Economic Inequality in Indonesia

6 Economic Inequality in Indonesia
Trends, Causes and Policy Response

SATISH CHANDRA MISHRA
Introduction: Understanding the 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 worldwide. 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
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Inequality and Social Justice in Asia
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 governments 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 emphasized 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 perfor mance of the Asian Miracle countries however, transformed traditional views on economic inequality. The presence of these Asian countries as
Economic Inequality in Indonesia
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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 Banks 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 developing 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 bureaucracies. 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 g rowth, 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 g rowth 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 wor r y too much about economic distribution. 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 distribution 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 ReaganThatcher theor y 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
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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 discoursefrom 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 ideologically 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 friendly to open commerce and labour movements that are central to this renewed fascination with the fairness and social acceptability of a given patter n 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
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background that addresses some very cr itical questions relevant to an understanding of Indonesias 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 regions 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 economic conditions in the colonial and early independence eras; and regionalismin a variety of manifestationshas been a preoccupation of all governments of modern Indonesia. Its economy comprises both the advanced technology of modern cities of Java and highly capitalintensive extractive and processing industries, as well as tribal 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) agriculture 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) neighbouring countries than with the national capital, Jakarta, and Java more generally.6
The constancy of economic distribution against a backdrop of tremendous economic 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.
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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 gover nments to formulate and implement development policy. Add to these the enclave-based investment in much of Indonesias 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 Indonesias most severe economic crisis, does not necessarily mean that the burden of poverty reduction and an improvement of income distribution 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 postindependence 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
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producing equitable and inclusive development 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 in Indonesia: 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 expenditure. 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 intrahousehold income distribution. Other weaknesses relate to variations in inter country or interregional prices in the estimation of cross-sectional gini coefficients, 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, 19691993, Rupiah Billion (current)

Year Susenas (1) 1969/70 1976 1978 1980 1984 1987 1990 1993 1996 1999 2002 1,949 7,223 9,488 14,814 30,674 44,617 64,721 98,015 165,810 337,778 525,636 National Accounts (2) 2,428 10,500 15,126 25,595 54,066 71,988 106,312 175,078 332,094 813,183 1,137,762 Percentage of Susenas to National Accounts (1)/(2) 100 80.27 68.79 62.73 57.88 56.73 61.98 60.88 55.98 49.93 41.54 46.20
Source: BPS, National Accounts; BPS, Pengeluaran Untuk Konsumsi Penduduk Indonesia; and BPS, Statistical Yearbook of Indonesia, various years.
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FIGURE 1: Estimate of Private Consumption: Susenas and National Account, 19691993

Source: BPS, National Accounts; BPS, Pengeluaran Untuk Konsumsi Penduduk Indonesia; and BPS, Statistical Yearbook of Indonesia, various years.
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 gover nment in the 1950s. Despite Indonesias 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
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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 distribution 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 countr y g rowth-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, 19642007

Source: BPS, series of Susenas data.
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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 gover nment, 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 Indonesias 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 1963 1964 1967 1970 1976 1978 1980 1981 1984 1987 1990 1993 1999 2002 2005 Bottom 40% 19.4 18.6 18.4 19.9 19.5 18.1 19.5 20.5 20.4 21.2 20.8 20.4 21.7 20.9 20.2 Middle 40% 40.4 37.9 39.4 39.3 38.0 36.6 38.2 37.4 38.0 37.6 37.0 36.9 37.7 36.9 37.7 Highest 20% 40.2 43.4 42.3 40.8 42.5 45.3 42.3 42.1 41.6 41.2 42.3 42.8 40.6 42.2 42.1 Ratio H20/B40 2.07 2.33 2.30 2.05 2.18 2.50 2.17 2.05 2.04 1.94 2.03 2.10 1.87 2.02 2.08
Source: Akita et al. (1999), and BPS. Statistical Yearbook of Indonesia, various years.
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large body of literature on Indonesias 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 in Indonesia

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 interprovincial distribution of the gini coefficient remains relatively constant over time. The coefficient of variation of the interprovincial 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 Indonesias 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 ver y little var iation in inter provincial distribution of consumption. Moreover, the extent of the variation also
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TABLE 3: Gini Index and Interprovince Trend in Indonesia, 19762005

