Growth, Poverty, and Inequality under Jokowi

SUMMARY

The political authority of President Joko Widodo (Jokowi) was bolstered in the third quarter of 2015 by a cabinet reshuffle, his coalition's gaining a parliamentary majority, and several foreign-policy developments. Indonesia's request to rejoin OPEC, for example, after having left in 2008, seemed more about international relations than oil prices, while official visits to the Middle East and the United States allowed Jokowi to project his presidency on the international stage. He still faces resistance from within his own party, however.

Jokowi's politically bold reshuffle of economic ministers in August soon yielded a range of policy announcements. In September and October, his government introduced its first substantial set of reforms—a number of economic policy packages intended, among other things, to attract investment and stimulate domestic demand. If even half of these policies are put in place, the impact on Indonesia's economy should be tangible.

Few countries have escaped the effects of falling global commodity prices and China's growth slowdown. At 4.7%, year on year, in the third quarter Indonesia's rate of economic growth again fell short of the government's target. Slowing growth and a negative outlook have lowered market expectations and weakened the rupiah, which is also burdened by the large outstanding external debt held by corporate borrowers. Indonesia's real effective exchange rate has recently begun to depreciate, however, which may stimulate exports. Growth prospects will also improve if the substantial increase in capital and infrastructure spending allocated in the state budget is realised.

Against this backdrop, we focus on what has happened to poverty and inequality in Indonesia since Jokowi took office. The distributional impacts of the current macroeconomic climate are likely to be hardest felt by the poor. Indonesia is well known for its record on poverty reduction, but between September 2014 and March 2015 the share of the population in poverty increased, even though economic growth was close to 5.0%. Slowing growth, rising food prices, the falling real wages of farmers, and the delayed disbursement of fuel-price compensation all had an effect. Such impacts may be mitigated in the medium term by Jokowi's budget reallocations to infrastructure, if realised, and his expansion of social spending.

Keywords:

• growth
• poverty
• inequality
• inclusive growth

JEL classification:

• E60
• I32
• I38
• O11
• O53

POLITICAL DEVELOPMENTS

Between July and October 2015, events in Indonesia—notably, a cabinet reshuffle, the changing balance of power in the People's Representative Council (DPR), and foreign-policy developments—did much to bolster President Joko Widodo's (Jokowi's) authority domestically after what had been a rocky period. Jokowi's presidency began in October 2014 with an undeniable political success: the budget reallocation of fuel subsidies to infrastructure and social spending. Since then, however, and despite new fiscal space, many of the 10 major infrastructure projects that he had identified as priorities (including flagship port and maritime developments) have failed to make much progress, owing in part to political infighting, a lack of cooperation and coordination among ministries, and Jokowi's reportedly indecisive and non-confrontational leadership style. The making and unmaking of policy has become surprisingly common, and ministers have enacted policies that Jokowi has later had to overturn.

In August, Jokowi made his long-awaited first cabinet reshuffle, in which five ministers were removed and one was reassigned. New appointees included a set of well-known economists: Darmin Nasution, a former governor of Bank Indonesia (BI), the central bank, who became coordinating minister of economic affairs; Rizal Ramli, a former minister of finance, who became coordinating minister for maritime affairs; and Thomas Lembong, a former investment banker who reportedly played an important role in Jokowi's election victory, who became minister for trade. These appointments were a response to macroeconomic circumstances and have already yielded a broad set of policy announcements.

Other changes included the movement of retired general Luhut Panjaitan from presidential chief of staff to coordinating minister for political, legal, and security affairs, replacing Tedjo Edhy Purdijatno; former coordinating minister for the economy Sofyan Djalil, who was appointed minister for national development planning; and Pramono Anung, one of the president's closest advisors, who was appointed cabinet secretary. Teten Masduki, a former lawyer and anti-corruption activist, was appointed the president's new chief of staff. Jokowi also appointed General Gatot Nurmantyo chief of the armed forces and Sutiyoso, a former governor of Jakarta, head of the State Intelligence Agency. Sutiyoso is chair of PKPI (Indonesian Justice and Unity Party), so his appointment was widely seen as political. The police commissioner, General Budi Waseso, was removed from his position as head of the criminal investigation unit (Kabareskrim).¹

Jokowi's authority was also strengthened in September, by the surprise defection of PAN (National Mandate Party) from the opposing Red-and-White Coalition. This move in effect gave Jokowi's Great Indonesia Coalition a parliamentary majority for the first time—it holds 289 of 560 seats in the DPR, against the 201 held by the Red-and-White Coalition² — but Jokowi still faces resistance from within his own party, PDI–P (Indonesian Democratic Party of Struggle), which did well in the cabinet reshuffle (Rizal is close to party chair and former president Megawati, and Pramono was party secretary-general).

Several foreign-policy developments helped to reassert Jokowi's domestic authority by projecting his presidency on the international stage. A presidential tour of the Middle East in early July was one such opportunity. A visit to the United States in late October to meet with President Obama was another. Meanwhile, Indonesia's decision to rejoin OPEC, the cartel of oil-producing nations, seemed more about international relations than oil prices. Indonesia left OPEC in 2008, on becoming a net importer of oil. Given that the purpose of a cartel is to raise prices to benefit suppliers at the expense of buyers, and that Indonesia is still a net buyer of oil, if OPEC succeeds then Indonesia may suffer economically. These developments taken as a whole suggest that Jokowi is giving more attention to foreign policy as he enters his second year in office.³

MACROECONOMIC DEVELOPMENTS

Economic Growth

Few countries have escaped the effects of falling global commodity prices and China's growth slowdown. Indonesia's rate of economic growth continues to be lower than the government's target of 5.3%, but the country is weathering the global storm in the sense that growth has not slowed further. Medium-term growth prospects will be improved if the substantial increase in capital and infrastructure spending allocated in the state budget is realised. This boost to the production– possibility frontier for Indonesia could act as an investment-led Keynesian stimulus, and would mean that Indonesia's budget reallocations could to some considerable extent counteract the global winds. Indonesia at the very least has wriggle room, thanks to a fiscal stimulus that other countries lack.

