I Indonesia’s Rising Divide II The World Bank The World Bank Printed in Office Jakarta 1818 H Street NW March 2016 Indonesia Stock Exchange Washington, DC 20433, USA Building Tower II/12th Floor T (202) 458-1876 Jl Jend Sudirman Kav 52-53 F (202) 522-1557/1560 Jakarta 12910 W www.worldbank.org P (6221) 5299-3000 F (6221) 5299-3111 W www.worldbank.org/id Indonesia’s Rising Divide The World Bank does not endorsement or acceptance Photo Credits is a product of the staff guarantee the accuracy of of such boundaries. World Bank of the World Bank. The the data included in this Josh Estey findings, interpretations, work. The boundaries, For any questions shutterstock.com and conclusions expressed colors, denominations, and regarding this report, herein do not necessarily other information shown please contact reflect the views of the on any map in this work do Board of Executive not imply any judgment on Vivi Alatas Directors of the World the part of the World Bank (valatas@worldbank.org) Bank or the Government concerning the legal status and Matthew Wai-Poi they represent. of any territory or the (mwaipoi@worldbank.org). I A Word From the Country Director Rodrigo A. Chaves Country Director, Indonesia The World Bank Indonesia has undergone a remarkable transformation over the past 15 years. The national poverty rate was halved, from 24 percent in 1999 to 11.3 percent in 2014. Growth averaged at 6 percent annually for a decade up until 2015. Internationally, Indonesia also joined the G-20 as Southeast Asia’s only representative. But the quest for widely shared prosperity is not over. Indonesia is at risk of leaving its poor and vulnerable behind. Poverty reduction has begun to stagnate, with a near zero decline in 2014. Income inequality is rapidly rising and up to one third of it is explained by inequal- ity of opportunities. Healthy and well educated children live side by side with children who suffer from malnutrition, learn little when they are in school, and drop out too early. And there are stark inequalities between regions; for example, 6 percent of children in Jakar- ta do not have access to proper sanitation while, at the same time, 98 percent of children in rural Papua have no access. This kind of inequality dims the prospects of important segments of society for generations. The Government of Indonesia has rightly identified inequality as an obstacle to sustainable development and has set targets to reduce it. In support of this public policy objective, the World Bank embarked on research to better understand why inequality is rising in Indonesia, why it matters, and what can be done about it. This work is the result of partnerships between many government agencies and The World Bank. The study enjoyed the financial support from the Australian Department of Foreign Affairs and Trade. Inequality is complex, impacting many facets of life and involving many actors. We hope that this report will encourage public policy based on evidence and informed by experiences from countries that have successfully reduced inequality. In the country Indonesians deserve and want, extreme poverty is eliminated. In the Indonesia its people dream of, the poor and vulnerable have more opportunities to enjoy ‘shared pros- perity’. This is not an agenda of redistributing an economy of a fixed size. Indonesians need to expand the size of the pie, and keep expanding it and sharing it, to ensure that the welfare of all, and especially the most vulnerable, rises as quickly as possible. The task of slowing – or even reversing – the trend of rising inequality is a large challenge, and one that will take time to achieve. But we believe that by standing together – the government, alongside civil society and the private sector, with the support of development partners – the country will be able to make a difference for current and future generations who deserve a fair opportunity for a better life. We at the World Bank Group stand ready to continue supporting these objectives. INDONESIA's Rising Divide II ’ Why inequality is rising, why it matters AN D w h a t c a n b e d o n e March 2016, World Bank III IV Acknowledgements Indonesia’s Rising Divide was prepared by t h e W o r l d B a n k ’ s P o v e rt y G l o b a l P r a c - t i c e t e a m i n t h e Ja k a rta o f f i c e . The team, led by Vivi Alatas (Lead Economist, GPV02), provides technical and policy advice based on sound empirical research and analysis to the Government of Indonesia to support their efforts to reduce poverty, vulnerability and inequality. Financial support for this report was pro- vided by the Australian Department of Foreign Affairs and Trade through the trust fund for the Partnership for Knowledge-based Poverty Reduction. The trust fund is under the strategic oversight of Bambang Widianto, Exec- utive Secretary of the National Team for the Acceleration of Poverty Reduction (Tim Nasional Percepatan Penang- gulangan Kemiskinan, or TNP2K) and Rahma Iryantiof the National Development Planning Agency (Badan Per- encanaan Pembangunan Nasional, or Bappenas). This report was prepared by a core team led by Matthew- Wai-Poi (Senior Economist, GPV02) based on a series of background papers and presentations. The paper on the Distributional Impact of Fiscal Policy in Indonesia was written by Rythia Afkar (Education Economist, GED02), Jon Jellema (Consultant, EACVF) and Matthew Wai-Poi; on the Inequality of Opportunity by Grace Hadiwidjaja (Consultant, GPVDR), Ray Hervandi (Consultant, GP- VDR), Matthew Wai-Poi and Laura Wijaya (Consultant, GPV02); and on the Public Perceptions of Inequality by Taufik Indrakesuma (Consultant, GPVDR) with the guid- ance of Edgar Janz (Senior Knowledge Management Spe- cialist, GPV02) and Matthew Wai-Poi. Background pre- sentations were developed on Top Incomes in Indonesia by Michaelino Mervisiano (Consultant, GPVDR), Imam Setiawan (Consultant, GPV02), Matthew Wai-Poi, Maria Monica Wihardja (Poverty Specialist, GPV02) and Dody Suria Wijaya (Consultant, GPVDR); on Indonesia’sMiddle Class by Ririn Purnamasari (Senior Economist, GPV02), Ikuko Uochi (Consultant, GPV02) and Matthew Wai-Poi; and on the Inequality of Outcomes by Amri Ilmma (Re- search Analyst, GPVDR), Taufik Hidayat (Consultant, GPVDR) and Matthew Wai-Poi. Additional contributions were made by Edgar Janz, Mattia Makovec (Consultant, GPVDR), Audrey Sacks (Social Development Specialist, Contr GSUID), Astrid Rengganis Savitri (Consultant, GPV02), and Bagus Arya Wirapati (Research Analyst, GPV02). the V Excellent comments were received from Peer Re- The report draws from joint work on fiscal incidence viewers Luis-Felipe Lopez-Calvo (Lead Economist, with a team from the Fiscal Policy Office, led by Luky DECWD), Caterina Laderchi (Senior Economist, Alfirman (Head of Macroeconomic Policy Center, GPV03), and Hal Hill (H.W. Arndt Professor of South- PKEM-BKF) and including Arti Dyah Woroutami east Asian Economies, Australian National Univer- (Head of Welfare and Labor Sub-division of PKEM- sity), as well as from Emma Allen (ILO), Chantelle BKF) and Ahmad Fikri Aulia (Executive of Welfare Boudreaux (Consultant, GHNDR), Melissa Chew and Labor Sub-division of PKEM-BKF). The fiscal (Consultant, GHN02), David Gottlieb (Department incidence work adopts the Commitment to Equity of Foreign Affairs and Trade, Australian Embassy), approach. Launched in 2008, the Commitment to Eq- Pandu Harimurti (Senior Health Specialist, GHN02), uity (CEQ) project is an initiative of the Center for Ahya Ihsan (Economist, GMF06), Yue Man Lee Inter-American Policy and Research (CIPR) and the (Economist, GMF06), Norman Loazya (Lead Econo- Department of Economics, Tulane University, the mist, DECMG), Neil McCulloch (Director, Economic Center for Global Development and the Inter-Ameri- Policy Program, Oxford Policy Management), Puti can Dialogue. Developed by Nora Lustig and her team Marzoeki (Senior Health Specialist, GHN02), Iene at Tulane University, the Commitment to Equity diag- Muliati (Senior Social Protection Specialist, GSP02), nostic tool relies on a comprehensive fiscal incidence Arvind Nair (Economist, GGO14), Truman Packard analysis designed to assess how taxation and public (Lead Economist, GSP04), Eko Setyo Pambudi (Re- expenditures affect income inequality, poverty, and search Analyst, GHN02), Samer al-Samarrai (Senior different socioeconomic groups. For more details, see Economist, GED02), Ali Winoto Subandoro (Health www.commitmentoequity.org. Specialist, GHN02), Ajay Tandon (Senior Economist, GHN02), Violeta Vulovic (Consultant, GMF06), Mitch The report also draws on joint work on top incomes in Wiener (Senior Social Protection Specialist, GSPDR), Indonesia, conducted in collaboration with Luky Al- Rob Wrobel (Senior Social Development Specialist, firman of the Fiscal Policy Office and Bank Indonesia. GSUID), and Wei Aun Yap (Consultant, GHN02), as The Bank Indonesia team includes N.A. Anggini Sari well as unnamed DFAT staff. The report has benefited (Deputy Director, Division Head, Credit Information greatlyfrom these comments. Regulation, Licensing, and Development Division, Re- porting Management and Compliance Department), The report was edited by Peter Milne and Edgar Janz, Sani Eka Duta (Assistant Director, Credit Information with support from Taufik Indrakesuma. Division, Reporting Management and Compliance Department) and Darma Saputra (Reporting Manage- Layout for this paper was done by Bentuk Team (An- ment and Compliance Department). dreas Pranoto, Muhammad Kamal, Phoebe Wathoel, Randy Kurnia). The perceptions data used in this report and the per- ceptions background paper were kindly provided by This report was produced under the overall guidance the Indonesian Survey Institute (Lembaga Survei In- of Shubham Chaudhuri (Practice Manager, GMF06), donesia, or LSI). Ana Revenga (Senior Director, GPVDR), Carlos Sil- va-Jaurequi (Lead Economist, GPVGE) and Salman Zaidi (Practice Manager, GPV02). Strategic guidance and key comments were provided by Rodrigo Chaves (Country Director, EACIF), Ndiame Diop (Lead Econ- omist, GMF06) and Cristobal Ridao-Cano (Program ributors Leader, EACIF). List of Abbreviations, Acronyms, and Indonesian Terms Page I Figures, Tables, & Boxes Page II Overview Page 1 I EXecutive 1 Rising Inequality: The Recent summary Trend and Why It Matters Page 5 Page 35 1. 1. 1. 2. The recent trend in Does inequality inequality matter? Page 37 Page 42 2 Why Inequality Is Rising Page 45 2. 1 . 2 .2 . 2 .3. 2.4 . 2. 5. A framework for Why an unfair start Why a widening gap Why financial and Why shocks make it understanding in life holds the poor between skilled and physical assets are even harder for many inequality back unskilled wages is helping the rich pull to catch up Page 47 Page 53 increasing inequality away from the rest Page 87 Page 71 Page 81 2.2.1 A significant 2.3.1 Increasing degree of overall demand for and inequality is explained shortage of skilled by circumstances at workers is driving their birth wages higher, which Page 53 benefits those children 2.2.2 An unfair start who got the right begins with differences start in life in child health Page 71 Page 54 2.3.2 At the same 2.2.3 Changes in time, most workers are fertility patterns trapped in low- are also affecting paying jobs inequality, both today Page 75 and tomorrow 2.3.3 The widening Page 64 wage gap between 2.2.4 An unfair start few skilled workers in life continues with and the majority of differences in skills unskilled workers is development and one of the main drivers education of increasing inequality Page 65 in the past decade Page 79 INDONESIA's Rising Divide Table of Contents 3 How Inequality Can Be Addressed Page 91 3. 1. 3.2. 3.3. 3.4. 