Province Nangroe Aceh Darussalam North Sumatera West Sumatera Riau Jambi South Sumatera Bengkulu Lampung Bangka Belitung Riau Islands DKI Jakarta West Java Central Java D.I. Yogyakarta East Java Banten Bali West Nusa Tenggara East Nusa Tenggara West Kalimantan Central Kalimantan South Kalimantan East Kalimantan North Sulawesi Central Sulawesi South Sulawesi Southeast Sulawesi Gorontalo Maluku North Maluku Papua Indonesia Standard Deviation Coefficient of Variation (Std/Mean) 1976 0.30 0.28 0.27 0.34 0.29 0.31 0.31 0.33 0.30 0.31 0.37 0.33 0.23 0.31 0.38 0.32 0.27 0.29 0.24 0.41 0.38 0.35 0.34 0.38 0.35 0.05 0.15 1984 0.26 0.26 0.26 0.26 0.20 0.27 0.21 0.29 0.29 0.30 0.31 0.34 0.31 0.29 0.30 0.31 0.25 0.29 0.26 0.36 0.35 0.30 0.35 0.32 0.30 0.37 0.33 0.04 0.14 1987 0.26 0.29 0.26 0.25 0.23 0.27 0.22 0.28 0.29 0.30 0.28 0.30 0.33 0.33 0.29 0.28 0.26 0.24 0.28 0.31 0.29 0.27 0.27 0.29 0.30 0.38 0.32 0.03 0.12 1990 0.22 0.25 0.27 0.26 0.23 0.27 0.26 0.27 0.31 0.32 0.29 0.35 0.30 0.30 0.30 0.30 0.28 0.25 0.25 0.30 0.28 0.25 0.30 0.30 0.27 0.33 0.32 0.03 0.11 1993 0.29 0.30 0.31 0.27 0.24 0.30 0.28 0.26 0.42 0.30 0.30 0.33 0.33 0.32 0.27 0.25 0.30 0.26 0.27 0.31 0.29 0.29 0.27 0.27 0.30 0.36 0.34 0.04 0.13 1996 0.26 0.30 0.28 0.30 0.25 0.30 0.27 0.28 0.36 0.36 0.29 0.38 0.31 0.31 0.29 0.30 0.30 0.27 0.29 0.32 0.34 0.30 0.32 0.31 0.27 0.39 0.36 0.04 0.12 1999 0.24 0.25 0.26 0.22 0.24 0.26 0.25 0.29 0.32 0.29 0.26 0.34 0.29 0.27 0.26 0.27 0.27 0.24 0.26 0.28 0.27 0.29 0.30 0.28 0.24 0.36 0.31 0.03 0.12 2002 0.29 0.27 0.29 0.26 0.29 0.25 0.25 0.25 0.32 0.29 0.28 0.37 0.31 0.33 0.30 0.27 0.29 0.30 0.25 0.29 0.30 0.27 0.28 0.30 0.27 0.24 0.33 0.03 0.10 2005 0.30 0.33 0.30 0.28 0.31 0.31 0.35 0.38 0.28 0.27 0.27 0.34 0.31 0.42 0.36 0.36 0.33 0.32 0.35 0.31 0.28 0.28 0.32 0.32 0.30 0.35 0.36 0.36 0.26 0.26 0.39 0.36 0.04 0.12
Source: BPS, Statistical Yearbook of Indonesia, various years; Bappenas (2001), Pembangunan Daerah dalam Angka (Regional Development in Figures); and Strategic Asia staff calculations.
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TABLE 4: Income Distribution by Classification, World Bank and Gini Ratio, Indonesia, 2005
No. Provinces 40 Percent of Population with Lowest Income 21.56 *) 20.27 21.45 22.88 20.98 21.6 20.08 18.82 21.57 22.32 20.64 19.59 22.31 15.41 19.79 18.79 20.12 21.69 19.91 21.98 22.32 22.45 19.78 20.03 21.85 19.55 18.91 19.87 24.53 24.69 17.14 18.81 40 Percent of Population with Moderate Income 39.06 *) 38.18 39.31 38.39 38.89 36.91 34.69 33.56 41.57 43.31 47.92 38.3 36.52 32.66 34.67 36.36 34.97 36.79 35.6 36.19 39.94 41.04 39.06 39.27 38.07 35.51 35.43 35.75 38.07 37.72 35.69 36.4 20 Percent of Population with Highest Income 39.39 *) 41.55 39.24 38.73 40.12 41.49 45.23 47.62 36.85 34.37 31.44 42.11 41.17 51.93 45.54 44.85 44.9 41.51 44.5 41.83 37.74 36.51 41.16 40.7 40.08 44.94 45.66 44.38 37.4 37.59 47.17 44.78 Gini Ratio
1. Nangroe Aceh Darussalam 2. Sumatera Utara 3. Sumatera Barat 4. Riau 5. Jambi 6. Sumatera Selatan 7. Bengkulu 8. Lampung 9. Kep. Bangka Belitung 10. Kep. Riau 11. DKI Jakarta 12. Jawa Barat 13. Jawa Tengah 14. DI Yogyakarta 15. Jawa Timur 16. Banten 17. Bali 18. Nusa Tenggara Barat 19. Nusa Tenggara Timur 20. Kalimantan Barat 21. Kalimantan Tengah 22. Kalimantan Selatan 23. Kalimantan Timur 24. Sulawesi Utara 25. Sulawesi Tengah 26. Sulawesi Selatan 27. Sulawesi Tenggara 28. Gorontalo 29. Maluku 30. Maluku Utara 31. Papua INDONESIA
0.299 *) 0.327 0.303 0.283 0.311 0.311 0.353 0.375 0.281 0.274 0.269 0.336 0.306 0.415 0.356 0.356 0.33 0.318 0.351 0.31 0.283 0.279 0.318 0.323 0.301 0.353 0.364 0.355 0.258 0.261 0.389 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.
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FIGURE 3: Interregional Inequality in Indonesia

Source: Data constructed from Selected Socio-Economic Indicators of Indonesia, 2007.
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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.
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 geographical 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 Indonesias
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 consumption in rural and urban areas across different
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TABLE 5: Regional Output Disparity in Indonesia, 19772005

1978 Ratio using GDRP per capita Highest to Lowest Java-Bali and Outer Islands Western to Eastern Ratio using GDRP without Oil-Gas per capita Highest to Lowest Java-Bali and Outer Islands Western to Eastern 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). 4.55 0.93 0.95 7.50 1.13 1.21 9.61 1.24 1.18 9.37 1.30 1.21 13.92 1.18 15.83 1.33 17.14 0.60 0.79 16.30 0.83 1.09 12.49 0.99 1.11 10.18 1.09 1.12 18.39 0.99 17.57 1.12 1988 1993 1997 2000 2004
TABLE 6: Rural-Urban Expenditure Group Share by Deciles, 19842005

