Towards a better measure of income inequality in Indonesia

Abstract

Indonesia has experienced significant economic growth in recent years (on average, 5% in 2000–08), but many people are still living in poverty. Income inequality, as measured by the official Gini coefficient, has also increased. This paper evaluates household income and income inequality in Indonesia, assessing both market and non-market income to reach a more accurate measure of how actual income affects living standards. We find that if household income considers non-market income, income distribution is significantly more balanced, the coefficient of income inequality falls from 0.41 to 0.21 and the income share of the population's poorest deciles increases more than fivefold. The results suggest that market income alone is a misleading measure of income distribution in Indonesia.

Keywords:

• net income
• actual income
• income distribution
• income in kind
• consumption of own production

Acknowledgements

The authors are grateful to Tesfaye Gebremedhin, Muni Perumal, Yogi Vidyattama, Riyana Miranti and Ross McLeod for their valuable and helpful comments. We also received many comments from participants at the 40^th Australian Conference of Economists, in 2011. Responsibility for the final version is that of the authors.

Notes

¹Economic growth's role in reducing poverty has been demonstrated elsewhere. Cameron (2002) found that Indonesia's rapid rate of average real economic growth (7.1% per annum) during 1968–97 did not change inequality levels markedly. Fields et al. (2003) demonstrated that in Indonesia, South Africa, Spain and Venezuela, those with the lowest average household incomes enjoyed the most favourable income changes during the 1990s.

²Leigh and Van der Eng (2010) compare expenditure- and income-based Gini ratios for 1982–2004 and then use the household income data to analyse trends in top income.

³Leigh and Van der Eng (2010) summed individual data to household levels for 1999 and 2002.