In the third quarter, the Indonesian economy grew by 4.7% (year on year), as it had in the first and second quarters. This rate of growth sits uneasily with the government's National Medium-Term Development Plan 2015–2019, which aims for growth of 6.0%–8.0% per year in order to achieve key national goals, such as becoming a high-income country (Bappenas 2014). Economic growth has been slowing since the fourth quarter of 2010, when it peaked at 6.8%. This slowing is visible across almost all sectors (table 1). In the third quarter, economic output in mining and quarrying contracted by 5.6%, much more than in the first quarter but slightly less than in the second. This is also reflected in the data on provincial economic growth; the economies of Aceh, Riau, and East Kalimantan contracted during the second quarter.⁴

Table 1. Components of GDP Growth, 2013–15 (% year on year)

In contrast to growth in mining and quarrying, growth in agriculture—significant for 35% of the labour force—was relatively strong in the second and third quarters. Underlying this growth, however, was a shift in planting and harvest times owing to changes in climatic conditions. Some agricultural production thus moved from the first quarter to the second (BPS 2015a). The growth of the manufacturing sector in the second and third quarters is still slower than it was in most of 2014. Moreover, economic growth in wholesale and retail trade, one of the most important non-tradable sectors, was only 1.5% in the third quarter, down from 4.0% in the first quarter and 1.8% in the second. In previous quarters, it was activity in this sector that prevented a greater slowdown in growth. Wholesale and retail trade constitutes 14% of total value added in Indonesia's GDP (about the same as agriculture). Slow growth in this sector is worrying because it indicates weak domestic demand.

In the second and third quarters, on the expenditure side of GDP, underlying the trends in aggregate economic growth are trends in exports, investment, and government consumption. Indonesia's export contraction continued, but this trend needs to be viewed in the context of falling global commodity prices and slower growth in China. The global prices of commodities that matter most to the Indonesian economy have been declining since early 2011. Nickel and aluminum, two base metals that serve as indicators of global demand, are close to six-year lows, which is bad news for Indonesia. The primary cause of weak exports was declining commodity prices for Indonesia's main export commodities—notably, crude oil, palm oil, copper, coal, and rubber (figure 1). In May 2015, Indonesia's exports to China were half the value of what they were at their peak in December 2013, while Indonesia's exports to Japan, which have also been on a downward trajectory, were a third of the value of what they were in mid-2011.

FIGURE 1 Index of Selected Commodity Prices, 2009–15

Source: Data from the IMF (2015b).
Note: January 2011 = 100. PO = palm oil.

Improvements in investment trends in Indonesia over the last year have been constrained by weak investor confidence, itself owing to the weakening of economic growth prospects. Policy reforms may stimulate investment. In the last few quarters, private consumption, the largest expenditure component of GDP, has been growing slightly faster than GDP itself, and to some extent maintaining economic growth. BI's consumer confidence index, however, fell to 99.3 (a negative outlook) in October 2015 from 112.6 (a positive outlook) in August 2015. The index is now at its lowest point since 2010.⁵ Private consumption remained stable at 5%. The government looked to boost demand by introducing expansionary fiscal measures in social policy and by exempting certain goods from luxury taxes. Although the former method is likely to increase household consumption, one could ask whether the latter method is the best way to boost aggregate consumption.

In the third quarter, investment and government consumption picked up because of faster realisation of planned expenditure, after a delay in previous quarters. Government consumption growth jumped to 6.6% (from 2.1% in the second quarter) and investment growth increased to 4.6% (from 3.7%). Imports contracted strongly in the second quarter (by 7.0%) and the third quarter (by 6.1%). In the second quarter, the biggest import contraction was, worryingly, in capital equipment, which fell by 22% in value and 32% in quantity (BI 2015). That said, exports contracted less in the second and third quarters than in the first.

Inflation, Interest-Rate Policy, and the Exchange Rate

Annual headline inflation has been stable but relatively high, at around 7.0%, since May. In September, however, it fell slightly, to 6.8%, and continued to fall in October, to 6.2%. The increase in fuel prices drove up headline inflation during February–May. Rising headline inflation during June–August, however, was triggered by factors unrelated to fuel prices or ‘administered’ inflation (of items less affected by market forces). Although the price of diesel has been cut slightly as part of recent economic policy packages,⁶ other fuel prices have changed little since April 2015 and, accordingly, administered inflation has been stable. ‘Volatile’ inflation—that is, inflation of prices of items most susceptible to shocks, such as food, fuel, and electricity—was 6.3% in April, climbed to 9.7% in August, but fell back to 7.0% in October (figure 2). The mid-year increase in volatile inflation is likely to have played a major role in raising poverty estimates.

FIGURE 2 The Fuel Price and Inflation, 2014–15

Source: CEIC Indonesia Premium Database.