Country Year 1 Indonesia (Rural) Indonesia (Rural) Indonesia (Rural) Indonesia (Rural) Indonesia (Rural) Indonesia (Rural) Indonesia (Rural) Indonesia (Rural) Indonesia (Urban) Indonesia (Urban) Indonesia (Urban) Indonesia (Urban) Indonesia (Urban) Indonesia (Urban) Indonesia (Urban) Indonesia (Urban) 1984 1987 1990 1993 1996 1999 2002 2005 1984 1987 1990 1993 1996 1999 2002 2005 2 Consumption Share by Deciles (%)* 3 4 5 6 7 8 11.94 11.68 11.72 11.76 11.71 11.81 11.67 11.79 11.96 11.84 11.76 11.66 11.58 11.31 11.67 11.39 9 14.38 14.02 14.08 13.95 14.03 13.84 13.87 14.26 14.78 14.82 14.99 14.92 14.97 14.22 14.66 14.75 10 24.00 23.64 22.63 22.31 23.48 21.34 22.63 24.55 26.64 26.49 28.00 28.70 30.37 29.58 28.38 32.45
3.78 5.20 6.16 7.08 8.04 9.09 10.33 4.28 5.52 6.37 7.20 8.07 9.03 10.19 4.45 5.56 6.50 7.38 8.24 9.17 10.27 4.46 5.72 6.58 7.40 8.27 9.21 10.34 4.27 5.52 6.38 7.22 8.10 9.07 10.22 4.50 5.88 6.76 7.60 8.44 9.38 10.45 4.55 5.74 6.57 7.37 8.21 9.14 10.25 3.90 5.23 6.14 7.02 7.94 8.97 10.20 3.25 4.63 5.61 6.59 7.61 8.78 10.15 3.53 4.65 5.64 6.62 7.62 8.73 10.06 3.46 4.44 5.38 6.32 7.33 8.46 3.44 4.38 5.31 6.23 7.24 8.36 3.18 4.12 5.04 5.98 7.00 8.16 3.47 4.62 5.47 6.30 7.21 8.26 3.49 4.54 5.41 6.31 7.30 8.43 2.87 3.94 4.81 5.74 6.74 7.92 9.86 9.76 9.60 9.56 9.81 9.39
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.
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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 households in the same decile. In the same year the consumption share of the 9th decile stood at 14.26 percent in rural areas compared 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 Across Provinces 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 betweeng roup 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 households, 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 remaining 75.4 percent was contributed by inequality within urban and rural households. Decomposition by educational groups and by gender in Akita et al. (1999) generates 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 withingroup inequality was even more pronounced 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-g roup inequality accounts for the overwhelming share of income inequality variations as opposed to variations in inequality across groups.
Income Distribution in Indonesia: Contrasts with International Experience

There is a shar p divergence between changes and pattern of inequality in
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TABLE 7: Inequality Decomposition by Province, 19871993

Province 1987 Aceh N. Sumatra W. Sumatra Riau Jambi S. Sumatra Bengkulu Lampung Jakarta W. Java C. Java Yogyakarta E. Java Bali W. Nusa Teng. E. Nusa Teng. E. Timor W. Kalimantan C. Kalimantan S. Kalimantan E. Kalimantan N. Sulawesi C. Sulawesi S. Sulawesi S.E. Sulawesi Maluku Irian Jaya All groups W-group (% share) B-group (% share) 0.182 0.183 0.160 0.142 0.127 0.182 0.120 0.184 0.188 0.223 0.183 0.226 0.267 0.222 0.202 0.205 0.106 0.166 0.137 0.178 0.164 0.171 0.172 0.169 0.205 0.212 0.306 0.247 0.205 (83.0) 0.042 (17.0) Theil T 1990 0.129 0.142 0.178 0.147 0.112 0.180 0.147 0.173 0.210 0.246 0.194 0.317 0.227 0.198 0.234 0.203 0.233 0.177 0.141 0.148 0.163 0.141 0.158 0.201 0.212 0.123 0.225 0.245 0.204 (83.3) 0.041 (16.7) 1993 0.200 0.174 0.222 0.144 0.135 0.207 0.149 0.158 0.235 0.221 0.198 0.256 0.269 0.204 0.192 0.170 0.300 0.200 0.146 0.168 0.214 0.165 0.183 0.172 0.176 0.186 0.246 0.266 0.216 (81.2) 0.05 (18.8) 1987 0.178 0.177 0.164 0.140 0.124 0.172 0.112 0.175 0.181 0.215 0.179 0.220 0.241 0.209 0.197 0.183 0.111 0.153 0.132 0.169 0.162 0.170 0.166 0.164 0.197 0.196 0.302 0.232 0.197 (84.9) 0.035 (15.1) Theil L 1990 0.128 0.142 0.182 0.145 0.113 0.167 0.139 0.166 0.201 0.223 0.189 0.275 0.207 0.189 0.208 0.187 0.217 0.166 0.138 0.145 0.161 0.141 0.150 0.199 0.195 0.119 0.225 0.227 0.193 (85.0) 0.034 (15.0) 1993 0.196 0.165 0.214 0.142 0.130 0.192 0.138 0.153 0.235 0.214 0.189 0.243 0.238 0.197 0.183 0.158 0.264 0.184 0.137 0.166 0.211 0.160 0.175 0.173 0.168 0.181 0.249 0.243 0.201 (82.7) 0.042 (17.3) 1987 0.333 0.327 0.312 0.291 0.277 0.322 0.261 0.329 0.333 0.360 0.330 0.363 0.381 0.356 0.345 0.342 0.258 0.310 0.288 0.321 0.306 0.322 0.326 0.318 0.349 0.350 0.426 0.372 Gini 1990 0.279 0.293 0.328 0.296 0.262 0.313 0.293 0.319 0.352 0.358 0.336 0.378 0.351 0.342 0.354 0.344 0.367 0.319 0.296 0.295 0.312 0.294 0.305 0.348 0.350 0.277 371 0.361 1993 0.344 0.313 0.355 0.296 0.285 0.341 0.290 0.307 0.379 0.359 0.340 0.378 0.379 0.347 0.337 0.314 0.404 0.337 0.290 0.318 0.354 0.311 0.331 0.321 0.318 0.334 0.389 0.378
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,
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geographical areas and across urban and rural areas exhibits the same trend of low and near constant indices.
Figure 5 presents ADB (2007) comparisons of changes in inequality in the East Asian region since 1990. The Indonesian
FIGURE 5: Changes in Gini Coefficient for Expenditure/Income Distributions, 1990s2000s (percentage points)
Note: Years over which changes are computed are as follow: Armenia (19982003); Azerbaijan (1995 2001); Bangladesh (19912005); Cambodia (19932004); PRC (19932004); India (19932004); Indonesia (19932002); Kazakhstan (19962003); Korea (19932004); Lao PDR (19922002); Malaysia (19932004); Mongolia (19952002); Nepal (19952003); Pakistan (19922004); Philippines (19942003); Sri Lanka (19952002); Taipei, China (19932003); Tajikistan (19932003); Thailand (19922002); Turkmenistan (19982003); and Viet Nam (19932004); Income distribution for Korea and Taipei, China; expenditure distribution for the rest. Source: Ali (2007).
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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 and Top 20 Percent 1990s2000s (in 1993 PPP dollars)
Note: Years over which changes are computed are as follow: Bangladesh (19912005); Cambodia (19932004); PRC (19932004); India (19932004); Indonesia (19932002); Lao PDR (19922002); Malaysia (19932004); Nepal (19952003); Pakistan (19922004); Philippines (19942003); Sri Lanka (19952002); Thailand (19922002); and Viet Nam (19932004); numbers is parenthesis pertain to annualized growth rates. Source: Ali (2007).
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dollars in selected Asian countr ies. Indonesia once again illustrates the relative similar ity of g rowth 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 demonstrates 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, 19812004

