Will Indonesia face economic slowdown due to rising inequality?

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Indonesia’s growing inequality threatens to stunt its economic growth, and bring forth civil strife. What are the root causes of inequality in Indonesia? How can the Indonesian government tackle the root causes of inequality?

By Rasa Sarwari

In the past 16 years Indonesia has sustained an impressive growth rate above 4%, helping to bolster its economy and generate more wealth for Indonesians. However, Indonesia’s growth has mainly profited the richest 20%, while the vast majority of Indonesians have been neglected.

Growing inequality in Indonesia

Accordingly, Indonesia has one of the fastest growing rates of inequality in East Asia, which is causing alarm among many Indonesians. From 2003 to 2010, the average consumption per person for Indonesia’s wealthiest 10% was above 6% annually, while the poorest 40% saw a growth in consumption of less than 2% annually.

Subsequently, in a 2014 survey on public perceptions of inequality, the majority of Indonesian’s surveyed thought their income distribution was “very unequal” and wanted the government to do more to tackle inequality. In light of the disparity between Indonesia’s poor and wealthy, there has been a salient increase in the country’s Gini coefficient in the past 16 years, as it has risen from 30 in 2000 to 41 in 2014.


Even the World Bank Country Director for Indonesia, Rodrigo Chaves has noticed the growing issue of inequality and has stated that “despite impressive economic growth and poverty reduction, equity in growth has been more elusive in Indonesia.  With the affluent racing ahead faster than the majority, in the long term Indonesia risks slower growth and weakened social cohesion if too many Indonesians are left behind. Their lost potential is Indonesia’s lost potential,”

Therefore, the repercussions of not addressing Indonesia’s issue of inequality could be dire, as it may result in economic slowdown, increased risk on civil strife, and increased poverty. The issues linked to the long-term effects of inequality is also of concern to many Indonesians, and 60% of those surveyed in the 2014 report have said they would agree to slower economic growth in return for lower inequality.

Root causes of inequality in Indonesia

In response to the growing problem of inequality, the Indonesian government has put forth its Medium Term Development Plan, which seeks to reduce the Gini coefficient from 41 to 36 by 2019.

However, if the government plans on fulfilling their objective by 2019, they must effectively tackle Indonesia’s four root causes of inequality:

  1. Inequality of the labour market, as skilled workers reap the rewards of economic growth, while the majority of unskilled workers are stuck in informal and low paying jobs, with little opportunity to develop new skills.
  2. High concentration of wealth among elites, as the top 20% of Indonesia’s population is getting richer and richer, while the poor are getting poorer, driving inequality.
  3. Disparity in the resilience to shocks, the wealthy are much more capable of withstanding shocks than the poor are, as poor household are more vulnerable to losing income that is needed for health-care and education.
  4. Inequality in opportunities, as the opportunities available to children is often determined by their parent’s income and level of education. Thus, children with poor, uneducated parents are at more of a disadvantage than children with wealthy, educated parents.

Source: http://www.tnp2k.go.id/en/acceleration-policies/developments-in-poverty-levels-in-indonesia/

Accordingly, in the 2014 survey on inequality more than 50% of people believed that poverty was often out of the hands of the individual, and the same amount of people were in favour of more social protection polices, to aid poor and vulnerable families. Social protections programs could come in the form of conditional cash payments, skill training and education subsidies, in order to help poor and vulnerable Indonesians find more opportunities so they may escape the cycle of poverty.

Moreover, the World Bank’s lead economist in Jakarta, Vivi Alatas stated that “Indonesia can improve infrastructure in the provinces so that children in remote provinces have an equal start to life – through better health-care and education – that would determine their opportunities later in life. When these children enter the labour market, Indonesia can provide skills training to informal workers so that they are not trapped in jobs with low pay and little mobility. And many fiscal policy options are available that would improve revenue and redirect spending to programs that directly benefit the poor”.

Solutions to combat Indonesia’s inequality

In light of Indonesia’s high level of inequality there are measures that can reduce the gap between the rich and the poor, and help Indonesians escape the cycle of poverty.

Brazil, another large developing country, was able to reduce their Gini coefficient by 14 points, when its government focused on public policies to reduce inequality.

Additionally, the following options are some of the key methods in which the Indonesian government can tackle inequality:

  • Implementing social protection programs, like skills training, education subsidies, and conditional monetary payments.
  • Improved access to social services, such as education and healthcare can empower vulnerable and poor families, and increase their resilience during shocks.
  • Utilising government funds to combat inequality.
  • Employing a just taxation system.
  • Improving tax collection from the wealthy.