Poverty rate rises over the last three years, Indonesia is the worst country in Southeast Asia in combating poverty Inequality gap widens, wealth and economic resources are concentrated in a small number of people only Social and economic justice must be included as development target to prevent social explosion and maintain the sustainability of the development process
Managing Director: Setyo Budiantoro, MA
Perkumpulan Prakarsa Executive Director

ndonesia is the poorest performer on poverty reduction in Southeast Asia region. It is calculated that 2.7 million people become poorer in the country over the last three years. This increase of extreme poverty is, shamefully, the worst one in the region. Indonesia even lags behind its neighboring countries such as Cambodia and Laos in reducing poverty, -not to mention when it is compared to the better off neighbors such as Thailand or Malaysia. Moreover, it is not just that the poverty increases, the share of wealth has also been more disproportionate. The accumulation of 0.02 % richest Indonesians wealth is equivalent to 25% of the countrys total GDP (Gross Domestic Product), and the wealth owned by only these 43 thousand people is equal to the wealth accumulation of another 140 million people. If this situation persists, people will feel that their sense of social-economic justice is torn down and as a result, social explosion may take place.

threshold is actually only Rp 5,000 more than the current national poverty line. In Southeast Asian region itself, Malaysia and Thailand have even set up a higher threshold.3 If the US$2 per day poverty threshold is used in Indonesia, 117 million people or more than half (51%) of the population will be categorized as people living in poverty! Using similar measure, the number of Indonesian poor will also climb to 15.5 million or nearly 6% increase in the last three years. A less than 60% increase of the poverty line will quadrupled the official number of people living in poverty (see chart). Therefore it is not surprised that poverty measure in Indonesia is highly political because a decline in poverty incidence, inarguably, is one of the indicators of achievement of the government. Thus there is always a tendency to keep the threshold at a minimum (conservative) level because once it is slightly raised, the poverty rate will rise significantly and as the consequence, the government might get red scorecard in development. For such reason, the poverty threshold is prone to be politicized as a means to create good image of governments performance. It is in this context that BPS as a government-founded institution is vulnerable to be used as governments political instrument in poverty reduction issue. The politics of poverty threshold is perilous and inhuman. Categorization of millions of real poor people into not poor category due to an overly low poverty threshold will prevent them from accessing their rights to receive states assistance. If the government is intentionally doing this to establish a low poverty rate, then it is a negligence of the states responsibility

The politics of poverty threshold

The government of Indonesia employs a slightly below poverty line than that of the Asian Development Bank (ADB). In the previous year, Indonesian poverty line was Rp 212 thousand per month or Rp 7,060 per day (BPS, 1 July 2011). That figure is equivalent to US$ 1.13 PPP, while ADB used US$ 1.25 PPP (or Rp 7,800 per day) to determine its poverty line.1 This tiny 10% discrepancy that equals to only 12 cents dollar (less than 750 rupiah) apparently makes a lot of difference. There will be additional 12 million new poor people with this adjusted calculation, and their number is estimated to swell up to 43.1 million people, a huge 40% rise than using the former benchmark. That is despite the fact that even the latter benchmark has no longer been used in other countries because it was considered too low. Such money is only equivalent to one toll way entry ticket or one parking ticket at a modern shopping mall, whereas a poor household must purchase over a hundred types of commodity from food, clothing, housing, health and education with the same amount of money. Indonesia is, pitifully, the only one country among the other Southeast Asian countries which poverty incidence has been hiked over the last three years (see Table 1). Many countries have already used US$ 2 PPP which is equivalent to Rp 12,000 as their poverty threshold.2 This

Panel of expert and Research Associate:

Prof. Dr. Sri-Edi Swasono
Prof. Dr. Hasbullah Thabrany Prof. Dr. A. Erani Yustika Dr. Bambang Ismawan (c) Dr. B. Herry Priyono Dr. Edi Suharto Dr. A. Prasetyantoko Dr. Poppy Ismalina Dr. Zulfan Tadjoeddin Dr. Muliadi Widjaja Dr. Sutoro Eko (c) Dr. Ari Sujito (c) Dr. Berly Martawardaya (c)

Prakarsa Policy Review is an independent policy analysis and recommendation about various critical issues related to development and welfare.