Country Bangladesh China-Rural China-Urban India-Rural India-Urban Pakistan Indonesia Lao PDR Malaysia Philippines Sri Lanka Thailand Viet Nam Argentina-Urban Brazil Chile Colombia Peru Mozambique Namibia Nigeria Zambia Zimbabwe 1981 25.88 24.99 18.46 31.57 34.21 33.35 33.29 30.40 48.63 41.04 32.47 45.22 35.68 44.51 57.57 56.43 59.13 45.72 44.49 74.33 38.68 60.05 56.17 1984 26.14 26.69 17.08 30.06 33.33 33.35 33.29 30.40 48.63 41.04 32.47 44.63 35.68 44.51 57.88 56.43 56.12 45.72 44.49 74.33 38.68 60.05 56.17 1987 28.85 29.45 20.20 30.13 35.57 33.35 33.12 30.40 47.04 40.63 32.47 43.84 35.68 44.51 59.31 56.43 53.11 45.10 44.49 74.33 38.68 60.05 56.17 1990 28.56 30.57 24.78 29.49 35.06 33.23 34.65 30.40 46.17 43.82 30.10 45.03 35.68 45.35 60.68 55.52 52.46 43.87 44.49 74.33 42.71 60.05 56.17 1993 28.27 32.13 28.47 28.59 34.34 30.31 34.36 30.40 47.65 42.89 32.30 46.22 35.68 45.35 59.82 55.47 54.27 44.87 44.49 74.33 44.95 52.61 52.81 1996 33.00 33.62 29.09 29.02 35.08 28.65 36.55 37.00 48.84 46.16 34.36 43.39 35.58 48.58 59.98 55.06 56.96 46.24 44.49 74.33 46.50 49.79 50.12 1999 33.42 35.39 31.55 29.52 35.96 33.02 31.73 37.00 49.15 46.09 33.24 43.53 35.52 49.84 59.19 55.55 57.92 49.82 45.58 74.33 45.33 53.44 50.12 2002 33.42 38.02 33.46 30.04 36.85 30.39 34.30 34.67 49.15 44.48 40.18 41.96 37.55 52.52 58.75 54.92 58.83 54.65 47.11 74.33 43.60 50.74 50.12 2004 33.42 38.09 33.98 30.46 37.59 31.18 34.30 34.67 49.15 44.48 40.18 41.96 34.41 51.28 56.99 54.92 58.83 52.03 47.11 74.33 43.60 50.74 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).
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FIGURE 7: Economic Inequality in Selected Asian Countries, 19812004

Source: World Bank Poverty Monitor (http://iresearch.worldbank.org/PovcalNet/Jsp/index.jsp).
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 shar pest 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
Years FIGURE 8: Rural Gini Index in China and India, 19812004
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Year FIGURE 9: Urban Gini Index in China and India, 19812004

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 ver y 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
data, but it was relatively evenly distributed amongst the poor segments of the population. The result was the economic TABLE 9: Indonesia Economic Indicators, 19642007
Year 1964 1969 1976 1978 1980 1981 1984 1987 1990 1993 1996 1999 2002 2005 2006 2007 GDP Growth 3.5 7.1 6.9 7.7 7.9 7.4 6.0 3.9 7.2 6.5 8.0 0.8 4.5 5.7 5.5 6.3 Poverty 60.00* 40.08 33.31 28.56 26.85 21.64 17.42 15.08 13.67 17.65 23.43 18.20 15.97 17.75 16.58 Gini Index 0.35 0.35 0.34 0.38 0.34 0.33 0.33 0.32 0.32 0.34 0.36 0.33 0.34 0.33 0.36 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.
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FIGURE 10: Economic Growth, Poverty and Inequality in Indonesia, 19642007

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, 19762007

Source: Constructed from BPS data, various edition.
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FIGURE 12: Global Inequality and its Components, 18201992

Source: Bourguignon and Morrisson (2002) and World Bank (2005).
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 longter m 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 Indonesias human development reports of 2001 and 2004 describe variations in a range of nonincome 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 g ross 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
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TABLE 10: Comparison of per Capita GRDP and HDI, 2002