Prices of staple foods have increased rapidly in recent months. The price of rice, for example, rose by 16.2%, year on year, to 1 October, and the price of sugar rose by 13.3% (figure 3). Although core inflation is stable, at around 5.0%, BI has indicated that it will focus on maintaining financial stability, rather than boosting aggregate demand by reducing interest rates. It lowered its official rate slightly in January, to 7.50% (from 7.75%), but has since left it unchanged. It is entirely possible for base money to expand even when interest rates are constant or rising, yet BI has insisted on maintaining its position on rates—despite slowing growth— because of the risk of capital outflow and its impact on the already weakened rupiah.⁷ In the year to September, the rupiah depreciated against the US dollar by around 14% (figure 4). On 28 August, the nominal exchange rate exceeded the so-called psychological threshold of Rp 14,000 per dollar (there is no evidence to support such a threshold, other than its association with the 1997–98 Asian financial crisis). Slowing growth and a weakening outlook for Indonesia have lowered market expectations and weakened the rupiah, which is also burdened by the large outstanding external debt held by corporate borrowers. As the rupiah depreciates, the servicing costs of external debts increase. Indonesian corporate debt has doubled since 2010, reaching $170 billion in August 2015. A quarter of this amount is short-term borrowing with a maturity of under one year and—worryingly, if the rupiah depreciates further—with 96% held in foreign currency. In total, it is estimated that Indonesian companies have $42 billion in foreign-currency loans to roll over in the next 12 months. Foreign debt held by local developers is a particular concern, as it is denominated in US dollars and the fall of the rupiah has left much hedged debt unprotected (Financial Times, 4 Oct. 2015). On reaching 14,700 per US dollar in early October, its lowest level ever, the rupiah started to rebound (along with other currencies), after the US Federal Reserve hinted that it would continue to hold rates at a low level while economic growth in the United States remained in a risky phase. By 9 October 2015, the rupiah had returned to the level it was before China devalued its currency. Some argue that the announcement in September of the government's second economic policy package also contributed to the rebound (MetroTVNews.com, 10 Oct. 2015).

FIGURE 3 Price Index of Selected Staples, 2014–15

Source: Data from the Ministry of Trade (2015).
Note: 1 October 2014 = 100.

FIGURE 4 Exchange-Rate Index against US Dollar, Selected Countries, 2015

Source: Data from the IMF (2015a).
Note: 6 January 2015 = 100. CN = China. PH = Philippines. TH = Thailand. ID = Indonesia. MY = Malaysia.

Exchange-rate depreciations can be good for economic growth if they generate an export boom. Until June 2014, the nominal exchange rate was highly correlated with the real exchange rate (figure 5). From June 2014 to January 2015, however, the depreciation of the nominal exchange rate was followed by an appreciation of the real effective exchange rate, because the currencies of almost all Indonesia's main trading partners also depreciated against the US dollar. As a result, Indonesia's exports did not become more competitive. Indonesia's real effective exchange rate has recently begun to depreciate, however, which may stimulate exports and provide a much-welcome boost to economic growth.

FIGURE 5 Exchange Rate and Real Effective Exchange Rate Index, 2013–15

Source: CEIC Indonesia Premium Database.
Note: 2010 = 100. REER = real effective exchange rate.

Fiscal Policy

Fiscal policy is likely to be important for economic stimulus in the immediate future, given global events and their downward pull on growth. The revised 2015 budget (table 2) includes a projected increase of almost 20% in tax revenues; a decrease of 61% in energy subsidies, which would save the government more than Rp 200 trillion; an increase of Rp 115 trillion in capital expenditure; and a reduction of the fiscal deficit from 2.3% to 1.9% of GDP, well below the legal limit (3.0% of GDP).⁸ In the first three-quarters of the year, however, the budget's implementation was hampered by poor revenue collection and spending.

Table 2. Budgets for 2014 and 2015 (Rp trillion)

The government's tax-revenue target is deliberately ambitious, owing largely to an expected decline in oil and gas revenue. By September, the government had reached only 54% of its target for overall tax-revenue and 47% of its target for value-added-tax revenue (which is closely linked to economic growth), compared with 65% and 59%, respectively, last September. Yet nominal tax revenues have started to grow, year on year, and it is important to look at the budget from another perspective: that the new government was aware that oil and gas revenue would decline owing to falling commodity prices and lowered its target accordingly.

On the spending side, fuel subsidies are still large—contrary to popular perceptions that they had been eliminated. By September, 63% of the total government budget line had been spent, compared with 66% last year. That said, although capital expenditure in this year's budget increased by 71% on last year's budget, only 28% of the capital-spending budget line had been spent by September 2015 (compared with 37% by September 2014). In nominal terms, Rp 77 trillion of capital spending had been realised by September 2015, compared with Rp 60 trillion by September 2014. The government plans to spend as much as Rp 276 trillion on capital expenditure this year. If realised, it would be the largest annual increase in planned capital expenditure in Indonesia's history. Even if the final realisation of the planned capital expenditure in the budget is low, it will still be a substantial amount, which will be positive for Indonesia's medium-term growth prospects. It is also usual, though not optimal, for more than half of capital spending to be realised towards the end of the year. One also needs to allow time for a new administration to settle into government. The slow realisation of spending is partly due to a protracted process of parliamentary approval and the reorganisation of government agencies. In Indonesia, in general, significant spending starts in the second quarter. The slow realisation of spending has, however, delayed the disbursement of cash compensation intended to protect the poor from the impact of the fuelsubsidy reform. This has contributed to a rise in poverty. One positive indication that infrastructure spending has begun in earnest was the 17% jump in August in annual cement production.