3.5. Improving local service Improving the skills of Ensuring all households Aligning government Most of the delivery, particularly for today’s workforce and have effective protection taxes and spending to recommended policies health, education and providing them with more from shocks better address inequality have broad-based public family planning productive jobs Page 111 Page 117 support as a means of Page 97 Page 107 tackling poverty Page 125 3.1.1 Ensuring all children 3.2.1 Creating more jobs 3.3.1 Addressing high and 3.4.1 Fiscal policy as a tool receive a fair start in life Page 107 volatile rice prices to address inequality, now through quality health care 3.2.2 Improving protection Page 111 as well as in the future Page 97 for low-income and 3.3.2 Strengthening social Page 117 3.1.2 Ensuring all children vulnerable workers protection 3.4.2 Spending choices receive a fair start in life Page 109 Page 113 are likely to have the through quality education 3.2.3 Reforming the skills 3.3.3 Crisis monitoring greatest influence on Page 101 training system to enable and response: developing current inequality 3.1.3 Revitalizing family workers to access jobs a permanent and Page 118 planning to help poor Page 110 comprehensive system 3.4.3 Closing the large households to have the Page 116 infrastructure gap family sizes they want can reduce inequality Page 105 in Indonesia by strengthening growth, stimulating job, improving access to public services, and lowering food prices Page 119 3.4.4 However, fiscal policy needs to remain sustainable Page 121 3.4.5 The revenue mix used to achieve fiscal sustainability can also influence inequality today Page 109 4 Conclusion Page 127 129 References INDONESIA's Rising Divide I List of Abbreviations, Acronyms & Indonesian Terms Term Definition AEC ASEAN Economic Community APBN Anggaran Pendapatan dan Belanja Negara (Central Government Budget) ASEAN Association of Southeast Asian Nations ave. average Bappenas Badan Perencanaan Pembangunan Nasional (National Development Planning Agency) BCC Behavioral Change Communication BCG Bacillus Calmette-Guerin vaccine bidan midwife BKKBD Badan Kependudukan dan Keluarga Berencana Daerah (Regional Population and Family Planning Agency) BKKBN Badan Kependudukan dan Keluarga Berencana Nasional (National Population and Family Planning Board) BKPM Badan Koordinasi Penanaman Modal (Investment Coordinating Agency) BOP Bantuan Operasional Pendidikan (Operational Assistance for Education) BOS Bantuan Operasional Sekolah (Operational Assistance for Schools) BOSDA Bantuan Operasional Sekolah Daerah (Operational Assistance for Schools from Local Government) BPJS Badan Penyelenggara Jaminan Sosial (Social Security Organizing Body) BPS Badan Pusat Statistik (Central Statistics Agency) Bulog Badan Urusan Logistik (Logistics Agency) CMRS Crisis Monitoring and Response System CPI Consumer Price Index DAK Dana Alokasi Khusus (Special Allocation Fund) DHS Indonesia Demographic and Health Survey DKI Daerah Khusus Ibukota (Special Capital Region) DPT Diphtheria, Pertussis, and Tetanus vaccine ECD Early Childhood Development EI Effectiveness Index FHH Female-Headed Household INDONESIA's Rising Divide II GDP Gross Domestic Product GIC Growth Incidence Curve HH/hh Household ICT information and communications technology IDR Indonesian Rupiah IEC information education and communication IFLS Indonesia Family Life Survey IMF International Monetary Fund IT information technology IUD Intrauterine Device Jamkesmas Jaminan Kesehatan Masyarakat (Public Health Insurance) JCI Jakarta Composite Index JKN Jaminan Kesehatan Nasional (National Health Insurance) kabupaten regency KIP Kartu Indonesia Pintar (Indonesia Smart Card) km kilometer kotamadya mid-size city LSI Lembaga Survei Indonesia (Indonesian Survey Institute) MHH Male-Headed Household MP3EI Master Plan Percepatan dan Perluasan Pembangunan Ekonomi Indonesia (Master Plan for the Acceleration and Expansion of Economic Development in Indonesia MSS Minimum service standards NCD Non-communicable disease NES national education standards NGO non-government organization NTR non-tax revenue NVMS National Violence Monitoring System INDONESIA's Rising Divide III OECD Organisation for Economic Co-operation and Development OP Operasi Pasar (Market Operation) ORT Oral Rehydration Therapy OSS one-stop service PISA Programme for International Student Assessment PKH Program Keluarga Harapan (Family Hope Program) PLKB Petugas Lapangan Keluarga Berencana (Family Planning Field Official) PNPM-Generasi PNPM Generasi Sehat dan Cerdas (PNPM Healthy and Smart Generation Program) PNPM-Mandiri Program Nasional Pemberdayaan Masyarakat Mandiri (National Community Empowerment Program) PNPM-Rural Program Nasional Pemberdayaan Masyarakat Rural (National Rural Community Empowerment Program) Podes Sensus Potensi Desa (Village Potential Census) Posyandu Pos Pelayanan Terpadu (Integrated Service Post) PTT pegawai tidak tetap (contract employee) Puskesmas Pusat Kesehatan Masyarakat (Public Health Centre) Q1 Quintile 1, i.e., poorest 20 percent Q2 Quintile 2, i.e., second poorest 20 percent Q3 Quintile 3, i.e. middle 20 percent Q4 Quintile 4, i.e., second richest 20 percent Q5 Quintile 5, i.e., richest 20 percent Raskin Subsidi Beras Bagi Masyarakat Berpendapatan Rendah (Rice Subsidies for Low Income People) RPJM-N Rencana Pembangunan Jangka Menengah Nasional (National Medium-Term Development Plan) Sakernas Survei Angkatan Kerja Nasional (National Labor Force Survey) SBM School-based management SD Sekolah Dasar (Primary School) SJSN Sistem Jaminan Sosial Nasional (National Social Security System) SKPD-KB Satuan Kerja Perangkat Daerah - Keluarga Berencana (Regional Family Planning Work Unit) SMA Sekolah Menengah Atas (Senior Secondary School) INDONESIA's Rising Divide IV SME Small and medium enterprises SMP Sekolah Menengah Pertama (Junior Secondary School) Susenas Survei Sosial Ekonomi Nasional (National Socio-Economic Survey) TFR Total Fertility Rate UHC Universal Health Coverage US$ United States Dollar USAID United States Agency for International Development VAT Value-added tax WDI World Development Indicators WHO World Health Organization INDONESIA's Rising Divide V Figures, Tables & Boxes Figures Figure ES.1. Gini coefficient (points) and national poverty rate (percent) 1980-2014 8 Figure ES.2. Gini coefficient in East Asia, 1990s and 2000s 8 Figure ES.3. Population share by class, 2002-2014 (percent) 8 Figure ES.4. Share of national consumption by each quintile: what people think it should be, what people think it is, what it really is (percent) 10 Figure ES.5. Understanding inequality through an income-generating asset framework with a reinforcing feedback loop 11 Figure ES.6. Stunting by country (percent) 12 Figure ES.7. Lack of access to clean water and proper sanitation by household per capita consumption decile (per- cent) 12 Figure ES.8. Enrolment of 13-15 year olds by parents’ per capita consumption quintile 13 Figure ES.9. Quality of schooling facilities and teachers (percent) 13 Figure ES.10. Percentage of 15-year olds with international PISA mathematics and science scores below Level 2 (basic skills, 420 points) 14 Figure ES.11. Employment by education level, 2002-13 (percent) 16 Figure ES.12. Important skills identified by employers, and skill gaps (percent) 16 Figure ES.13. Share of total wealth held by richest 10 percent of households (percent) 18 Figure ES.14. Access to health insurance (percent) 20 Figure ES.15. Poverty and vulnerability rates in Indonesia, 2014 (percent) 20 Figure ES.16. Gini Coefficient in Brazil and Latin America 22 Figure ES.17. Growth Incidence Curve for Brazil, 2001-2009 22 Figure 1.1. Average monthly per capita consumption (IDR) by decile, 2002 and 2014 38 Figure 1.2. Gini coefficient (points) and national poverty rate (percent) 1980-2014 38 Figure 1.3. Gini coefficient in East Asia, 1990s and 2000s 39 Figure 1.4. Annualized point change in Gini coefficient in East Asia, 1990s and 2000s 39 Figure 1.5. Gini coefficients for lower middle-income countries 39 Figure 1.6. Population share by class (percent) 2002-14 39 Figure 1.7. Average conflict incidents for low, medium and high inequality districts 43 Figure 1.8. Type of jobs for senior secondary school graduates 43 Figure 1.9. Share of national consumption by each quintile: what people think it should be, what people think it is, what it really is (percent) 44 Figure 2.1. Growth incidence curve by household per capita consumption percentile, 1996-2010 47 Figure 2.2. Understanding inequality through an income-generating asset framework with a reinforcing feedback loop 49 Figure 2.3. Percentage of consumption inequality due to differences between and within groups with different birth circumstances 54 INDONESIA's Rising Divide VI Figure 2.4. Percentage of consumption inequality due to differences between and within groups with different birth circumstances, by Head of Household cohort 54 Figure 2.5. Infant mortality (per 1,000 live births) 55 Figure 2.6. Stunting by country (percent) 55 Figure 2.7. Probability of stunting by parents’ education (percent) 55 Figure 2.8. Skilled first ante-natal and post-natal care usage (percent) 55 Figure 2.9. Unskilled deliveries by region (percent) 56 Figure 2.10. Unskilled deliveries by per capita consumption decile (percent) 56 Figure 2.11. Complete immunization rates by different populations (percent) 56 Figure 2.12. Age-appropriate breastfeeding by age (percent) 57 Figure 2.13. Micronutrient intake and deworming by different populations (percent) 57 Figure 2.14. Lack of access to clean water and proper sanitation by household per capita consumption decile (per- cent) 58 Figure 2.15. Diarrhea incidence and treatment (percent) 58 Figure 2.16. Availability of Puskesmas health centers (percent of villages with Puskesmas) and distance to Puskesmas if not in village (km) 58 Figure 2.17. Selected service indicator scores and general service readiness index for Puskesmas by province, 2011 59 Figure 2.18. Full immunization rates for children aged 12-23 months by mother’s education (percent) 60 Figure 2.19. Immunization rates for children based on birth order (percent) 60 Figure 2.20. Urban poverty for housing, water and sanitation 60 Figure 2.21. Rural poverty for housing, water and sanitation 60 Figure 2.22. Comparison of actual and counterfactual 2002 Gini if household size in 2002 remained the same as in 1993 61 Figure 2.23. Comparison of actual and counterfactual 2014 Gini if household size in 2014 remained the same as in 2002, and if size continued to decline at the same rate as 1993-2002 62 Figure 2.24. Years of completed education, 16-18 year olds (percent) 65 Figure 2.25. Years of completed education, 19-21 year olds (percent) 65 Figure 2.26. Annual schooling costs by school level (IDR thousand) 66 Figure 2.27. Percentage of households with school-aged children receiving a scholarship by household per capita expenditure deciles (percent) 66 Figure 2.28. Median monthly incomes of children aged 15-18 years old (rupiah) 67 Figure 2.29. Enrolment of 13-15 year olds by parents’ consumption quintile 67 Figure 2.30. Enrolment of 13-15 year olds by parents’ education 67 Figure 2.31. Educational attainment probability of children born in the 1960s and 1970s with parents who did not com- plete primary, relative to the 1950s cohort (percent) 68 Figure 2.32. Adult income quintile probability of children born in the 1960s and 1970s with parents who did not com- plete primary, relative to the 1950s cohort (percent) 68 Figure 2.33. ECD enrolment rates for 5-6 year olds by region, gender and income (percent) 68 Figure 2.34. Probability of 7-14 year old children being in the top or bottom quintile of cognitive scores by parents’ education (percent) 68 Figure 2.35. ECD availability in village (percent) and distance to nearest center if not in village (km) by region 69 Figure 2.36. Quality of schooling facilities and teachers (percent) 69 Figure 2.37. Children who reported reading a text book in the past week (percent) 70 INDONESIA's Rising Divide VII Figure 2.38. Children who reported reading a science book in the past week (percent) 70 Figure 2.39. Percentage of 15-year-olds with international PISA mathematics and science scores below Level 2 (basic skills, 420 points) 70 Figure 2.40. Employment by education level, 2002-13 (percent) 72 Figure 2.41. Education decomposition of labor force (percent) 72 Figure 2.42. Important skills identified by employers, and skill gaps 72 Figure 2.43. Method for finding job, youth aged 15-24 years old (percent) 73 Figure 2.44. Method for finding job, all workers aged 25 years and older (percent) 73 Figure 2.45. Youths aged 19-24 years who have attended or competed training course (percent) 73 Figure 2.46. Share of firms providing formal training (percent) 73 Figure 2.47. Annualized wage growth (2001-14) versus sectoral productivity (2012 annual value added per worker, IDR million) 74 Figure 2.48. Share of total employment, 2014 (percent) 75 Figure 2.49. Employment and labor productivity growth by sector 2001-12 (percent) 75 Figure 2.50. Employment composition by status (percent) 76 Figure 2.51. Informal workers by sector, 2012 (percent) 76 Figure 2.52. Labor market legislation index across countries 77 Figure 2.53. Minimum wages in selected East Asian countries (US$ per month) 79 Figure 2.54. Worker wage premium over those