GRDP US$ PPP D.I. Yogyakarta Maluku North Sulawesi Jambi Bengkulu Central Java Lampung Riau West Sumatera North Maluku South East Sulawesi Central Kalimantan East Nusa Tenggara DKI Jakarta West Java Gorontalo North Sumatera South Sulawesi South Sumatera East Kalimantan Bali Banten East Java Bangka Belitung Central Sulawesi Nangroe Aceh Darussalam South Kalimantan West Kalimantan West Nusa Tenggara Papua 1,581 950 1,695 1,270 1,188 1,340 1,085 2,050 1,714 1,094 948 2,321 756 7,705 1,680 1,117 2,357 1,340 1,769 9,242 2,497 2,727 1,641 2,083 2,053 3,051 2,092 1,975 2,290 4,180 GDRP Rank 20 28 17 23 24 22 27 13 16 26 29 8 30 2 18 25 7 21 15 1 6 5 19 11 12 4 10 14 9 3 HDI 70.8 66.5 71.3 67.1 66.2 66.3 65.8 69.1 67.5 65.8 64.1 69.1 60.3 75.6 65.8 64.1 68.8 65.3 66.0 70.0 67.5 66.6 64.1 65.4 64.4 66.0 64.3 62.9 57.8 60.1 HDI Rank 3 12 2 10 14 13 18 5 8 19 26 6 28 1 17 24 7 21 16 4 9 11 25 20 22 15 23 27 30 29 GRDP Rank HDI Rank 17 16 15 13 10 9 9 8 8 7 3 2 2 1 1 1 0 0 1 3 3 6 6 9 10 11 13 13 21 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 Indonesias 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
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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.
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 improvements 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 barriers 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
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FIGURE 14: Infant Mortality and Life Expectancy, 19602000

Source: BPS, Bappenas and UNDP (2001).
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 ver y 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.
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Indonesias Economic Transformation and Underestimation of Inequality Economic Diversification of Indonesia

The Indonesian development story is just four decades old. In that time it moved from being an overwhelmingly rural, lowincome economy to a diversified middleincome countr y. 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 TABLE 11: Agriculture and Manufacturing Sector Contribution, 19712007
Agricultural Year GDP Share 44.0 24.0 17.9 16.1 18.1 15.7 13.8 Employment Share 64.2 54.8 56.0 41.2 45.0 44.3 41.2 Manufacturing GDP Share 8.8 13.0 19.4 26.8 25.0 30.7 27.4 Employment Share 6.5 8.5 10.2 12.9 11.3 13.2 12.4
1971 1980 1990 1997 1998 2002 2007
Source: BPS & Bank Indonesia, various publications and years.
FIGURE 15: Gross Domestic Product at Current Market Prices, by Industrial Origin, 19682005 (billion rupiahs)
Source: BPS (1997) Statistics During 50 Years Indonesian Independence; BPS, Statistical Year Book of Indonesia 2005/2006.
168 Inequality and Social Justice in Asia
FIGURE 16: Economic structure in Indonesia, 19512000

Source: Daan Marks, The Service Sector in Indonesias National Accounts, 19512000 (2005).
TABLE 12: Structure of Provincial GDP Sector-wise (in percent)

1975 A Aceh North Sumatra West Sumatra Riau Jambi South Sumatra Bengkulu Lampung Sumatra Jakarta West Java Central Java Yogyakarta East Java Bali Java-Bali West Kalimantan Central Kalimantan South Lalimantan East Kalimantan Kalimantan North Sulawesi Central Sulawesi South Sulawesi Southeast Sulawesi Sulawesi West Nusa Tenggara East Nusa Tenggara Maluku Papua Eastern Indonesia Indonesia 47.3 41.0 43.7 2.8 50.0 20.9 53.5 56.4 21.8 1.7 34.6 43.6 41.6 42.9 47.8 33.8 51.3 53.9 40.9 13.4 28.1 45.1 63.8 53.0 43.8 51.4 60.8 69.1 63.3 20.3 45.9 30.9 I 22.8 18.8 16.5 91.2 17.8 47.3 6.6 9.1 56.4 23.0 22.4 13.2 14.2 13.1 11.9 17.4 13.7 10.0 7.0 62.1 40.3 8.5 6.8 5.1 23.2 7.3 7.0 4.9 5.3 63.9 30.0 31.6 S 29.9 40.3 39.8 6.0 32.2 31.8 39.9 34.5 21.8 75.3 43.0 43.2 44.2 44.0 40.5 48.8 35.1 36.0 52.2 24.5 31.6 46.4 29.4 41.9 33.0 41.3 32.2 26.1 31.4 15.9 24.1 37.5 M 3.5 6.3 9.5 2.2 9.2 19.1 1.9 7.3 6.4 15.5 8.0 9.5 8.9 11.7 3.0 10.6 10.5 3.9 4.7 5.0 6.0 4.4 1.2 3.6 1.3 3.5 2.4 2.3 1.1 0.5 1.3 8.2 A 17.9 34.5 31.9 5.4 34.3 18.1 34.1 41.9 21.9 1.1 21.6 30.5 28.8 25.5 34.7 20.6 27.6 36.4 26.1 9.3 16.7 35.4 42.3 42.3 40.2 40.8 48.0 50.0 32.8 18.1 34.2 21.9 I 66.4 25.8 18.8 81.4 20.8 44.8 17.9 14.9 48.2 37.9 39.5 30.2 16.9 27.9 11.7 33.1 23.5 20.4 23.9 71.2 53.0 12.0 16.3 16.7 14.8 15.5 10.5 6.9 24.7 57.3 29.7 37.9 1990 S 15.7 39.7 49.3 13.2 44.8 37.1 48.0 43.1 29.9 61.0 38.9 39.3 54.3 46.6 53.6 46.3 48.9 43.2 50.0 19.5 30.3 52.6 41.4 41.0 45.0 43.7 41.6 43.1 42.4 24.6 36.1 40.3 M 28.7 18.2 12.1 6.5 14.4 19.7 3.0 10.9 15.7 26.4 20.4 24.9 10.3 21.0 5.3 22.1 18.7 9.8 16.9 31.3 25.6 5.7 5.9 7.8 2.3 6.6 2.8 1.9 14.4 2.4 5.3 19.6 A 23.9 24.5 24.4 16.9 29.2 19.8 40.1 37.4 22.8 0.1 12.3 19.9 16.6 17.5 20.7 11.6 27.3 41.7 25.3 6.4 14.9 21.0 45.3 33.5 41.1 33.7 24.7 42.5 36.5 10.0 26.4 15.8 I 50.2 33.5 22.6 67.7 33.0 54.8 10.5 22.7 46.8 27.5 53.8 40.5 24.8 37.4 15.4 39.0 29.9 14.5 38.5 79.5 61.5 32.6 38.4 27.3 19.3 25.7 44.8 11.2 12.6 60.1 42.6 42.4 2004 S 26.0 42.0 53.0 15.4 37.9 25.4 49.5 39.9 30.4 72.4 33.9 39.6 58.6 45.1 63.9 49.5 42.8 43.7 36.2 14.1 23.6 46.4 7.7 39.1 39.6 40.5 30.5 46.3 51.0 20.9 30.9 41.8 M 18.3 25.4 12.2 30.9 11.8 22.6 4.0 11.8 23.1 15.9 42.6 32.6 14.7 29.6 9.0 29.2 19.8 9.0 15.5 37.5 29.7 9.2 38.9 13.5 6.2 10.9 3.4 1.6 8.1 5.6 4.5 26.3 Structural Change 3sector 54.8 33.0 38.7 46.8 41.5 15.0 26.8 38.0 19.2 8.9 62.7 54.5 49.9 50.7 54.1 44.5 47.9 24.5 63.0 34.7 42.3 48.3 36.9 44.4 13.0 36.9 75.5 53.2 53.7 10.1 39.0 30.3 9sector 58.7 50.9 41.9 109.5 43.8 24.8 34.1 43.6 (n.a.) 39.7 77.1 58.9 49.9 62.1 66.4 (n.a.) 54.0 29.3 63.0 67.2 (n.a.) 59.3 50.2 36.1 (n.a.) 82.6 55.9 54.4 27.4 (n.a.) 56.0
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Note: Based on current prices: A = Agriculture; I = Industry; S = Service; M = Manufacture, which is a subset of I. Source: Hal Hill, Indonesias Changing Economic Geography, ANU, 2008.
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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 employment. Ag r 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, 19502007