Balance of Payments

Indonesia's trade balance showed a $4.1 billion surplus in the second quarter (in contrast to a year ago, when it was in deficit), largely because of much lower levels of merchandise imports in the first and second quarters (table 3). The decline in imports is mainly due to a large decline in the value of oil and gas imports. To some extent, the reduction in oil imports can be attributed to domestic fuel-price reform. Oil and gas imports in the second quarter were $6.8 billion, compared with $10.7 billion in the same quarter in 2014 (before the domestic fuel-price adjustment was implemented in November 2014). Non–oil and gas imports, however, also recorded lower values than they did in the same quarter last year. This indicates at least two things: that the exchange-rate depreciation has had an effect, and that investment and production activities have slowed because Indonesian imports predominantly comprise capital goods and raw materials. Foreign-exchange reserves declined by $3.6 billion in the second quarter but remain healthy, at $108 billion. BI noted that the decline in foreign reserves was a result of the government's foreign-debt repayments. BI also acknowledged that some of these reserves were used to support the rupiah. In nominal terms, exports of goods rose owing largely to non–oil and gas exports, which is encouraging.

Table 3. Balance of Payments, 2014–15 ($ billion)

There was a notable change in the second quarter in the overall net financial account, which recorded only $2.5 billion of net capital inflows. The overall current account deficit is $4.5 billion, while the overall deficit is $2.9 billion. The decline in net capital inflows during the second quarter was due in part to lower portfolio-investment inflows and large capital outflows. Portfolio investment fell by $3.0 billion in the second quarter because of large net sales of domestic stock by foreign investors and because of relatively low levels of foreign acquisition of government bonds (BI 2015). Capital outflows included negative ‘other investment’ of $6.9 billion, driven mainly by lower levels of new corporate external debt (owing to economic uncertainty and weaker growth prospects) and the payment of outstanding corporate and government debts.

Macroeconomic Policy

Declining commodity prices and a slowdown in China are the immediate causes of slower economic growth in Indonesia, but underlying problems remain. During the Yudhoyono years, growth was based on a commodity boom—as Sadli's Law argues, good times may produce bad policies (Hill and Thee 2008, 154)—and almost no significant reforms were introduced before the end of the boom.

Jokowi faces three structural problems that have hindered economic development in Indonesia since the 1997–98 Asian financial crisis: low infrastructure investment, weak manufacturing performance, and weak growth in foreign direct investment. These were all major drivers of structural change prior to the late 1990s. Infrastructure investment is still only half of what it was before the crisis, and is lower than that of other high-performing Asian economies. Indonesia's manufacturing performance has become less competitive since the crisis and a process of premature deindustrialisation may have begun, if one considers the proportion of manufacturing value added in GDP and the proportion of employment in manufacturing (See Rodrik 2015 for a discussion). Indonesia, unlike many of its neighbours, has yet to take advantage of global value chains; manufacturing has been held back by labour-market policies and low levels of labour productivity (Hill and Aswicahyono 2014). Foreign direct investment, meanwhile, has been hindered by bureaucracy and economic nationalism, though no more than in some other middle-income developing countries.

Against this backdrop, we evaluate to what extent the new economic policies, the fuel-subsidy reform, and the cabinet reshuffle can address these structural problems that hinder industrialisation. One of the most important economic policies of the Jokowi government has been the fuel-subsidy reform (see Damuri and Day 2015). By reallocating the fuel subsidy, Indonesia was in a position to increase government capital spending (mostly in infrastructure) by 70% in the 2015 planned budget—an important aspect of Jokowi's medium-term economic strategy. Capital investment is likely to make a difference, though more so in the medium term.

Jokowi's politically bold reshuffle of economic ministers in August seems to have already had an impact; in September and October, the government announced five economic policy packages. They include revising more than 130 regulations deemed detrimental to businesses; simplifying the application process for investment permits and planning permits, land acquisitions, and procurement; accelerating strategic projects; creating a new village fund to finance a cash-for-work program; extending the subsidised Rice for the Poor (Raskin) program from 12 months to 14 months; supplying new subsidised credit, via cooperatives, to support small and medium enterprises in rural areas; raising the tax-free threshold to a level that will cover most unskilled workers; revising corporate tax policy and introducing tax holidays of up to 20 years (which may later erode tax revenue); supporting the operational costs of domestic industries by reducing the prices of fuel, electricity, and gas (which may in the first instance seem contrary to fuel-subsidy reform but—so far at least—relates only to the price of diesel and, given the state of the economy, is not unreasonable as a temporary measure); changing how the minimum wage is set; and introducing a set of financial reforms.

Judging by the components of the packages, these measures are intended to raise domestic public and private and international investment by cutting bureaucratic procedures, reducing operational costs, and providing tax breaks; to stimulate domestic demand by providing subsidised credit to households and small and medium enterprises as well as by accelerating the village fund; to help industries import raw and capital goods and give fiscal incentives for exports; to reduce financial volatility, particularly exchange-rate volatility; and to make minimum-wage adjustments more predictable by overhauling the current regime (in which setting minimum wages involves negotiating with labour unions, district leaders, and industry). The fifth package, in late October, covers three areas of deregulation. It obligates companies to revalue their assets in light of inflation and the rupiah devaluation; this is expected to improve performance by giving firms a better understanding of their assets and debts. It eliminates double taxation for investment funds in real estate, property, and infrastructure, with the aim of attracting funds to Indonesia's capital market. It also attempts to simplify the regulatory and licensing procedures for Sharia banking and finance products.