Table.1 Number of Poor People in Southeast Asian Countries (in million) Poverty Line Below US$ 1.25 PPP Year 2008 2009 2010 Indonesia 40.4 44.8 43.1 Philippines 15.85 16.29 15.63 Vietnam Cambodia Laos 11.97 11.62 11.1 4.1 4.2 4.09 2.18 2.12 2.04 Thailand Malaysia 0.14 0.16 0.11 0.00 0.00 0.00

An indication of inequality can also be seen from the third-party ownership of bank deposits. From the LPS (Lembaga Penjamin Simpanan or Indonesia Deposit Insurance Corporation) data (July, 2011), the number of third party funds reached Rp 2,400 trillion that which are saved in nearly 100 million customer accounts, but 40% of that amount (Rp 1,000 trillion) is owned by only 0.04% of the customer or 40 thousand accounts. Furthermore, only 1.3% of the accounts hold 75% of the third party funding (Rp 2,000 trillion). The aforementioned facts indicate an increase of poverty and inequality. Nevertheless, the Gini Index (inequality indicator) issued by BPS (Badan Pusat Statistik or Central Bureau of Statistics) showed a relatively proportional distribution of Indonesian economy. Indonesian Gini Index is only 0.38. 6 Needless to say, there have already been much criticisms of the BPS measurement which is considered underrepresented. One of the causes is the inability of the economic census to portrait the wealth of rich families, moreover the super-rich. Thus, the inequality is not visible.

Source : Asian Development Bank (ADB), 2011

140 120

Number of Poor People From Different Calculation of Poverty Lines

118.5 102 117.4

100 Millions People 80 60 40 20 35 40.4 32.5 44.8 31 43.1

Official Poverty Line Poverty Line US$ 1.25 PPP Poverty Line US$ 2 PPP

From the political economy aspect, the issue of inequality is often deliberately concealed by the state or the conservative 0 2009 2008 2010 international financial institutions. Questioning the disparities Source: BPS, 2011 and ADB, 2011 (processed) is questioning the unjust economic structure, which demands Notes: 1. Official proverty line in 2010 is equal to Rp 7,060 change and reform of the development system. This is, of 2. Proverty line US$ 1.25 PPP in 2010 is equal to Rp 7,800 3. Proverty line US$ 2 PPP in 2010 is equal to Rp 12,474 12.474 course, something that has been avoided by the status-quo supporters, who have always been benefited from the existing as mandated in the Constitution i.e. impoverished persons system. Therefore, more highlights are often allotted to the and abandoned children shall be taken care of by the state. issue of poverty, in order to conceal the inequality issue

Inequality Gap Widens

In addition to the increased poverty rate, even worse, the inequality is also rise extremely. The ownership of the economic pie is now more concentrated on the super-rich group whose number is very small. In 2010, the wealth of 40 richest people was Rp 680 trillion (US$ 71.3 billion), or equivalent to 10.3% of Indonesias GDP. The wealth of the 40 richest people is equal to the wealth of approximately 15 million families who live in poverty or 60 million poorest people. Notes from Forbes Magazine showed that the wealth of those 40 richest people in Indonesia rose about 80% in average over the last 5 years. Percentage of wealth accumulation of some richest people to GDP in Indonesia is far greater than in countries like the USA, Germany, China and Japan (see table 2). Furthermore, it turns out that wealth accumulation of only 0.02% of the population is equal to 25% of GDP (Winters, 2011).4 Wealth possessed by these 43 thousand richest people is almost equivalent to the wealth accumulation of 60% of the population or 140 million people. This situation could be worse than before the fall of the New Order (1997), where the wealth of 1% of the population was equivalent to the wealth of 28% of the population.5 The current concentration of Indonesian wealth, compared to other neighbouring countries is, three times higher than Thailand, four times than that of Malaysia, and 25 times that of Singapore (Winters, 2011).

In fact, it is not that all has been growing, but the rich have been growing more quickly that has happened, as has been claimed all the time, but the fact is the rich rise more quickly, but the poor deprived even more. Or as the popular language says the rich get richer, the poor get poorer, -is a more appropriate phrase to portrait the real situation.7 Unfortunately, such system continues to be well-maintained up to now.

The More Concentrated Land Ownership

In fact, the redistribution of wealth to the super-rich and the impoverishment of the poor people occurred systematically. The situation is clearly reflected in the ownership of production assets, specifically land ownership. Land ownership is fundamental for almost 40% of Indonesian population who work in agricultural sector, which mostly presented in rural area (CBS, 2010). Agrarian reform, which has not taken place in Indonesia, has caused high inequality of agricultural land ownership.8 If in 1983 the Gini Index of land ownership was 0.50, in 2003 the Gini Index has reached 0.72. That number does not just show the high inequality of land ownership, but also show a highly concentrated land ownership. Trend in ownership of hundreds and thousands hectares of farming land possessed by wealthy businessmen indicates that phenomenon. On the other hand, it has been more often to find farmers whose land tenure are only 0.3 hectares, or landless farmers who work as farm labourers. If the land is planted with rice, then the income

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received is only Rp 220 thousand/ month.9 It is not surprising that 80% income of small farmers is not from agricultural sector (non-farm), but from ngojek (motorbike taxi), construction labourers, street vendors, etc.10 This situation demonstrates an extreme contrast. For small farmers, their land ownership is declining along with their poverty level, while on the other end, massive land ownership is found more often among the rich businessmen, along with the rise of commodity price in the world market. The price hike of palm oil for instance, is one of the main reasons why the wealth of Indonesian richest are skyrocketing.