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).
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Kuznets, which was the source of much of the early literature on the growthinequality 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, 19861999

Source: Irawan, Ahmed and Islam (2000) Labour Market Dynamics in Indonesia, Analysis of 18 Key Indicators of the Labour Market (KILM) 19851999. Jakarta: International Labour Office.
FIGURE 19: Real and Nominal Wages in Indonesia, 20002007 (1995 constant prices)
Source: ILO, Labour and Social Trends in Indonesia, 2008.
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tended to be relatively constant during the per iod of the economys 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 Evolution of Inequality in the New Order

In the absence of any major redistribution of income at the beginning of the development 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 Indonesias 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. Indonesias success (in contrast to many other oil exporting countries, 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 proportionately greater on lower income households.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 Indonesias economic growth was widely shared. Sharp declines in absolute poverty followed and further provided evidence of Indonesias 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 Indonesias gross primary enrolment ratio stood at around 68 percent
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compared to around 80 percent for Thailand and over 90 percent for Malaysia. By the end of the 1980s, Indonesia enjoyed the highest primary enrolment ratios amongst neighbouring countries. This was reflected in a sustained rise in Indonesias 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
FIGURE 20: Primary Enrolment in Southeast Asia, 19651990

Source: BPS, Bappenas, and UNDP (2001).
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FIGURE 21: Education and Health Expenditure, 19691998 (as percent of development expenditure)
Source: BPS, Bappenas and UNDP (2001).
FIGURE 22: Primary School INPRES Budget, 19741998

Source: MoF, Financial Notes, various years.
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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 and Implications 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 concentration and income inequality. These are summarized below. First, asset ownership and distribution in the countrys 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 summar ized 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 corporations remains blurred even in the present day. Indonesian conglomerates were held together since their inception in a web of cross-holdings and inter-linked directorships. 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).
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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 gover nment 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, 19632003

Java Average Land Holdings (ha) 1963 1973 1983 1993 2003 0.70 0.60 0.58 0.47 0.30 Land Gini 0.45 0.49 0.56 0.72 Outside Java Average Land Holdings (ha) 1.90 1.50 1.38 1.19 0.80 Land Gini 0.48 0.48 0.64 National Average Land Holdings (ha) 1.10 1.00 0.98 0.83 0.70 Land Gini 0.55 0.50 0.64 0.72 Land Theil Index 0.29 0.28 0.23 0.23 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, 19832003

1983 Household < 0.5 Ha 0.50.99 Ha 1.01.99 Ha > 2.0 Ha 6,412,246 3,671,243 2,922,294 2,168,315 Share (%) 42.26 24.19 19.26 14.29 1993 Household 10,631,887 4,348,303 3,132,145 1,601,409 Share (%) 53.93 22.06 15.89 8.12 2003 Household 14,028,589 4,578,053 3,460,406 2,801,627 Share (%) 56.41 18.41 13.91 11.27
Source: BPS, Agriculture Census, various years.
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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 redistribution 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 Richer Household 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 pronounced 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 consumption 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 childrens 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 nonagr 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 households in the economy the greater the underestimation of household consumption as a proxy for household income. In fact, this is likely to be the most plausible explanation for the constancy in Indonesias income distribution indices despite the countrys 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 higherincome 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
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FIGURE 24: Official (SUSENAS) and Corrected Gini Index, 19762002

Source: BPS data, calculation by UNSFIR.
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 Shifts during 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
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Order period from 1967 to 1996. The advent of the Green Revolution and the establishment of the food logistics agency BULOGcontributed towards stabilizing food prices which combined with investment 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 inter pretations 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 todays Indonesia.
Economic Inequality and Future Indonesian Development

