Indonesia must address its income inequality

When Indonesia declared independence from Dutch rule in 1945, the country’s founder, Sukarno, called on his people to build a nation that would “stand in strength,” eternally united. That mantra — unity and strength — helped to shape the country’s future, including its approach to economic development. During much of Indonesia’s early history, its egalitarian distribution of wealth and assets set it apart from its neighbors.
But seven decades later, the legacy of equality is fading. If Indonesia is to remain one of Asia’s most robust economies, it is essential that its current leadership recommit to narrowing the socioeconomic gap.
During much of the 1970s and 1980s, Indonesia’s low level of income inequality helped to raise living standards and reduce poverty. In 1970, just 25 years after independence, the country managed an enviable distribution of wealth among a diverse population, and maintained it for decades.
However, since the Asian financial crisis in 1997, income gaps have widened throughout the region, and in Indonesia in particular, where social welfare programs have barely stemmed the rise in inequality.
To economists like us, this trend is deeply worrying. Because persistent high or rising inequality can contribute to political instability and undermine social cohesion, it is critical that Indonesia address it. Paradoxically, Malaysia’s experience is instructive.
In Malaysia, income inequality is no longer primarily a function of ethnicity, or the rural-urban divide, as it once was. Thanks to successful redistribution strategies adopted during the 1970s and 1980s, average per capita income increased, and poverty rates fell dramatically. Though wealth distribution remains a major concern, Malaysia’s income equality has been steadily improving since the mid-1970s.
Indonesia is moving in the opposite direction. Not only does it have one of the highewt levels of wealth inequality in the world, it also suffers deep regional disparities. The poorer eastern provinces, which have a history of ethnic violence, lag behind the rest of the country on human development indicators, infrastructure quality and access to education. Despite the country’s overall progress, food insecurity and child malnutrition remain serious issues in the east. In other words, it is not just Indonesia’s income distribution that concerns us, but how unequal access to health care, education and social services has become.

The world’s most populous Muslim country is in danger of betraying a seven-decade legacy of egalitarianism that distinguished it from its neighbors.

M. Niaz Asadullah & Maliki

Our concern is widely shared. Last month, scholars, practitioners, and policymakers from around the world gathered at the Indonesian Development Forum to explore solutions to the many forms of inequality that are affecting Indonesia today. The challenges are complex, and discussions focused on the need for multipronged solutions. As Columbia University’s Jeffrey D. Sachs noted, greater investment in education, and more effective wealth redistribution strategies, are the key areas that Indonesia’s government must focus on.
The classroom is the foundation of sustainable development everywhere. Access to education is one of the best ways for poor or disadvantaged youth to become economically productive and climb out of poverty. Unfortunately, Indonesia’s public schools, especially in the east, are struggling with teacher absenteeism. Children who want to learn simply cannot when their instructors do not show up. Broadening access to education is not only about boosting enrollment rates; it also requires ensuring accountability and improving service quality.
Nevertheless, reforming the education sector alone will not be enough to close Indonesia’s wealth gap. Strategies that the government should consider include expanding social protection, creating more vocational-training programs and overhauling the tax system. In many OECD countries, redistributive policies, like tax breaks and expansion of welfare benefits, have helped reduce inequality. If Indonesia is to hit the targets set by the UN’ Sustainable Development Goals for reducing inequality by 2030, it must follow these countries’ example.
There are many reasons to be hopeful. Bambang Brodjonegoro, Indonesia’s minister of national development planning, has helped make social inequality a key agenda item. This time next year, the Indonesia Development Forum will meet again to gauge progress in our efforts to tackle regional inequality.
Clearly, the political will exists to restore greater equality to Indonesia’s economy. If current leaders can remain as focused on their vision as the country’s founders were on theirs, Indonesia will again serve as a model of unity and strength for the region.
• M. Niaz Asadullah is Professor of Development Economics at the University of Malaya in Kuala Lumpur, and head of the Southeast Asia cluster of the Global Labor Organization. Maliki, a Global Labor Organization research fellow, is Director for Population Planning and Social Security at the Indonesian Ministry of National Development Planning. 
© Project Syndicate