Table. 2 Proportion of Wealth Accumulation of the Richests to GDP Country Indonesia US Germany Brazil Britain China Japan Billionaires % Wealth to GDP 2010

Urbanization Push Factor and the Informal Sector

Because agriculture sector and villages can no longer be relied upon for livelihood, the villagers escape farming and rural life altogether and flight for urbanization (or work as migrant worker abroad). This type of migration is due to push factor which is stimulated by the difficulties to find decent means of livelihood in the village. It is different with the one caused by pull factor, in which the citys economic activity grows rapidly, creates job opportunity and thus, pull the rural labour force The level of urbanization in Indonesia is exceedingly worrying; it even has surpassed giant developing countries like China and India.11 Urbanization which is stimulated by the difficulties to make a decent living is urbanization without adequate skills or education of the newcomers. On the other hand, the city has low demand for labour, thus it does not really require new workforce. As a result, the informal sector in large cities proliferated like mushrooms in rainy season and become the source of livelihood for many people. This condition is also aggravated by the quality of economic growth which lacking ability to absorb labours. This leads to a situation in which even the educated labours have difficulties to access formal employment. The informal sector eventually became crowded area and people fight over the crumbs of the economic pie. Educated labour force working at informal sector is actually doing a class suicide, - which means they work in a sector that is lower than their level of education or skills. Act of class suicide is a waste of productivity of educated human resources, but they choose to do so anyway because other options are not available.

40 400 52 30 32 115 26

10.3% 9.4 7.4 6.3 4.2 3.9 1.4

Source : New York Times (July, 2011) and Forbes (December, 2010)

However, MSEs face great barriers to develop or expand their businesses. Access to get capital is their main difficulty, followed by access to market and lack of capacity or skills. Capital has always been a daunting ghost for many SMEs. Until now, the majority of capital assets are acquired by selling their own assets or through informal channels such as friends, moneylenders and individual financiers outside their family ties. Ironically, there is an estimated Rp 500 trillion which is kept in the banks annually, supposedly can be channelled to the MSEs. However, banks prefer the safest way to make profit by keeping public funds that they manage in the form of Sertifikat Bank Indonesia (SBI) or Central Bank Obligation. If using this low risk method can produce huge net profit anyway, why would they bother to grant credits for the MSEs?

Justice, Inequality, and Poverty

The issue of distribution or economic justice is a crucial problem in Indonesia. Inequality or a highly concentrated wealth does not only offend the sense of justice, but also leads to a more vulnerable and fragile economy. High purchasing power, but only limited to a handful of people would limit the aggregate demand. In addition, it is unlikely that the richest will spend their entire revenues. On the other hand, low purchasing power due to the widespread poverty within the society will also limit the demand for goods and services. The middle class in Indonesia, whose number is not large yet, is mostly the lower middle class, who are still too insignificant to be the driving force of the economy. Lack of access or socio-economic exclusion hampers the lower class to grow. Empowering peoples economy without improving access to production assets will not make the economy grow significantly. Opening that access will stimulate the lower class to grow and resolve their problems themselves, but exclusion of access will create dependency on aid and growth barriers. This exclusion prolongs the rise of inequality. What is alarming about prolonged socio-economic injustice is the probability of a social and political convulsion. This is daunting because the wealth that is only concentrated in a small handful of people, can easily be moved too.

Financial Access Exclusion

The informal sector becomes the main source of livelihood for most people because formal sector fails to absorb labour force. These people work mostly in the sector of micro and small enterprises (MSEs). In 2008, there were 51 million MSEs entities that absorbed 88 million workers or 94% of the total employment (BPS and the Ministry of Cooperatives, SME, 2009). Their role in the economy cannot be undermined since their economic activity contributes to more than 42% of Indonesias GDP.