with primary education or less, 2003-10 (percent) 80 Figure 2.55. Household per capita consumption premium over those with head of household primary education or less, 2003-10 (percent) 80 Figure 2.56. Primary wage Gini coefficient, 2000-13 80 Figure 2.57. Labor share of income, 10-year change (percentage points) 81 Figure 2.58. Labor share of Indonesian manufacturing income (percent) 82 Figure 2.59. Jakarta Composite Index, 1997-2014 82 Figure 2.60. Jakarta residential condominium market 82 Figure 2.61. Share of total wealth held by richest 10 percent of households (percent) 84 Figure 2.62. Change in share of total wealth held by richest 10 percent of households (percentage points) 85 Figure 2.63. Growth incidence curve, 1993-2014 (annual real per capita consumption growth by household per capita consumption quintile) 86 Figure 2.64. Access to health insurance (percent) 88 Figure 2.65. Access to pensions (percent) 88 Figure 2.66. The three dimensions of universal health coverage 88 Figure 2.67. CPI and CPI for the poor, 2002-13 89 Figure 2.68. CPI poor (food) and CPI poor (non-food), 2002-13 89 Figure 2.69. Poverty and vulnerability rates in Indonesia, 2014 (percent) 90 Figure 2.70. Proportion of poor who were poor the year before 90 Figure 3.1. Growth incidence curve, Thailand 2000-06 93 Figure 3.2. Growth incidence curve, Thailand 2006-10 93 Figure 3.3. Growth incidence curve, Vietnam 2004-12 94 Figure 3.4. Growth incidence curve, Brazil 2001-09 94 Figure 3.5 Gini coefficient in Brazil and Latin America 95 Figure 3.6 Growth incidence curve for Brazil, 2001-2009 96 Figure 3.7. Public health spending (percent of GDP) and out-of-pocket spending (percent of total health INDONESIA's Rising Divide VIII spending) internationally 98 Figure 3.8. Changes in real health expenditure (percent, 2003-11) and change in birth by skilled attendant (percent, 2003-11) 99 Figure 3.9. Changes in real health expenditure (percent, 2003-11) and change in immunization coverage (percent, 2003-11) 99 Figure 3.10. Receipt of severance pay, as reported by workers (percent) 109 Figure 3.11. Employees receiving less than minimum wage by consumption quintile (percent) 109 Figure 3.12. Reduction in the Gini coefficient through fiscal policy, selected countries (points) 118 Figure 3.13. Inequality reducing effectiveness (EI) and government spending on different programs and policies, 2012 119 Figure 3.14. Incidence of indirect taxes in selected countries (percent of market income) 123 Tables Table 2.1. Average household size by per capita consumption decile, 1993 and 2002 62 Table 2.2. Average household size by per capita consumption decile, 2002 and 2014 63 Table 2.3. Oral reading fluency advantages based on ECD participation, location and wealth (words per minute faster than reference) 69 Table 2.4. Ease of doing business in East Asia Pacific 78 Table 2.5. Change in consumption Gini 2003-10 decomposed (percentage of change explained) 80 Table 2.6. Household income mobility matrix, 1993-2007 90 Table 3.1. Drivers of inequality, based on the income-generating asset model 93 Table 3.2 Drivers of inequality and possible tools to address them 95 Table 3.3. Costs and funding in DKI Jakarta to reach different education standards (IDR ’000) 104 Table 3.4. Policies seen as top priorities for reducing inequality 126 Boxes Box ES.1 How Brazil reduced inequality 22 Box 1.1. Measuring inequality 41 Box 2.1. Understanding inequality with growth incidence curves 48 Box 2.2. Putri is poor with limited assets and low returns 51 Box 2.3. Fitri is an emerging consumer with minor asset accumulation 51 Box 2.4. Dewi is part of the economically secure middle class with improving assets 52 Box 2.5. Siti is upper class with many assets and high returns 52 Box 2.6. Strategic and emerging issues for family planning in Indonesia 63 Box 2.7. Increasing inequality: not just the commodities boom 86 Box 3.1. How Brazil reduced inequality 95 Box 3.2. Recent reforms in DKI Jakarta show how BOSDA can complement BOS to help schools reach higher quality standards, support schools in disadvantaged areas, and encourage higher performance 104 Box 3.3. A public works program for Indonesia 115 Box 3.4. Improving infrastructure in Indonesia 120 Box 3.5. Achieving fiscal sustainability: priority actions 122 INDONESIA's Rising Divide 1 Ine Overview Rising Rising inequality is creating an Indonesia that is more divided than ever before . Fifteen years of sustained economic growth in Indonesia have helped to reduce poverty and create a growing middle Ur gent action is needed, not only b e cau se inequality is often unfair, b ut a l s o b ecause it may lead to slower g r ow t h a nd poverty redu ction, and an increa se d ri sk class. However, growth over the past decade has primarily of conflict. A certain degree of inequality can be benefited the richest 20 percent and left the remaining positive, by rewarding those who work hard, innovate 80 percent of the population—about 205 million people— and take risks. But income inequality is unfair when not behind. With rising disparities in living conditions and an everyone has the same initial opportunities in life. The increased concentration of wealth in the hands of the few, consequences of doing nothing and allowing inequality Indonesia’s level of inequality is now considered to be to grow unchecked could be serious, giving rise to slower equality relatively high and is climbing faster than most of its East economic growth and poverty reduction, and increasing Asian neighbors. the risk of conflict. Most Indonesians are now aware of the issue and believe that the Government should take action. 3 INDONESIA's Rising Divide Overview 4 Allowing inequality to grow unchecked could give rise to slower economic growth and poverty reduction, and increase the risk of conflict. There are four main drivers of inequality in Indonesia that affect both current and future generations. Taking action requires a better understanding of why inequality is rising. So in partnership with the Government of Indonesia and supported by the Australian Department of Foreign Affairs and Trade, the World Bank conducted a research project that explored this question and identified four main causes. Inequality of opportunity Poorer children often have an unfair start in life, undermining their ability to succeed later. At least one- third of inequality is due to factors outside an individual’s control. Unequal jobs The labor market is divided between high-skilled workers who receive increasing wages, and the rest of the workforce that does not have the opportunity to develop these skills and is trapped in low- productivity, informal, and low-wage jobs. High wealth concentration A minority of Indonesians are benefitting from the possession of financial assets—sometimes acquired through corrupt means—that, in turn, drives inequality higher both today and in the future. Low resiliency Shocks are becoming increasingly more common and disproportionately affect poor and vulnerable households, eroding their ability to earn incomes and invest in the health and education needed to climb up the economic ladder. Public policies can help Indonesia to break the intergenerational cycle of inequality. High inequality is not inevitable; policymakers can reduce inequality by tackling those factors exacerbating inequality that lie outside an individual’s control. The World Bank recommends four key actions: Improving local service delivery A key to a better start for the next generation lies in enhanced local service delivery, which can improve health, education and family planning opportunities for all. Promoting better jobs and skills training Skills training programs can improve the competitiveness of workers who have missed out on a opportunities for the quality education. Also, the Government can help to create better jobs through greater investment in workforce infrastructure, a more conducive investment climate and a less rigid regulatory approach. Ensuring protection from shocks Government policies can reduce the frequency and severity of shocks, as well as provide coping mechanisms to ensure that all households have access to adequate protection when shocks do occur. Using taxes and government spending to Specific fiscal policies could focus on increasing spending on infrastructure, health and education, reduce inequality now and social assistance and social insurance. Such improved public spending could also be supported by in the future a fairer taxation system designed to address some of the current tax regulations that encourage the concentration of wealth.  INDONESIA's Rising Divide 5 I n 201 5, Ind o ne si a sta nd s a s a n in today’s modern and dynamic economy; most i nc re a si ngly di v ide d c o un t ry, do not and are trapped in low-productivity and u ne q ua l i n m a ny way s. There is a growing low-wage jobs. Some families have access to income divide between the richest 10 percent and formal safety nets that can protect them from the the rest of the population, and this gap is driven many shocks that occur in life; many do not. And a by many other types of inequality in Indonesia. fortunate few Indonesians have access to financial People are divided into haves and have-nots from and physical assets (such as land and property) before birth. Some children are born healthy and that increase their wealth over time. This wealth grow up well in their early years; many do not. is passed down from generation to generation, Some children go to school and receive a quality both in the form of money and physical assets, education; many do not. This means that some and through greater access to better health and young adults enter the workforce with the right education. As a result, inequalities are being skills that are increasingly needed and rewarded compounded and deepened over time. 1 T hi s re p o rt a sk s w hy i n e q ua l i t y i s workers unable to move low-wage jobs to i nc re a si ng, w h y i t m at t e r s, a n d w h at more productive jobs where they should be ca n b e d o ne . The first section examines the better paid? How do shocks prevent many trend in inequality, which is already relatively hardworking Indonesians from climbing up the high in Indonesia and rising more rapidly than economic ladder? And why might the increasing in many neighboring countries. It also discusses concentration of wealth in a few hands be why it matters; a degree of inequality can be driving inequality higher, both today and positive, by providing rewards for hard work tomorrow, as well as potentially undermining and innovation. However, when inequality is economic growth and leading to policy-making too high this can be bad for economic growth, which promotes the narrow interest of a few 1 This Executive slow down poverty reduction, and undermine rather than the majority? The final section looks Summary summarizes social harmony. The second section seeks to at what can be done to prevent the country the key messages of the main report. The understand what is driving rising inequality in from becoming even more divided. This section report, in turn, draws Indonesia. Why are more children not growing suggests ways to avoid an Indonesia in which on a series of technical up healthy and leaving school with the right relatively few people are healthy, happy and background papers that are individually skills when there are more schools and health prosperous, and many more can only aspire to referenced. centers than ever before? Why are so many a better life but are unable to attain it. 6 7 executive summary Trends in Inequality in Indonesia Inequality is increasing, with most economic growth being enjoyed by relatively few Indonesians Inequality in Indonesia is rising Indonesia’s real GDP per capita grew at an annual rapidly. By most measures, inequality in average rate of 5.4 percent between 2000 and 2014. Indonesia has reached historically high levels. This growth helped to pull many out of poverty; In 2002, the richest 10 percent of Indonesians the poverty rate more than halved from 24 percent consumed as much as the poorest 42 percent during the crisis to 11 percent by 2014. Growth combined; by 2014, they consumed as much has also helped to create a stronger middle class as the poorest 54 percent. A popular measure than ever before; there are now 45 million people of inequality is the Gini coefficient, where 0 (the richest 18 percent of all Indonesians) who are represents complete equality and 100 represents economically secure and enjoy a higher quality