Reducing Inequality: An Essential Factor in Creating Indonesia's "New Economy"

Indonesia may be a G20 country, but its per capita income is still very low at US$4,538 in 2021, and that is further divided very unequally between rich and poor. This is called “wealth inequality” but it is far from the only inequality in Indonesia. Our contention is that if Indonesia is to indeed create a ‘new economy’ these inequalities have to be defined, acknowledged - and defeated- quickly.

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The drivers of inequality in Indonesia are complex and multi-layered, ranging from structural causes to more specific policy choices. Following a period of relatively equitable growth, market fundamentalism introduced following the financial crisis of 1997 has produced an economy that enables those at the top to capture by far the greatest share of the benefits of growth. This has resulted in an increase in the political influence of the successful business leaders who can, and often do, use the influence that great wealth brings to keep the rules in their favour, often at the expense of the many.

But what are the other inequalities that we need to address?

- Gender inequality, one of the oldest forms of inequality, is pervasive in Indonesia and acts as both a driver and a consequence of economic inequality, and is deeply based on the culture.

- Low wages and insecure work (either from the “informal sector”, micro-enterprises and casual workers or the pervasive practice of using daily workers) for those at the bottom further compounds inequality and prevents workers from lifting themselves out of poverty.

- Unequal access between rural and urban areas to infrastructures such as electricity, clean water and good quality roads compounds geographic inequalities, as do the rural education standards, which are far below the cities.

- A concentration of land ownership in the hands of big corporations and wealthy individuals means that the benefits of land ownership accrue to those at the top, at the expense of the rest of society

According to an in-depth Oxfam Study, one of the causes of this is that the taxation system has failed to play its necessary role in redistributing wealth, and is far from reaching its revenue-raising potential to fund inequality-reducing public services. Indonesia’s tax collection as a percentage of GDP is the second-lowest in South-East Asia. The IMF has calculated that the country has a potential tax take of 21.5% of GDP, which would go a long way to fund vital public services to provide equality of opportunity to all. For example, the government has made strides towards achieving universal health coverage, but more funds are needed to remove damaging insurance premiums. Likewise, the education system is underfunded; there are still barriers to equal access and it does not provide Indonesians with the skills needed to enter the formal workforce, meaning that millions of workers are unable to access higher-skilled and higher-paid jobs. A lot of the blame is placed on those who systematically avoid tax payments in many ways.

Oxfam’s recommendations to the government to close the gap between the rich and the rest, while not perfect and certainly idealistic, do at least point the way to actions which will, if implemented, change the lives of millions:

Inequality

• Develop a national plan to show clearly how it will tackle inequality and reach its targets to reduce the Gini coefficient, including between urban and rural areas, including ensuring that local governments commit to reducing inequality.

• Set out a roadmap to deliver a living wage, ensure that it is enforced, and further explore the idea of an ASEAN living wage.

• Regulate companies to ensure that more workers are on secure employment contracts, rather than day rates.

• Close the gender pay gap and remove barriers to women’s equal participation in the labour force. Work with civil society to promote positive social norms and attitudes around women’s work.

Tax

• Increase the tax-to-GDP ratio to reach Indonesia’s maximum tax potential. This is estimated to be 21.5 percent by the IMF. Do this by adding a higher-rate tax band 4 at the top of the personal income tax system; launching a review of wealth taxation with the aim of increasing property taxation for the highest value properties; increasing inheritance tax and introducing a net wealth tax, and developing a national action plan to tackle tax avoidance and evasion.

• Refrain from engaging in a ‘race to the bottom' on corporate taxation by maintaining corporate tax rates, refraining from offering harmful tax incentives, and working at the regional level on tax cooperation with other ASEAN countries.

Public Spending

• Building on the strides made towards universal health coverage through the JKN national health insurance scheme improves equitable access to healthcare by scrapping all premiums for health services and moving to an entirely tax-funded national health system. Double health expenditure to at least 2.2 percent GDP. Work towards increasing this spending to at least 3 percent GDP on health in the coming years.

• Increase education spending to 4 percent of GDP in the short term. Extend compulsory education to 12 years. Conduct a review to assess the continuing barriers to poorer students in accessing secondary education, and launch a three-year plan to urgently address these barriers.

• Introduce more and higher quality vocational training, by using increased tax financing to allocate 10–20 percent of the education budget to vocational training.

Gender

• Systematically analyse proposed policies for their impact on women and girls. Expand current gender budgeting processes and provide support for women’s rights organizations to engage in decision making processes on public spending.

• Commit to initiatives that reduce gender inequality across society, including addressing harmful social norms, supporting women’s leadership and decision making power and ending violence against women and girls.

The private sector should also play its role in reducing inequality, and businesses should take the following actions:

• Publish data on their own gender pay gaps;

• Ensure access to decent and safe employment opportunities for women;

• Employ workers on secure employment contracts;

• Support government action towards a national living wage and institute policies to move towards a living wage within their operations;

• nvest in the skills of employees to meet the need for higher-skilled workers;

• Provide on-the-job training, paid apprenticeships and placements, with corresponding professional certification and recognition;

• Engage with local government to ensure that local training centres provide training that matches market requirements.

Will these actions create ”The New Economy”, no, that will be done as a strategic and proactive development program focused on changing the structure and focus of the economy. What we are suggesting here is that we very deliberately, and we are sure, very painfully, examine the inequalities that pervade the current economy and try to make sure that they do not continue in the new.

What we have to remember is that reducing inequalities is a double-edged sword, like Robin Hood, the classic English outlaw, we will have to take from the rich to give to the poor, but also take from the men to give to the women, and take from the cities to give to the countryside, and all of this will be resisted furiously and tenaciously. It is going to be a long and hard road.