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Tackling yawning income gap in Indonesia

Publication Date : 10-04-2014

 

For the last 10 years, poverty reduction has been considered one of the most pertinent issues in Indonesia’s development policies. This is in line with the commitment to fulfill the Millennium Development Goals, which aim to halve the number of people living on less than US$1 a day, according to the UNDP.

In its 2011 report, the National Development Planning Board (Bappenas) claimed that this particular goal had been accomplished.

And while such an achievement deserves credit, it is high time to push the boundaries one step further by addressing the issue of inequality.

A study published by the Institute for Public Policy Research pointed to two pivotal reasons why we need to broaden our development agenda through incorporating the notion of inequality. The first is intertwined with inequality in terms of income disparity.

In the last 10 years, Indonesia’s economic growth has accelerated to over 4-6 per cent, a GlobalEdge study reported. One of the tangible impacts of such growth is a significant increase in gross domestic product (GDP), which in 2012 amounted to approximately $878 billion, the World Bank reported.

This positive trend should not make us complacent because the ugly truth is that our society is becoming more unequal. Based on the latest report, our Gini index — which reflects income disparities, with 0 indicating perfect equality and 1 showing perfect inequality — has been steadily rising from 0.37 in 2012 to 0.41 in 2013 (The Jakarta Post, Feb. 7, 2014).

A recent study by the International NGO Forum on Indonesian Development (INFID) in some regions found a sheer gap in income. For example, the monthly minimum wage in Jakarta, which is set at about 2.5 million rupiah (US$221), is highly incomparable to the salary of a CEO of a state-owned enterprise, who earns 250 million rupiah ($22,000)per month.

Such a condition is exacerbated by our tax system, which hurts not only the poor but also the middle class. In 2010, revenue collected from income tax (PPh, Article 21) nationwide was 55.3 trillion rupiah. This figure stands in contrast to the revenue collected from the private income of non-employee/entrepreneurs (PPh articles 25/29), which only stood at 3.6 trillion rupiah, according to a 2012 study by the Prakarsa research center.

The latter figure certainly raises serious questions considering that the wealth of the top 40 richest people in Indonesia totals 680 trillion rupiah, as Prakarsa stated. The unjust list could go on extensively, but the main message here is clear: while our middle class is upholding its duty in working hard and paying income tax, there is a small group of super elite that has been accumulating enormous wealth and being taxed incredibly low. The second inequality is related to structural inequality. In this context, structural inequality hampers a person or a group’s opportunity or outcome to live a life they consider to be of value (Sen, 2002).

The global audience’s attention to structural inequality has been increasing rapidly as empirical evidence indicates that current development programs so far have only been successful in improving the average outcomes around a range of basic needs but leaving further behind groups and individuals that are the poorest and most excluded, such as the disabled, religious minorities and indigenous communities, according to Unicef.

In Indonesia, poverty alleviation initiatives clearly demonstrate such an occurrence. The Mandiri National Community Empowerment Programme (PNPM Mandiri) has been praised for utilizing a community-based approach in creating more secure and sustainable employment and delivering resources directly to the community to alleviate poverty in rural areas.

Nevertheless, an evaluation study on PNPM Mandiri identifies the program’s failure to incorporate marginal groups’ aspirations, mainly because entrenched inequalities have not been acknowledged let alone overcome, such as discrimination on the basis of identity, a study by the Akatiga research centre revealed in 2010.

The impact is devastating when we perpetuate discrimination because this means someone is almost predetermined to be impoverished simply because the social or physical traits of a person places them in a subordinate position within society.

This is a disturbing fact also speaking from an economic perspective as we are losing a potential 3 to 7 per cent of total GDP when we exclude persons with disabilities from the workforce, according to figures of Unicef last year.

There is a series of measures that can be taken to improve our current situation. Within the context of income disparity, the tax bracket needs to be expanded.

At present, anyone who earns above 500 million rupiah per year is subjected to tax of only 30 per cent of total income. With the surge of wealth as highlighted above, two layers need to be added — people who make a profit of a minimum 1 billion rupiah per year should be taxed 35 per cent and those making a profit of 5 billion rupiah per year should be taxed 45 per cent.

The second measure is advancing data of potential revenue that can be collected from tax. The government should aim to raise the tax ratio — the government’s real capability to collect revenue from tax— of 1 percent every year.

Currently, our tax only accounts for 12 per cent of total GDP whereas ideally, as a middle income country, tax should contribute 19 per cent to GDP, as reported by Infid.

For structural inequality, policymakers at the local and national levels need to recognize that welfare deprivation cannot be separated from political, economic, cultural and social discrimination as they overlap and intersect.

Yet at the same, discrimination cases are viewed as part of the sheer complexity of this country’s past, present and future and have placed different groups along different historical discriminatory relationships.

Therefore, it is the government’s duty to ensure that multiple barriers are dismantled so that people’s aspirations and hopes can be realized. The upcoming presidential election would be the perfect momentum to push our future leaders to start devising policies to realize equality and justice.

 

 

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