of complete inequality. During the 1997-98 Asian life. They comprise the fastest growing segment of financial crisis, while poverty increased sharply the population, increasing at 10 percent per year the Gini also fell; everyone was affected, but the since 2002 (Figure ES.3).3 richest segments were hit the hardest by the crisis. Since then, the Gini has increased from However, those Indonesians who 30 points in 2000 to 41 points in 2014, its highest are now economically secure are recorded level (Figure ES.1). Even this elevated starting to leave the other 205 level, however, is likely to be underestimated million behind. The benefits of economic because household surveys tend to fail to capture growth have been enjoyed largely by the growing the richest households.2 Once relatively moderate consumer class. Between 2003 and 2010, by international standards, Indonesia’s level of consumption per person of the richest 10 percent inequality is now becoming high and climbing of Indonesians grew at over 6 percent per year faster than most of its East Asian neighbors (Figure after adjusting for inflation, but grew at less than 2 ES.2). percent per year for the poorest 40 percent. This contributed to a slowdown in the pace of poverty Fifteen years of sustained growth reduction, with the number of poor people falling have helped to reduce poverty by only 2 percent per year since 2002, and the and create a growing class of numbers of those vulnerable to poverty falling economically secure households. barely at all (Figure ES.3). After recovering from the Asian financial crisis, 2 The World Bank, Bank Indonesia and Ministry of Finance are collaborating on a project to estimate more accurately the number of middle and upper class Indonesians. The findings are published in “Finding the Hidden Rich: New approaches to measure top income households in Indonesia” (World Bank, forthcoming (c)) 3 For this report, households in the middle class in Indonesia are defined as those who are economically secure from poverty and vulnerability; the economic security line in 2014 was about IDR 1 million in consumption per person per month. See note to chart and the report ”Indonesia's New Climbers: Who are the middle class and what does it mean for the country?" (World Bank, forthcoming (a)). INDONESIA's Rising Divide Trends in Inequality in indonesia 8 After a long period of stability, the Gini began Gini coefficient (points) and national Source BPS, Susenas and World rising, then fell with the Asian financial crisis, poverty rate (percent) 1980–2014 Bank calculations Note Nominal consumption Gini. The before rising sharply since the recovery. (fig ES.1) national poverty line was changed in 1998, and the 1996 rate calculated under both the new and old methodologies. Suharto era Asian D emocracy, Global Financial F inancial D ecentrali z ation and C risis & A ftermath C risis C ommodity B oom 45 40 35 30 Gini 25 20 15 10 poverty – old poverty – new 5 0 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 The increase in the Gini in Indonesia over the past two Note Consumption Ginis for all countries except Malaysia, which uses income. The periods for each country are: Indonesia 1990- decades is one of the highest in the region. (fig ES.2) 2011; Malaysia 1992-2009; Lao PDR 1992-2008; China 1990-2008; Vietnam 1992-2008; Thailand 1990-2009; the Philippines 1991- Gini coefficient in East Asia 2009; and Cambodia 1994-2008. 1990s & 2000s Source Kanbur, Rhee and Zhuang (2014) Inequality in Asia and 90's 00's the Pacific, from PovCalNet. Malaysia China Philippines Thailand Indonesia Cambodia India Laos Vietnam 0 10 20 30 40 50 60 An economically secure “consumer” class has grown Source Susenas and World Bank calculations. The poor are below the national poverty line of around IDR 300,000 per person per month. The vulnerable have a strongly at 10 percent per year since 2002, and now includes greater than 10 percent chance of being poor the next year and are under 1.5 times nearly one in five Indonesians. However, reductions in the poverty line. The consumer class is economically secure, with a less than 10 percent chance of being poor or vulnerable next year, and consume more than IDR poverty and vulnerability have been very small.(fig ES.3) 1 million per person per month. The emerging consumer class is safe from poverty but not vulnerability and lie between the vulnerability and economic security lines. Population share by class, 2002-2014 (percent) See World Bank (forthcoming (b)) for more details. Poor 18 .1 3 3 .7 4 1. 2 7.0 annual Growth (–)2 .2% 2002 Vuln erable 17.7 28. 8 43.3 1 0.1 A nnual Growth (–)0.1% 2006 13.3 26 .1 45.9 14.8 Emerg in g Con s um e r Class A nnual Growth 2.4% 2010 11.3 2 6. 9 44.2 17.7 Con s umer Cl as s A nnual Growth 1 0% 2014 0 20 40 60 80 100 INDONESIA's Rising Divide 9 executive summary Why inequality Matters Income inequality can be unfair when not everyone has the same initial opportunities in life Income inequality is not always a unfair. Other factors outside an individual’s control bad thing; it can provide rewards for that can affect incomes, standards of living and those who work hard and take risks. inequality, include government policies, such as Hard work and innovation benefit society by creating food import restrictions that increase the cost of new goods and services that everyone can enjoy, living most for the poor, or patterns of government as well as contributing to a larger economy. This, taxation and spending that do not collect and in turn, can supply the Government with a greater channel sufficient resources to help the poor and ability to provide public services to all. If this results in vulnerable, or those without equal access. a gap between those hard workers and those who work less hard, then some income inequality may High levels of inequality may slow be justified and even desirable. Many Indonesians economic growth, while more equal share this view. When asked in a 2014 survey countries may grow faster. High whether inequality is ever acceptable, 74 percent inequality may reduce economic growth for all say that “inequality is sometimes acceptable” as if poorer people are unable to properly invest long as wealth acquisition is fair and meritocratic, in their children’s development, if people fail prices are affordable, and the poor are protected.4 to exit poverty and vulnerability and move into the consumer class, and if people fail to find Inequality can be unfair, however, productive jobs. Recent research indicates that when it is due to factors beyond a higher Gini leads to lower and less stable the control of individuals. There are economic growth. Moreover, when the share many forms of inequality. There are economic of total income held by the richest 20 percent inequalities of income, wealth and consumption. of people increases by 5 percentage points, There is also inequality of opportunity, when not economic growth falls by 0.4 of a percentage point. everyone has access to the same opportunities in At the same time, when the share of total income held life. Factors beyond the control of an individual— by the poorest 20 percent of people increases where you are born, how educated or wealthy by 5 percentage points, growth increases by 1.9 your parents are, and what access to public percentage points. Increased income shares for services you had access to when you were the second- and third-poorest quintiles have also growing up—can have a major influence on how been shown to increase economic growth. your life turns out. Having a healthy start in life and a quality education are fundamental prerequisites High inequality can also have for getting a good job and earning a decent living social costs, which may exacerbate in the future. When economic inequality arises conflict . When people perceive that there because of ‘inequality of opportunity’—that is, are large differences in income and wealth, this when not everyone has a fair start in life—it is can create social tensions and disharmony, which can in turn create conflict. Indeed, districts with 4 For a detailed exploration of what Indonesians higher levels of inequality than the average in think about inequality and what should be done, Indonesia have 1.6 times the rates of conflict see the background paper: A Perceived Divide: How Indonesians think about inequality and what should compared with districts with lower levels of be done (World Bank, 2015a). inequality. As we shall see in the following section, INDONESIA's Rising Divide why inequality matters 10 Indonesians already think inequality is too high this also has costs; individuals seek favorable and should be reduced. Conflict in turn can reduce treatment and protection of their position, leading economic growth through labor disruption and to the misallocation of resources, corruption lower investment. Furthermore, if inequality is and nepotism, all of which have high social and due to rent-seeking behavior—people trying to economic costs, including a loss of confidence capture existing resources without generating in public institutions. new wealth through productive activities—then Not only do surveyed Indonesians believe inequality should be lower than it is now, but in reality Source World Bank (2015a) using LSI 2014 and Susenas inequality is even higher than they think that it currently is. (fig ES.4) 2014 data Share of national consumption by each quintile: what people think it should be, what P o o r e st 2 3 4 R i c h est people think it is, what it really is (percent) Q u i nt il e Quintile W h at Th ey 14 16 19 23 28 t h in k it s h ou ld be W h at Th ey 7 12 18 25 38 t h in k it is W h at it 7 10 14 20 49 Ac t ua lly is 0 10 20 30 40 50 60 70 80 90 100 Public concern towards statements about strategies to reduce inequality. inequality and demand for They have the support of the public; 47 percent of those surveyed say it is “very urgent” for the government action are rising Government to address inequality, while another 41 percent think it is “quite urgent.” Indonesians think that inequality is now too high. People surveyed, on Taking action will require a better average, indicate a preference for a more equal understanding of why inequality is country, in which the richest fifth accounts for rising, why this matters, and what 28 percent of all consumption. However, those can be done about it. In partnership with surveyed estimate that, currently, the richest the Government of Indonesia and supported by fifth of Indonesians account for 38 percent of all the Australian Department of Foreign Affairs and consumption. But, while most respondents already Trade, the World Bank conducted a research think Indonesia is too unequal, in fact inequality project to examine inequality and its drivers is even higher than most Indonesians perceive: in Indonesia. The purpose of the project was national data indicate that the richest fifth actually to support the Government in gaining a better enjoys 49 percent of all household consumption. understanding of this emerging issue and being better able to make policy decisions, informed Given this perception, most by rigorous research and evidence, on how to Indonesians think that urgent action respond. This section of the summary of the report is needed, which is why inequality has become examines recent trends in inequality and why a major public issue. Inequality was a key issue in these may be of concern. The next section looks the run-up to the Indonesian presidential elections into the reasons why inequality is rising and why in July 2014, with major national and international a policy response is needed. The fourth and final media outlets reporting on rising inequality section considers what government policymakers and both presidential candidates making public can do to address increasing inequality. INDONESIA's Rising Divide 11 executive summary Why inequality is Rising To understand what drives inequality There are four main drivers of in Indonesia and why it is rising, we inequality in Indonesia that need to understand the different affect both current and future resources that different households generations. Applying the framework have and how they generate income above, we find that there are four main drivers from them (Figure ES.5). Households use of inequality in Indonesia. First, inequality of different resources to earn income. They use their opportunity means that not everyone develops the labor to earn wages and salaries, but they can also skills needed to secure well-paying