Will these policies boost the economy? It seems there is something for everyone. International investors will benefit from less bureaucracy and from shorter processing times for investment permits. The domestic business sector will welcome the introduction of credit for small and medium enterprises and the increased support for the operational costs of domestic industries. The manufacturing labour force may see minimum wages rise at a slower rate, although many workers will no longer pay income tax. The poor will benefit from increased consumption, thanks to additional funding for the government's cash-for-work and Raskin programs. The policy packages are comprehensive, but questions remain about their transformative power and how they will reinvigorate the manufacturing sector, which has historically been the engine of Indonesia's economic development and growth. The fourth package, which changes how minimum wages will be set, may go some way in this direction. From January 2016, a new wage formula will aim to give more certainty to businesses and workers. It will calculate changes to the annual minimum wage in each province by pegging increases to inflation and GDP growth. Workers will then be guaranteed to see their real wages improve during periods of economic growth.

These policy packages are Jokowi's first substantial set of reforms. Of course, their effectiveness in stimulating the economy will depend on the nature and extent of their implementation and what happens outside Indonesia in terms of China's growth and commodity prices. If even half of these policies are put in place, the impact on the economy, in both the short and medium term, should be tangible.

POVERTY AND INEQUALITY UNDER JOKOWI

Distribution and Economic Growth

Jokowi's election platform and his previous policies as mayor of Solo and governor of Jakarta suggest that he has a specific interest in improving the living standards of the poorest and raising people out of poverty. These objectives require policies on growth and, often, short-run transfers, as well as changes to social policy and entitlements. They can also require greater medium-term investment in education and health care, for example, to redistribute the benefits of economic growth and create opportunities. The question of which part of Indonesian society has benefited most from economic growth and trends in inequality during democratisation was raised in mid-2014, during the presidential campaign, not only because Jokowi was known for enacting specific social policies as mayor and governor but also because of his humble background. During the campaign, he came to be viewed as a pro-poor figure.

Questions about the distribution of economic growth are increasingly viewed in the development literature as an instrumental concern. In particular, they relate to mathematical identity: that high or rising income (or consumption) inequality is associated with lower rates of poverty reduction at any given poverty line. The ongoing debate in the econometrics literature on the relation between inequality and growth received a detailed review in Cunha Neves and Tavares Silva's (2014) article. Although numerous methodological issues remain, an emerging consensus is that inequality may support growth at low levels of average income, but rising or high inequality can hamper growth at the middle level. Brueckner and Lederman (2015), for example, found that, on average, if the Gini, a common measure of inequality, rises by one percentage point, GDP per capita will fall by 1.1% over five years. Importantly, however, they also found that increases in inequality raise GDP per capita in low-income countries but reduce it in middle-income countries. For these reasons, there is an instrumental case for governments in middle-income countries such as Indonesia to—at a minimum—be concerned about rapid and substantial rises in inequality, owing to the potential impact of these rises on future growth and the rate of poverty reduction.⁹

Such matters resonate with the government's National Medium-Term Development Plan in that, for the first time, an explicit target for the Gini coefficient, of 0.36 in 2019 (it is now 0.41), has been set alongside the target for a national poverty rate, of 7%–8% by 2019. The government will look to reach these targets by creating employment, providing basic services, and implementing social-protection policies (Bappenas 2014). One causal mechanism for reducing inequality is the attempt to improve human capital and, in doing so, raise the future incomes of those at the lower end of the distribution. In the shorter term, generating employment and introducing direct-transfer policies as part of the social policy and welfare regime are likely to address inequality.

It is commonly thought that Indonesia's Gini is low. This is the case if one takes at face value the consumption Gini from the National Socio-economic Survey (Susenas) data and compares it internationally. However, the mismatch between the Susenas data and the national accounts suggests that Susenas may be weak at capturing top incomes; Susenas reports that only approximately 10% of Indonesians consumed more than $10 per day in 2012 (in 2011 purchasing-power-parity [PPP] dollars) (Edward and Sumner 2015). Further, Indonesia's Gini is based on consumption inequality, so adjusting consumption to income would raise inequality estimates considerably (see Lahoti, Jahadev, and Reddy 2014). And adjusting the estimate of inequality using the taxation data of top incomes shows that the share of income to the richest is generally much greater in Indonesia than in other countries (see Leigh and Van der Eng 2009) and challenges the perception that Indonesia is relatively egalitarian.

Indonesia is also well known for its record on poverty reduction, but its national poverty line is one of the lowest in the world—comparable, in PPP dollars, to those of the poorest countries of sub-Saharan Africa—despite GDP per capita in Indonesia of $10,500 (in 2011 PPP dollars). As is well documented, many people in Indonesia live not far above the national poverty line; median consumption, using Susenas data, in Indonesia in 2012 was approximately $4 per day, in 2011 PPP dollars (Edward and Sumner 2015). Perhaps a quarter to half of the population are therefore potentially vulnerable to falling back into poverty if, for example, growth slows or rice prices spike, as has happened recently.