The outbreak of the Asian Economic Crisis in 1998 resulted in a dramatic transformation in fortunes. Not only did the country endure its worst economic crisis in half a centur y, but the countr y 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 industries. 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 Indonesias 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 Indonesias impressive record on growth, equality and poverty reduction is likely to be sustained under the changing conditions of the domestic democracy and international globalization. If not it is questionable whether income inequality will
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FIGURE 25: Poverty and Unemployment Rate Post-Crisis

Source: BPS, Labour Force Situation Report and Indonesian Statistics, various years.
FIGURE 26: Unemployment Rate in Selected Asian Countries, 19902007

Source: ADB Key Indicators 2008.
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follow the rising trend so familiar in other Asian countries. Although a detailed discussion of Indonesias 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. Indonesias 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 employment 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/ ).
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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 development 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 manufacturing base and with a less developed higher educational infrastructure, the major source of future economic growth in Indonesia is likely to focus on the exploitation 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 governments 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 education, 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 organizations.While Indonesian officials are now required to allocate at least 20 percent of the total government budget on education by Constitutional law, regional governments 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 Indonesias inequality predicament becomes more apparent and as the potential
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for regional conflict around competing claims to Indonesias natural commodities begins to surface, inequality is likely to emerge as a central issue on the policy horizon.
Conclusions and Policy Recommendations 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 enor mous 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 questioning 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 urbanization, 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 measurement 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 discovering, sustained economic growth in the context of a globalized free markets can create major imbalances. The very fact that income
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inequality levels in China (once the envy of countries 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, Indonesias 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 Suhartos inner family circle immune from any countervailing power in the militar y. 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 concer ned 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
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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 emergence 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 however, 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 Policy Recommendations

One key issue in arriving at policy recommendations 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 governments ability to tax and spend for social welfare prog rammes 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
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BOX 1: Policy Responses Impacting Inequality

Year Soekarno era 1950 Policy/Program Benteng (Fortress) Programme Information To promote the development of indigenous entrepreneurs faster, Djuanda, the Minister of Welfare, in April 1950 issued a regulation which gave priority to indigenous businessmen to import goods from abroad. To facilitate this import trade, indigenous businessmen were given easy access to cheap credit The Basic Agrarian Law 1960 was a key part of Soekarnos concept on Indonesian socialism and indeed one of the few pieces of socialistic legislation that was ever enacted in the Guided Economy Period. Soekarnos landredistribution programme Evaluation Indigenous importers with inadequate financial resources continued to serve as agents for ethnic Chinese businessmen (AliBaba business). Indonesias experience with its first affirmative programme to promote a strong and self-reliant indigenous business class proved to be a failure and in the second half of the 1950s came to an inglorious end It is very difficult to estimate how much land has been redistributed under this law, because after 1965 there is evidence that landlords took back land that had been confiscated or squatted on by labourers. Implementation of this policy remain blurred (no 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 PKIs members Not yet implemented due to political-economy instability
1960
Land reform
1964
BIMAS programme and slogan Panca Usaha
Agriculture intensification programme by using better ways on farming (use of fertilizer, improved water control, selected seeds, etc.) Involved students from agricultural studies fields
New Order era (Soeharto) 19661968 BIMAS programme with credit support from BRI to farmers
After 1974, production growth tended to decline as the BIMAS intensification programme ran Contd...

Contd... Year Policy/Program Information Evaluation into problems. Credit default increased moderately 1967 BULOG establishment To control rice price, distribution, and import authorities
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In 1969, BULOG was also made responsible to manage rice buffer stock (Presidential Decree No 11/1969)
Repelita I (1969-1970 to 1973-1974)
Emphasized food production, infrastructure rehabilitation and government capacity building (civil service administration) Inmas programme Rice intensification programme carried out by former BIMAS participants, but without government credit To encourage Kabupaten authorities to carry out labourintensive public works with financial assistance from the central government through per capita subsidies Government preferred to increase land productivity to improve farmer income (rural income) rather than distribution of assets/ land On Pelita I, government completed the building of irrigation infrastructures on almost 1.5 million Ha paddy land. Inflation was well-controlled (moderate level) as a result of rice price stability (food availability). Agriculture sector (include irrigation) budget accounted for almost one-third overall government budget To reduce disparity/ inequality on human development, per capita GDRP and income distribution interprovince
1969
1969-70
Kabupaten Public Works Programme
1969 and after
Irrigation Development scheme
1970
INPRES funding system
Government system, which allows direct grants from the center to the regions (allocated at different levels, i.e. Provincial, District and Village
Contd...
188
Contd... Year Repelita II (1974-1975 to 1978-1979) Policy/Program Emphasized employment and distributional equity as well as economic growth Puskesmas development INPRES primary school Government policy to improve public services on health Information
Evaluation
1970s
1974
Government policy to increase primary school enrolment rate and decrease illiteracy rate, in order to improve human capital To increase womens participation on national development agenda 8 roads to equality: regional development, access to health and education services, employment opportunity equality on minimum needs (food, clothes and housing), law access, etc. Most of scholars believe, this jargon was the governments answer to political instability, regional dissatisfaction and social unrest which steadily increased during Pelita II (19731978)
1978
Establishment of State Ministry of Womens Role Government launched jargon Trilogy of Development: growth, stability and equality; and also 8 roads to equality
Repelita (1979-1980 to 1983-1984)
Repelita III was to focus on agriculture sector to achieve food self sufficiency, and to boost manufacturing industry 1979 Income-Generating Project for the Marginal/Landless Farmers (P4K) Joint project of Ministry of Agriculture and BRI to increase income of small farmer self-help groups and organizing them to gain access to formal credit for funding their business Focus to maintain food self-sufficiency and to encourage machinery industry Contd... First phase evaluation showed that the average real income of the participating small-farmers had increased by approximately 40 percent
Repelita IV (1984-1985 to 1988-1989)