jobs. Second, earn income from financial and physical assets. with an increasing emphasis on the right skills in Understanding why some households have better a modern economy, the rewards for those who do jobs and earn more, and why some households find good jobs are increasing. At the same time, have more financial assets and earn more, is key those without the necessary skills are becoming to understanding why inequality is rising. Inequality trapped in informal or low-productivity and low- is also influenced by how this income is spent: wage jobs. Together these factors mean that how much is consumed (and over how many wage inequality is increasing. Third, the increasing people it is shared) and how much is saved. In concentration of financial resources in the hands addition, shocks and disasters can suddenly erode of just a few wealthy households means higher household assets and incomes so it is important income inequality today and reinforces human to understand why richer households are more and financial resource inequality in the next resilient in the face of such events. generation. Fourth, shocks can affect inequality at any stage of the framework by eroding a household’s ability to earn an income, save, and invest in health and education. In the following section we explore each of these drivers in turn. 1 2 3 An income- generating asset framework can help us think about why Assets Income Consumption inequality arises. The Different households Households receive Households spend income on consumption framework applies have different income that each (determining inequality today), but the more family quantities and resource generates members, the further the income is spread across generations qualities of assets • Human resources and can deepen • Human resources generate labor income Shocks increase the cost of living; e.g., food prices hocks inequality over time. • Financial resources • Financial resources generate interst (fig ES.5) Shocks directly 4 and rents reduce income Understanding generating assets; Shocks reduce inequality through an e.g., natural disaster, income-generating illness income that can be generated from Investment asset framework with a assets; e.g., drought, Income not spent is invested, in better reinforcing feedback loop unemployment financial and human resources for their children (determining inequality tomorrow through more assets) inte rge ne rat i o na l t r a nsm issi o n o f i nco m e g e ne r at i o n INDONESIA's Rising Divide why inequality is rising 12 01 from when they are still in the womb and up until they are two years old. As a result, these children An unequal start to life are stunted, failing to reach the right height for means an unequal life their age. They develop their cognitive skills more slowly, reach lower educational levels, and earn in the future less as adults, compared with children who grow up healthy. This is one of the most important Inequality of opportunity from birth development challenges for Indonesia, where 37 can explain a substantial amount percent of children are stunted—a much higher of income inequality in later life. 5 level than Indonesia’s regional peers (Figure ES.6). Adult income or consumption inequality is unfair when it is driven by inequality of opportunity at an The persistently high rates of early age: the conditions that children are born childhood stunting come in part from into and have no ability to change. One-third of unequal access to nutrition, clean all consumption inequality in Indonesia is due to water, proper sanitation and quality a small number of factors that are outside of an health services. Many poor children are not individual’s control. The most important factor properly breastfed and poorer children are the is parents’ education and, to a lesser extent, least likely to be fed the micronutrients they need. where they were born. Differences in gender While most start the immunization process, few of explain relatively little of the level of them finish it. Also, many children lack access to inequality in Indonesia. clean water and proper sanitation, which increases the risk of illness and affects nutrition. Gaps in Inequality of opportunity begins access to health care have been closing over time when more than one in three but remain significant (Figure ES.7). More importantly, a Indonesian children fails to get a quality gap persists; facilities in many places lack Children’s healthy start. Differences in the quality both the basic amenities, as well as the trained health and nutrition in the of a household’s human resources—their and competent personnel required to deliver the most important asset—drive a large degree basic health services mandated by law. One of consumption inequality in Indonesia. These reason is that, up until recently, Indonesia had the first two years differences start even before birth. Some children fifth-lowest level of health spending relative to GDP will affect them from poorer households do not receive proper in the world, although this has been increasing for the rest of nutrition during the critical development stages— under the new Jokowi administration. their lives Childhood stunting is strongly linked to worse Source Gaps in access to better child health are closing (such as in WHO Child mortality, cognitive, education, and adult Nutrition water in sanitation, as shown), although quality levels remain income and health outcomes. Stunting is Indicators. persistently low in many places. (fig ES.7) much higher in Indonesia than most Lack of access to clean water and proper sanitation by Source neighboring countries. (fig ES.6) household per capita consumption decile (percent) Susenas Stunting by country (percent) Poor Sanitation 2002 th a i l a nd 16 Poor Sanitation 2011 Poor m a l ays i a 17.5 100 water 2002 v iet na m 23 80 p h il i ppi ne s 33 Poor water 2011 m yan m a r 35 60 in d o n e s i a 37 40 ca m bo d i a 41 20 5 For a more detailed look at how inequality of opportunity for children leads to income inequality as adults, see the background paper “An Unfair Start: How unequal opportunities 0 affect Indonesia’s children” (World Bank, 2015b). 1 2 3 4 5 6 7 8 9 10 INDONESIA's Rising Divide 13 executive summary Poorer The family size of poorer households A key reason for this is that the families shrank faster than richer effectiveness of family planning households during the 1990s, which in Indonesia has declined over the tend to be helped to moderate inequality. Having past decade. The use of contraceptives is larger, which more family members in a household means fewer roughly the same now as it was a decade ago. means that resources available per person. Poorer households While the unmet need for contraception is not resources are tend to be larger with more children, so not particularly high compared with other countries, spread thinly only do they have lower incomes than richer it remains a major reproductive health issue and households, but their consumption per person is has shown little signs of falling in recent years. even less. However, due to an effective national Moreover, this reflects unequal access to proper family planning campaign since the 1970s, the family planning between the rich and the poor, family size of poorer households shrank faster than especially for longer-term methods such as IUDs richer households during the 1990s. This meant (intrauterine devices), which are more effective inequality was lower than it would otherwise in limiting family size. Decentralization, a lack of have been. With poorer households having fewer political support at the local level, and regulatory children to spread their income over, their per deficiencies have all served to weaken family capita consumption rose faster and the Gini was planning. First, the National Family Planning 2.5 points lower than it would have been if relative Agency (BKKBN), previously a strong, centrally-run household sizes had been the same in 2002 as agency, has struggled to maintain its effectiveness they were in 1993. in a decentralized Indonesia, where significant responsibilities for implementation and monitoring This trend reversed during the have been devolved to local governments (districts 2000s; the family size of richer and municipalities). Second, budget support from households has fallen while poorer local governments has declined. households have remained the same size, contributing significantly to Furthermore, these demographic rising inequality. Between 2002 and 2014, changes will have a bearing the average household size of the poorer half of on opportunities for the next Indonesians remained stable, while that of the generation. Not only has the reversal of family richer half of Indonesians continued to fall, albeit size trends for richer and poorer households more slowly than in the 1990s. This contributed contributed to higher consumption inequality to the increase in inequality over this period. If today, it will also affect consumption inequality reductions in household size for the poor and in the future. Smaller family sizes for richer rich had continued to follow the same pattern as households bring a number of benefits that will between 1993 and 2002, the Gini would have be of advantage to their children compared with been 4 points lower in 2014, at 37 rather than 41. those from poorer households. Smaller families The enrolment gap between richer and poorer Source …but increasing enrolment National Source Susenas Podes 2011 children has been closing over time… (fig ES.8) 2012 rates mask differences in the Rural Infrastructure Enrolment of 13-15 year olds by parents’ per quality of education across Urban Survey capita consumption quintile schools and regions… (fig ES.9) Maluku/Papua Quality of schooling facilities 100 and teachers (percent) 92 98 86 86 Q5 90 77 Q4 68 62 61 Q3 80 55 49 45 Q2 70 33 60 Q1 All schools: share smp with share schools 50 av. share of laboratory with electricity teachers with 2004 2007 2011 2013 diploma INDONESIA's Rising Divide why inequality is rising 14 can contribute to better maternal and child health …which in turn contributes to Source OECD 2015 outcomes, while a longer gap between children Indonesia having some of the worst allows the mother’s body to recover and deliver international test scores in science more nutrients, helping babies to be born at a and mathematics (fig ES.10) healthy weight. It also means that more attention Percentage of 15-year olds with international PISA can be devoted to each child, helping to prepare mathematics and science scores below Level 2 them better for entering preschool. Reduced rates ( basic skills, 420 points) of teenage pregnancy can decrease maternal and child mortality rates, as well as the incidence of low birth weight. Healthier children born into richer families in turn can increase inequality tomorrow because they have had a better start in life. 89.2 Ghana 87.2 Honduras 85.6 South Africa Morocco Inequality of opportunity deepens 78.9 73.8 Indonesia when not every child gets a good 73.7 67.7 Peru Qata r start in school. Children living outside of 67.6 Colombia 67.0 Botswana Java or in rural areas, especially the poor, are 65.0 Oman 64.6 Syria less likely to attend early childhood development 64.3 Brazil 63.9 Tunisia programs, when learning begins. By primary 61.4 Jordan 61.2 Saudi Arabia school, however, enrolment is nearly universal, 61.1 Argentina 59.9 Palestine and the junior secondary enrolment gap between 59.1 Albania Macedonia richer and poorer children has been closing over 57.0 56.0 Montenegro time (Figure ES.8). Nonetheless, poorer children 55.3 Lebanon Georgia 54.9 are not making the transition to the next schooling 53.8 Mexico 53.6 Uruguay level at the same rate as richer children; enrolment 53.4 Bahrain 52.5 Costa Rica rates for the richest 20 percent of children are only 51.1 Malaysia 49.8 Iran 9 percentage points higher than for the poorest 46.3 Kazakhstan 45.3 Chile 20 percent in year six (the last year of primary), 44.7 Armenia Thailand but 21 percentage points higher in year seven (the 44.2 42.7 UAE beginning of junior high). 