In light of the above, what has happened to inequality and poverty since Jokowi's inauguration? Of course, little over a year has passed, so our assessment is necessarily preliminary.¹⁰ Much may depend on the distributional impacts of the reallocation of highly regressive fuel subsidies to infrastructure and social spending and what happens to the price of staple foods such as rice. For this reason, we consider the social policies that are likely to have medium-term impacts on poverty and inequality, as well the outcomes based on data available in the second quarter.

The new president inherited consumption inequality that was on an upward path (at least to 2011), slowing GDP growth, and a slowing rate of poverty reduction (figure 6). New data released in the second quarter point towards stable inequality but stagnant poverty reduction. From September 2014 to March 2015, Indonesia's Gini coefficient remained at 0.41 (where it has been since 2011, after having risen from 0.33 in 2001). This change in the trend coincided with the end of the commodity boom and suggested that growth driven by commodity prices may have been the main cause of Indonesia's increasing inequality. Commodities such as oil, gas, and coal are capital-intensive, so this hypothesis has a theoretical logic. The Gini coefficient in urban areas remained at 0.43; in rural areas, it fell by a small amount, from 0.34 in September 2014 to 0.33 in March 2015. The Gini increased in 13 provinces (table 4) but decreased in 20, suggesting considerable variation.

FIGURE 6 Growth, Inequality, and Poverty in Indonesia, 2001–19 (%)

Sources: Data from BPS and Bappenas (2014).
Note: The dashed lines are the targets in the National Medium-Term Development Plan 2015–2019.

Table 4. Gini Coefficient by Province, September 2014 and March 2015

New Poverty Data

Recent data from Badan Pusat Statistik (BPS 2015b), Indonesia's central statistics agency, reported a rise in the poverty headcount of almost 1.0 million people, from 27.7 million to 28.6 million, or from 11.0% of the population to 11.2%, between September 2014 and March 2015 (table 5).¹¹ The surprise is not that poverty rose slightly as a proportion of the population but that poverty did not fall even though economic growth was close to 5%. There are at least four reasons for this: economic growth was slowing; food prices rose, most notably the price of rice; farmers’ real wages fell slightly; and the disbursement of fuel-price compensation through the Family Welfare Savings Program (PSKS) was delayed.

Table 5. BPS Estimates of Poverty and Inequality in Indonesia (September 2014 and March 2015)

Looking ahead, the prospects for poverty reduction remain mixed at best. Macroeconomic circumstances are likely to weigh heaviest on the poorer end of the distribution, although they can be countered by effective infrastructure spending and social spending (also see box 1). Many of Indonesia's poorest people work in agriculture, so the fact that the real wages of farmers are stagnant or declining is of importance. The real wages of farmers declined from Rp 38,144 per day in January to Rp 37,855 per day in September.¹² During the same period, the real wages of construction workers, a representative urban real wage, also declined slightly, from Rp 66,114 per day to Rp 66,000 per day.

Rising Commodity Prices and Anti-import Policies

The rise in prices of staple foods, particularly rice, has played a role in the increase in the poverty incidence. The share of rice in a poor household's consumption basket is substantial in rural areas, in particular, and most of the rural population are net consumers of rice (McCulloch 2008). The share of rice in the poverty line is 23% in urban areas and 33% in rural areas (BPS 2015b). The poverty incidence increased by 0.45% in rural areas and by 0.13% in urban areas.

Given the large share of rice in the poverty line (and the sensitivity of poverty estimates to changes in the poverty line) a small increase in rice prices could lead to a substantial increase in the poverty incidence.¹³ The price of rice reached its peak in March, when BPS was conducting the latest Susenas survey. The price increased by around 16% over six months, owing largely to a drought that started in January and peaked in July (Republika, 13 Sept. 2015). The worst affected areas were among the biggest suppliers of national rice production, and included districts in West Java, Central Java, and South Sumatra. The government's import controls were also partly responsible, because the shortage of rice could have been predicted and rice imports could have held down rice prices.

BOX 1 Go-Jek: A New Model for Growth?

In 2015, in Jakarta, Bandung, Surabaya, Denpasar, and Makassar, among other large cities in Indonesia, several new motorcycle-taxi referral services emerged, including GrabBike and, most notably, Go-Jek. These services differ greatly from traditional motorcycle-taxi services, or ojek. For one, they use smartphone applications to connect drivers with passengers. Passengers know in advance, via their smartphone, the price that they will pay for their trip, and drivers spend less time waiting for passengers.

Go-Jek's business model appeals greatly to potential drivers, although it is labour-intensive and rewards drivers who are willing to work long hours. In an economy like Indonesia's, where unskilled labour is still abundant, it is important that labour-intensive activities provide inclusive economic growth. Go-Jek drivers get 80% of the revenues from its services and receive a free uniform and helmet. They can also pay for a smartphone in instalments. Motorcycles are relatively affordable; a driver can buy one on credit, earn around $200 a month, and make repayments of around $30 a month.

Go-Jek also offers services other than basic transport. With the cooperation of certain restaurants, consumers can order food on their smartphones and pay the Go-Jek driver who delivers their order. Go-Jek offers similar services for grocery shopping. In general, the variety and quality of Go-Jek's services are superior to those offered by traditional ojek drivers. Customers can also use their smartphones to rate their Go-Jek driver's performance—drivers with higher ratings are likely to attract more passengers and therefore make more money—which gives drivers the incentive to improve. In October, Go-Jek reported that its smartphone application had been downloaded at least 6.1 million times, and that it had amassed 200,000 active drivers since its launch in January (Jakarta Post, 24 Oct. 2015).