Contd... Year 1980s Policy/Program Government policies to increase female income Information Peningkatan Peranan Wanita Tani (P2WT) Peningkatan Peranan Wanita dalam Industri Kecil (P2WIK) Peningkatan Peranan Wanita menuju Keluarga Sehat dan Sejahtera (P2W-KSS) Evaluation
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Training and socialization about new agricultural technology Support rural women in small medium industry (household industries) To improve skill and literacy rate of women, to socialize the significance of family reproductive and health system for women from poor family
Repelita V (1989-1990 to 1993-1994)
Focus on agricultural sector, maintain food self-sufficiency, export promotion, employment opportunities, agro-industry and machinery The Inpres Desa Tertinggal (IDT) programme Established via Presidential Decree to accelerate poverty reduction in left behind villages. IDT consisted of fundRp 20 million/ villagegiven to the communities to manage and execute incomegenerating activities. Promoting income earnings opportunities for the poor Appeal to companies with post-tax income of Rp 100 million or more to contribute up to 2 percent of their aftertax income to help launch a new savings and loan programme aimed to assist families who were still below the poverty line Programme to provide supplementary food to primary school students in IDT villages Expected to serve 29.28 million school students The actual amount of the IDT grant per capita basis might be too small; The allocation of IDT grants with equal amount per village was problematic, due to the disparity on population density on each village BKK scheme serves 41 percent of the villages in Central Java
1993
1993
Increasing access to credit via Badan Kredit Kecamatan (BKK) Scheme Takesra/Kukesra
1995
1996
School-feeding Programme in IDT village
Contd...
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Contd... Year 1998 Policy/Program Special Market Operations (OPK) as part of social safety net programme Information OPK commenced by distributing 10 kg of rice each month to eligible households at subsidized price of Rp 1000/kg.
Evaluation In December 1998, nearly 9.3 million households were beneficiaries. Budget for Social Safety Net reached Rp 9 trillion Padat Karya has grown to include 13 subprogrammes involving 8 executing agencies and reaching more than 300 districts
Post Soeharto (Reformation Era)
1998
Employment Generation (Padat Karya Programme)
Programme to provide income support to the unemployed and the poor; obtain production of benefits in the form of lasting social capital, including peoples skills and enterprise Government allocated Rp 20 trillion to provide SMEs with technical assistance and access to credit Sustainable development, poverty reduction, employment creation, social justice, public participation, equal, regional autonomy principle, etc. According to this law, natural-resource-rich provinces will have largest share for natural resources revenue Policymaking process was changed Bappenas no longer has budgetary rights It regulates planning and budgeting process in short and medium term Government target on economic development: poverty reduction, agriculture
1998
SME schemes
Budget on 1998-99 was Rp147.2 billion or 0.9 percent to GDP
Propenas era (20002004)
Economic development with Ekonomi Kerakyatan principle
Inconsistency of national programmes, due to political instability and systemic transition
1999, 2001 and after
Regional Autonomy Law established
Regional disparities were likely to increase. Balancing funds mechanism was started via DAU, DAK and Dana Bagi Hasil
2003
State Finance Law No 17/2003
2004
Law on National Development Planning System established To achieve economic stability which will provide employment opportunities and
Planning, budgeting, monitoring, and policymaking on national development became more complex
Middle Term Development Plan (2004 2009)
Contd...

Contd... Year Policy/Program minimum needs availability, and also to built strong foundation for sustainable development (vision) Information revitalization, manufacturing competitiveness, improved non oil-gas export, improved investment climate, support to SMEs, labour market, macroeconomic 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 development There are 2 missions which strongly related with equity: (a) Development is equal for all and social justice; and (b) social welfare to achieve national competitiveness Evaluation
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Long-Term Development Plan (2005 2025)
Indonesia yang Maju, Mandiri dan Adil (vision).
Reduction on inequality and regional income disparity; food availability for all; and to serve and improve public housing and infrastructure. Improved human capital; and infrastructures development agenda; employment opportunities; non discriminative development agenda, reduce poverty rate; spatial development Programmes target to 19.1 million households
Government Work Plan 2009
Social Protection and Support Cluster
Programmes under this cluster: Raskin (Rice for the Poor), Jaskesmas, BLT (Bantuan Langsung Tunai), Programme to Increase Farmer Welfare and Programme Keluarga Harapan (Family Hope Plan)
Contd...
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Contd... Year Policy/Program Social Empowerment Cluster Information
Evaluation Each kecamatan which included in this programme will have Rp 3 billion/year as government support. The target is to cover 5720 kecamatan
PNPM Mandiri (National Programme on Social Empowerment) was the focus of this cluster
SMEs Empowerment Cluster
Focus to improve business climate such as ease to do business, special tax for SMEs, and Kredit Usaha Rakyat (People Business 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. Indonesias 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.
period. These measures reflect the changing 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 distribution 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 redistribution or concern for equality to the priority 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 government 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
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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 20092014 medium term development 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 preventing 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 achievements 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 interregional economic inequality with the DAK, and special financial grants have to be made to assist the backward and the most disadvantaged 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.
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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 1 Measurement of Consumer Expenditure in Indonesia: Comments on the SUSENAS Data

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 contains a core questionnaire, which collects information about demographic characteristics of all household members, their education, 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 district 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
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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 intertemporal 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 undertaken with BPS assistance to devolve the collection and analysis of nominal and real wages to five trial districts. Given the decentralization context coupled with the size and heterogeneity of Indonesia in terms of geography, markets, and access, local information 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 timeseries 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)
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End Notes
1. Also see Kaldor (1956). 2. World Banks 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-
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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). 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). Hill (1991), p. 3. See Mishra (2000) for a comparison between Indonesias systemic collapse in the late 1990s and the situation in former USSR following the fall of the Berlin Wall in 1990. 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. 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. Changes in sample size and coverage are described in Appendix 1. 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). 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). For a much quoted comparison between Indonesia and Nigeria see Bevan et al. (1999).
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6 Economic Inequality in Indonesia

Trends, Causes and Policy Response

Introduction: Understanding the Context

Inequality and Social Justice in Asia

Inequality and Social Justice in Asia