42.0 Bulgaria Romania 41.6 39.1 Serbia Turkey While 36.4 The biggest challenge to an equal 32.7 Israel* 32.5 Greece start for all is the quality of enrolment 28.8 28.3 Slovak Republic Ukraine education. Rural schools and those in eastern rates for poorer 26.1 Sweden 25.1 Croatia Indonesia are less likely to have trained teachers children have 24.7 Luxembourg Hungary or proper facilities, and teacher absenteeism is 24.5 improved, they 24.4 Iceland also a problem in some places (Figure ES.9). Even 23.5 United States Portugal 23.3 if poorer children stay in school, disparities in often do not 23.2 23.0 Italy Russia educational quality persist, so that the value of receive the 22.5 22.3 Lithuania Norway receiving a complete education is often less than same quality 21.8 France 21.1 Spain it is for better off children. This negatively affects of education 20.7 New Zealand 19.6 Belgium the learning outcomes of remote and poorer 19.6 United Kingdom Czech Republic students. For example, Grade 3 children in Java 18.7 18.5 Austria read 26 words faster per minute than those in 18.1 Denmark Australia 17.7 Nusa Tenggara, Maluku or Papua. Similarly, richer 17.7 Slovenia 17.4 Latvia children read 18 words faster than poorer children. 16.1 Germany 15.1 Netherlands In turn, the low quality of education for the 15.1 Ireland 13.8 Switzerland disadvantaged (the majority of Indonesian children) 13.7 Liechtenstein 13.1 Canada drives the low average quality of educational 12.7 Poland Taiwan outcomes; 74 percent of Indonesian 15-year-old 12.3 11.3 Vietnam children do not achieve even Level 2 basic skills 10.7 Finland Macao 10.7 (a score of 420) on PISA international mathematics 10.4 Japan 9.8 Singapore and science tests, the fifth worst score out of 82 8 .6 Korea 8.5 Estonia countries (Figure ES.10). 7.5 Hong Kong INDONESIA's Rising Divide 15 executive summary Despite closing gaps in access to in the 1950s to 34 percent for those born in the critical education and health 1970s. However, this decline has stopped and opportunities, inequality continues may even be reversing for those born in the 1980s to increase, with the role of and onwards. This is partly because access to circumstances at birth remaining quality services remains unequal, even if physical significant. The significant economic and access gaps have closed. Therefore, the skills education expansions that Indonesians enjoyed gap between advantaged and disadvantaged in the 1960s and 1970s meant that the role that children remains. But this alone would not lead to birth circumstances played, through factors such rising inequality. Instead, the persistent skills gap as parents’ education and where you were born is combining with an increasing gap between the and raised, fell from explaining 39 percent of earnings for the skilled and unskilled to today’s consumption inequality for people born drive inequality higher. 02 over half of all firms surveyed in manufacturing and services outside of education say that finding Two labor markets: professionals is “hard” or “very hard,” and 40 to 50 percent of them say their staff lack thinking, increasing wages for the behavioral, computer and language skills (Figure ES.12). few skilled workers and At the same time, there are few a low-productivity and training opportunities for those low-wage job trap for who leave school without the skills everyone else they need. Much of the Indonesian workforce leaves school without basic skills because of Increasing In today’s dynamic and globalized incomplete and poor quality education. There are limited opportunities for such workers to develop demand for economy, technological advances, these skills later in life. Less than 1 percent of especially in information and shortage of technology, mean that skills are youths aged 19 to 24 years old have attended skilled workers becoming more important. Technological training courses in engineering, IT or languages, is driving their progress has brought significant benefits in recent in part, for the first two, because of limited supply. wages higher decades, with cheaper transportation and cheaper At the same time, there are few on-the-job goods, greater access to markets for those in learning opportunities either, since most firms are remote areas, and improved communication small- or medium-sized enterprises (SMEs) and and knowledge sharing. The new technologies training provision is simply too costly. Few firms in underpinning these advances require increasingly Indonesia are providing such training, particularly higher skill levels to use and improve. As a compared with the rest of East Asia and elsewhere consequence, the demand for skilled workers in the world. Around 70 percent of firms in East in many sectors has increased in most countries Asia employing more than 100 workers offer around the world. These skilled workers tend formal training; in Indonesia less than 40 percent to be those children who completed school and do, and the gap increases for SMEs compared with benefitted from a high quality education in the first the region. With limited access to ‘second-chance’ place, highlighting the consequences of unequal skills training opportunities, these workers find it opportunity from birth. difficult to improve their skills and find better jobs. In Indonesia, employers are As a consequence, wages for skilled increasingly demanding more skilled workers have been increasing faster workers, but are struggling to find than those for unskilled workers. them. Employers in Indonesia are also looking There is an increasing wage gap between for workers with higher skill levels. The proportion 6 Labor productivity is measured here as the value of GDP of jobs requiring senior high school or tertiary education output in the sector divided by the number of workers. has increased over the past decade from 22 percent Worker productivity ranges from around IDR 20 million of in 2002 to 35 percent in 2013 (Figure ES.11). But GDP in very low productivity sectors, such as agriculture, to IDR 100-200 million in higher productivity sectors in education levels are not the same as skills. Despite manufacturing and financial services, to over IDR 500 increasing educational attainment in Indonesia, million in non-oil and gas mining. INDONESIA's Rising Divide why inequality is rising 16 skilled and unskilled workers. Wages in higher With most existing and new jobs Less than 1 productivity sectors that demand more skill, such being in low-productivity sectors, percent of as financial services, telecommunications and most workers are trapped in low- some manufacturing sectors, have risen faster paying jobs, which are often in the youths have than in those in lower productivity sectors. On agricultural and informal sectors. attended average, every extra IDR 200 million of annual labor Between 2001 and 2012, a total of over 20 training courses productivity enjoyed by a sector corresponded to million new jobs were created. Employment in engineering, 1 percentage point of higher real wage growth creation, however, has been concentrated in IT, or languages each year between 2001 and 2014.6 In this labor low-productivity, non-skill-intensive sectors. Out market, workers from richer households, where of total employment growth, 30 percent occurred they are more likely to be better educated and more in community, social and personal services and skilled, are benefitting from higher wages. 28 percent in wholesale, trade and retail, while manufacturing contributed only to 16 percent of Rising skilled wages are not total growth (3.3 million jobs). necessarily a problem as higher demand for skills is a positive sign in These workers have dim prospects an economy, but they are since underinvestment in a problem if not everyone has the infrastructure and a poor same opportunity to develop those investment climate are slowing down skills. As a country seeks to make the the creation of more productive jobs. transition from lower middle-income to higher Underinvestment in infrastructure and a poor middle-income, it is important that its economy investment climate have been major constraints evolves and sectors and firms move up the value to creating more and better jobs. Investment in chain into more advanced goods and services. As infrastructure collapsed during the Asian financial this process occurs, firms will demand a higher crisis and has still not fully recovered. Total annual degree of skill from workers. So, higher skilled infrastructure investment declined from an average wages can be a positive sign that an economy is 7 percent during 1995-97 to around 3-4 percent making this transition. That is, higher skilled wages of GDP in recent years, compared with over 7 by themselves are not necessarily a problem. percent in Thailand and Vietnam, and 10 percent However, when not everyone has the chance in China over the past decade. Despite rising to develop these skills, because of the sort of government spending in recent years, Indonesia’s inequality of opportunity that we have just seen core infrastructure stock, such as road networks, is widespread in Indonesia, in this case higher skilled ports, electricity, and telecommunication facilities, wages become a driver of higher long-run inequality. has not kept pace with economic growth. Indonesia The proportion of employment Source Nearly half of employers surveyed Source World Bank (2011) Sakernas, Skills for the Labor Market in requiring higher education levels World Bank identified skill gaps in staff (fig ES.12) Indonesia. has been increasing (fig ES.11) calculations Important skills identified by Employment by education level, 2002-13 (percent) employers, and skill gaps (percent) very Skill Gap important in staff 4.8 100 9.4 17.6 80 25.1 16.7 Basic Skills 60 18.5 40 Thinking Skills 60.9 46.9 20 Behavioral Skills 0 2002 2013 Computer Skills English Skills primary or Junior Senior tertiary less Secondary Secondary 0 10 20 30 40 50 INDONESIA's Rising Divide 17 executive summary has lost more than 1 percentage point of additional them consist of employees who are paid above annual GDP growth due to underinvestment in the minimum wage and who are not working in infrastructure. Problems with transportation are among casual type of jobs. the worst business constraints for manufacturing firms and prohibitive transport costs undermine At the same time, the legislation their competitiveness. Raw material producers find protects only a small number of themselves unable to tap growing opportunities workers. Most workers receive no severance linked to final consumer demand, while it is payments at all (66 percent), while those who do cheaper to import oranges from China than to receive payments usually receive less than they source them from Kalimantan. At the same time, are entitled to; only 7 percent of fired workers obtaining business licenses is very complicated, receive the full payment. Furthermore, as a expensive and time-consuming. Indonesia ranks consequence of these regulations, workers find 114th out of 189 countries in the World Bank’s Ease it difficult to move from informal to formal jobs, of Doing Business index, worse than Malaysia as formal employers consider the high costs of (18th), Thailand (26th), Vietnam (78th), China (90th) dismissal and the uncertainty over minimum wage and the Philippines (95th). For example, obtaining increases when hiring. Noncompliance with labor the licenses necessary to start a new business in regulations is likely to reinforce labor market manufacturing takes 794 days by law, although segmentation and wage inequality, adding to the actual implementation can be slower still. And it persistence of low-quality and low-productivity jobs. takes 101 days to obtain an electricity connection in Indonesia, compared with 35 days in Thailand. Inequality of opportunity in health and education combined with Indonesia’s labor market regulations increasing returns to skill are also discourage formal job creation together increasing inequality. and hinder workers from moving into Despite increasing enrolment rates for poorer more productive sectors. Indonesia has and disadvantaged children, they often still some of the most rigid labor regulations in the suffer from poor quality education, as well as region. It requires a minimum severance pay of at cognitive disadvantages from stunting during least 100 weeks of wages. At the same time, the early childhood. This means that they are not minimum wage-setting process has resulted in obtaining the skills needed to take advantage of large increases; in 2013, 25 provinces increased the increasing demand for skilled workers and their minimum wage by an average of 30 percent the increasing rewards that come with it. Since and Jakarta increased it by 44 percent. This has most of the other jobs being created are of low taken minimum wages in Indonesia to levels productivity and often informal, these workers that are even higher than those in Thailand and are