The emergence and rapid growth of Go-Jek and similar companies cannot be separated from the macroeconomic aspects of development. The challenges presented by recent rapid urbanisation in Indonesia have never been greater, and more than half the country has been urbanised. Yet economic growth and rising prosperity have not been distributed equally; inequality in Indonesian cities is high and rising. For millions of internal migrants, moving to the cities does not necessarily improve their livelihoods (Manning and Pratomo 2013). Recent data suggest that during 2006–11, poverty increased in two of every five cities that experienced economic growth (authors’ calculation using data from the World Bank [2015]).

Despite Indonesia's relatively low unemployment rate, its large cities continue to record high rates of informal employment, involuntary underemployment, and youth unemployment. In Jakarta, for example, in 2014, BPS recorded around 1 million informal workers, 121,000 involuntary underemployed workers and at least 260,000 unemployed youth. Go-Jek may not be the solution to underemployment and a lack of reliable public transport in large Indonesian cities, but it is providing short-term opportunities in urban areas where job opportunities are few and where employers offer low wages.

Warr and Yusuf (2014) found that Indonesia's rice-import restrictions, which have been in place since 2004, have imposed large and long-run increases in both domestic rice prices and the poverty incidence. The poverty incidence increased more among rural than urban people, even though higher agricultural prices mean higher incomes for many of the rural poor. Gains to poor farmers were outweighed by the losses incurred by the large number of rural poor who are net buyers of food, and the fact that food represents a large share of their total budgets (even larger, on average, than for the urban poor). The main beneficiaries of higher food prices are not the rural poor but the owners of agricultural land and capital, many of whom are based in urban areas.

During the early months of the new administration, anti-import policies were very visible. Statements from some high-level government officials, including the president, indicated that the ability to control imports tightly is considered one indicator of a government's success (MetroTVnews.com, 29 Feb. 2015). Jokowi also said that rent-seeking groups and organised-crime networks escalate prices in order to press the government to import rice. It is the rice-import ban, however, that has created room for rent-seeking activities, which, during the first half of 2015, made Indonesian rice prices at least 64% higher than international prices (Marks 2015). Rising anti-import policies were also part of a self-sufficiency agenda that supported Jokowi's political platform. Law 13/2010 on Horticulture, created during the Yudhoyono government, was the basis of a five-year blue-print for 2010–14 from the Ministry of Agriculture. This law targets, among other things, self-sufficiency in five commodities: rice, sugar, soybean, beef, and corn (Patunru and Rahardja 2015).

Another policy also contributed to the rising poverty incidence from September 2014 to March 2015. Before the government cut fuel subsidies in November 2014, it had anticipated the inflationary impact of these cuts and its consequences on the poor. It accordingly allocated compensation to 15.5 million households. For five months, Rp 200,000 per month per household was to be distributed in an effort to reduce the impact of the subsidy cuts. The first phase of the compensation was given to the target households for two months (November and December 2014), using the 2014 budget (Tempo.co, 20 Nov. 2014). Owing to the delay in the new budget disbursement, however, the PSKS compensation was not distributed until April 2015. Therefore, the poor were practically unprotected during the first three months of 2015, during which time the rice price escalated, particularly in March (the month of the annual Susenas survey). The estimated poverty incidence may have been lower if the cash transfers had been released earlier, as planned.

Immediately after the announcement of the new data on the rise in the incidence of poverty, the Indonesian media were dominated by the argument that the fuel-price increase in November 2014 increased poverty (see, for example, Republika, 15 Sept. 2015), which is misleading. Although higher fuel prices may have contributed to some extent, it was the sharp rise in the price of rice, caused by drought and made worse by a failed attempt to stabilise the price, that was the main factor in the increase in the poverty incidence.

Social Policies

The distributional impacts of current macroeconomic circumstances are likely to be hardest felt at the lower end of the income distribution, where, owing to lower levels of household savings, growth slowdowns and higher rice prices have a relatively greater impact on quality of life. Such impacts may be mitigated in the medium term, however, by Jokowi's budget reallocations to infrastructure and his expansion of funds for social policy, many of which were important election commitments. Also, one should note that the regressive fuel subsidies have been reduced in the budget—plans to eliminate them remain contentious—while infrastructure dominates the new fiscal space (figure 7).¹⁴

FIGURE 7 Change in Government Spending, by Category, 2014–15 (Rp trillion)

Sources: Data from the Ministry of Finance and the National Team for the Acceleration of Poverty Reduction.

Jokowi's proposed increase to infrastructure spending, if realised, would create substantial additional employment and potentially reduce spatial inequality across the country. There are no guarantees, however, that the economic growth created by infrastructure investment will benefit the poor more than the rich, or that this investment will boost economic growth and reduce inequality more effectively than social spending targeted at poor or near-poor and vulnerable households. Physical infrastructure investment, for instance, may give the poor greater access to employment opportunities. It may even create more jobs for unskilled workers than for skilled workers. And local multiplier effects are very likely (for example, opportunities for roadside food sellers near construction sites). Yet it may also complement private physical and human capital and therefore yield a higher return in richer areas, which are relatively abundant in private capital. This could increase income inequality rather than reduce it. To date, the empirical validity of an association between physical infrastructure and inequality has not been examined sufficiently (Calderón and Chong 2004).