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This has been the cause of the liquidity drought that has taken place during the 1998 economic crisis. Consequently, the result of many years of development will be subsided in an instant.

have not been yet included in the official state documents whereas a nations development is definitely pointless when the results bring benefits to only the minority of the population. The high level of inequality is a time bomb that could lead to social unrest that may destroy the result of many years of development in vain. Measurement of inequality should also be improved so it could better reflect the reality, particularly the accuracy of the data on the rich and the super rich.

Policy Recommendations
The increased poverty rate and widened inequality must be the priority that needs to be tackled, before it is too late and creating social unrest. There are several policy recommendations that must be done to prevent it, such as:

1. Adopting poverty line that also measures economic justice

Indonesia needs to adopt a poverty line which indicator is below 60% of the average income/ expenditure of the population in a locale (be it district, city, provincial or national level). By keep checking on how many people lag behind the others in the population, this poverty line will also be able to measure the level of inequality and checking on the social exclusion. This indicator will also support further recommendations to reduce poverty and improve economic justice, because Indonesian biggest problem is not insufficiency but asymmetrical distribution. The national average of this poverty line will be approximately Rp 15,000 per day. Nevertheless, this line may be dissimilar from one region to another because of the variation in living cost and the contextual setting. A uniform and extremely low poverty line as has been existed is inhuman and unrealistic. Moreover, the living cost in big city such as Jakarta, is certainly not on a par with that of the remote areas in the islands of Papua, Kalimantan, Sulawesi or even in Java.

3. BPS has to be an independent institution

Central Bureau of Statistics (BPS) has been under government control, because the Head of BPS is elected and directly accountable to the President. The government certainly has a reasonable concern to have excellent figures of development indicators (including poverty rate). BPS, in this case, is in a less powerful position against governments pressure; therefore the figures are prone to be cooked. This could pose serious consequences because nearly every single development planning is drawn based on BPS data. To maintain its independence from the government, there should be three candidates of Head of BPS recommended by the President to be elected by the Parliament. Country that does not compromise and strictly manages the independency of National Statistics so that it is not under the governments control is, for instance, the United Kingdom. In addition, a BPS Supervisor Commission should be established, which comprises of at least: independent statisticians (from universities), civil society groups, business organizations, parliament and government. That commission is a sort of Steering Committee or an independent commissioner in charge of directing and overseeing BPS. Then, BPS should also sign up to The Luxembourg Income Study (LIS) in order to obtain reviews and technical capacity so that its data output will be more accurate for the reference of the Indonesian development process. Written by Setyo Budiantoro, Executive Director of Perkumpulan Prakarsa (sbudiantoro@theprakarsa. org) and Luhur Fajar Martha, Research Associate at Perkumpulan Prakarsa (luhurfm@yahoo.com).
Endnotes

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2. Reducing inequality should be the target of development

Government is required to include targets, strategies and means of reducing the inequality in order to measure the success of development in the Law on State Budget (UU APBN) and the Medium and Long Term Development Plan. These

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The value of 1 dollar Purchasing Power Parity (PPP) or US$ 1 PPP is not equivalent to the nominal value of 1 dollar based on the currency exchange rate (around Rp 8,900). 1 US$ PPP is the equivalent value of goods/services that can be purchased in other countries with US$ 1 in the US. In Indonesia, the value of US$ 1 PPP is equivalent to nominal value of Rp 6237,- http://data.worldbank.org/indicator/PA.NUS.PPP 2 Wan, Guanghua and Iva Sebastian, Poverty in Asia and the Pacific: An Update, Asian Development Bank, August 2011 3 Asian Development Bank, The World Banks New Poverty Data: Implications for the Asian Development Bank, 2008 4 Winters, A Jeffrey, The Threats of Oligarchy and the Future of Indonesian Politics, presentation literature, 2011 5 Davies, B. James (Ed), Personal Wealth From a Global Perspective, Oxford University Press, 2008 6 Gini Index is used to measure inequality level within the scale of 0 to 1; the greater its value indicates greater inequality level. An index above 0.4 is generally accepted as indicating a worrying inequality level. 7 The term The rich get richer, the poor get poorer was popularized by dangdut singer, Rhoma Irama in the 1980s 8 Agrarian reform is one key to the economic success of Asian countries, including Japan, South Korea, Taiwan, etc.. Stiglitz has even suggested the importance of land reform in an interview with Tempo magazine in 2007
1 9 10 11

http://ekonomi.kompasiana.com/agrobisnis/2011/03/30/kemiskinan-petani-faktor-lahan/ http://www.kompas.com/kompas-cetak/0310/03/opini/600419.htm Misra, Satish, Economic Inequality in Indonesia: Trends, Causes and Policy Response, Strategic Asia, 2009

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