trapped in low-wage jobs. At the same Vietnam, as well as China and the Philippines, time, equipped with skills, workers from richer despite having one of the region’s lowest levels households are benefitting from a labor of labor productivity. With the enacting of a new market with a skills shortage. regulation as we go to print, a new minimum wage setting formula based on inflation and annual GDP The widening wage gap between few growth will now be used. While this is promising, skilled workers and the unskilled it fails to address productivity and still allows majority is one of the main drivers discretionary adjustments by provincial governors, of increasing inequality in the continuing the uncertainty. High severance and past decade. The increasing skilled wage an uncertain minimum wage negotiation process gap is reflected in higher wage inequality. The have meant that firms are less likely to employ Gini coefficient for primary wages increased by workers formally. Most companies respond by not around 5 points over the 2000s, contributing using formal contracts, resorting instead to short- to higher inequality. In fact, around 28 percent The richest 1 term contracts or relying on intermediary firms that of the increase in consumption inequality in the percent own provide outsourced workers. In fact, around one- 2000s can be explained by increasing returns third of Indonesian employees are still working to education. Since there is a wide degree of half of all the without a contract. Furthermore, while paid work variation in skill within each level of education, country's recently reached 45 percent of total employment, the contribution of increasing returns to skill, rather wealth a more in-depth look shows that only one-fifth of than education, is likely to be even higher. INDONESIA's Rising Divide why inequality is rising 18 03 A small number of Indonesians are benefitting from financial and physical assets—sometimes acquired High wealth through corrupt means—that, in turn, drives higher concentration and its inequality in the future consequences An increasing concentration of Indonesia has one of the highest concentrations of wealth Source Credit Suisse wealth in the hands of a few means out of 38 countries with available data (fig ES.13) (2014) that income from financial and p hy sica l assets is also driving inequality higher . Share of total wealth held by richest 1 percent of households (percent) Households earn income not only through jobs but also financial and physical assets. The share of income generated by labor has been falling and the russia 66.2 share generated by capital, such as financial and thailand 50.5 property assets, has been increasing—in Indonesia indonesia 50.3 as elsewhere in the world. In Indonesia, this partly india 49.0 reflects the strong returns to these assets over brazil 45.7 the past decade. It is largely rich households, chile 41.1 however, that have access to these resources. The south africa 40.1 richest 10 percent of Indonesians own an estimated czech republic 38.6 77 percent of all the country’s wealth. In fact, the richest 1 percent own half of all the country’s wealth united states 38.4 (Figure ES.13), which is the second-highest level israel 38.3 (along with Thailand) after Russia from a set of 38 china 37.2 countries. This means that income from financial korea 33.9 and physical assets benefits fewer households in mexico 33.7 Indonesia than in many other countries. poland 33.0 colomb ia 32.8 Furthermore, accumulated wealth taiwan 32.7 generates even higher incomes in switzerland 30.9 the future, driving inequality still romania 30.8 higher. Financial and physical assets are sweden 30.8 generating higher incomes for only a few wealthy austria 29.3 households in Indonesia, and these households denmark 29.3 are then saving this income as even more wealth. norway 28.9 The share of wealth owned by the richest 10 singapore 28.6 percent in Indonesia increased by 7 percentage germany 28.1 points between 2007 and 2014, in the top 10 of 46 countries over that period. These increased assets ireland 27.3 today will also generate even higher portugal 27.1 incomes tomorrow. spain 27.0 greece 26.7 Some wealth accumulation is partly canada 24.4 due to differences in how labor and new zealand 23.9 capital incomes are taxed. Increasing united kingdom 23.3 wealth concentration is due, in part, to differences netherlands 22.7 in the way income tax is collected from labor and finland 22.0 capital. For example, dividend withholding tax is italy 21.7 only 10 percent (and earned interest withholding france 21.4 is only 20 percent), lower than all but one labor australia 21.1 income tax rate and considerably lower than the japan 17.9 30 percent top marginal tax rate that most belgium 17.3 dividend earners would otherwise be paying. At INDONESIA's Rising Divide 19 executive summary the same time, the significant capital gains that corruption, not enough is known have been made from the housing and stock about the nature of the problem markets are theoretically subject to personal and the best actions to take. Not income tax, but are not subject to withholding enough is known about the nature of corruption taxes. With weak monitoring and compliance on in Indonesia and how it drives inequality. Public personal income taxes, low withholding rates perceptions suggest that it is widespread, and often mean less tax paid. Meanwhile, for many high profile cases provide vivid examples of workers, income tax on salaries is withheld by how the rules of game are being biased in favor the employer, ensuring a degree of compliance of insiders or circumvented altogether without for labor income. As a consequence, around legal consequences. Both forms of corruption 95 percent of personal income taxes (around seem highly likely to be linked to inequality 20 percent of total income taxes; corporate through lower growth, high wealth concentration income tax makes up the rest) are collected by and policymaking that exacerbates inequality withholding, mostly on salaries, and only the (for example, rigid labor markets that prevent remaining 5 percent from capital income. productive job creation or switching, or import restrictions that drive food prices higher). Other wealth accumulation may be However, an analysis of the political economy is due to various forms of corruption. needed to identify the underlying causes. Which For some, their financial and physical assets aspects of the political, economic, and legal are gained through personal connections and framework in Indonesia provide the incentives for corrupt practices; in 2014 Indonesia’s Corruption such rent-seeking to take place? That is, how are Perception Index, which measures perceptions of policies made, by whom and for whose benefit? public sector corruption around the world, was a When is corruption or rent-seeking due to a lack lowly 34 out of 100 (where 0 means very corrupt of appropriate checks and balances? And when and 100 very clean), ranking it 107th out of 175 is it due to a lack of enforcement of these checks countries. This suggests that some of the wealth (whether through discretion on investigation and accumulation has occurred through corruption—or prosecution of potential corruption or the at least is perceived to have been accumulated this way. outright subversion of the legal process through judicial capture)? However, in some areas, particularly the political economy of Indonesia’s institutions and the nature of 04 through a number of channels. They can affect the underlying assets that generate income; a Shocks erode a natural disaster, for example, might destroy the livestock or equipment used to make a living. household’s ability to Shocks can also reduce the income that comes earn and save, as well from these assets; a drought might reduce a harvest. They can also reduce how far that income as invest in health and goes in the case of food price shocks; soaring rice education prices linked to rice import restrictions in 2006 saw poverty rise by 2 percentage points. And There are many shocks that can erode they can reduce tomorrow’s income by depleting household resources and incomes. today’s assets (for example, selling a sewing Households can be affected by economic, health, machine to pay for hospital care) or by preventing social and political shocks, as well as natural accumulating assets for the future (for example, disasters. These shocks reduce household income lack of income due to losing a job). Shocks disproportionately affect Many Indonesians rely on friends and family to deal with these shocks poor and vulnerable households, rather than formal mechanisms. which can prevent them from Civil servants and the wealthy have access to climbing up the economic ladder health and employment insurance that they can INDONESIA's Rising Divide why inequality is rising 20 rely on during shocks. While the Government they are less likely to be adversely covers health insurance premiums for the poor affected, while vulnerable and vulnerable, these programs are not always households could fall back into effective because beneficiaries do not always poverty. With vulnerability high in Indonesia, know what services they are eligible for, or cannot small shocks can easily reduce incomes. While 28 access them because of limitations in the supply of million Indonesians live below the poverty line, services. Also, for many workers who are neither a further 68 million live less than 50 percent above poor nor rich but who work in the informal sector, it (Figure ES.15). As a consequence, small shocks can the expansion of health insurance coverage to easily send the vulnerable back into poverty; in fact, these households may be many years away (Figure around half of the poor each year were not poor ES.14). When people do not have access to formal the year before. Even non-vulnerable Indonesians coping mechanisms in times of shock, they usually can be badly affected by shocks such as illness and turn to family and friends. However, this typically disease or unemployment if they do not have does not provide enough support to fully cope, access to insurance or other coping mechanisms. and does not work when a shock such as a natural As a consequence, over a 14-year period, most disaster hits an entire community. When informal Indonesians have experienced considerable ups and borrowing is not enough, households may resort to downs in terms of their income. In contrast to this steps that reduce their future income, such as selling common situation, a majority of the richest fifth productive assets or pulling children out of school. of households have been able to remain secure in this top quintile over this same period of time Shocks hurt the incomes of all (notwithstanding the fact that, having the most Indonesians, but given that richer financial assets, they were most affected by the households are more resilient Asian financial crisis when inequality actually fell). Fewer than half of all Indonesians have health insurance (fig ES.14) Access to health insurance (percent) Poor 55.3 vulnerable 49.4 emerging consum er class 44.9 Consumer Class 50.0 There are more than twice as many vulnerable Indonesians as there are poor, living less than 50 percent above the poverty line, who fall easily into poverty if they suffer a shock (fig ES.15) Poverty and vulnerability rates in Indonesia, 2014 (percent) 11.3% 26.9 % ( 6 8 m i ll i o n ) ( 2 8 m i ll i o n ) v ul n e r a bl e poor 0 5 10 15 20 25 30 35 40 Source Susenas and World Bank (2015a). note The poor are under the national poverty line, around PPPUS$1.30; the vulnerable are under 1.5 times the poverty line, around US$1.90; the emerging consumer class are under 3.5 times the poverty line, around US$4.50; and the consumer class are above this. See World Bank (forthcoming (a)) for details. INDONESIA's Rising Divide 21 executive summary reducing inequality High inequality is not inevitable; policymakers can reduce it by tackling inequality that is due to factors outside an individual’s control High and rising inequality is not an The final section of the report inevitable part of the development examines some of these tools and process; regional neighbors have highlights priority actions. The grown economically without remainder of the Executive Summary proposes: increasing the disparity between rich and poor. Inequality has been rising • Improving local service delivery to provide equal quickly in Indonesia at the same time as it has opportunity for all: A key to a better