Social spending, too, is not guaranteed to reduce inequality. It depends who benefits and to what extent. The budget for social spending overall is dominated by education. Combined with other education spending, the total education budget is Rp 462 trillion ($38 billion), or a quarter of the total budget. That said, even with sizeable funding, there are substantial problems with education spending. Foremost, the large amount spent has not translated into improved learning outcomes, as assessed internationally by the OECD's Programme for International Student Assessment (OECD 2014). Furthermore, there are large regional disparities in the quality of education delivered. In contrast to that of other countries, Indonesia's spending on secondary education is not pro-poor and its spending on tertiary education is regressive (see Lustig 2015; Suryadarma and Jones 2015).

Jokowi has yet to take the opportunity to make education spending more progressive. One of his election promises was to initiate a Smart Indonesia Card (KIP), which was based on the Smart Jakarta Card (KJP) that he introduced while governor of Jakarta. The KJP program entitles poor families with schoolchildren to receive Rp 180,000 to Rp 240,000 per eligible child per month. When the KIP program was implemented, however, it simply continued Yudhoyono's Poor Students’ Assistance scheme (BSM). Its coverage expanded, but the nominal amount of assistance per student was the same—in effect, Rp 37,500 to 83,000 per student per month. In fact, aside from introducing the Village Fund, Jokowi's government has in large part maintained the programs of the Yudhoyono period (table 6).

Table 6. Targeted Social Programs under Yudhoyono and Jokowi

If Jokowi were to incorporate the KJP into the KIP program, the program's expenditure alone would have a large impact on poverty and inequality levels. The amount of money distributed to each KJP holder, for example, is substantial compared with the Indonesian poverty line (which, in 2015, is around Rp 330,000 per person per month). If a poor family with two schoolchildren were given Rp 200,000 per child per month (the average amount of KJP assistance), they could be lifted directly out of poverty, depending on how the funds were spent. The KJP program is also targeted not only to the poor but also to the near poor, or 15.5 million households in total. This a large share of the population, and hence the program's impact on inequality could be considerable.

Using data from Susenas, we estimated the quantitative impact of incorporating the KJP program into KIP. Our simulation (the details of which are available on request) suggests that the new program would be twice as effective as BSM in reducing the poverty incidence, and that it would also reduce the Gini coefficient from 0.41 to 0.40. The budget needed to finance such a program would be close to Rp 30 trillion; this is not a negligible amount of money, but it is within the fiscal space created by the fuel-subsidy reduction—though it would mean Rp 30 trillion less for infrastructure, for example.

Notes

1. There were also a number of developments at the Corruption Eradication Commission (KPK), most notably the coming before the DPR of the process to appoint five commissioners, from a shortlist of eight, for a four-year term. The commission arrested or detained a number of high-profile bribery suspects, including Gatot Pujo Nugroho, the governor of North Sumatra; Otto Cornelis Kaligis, a prominent lawyer; Patrice Rio Capella, a former secretary-general of NasDem; Tripeni Irianto Putro, the head of the State Administrative Court in Medan; Partogi Pangaribuan, a director-general of the Ministry of Trade; and Dewie Yasin Limpo, a legislator from Hanura (People's Conscience Party).

2. The remaining seats belong to the Democratic Party, which has been wavering between joining the Red-and-White Coalition and remaining unaligned.

3. Other events of note for Indonesia's foreign policy included the replacement in mid-September of Tony Abbott by Malcolm Turnbull as Australian prime minister, which is thought likely to improve relations between the two countries, and the visit to Indonesia in late July of the UK prime minister, David Cameron.

4. Economic growth in the second quarter of 2015 was weakest in Sumatra and Kalimantan, where output is dominated by the production of crude oil, gas, coal, and palm oil.

5. This index surveys 4,600 middle-class households in major cities, representing an estimated 80% of GDP. An index score above 100 indicates an improving outlook and a score below 100 indicates a worsening outlook.

6. The recent adjustment in the price of diesel fuel, by Rp 200, or 3.0%, was part of the third of five economic policy packages announced by the government in September and October.

7. BI also uses other measures to maintain a stable exchange rate. It issued, for example, Regulation 17/3/PBI/2015 and Circular Letter 17/11/DKSP/2015, which obligate traders to use the rupiah in quotes for the provision of goods and services (Tempo, 2 July 2015). It is uncertain how these measures will reduce the rupiah's volatility.

8. The 3.0% figure refers to the consolidated deficit (which includes subnational deficits). Since the regions have been running high surpluses, the central government could book an even larger deficit.

9. In a similar vein, Dabla-Norris et al. (2015, 6–7) showed that a higher net Gini is associated with lower output growth in the medium term, and found an inverse relation between economic growth and the national income share of the rich. They also found that as the income share of the richest quintile increases, GDP slows in the following five years. Conversely, an increased share of national income to the poorest quintile increases future growth.

10. At the time of writing, the latest Susenas raw data were not available, preventing us from comparing the growth incidence curve under Jokowi with that of the Yudhoyono era.

11. Using the March 2015 national poverty line of Rp 330,776 per person per month.

12. In constant 2012 prices (http://bps.go.id/linkTabelStatis/view/id/1465).

13. Our simulation, using Susenas data, suggests that for every 1% increase in the price of rice, the national poverty headcount will increase by more than 1% (with other factors held constant).

14. Commentators argue that the government has only shifted the burden of subsidisation to Pertamina, the state-owned oil and gas company, which has been incurring considerable uncompensated costs by selling petrol below market rates (Wall Street Journal, 25 Sept. 2015; Jakarta Post, 26 Sept. 2015).