start for future remained stable or has actually fallen in other fast generations is improved local service delivery, growing East Asian neighbors such as Malaysia, which can improve health, education and family Thailand and Vietnam. This indicates that rising planning opportunities for all. inequality is not an unavoidable byproduct of rapid growth. In fact, some countries, such as Brazil, • Promoting better jobs and skills training have been able to slow and eventually reverse opportunities for the workforce: Today’s workers rising inequality through a planned policy who had an unfair start can still improve their skills. approach (Box ES.1). When they do, the Government can help to make sure there are better jobs available through a Public policies can help to reduce more conducive investment climate and less rigid the impact of factors outside an but more effective worker protection regulations. individual’s control that affect their outcomes, ensuring that people • Ensuring protection from shocks: Government are no longer divided into the haves policies can reduce the frequency and severity of and have -nots from before birth. shocks, as well as provide the coping mechanisms Not all inequality needs to be addressed; the to ensure all households have access to adequate Government can aim to address inequality due to protection to the shocks when they do occur. factors outside an individual’s control, while leaving the inequality that rewards individuals for hard work, • Using taxes and government spending to reduce risk-taking and innovation. This means breaking the inequality now and in the future: This final priority cycle of intergenerational transmission of poverty is a pre-requisite for the first three. Setting and inequality. All children need to be born healthy, the right fiscal policy to increase spending on grow up well in their early years, go to school and infrastructure, health and education, social get a quality education, and enter the workforce assistance and social insurance, will allow the with the right skills for today’s modern and dynamic Government to create more equal opportunities economy. In addition, all families need access to for the future and better jobs now, as well as mechanisms that can protect them from the many ways for households to protect themselves. That shocks that can occur in life. More Indonesians need is, the first three priority actions are only possible to gain access over time to financial and physical if sufficient and effective spending decisions are wealth, and pay a fair share of tax on the income made. At the same time, how taxes are raised they generate. To do this, policymakers have a to fund this spending can be used to reduce range of instruments at their disposal. The best inequality today, as well as potentially address some tools are those that both address the main drivers of of the unfair aspects of wealth concentration. rising inequality and are politically feasible. INDONESIA's Rising Divide reducing inequality 22 B o x ES . 1 Macroeconomic stability and economic all government spending is social How Brazil growth have benefitted the poor. spending, including cash transfers, Since the poor do not have access to health and education. An important reduced the financial instruments that would role in reducing inequality was protect them from inflation, a stable played by a large expansion in social inequality macroeconomic environment that assistance spending. Increased keeps prices low has benefitted the contributory and non-contributory poor and vulnerable in Brazil. At the government transfers accounted same time, strong economic expansion for around 30 percent of the Gini Brazil was effective in reducing has driven job creation, allowing poorer reduction between 2001 and 2009. inequality in the 2000s, albeit from a households to earn better incomes. Most important was the expansion of very unequal starting point. Between Bolsa Familia, Brazil’s conditional cash 2001 and 2009, Brazil’s income Gini Expansion in primary and secondary transfer program, similar to PKH in coefficient fell by 5 points, from 58.8 to education has changed the labor force Indonesia. Unlike PKH, which covers 53.7.7 This was a greater fall than average profile. Brazil’s inequality in labor only about 5 percent of households in the Latin American region, which also income had been driven in large part in Indonesia, Bolsa Familia has grown saw declining inequality over the 2000s. by inequality in education. Brazil began to cover 25 percent of Brazilian a concerted policy effort to expand households, and is viewed as the most With Brazil having many similarities education for poorer households. This cost-effective contribution in reaching to the Indonesian context, there are expansion was highly successful; in the poor and reducing inequality. a number of relevant lessons to be 1993, a child of a father with no formal learned on how inequality can be education would complete four years 7 Income Ginis are higher than consumption Ginis because rich households save more reduced. Brazil resembles Indonesia of schooling, whereas now students income, meaning consumption is more in a number of ways: it has a large, complete 9-11 years, regardless of equally distributed than income. The natural resource-based economy that parents’ education. As more workers Indonesian income Gini was 6.4 points higher become skilled, they benefit from than the consumption Gini, based on the has enjoyed strong growth over the average difference for the three years when 2000s; it has a highly decentralized higher wages. At the same time, both income and consumption Ginis were political system; it has already made this means there are fewer unskilled collected in Indonesia (1984, 1990 and 1993). the transition to become an upper workers. With economic growth middle-income country as Indonesia is also increasing demand for unskilled in the processing of now doing; and it workers, unskilled wages increased Growth Incidence Curve for Brazil, suffers from high income inequality and as well. It has been estimated that 2001-2009 (fig ES.17) inequalities of opportunity. Given this the falling wage differences between context, the four drivers behind falling skilled and unskilled labor represents r a t e o f a n n u a l g r o wt h ( i n % ) inequality in Brazil should be of interest two-thirds of the fall in inequality. 11.78 to Indonesia: (i) macroeconomic stability; (ii) an expansion of primary A move towards more pro-poor social 8.30 7.45 and secondary education; (iii) pro-poor spending, and a significant expansion 6.69 6.06 5.63 4.79 social spending; and (iv) an expansion in social assistance, also contributed 3.86 2.89 1.61 of social assistance. to falling inequality. Nearly half of Gini Coefficient in Brazil and Latin America (fig ES.16) 0.60 0.58 0.56 B raz il 1 2 3 4 5 6 7 8 9 10 0.54 0.52 decile 0.50 048 latin a me rica 0.46 ( 1 7 coun trie s) Av e r ag e o f i n c o m e p e r 0.44 c a p i t a g r o wt h r a t e s 5.91% 0.42 0.40 2001 2002 2003 2004 2005 2006 2007 2008 2009 INDONESIA's Rising Divide 23 executive summary Other programs such as Beneficio particularly benefitted the poorest, overseeing and implementing this de Prestacao Continuada (non- whose annual average per capita strategy is a key responsibility for a contributory pensions) provide greater income growth of nearly 12 percent senior government minister with a benefit levels than Bolsa Familia, was twice the national average and 10 strong mandate from the President but play less of a role in reducing times that of the richest 10 percent. himself; (iv) new major policy proposals inequality, while generous formal and in all ministries and agencies are public sector social security programs The Brazilian case illustrates that examined for possible effects on have been highly regressive. significant reductions in inequality are inequality; and (v) key policies and possible. It is clear that Indonesia can programs aiming to reduce inequality As a consequence of these policies, go beyond slowing the increase in are well-designed, funded and poorer Brazilians saw the highest inequality, and can actually begin to implemented. increases in income over the period. reduce inequality itself, provided that: (i) Average income growth for the poorer it becomes a key government priority; half of the Brazilian population was (ii) a coherent and explicit strategy above the national average, and is developed; (iii) accountability for 01 One of the most important steps in addressing inequalities of Local service delivery opportunity begins with improving the access of poorer households In addition In a decentralized Indonesia, to quality health services. Achieving to adequate effective delivery of quality the right start for children of poorer households services by local governments is requires having access to quality health services funding, the essential if opportunities are to be during the early development stages, without most important enjoyed by all. Since democratization and which such children will be disadvantaged for policy action decentralization, the financial and political powers the rest of their lives. More spending on health underpinning of local governments have increased dramatically. could help to reduce gaps in access. However, the a better start So too have their responsibilities. With much of priority is improving the quality of health services. the authority for key services that provide the Specific actions include: in life for all is opportunities for a good start in life, such as health, improved local water and sanitation, nutrition and family planning, • Increased health financing, with targeted DAK service delivery now being under local government control or investments and built-in incentives, to equip local influence, more must be done to ensure they have health facilities to deliver results. First, recent the means, capacity and incentives to provide or increases in public health spending should be support these services in an effective manner. sustained; Indonesia had the fifth-lowest health spending to GDP ratio out of 188 countries, at just Key policy actions can underpin improvements 1.2 percent of GDP in 2014 (including spending on in all areas of local service delivery. Local the national social security health system), before service delivery can be improved by building recent increases announced in the 2016 budget. the capacities of local governments to deliver But public health spending could also be improved services, moving towards a more performance- by making local governments more accountable based transfer system and providing the tools and better able to deliver health services on for citizens to monitor local service delivery. the ground. One approach is to use targeted Some cross-sectoral priorities for improving local investments combined with incentives to deliver service delivery include: changes in the way results. For example, multi-year Dana Alokasi central budgeting allocations are made; changes Khusus (DAK, or special funding for national in the incentives local budgeting face; applying priorities)transfers to district governments could be incentives for achieving local delivery standards; linked to measurable gaps in key health services and increased demand for public accountability. In relative to basic standards, such as those related particular, we look at how this might be achieved to maternal and child health. District government in health, education and family planning. contributions could be reimbursed based on evidence that these services are being provided, INDONESIA's Rising Divide reducing inequality 24 and subsequent DAK allocations could be based cadres is important, through improved training Indonesia had not only on gaps but also progress in closing them. quality, performance-based incentives, and the fifth-lowest Districts that underperform could be supported, strong supervision from Puskesmas (sub-district provided that the problem is a weak capacity to deliver. health centers). These cadres should visit every health spending community to make sure that pregnant women to GDP ratio • Producing sufficient competent health workers receive routine prenatal care, mothers bring out of 188 and ensuring enough of them are deployed to children for immunization, and other basic steps countries disadvantaged areas. There are a number of ways are taken to reduce the threat of illness, as well to improve the number, quality and distribution as the high costs of late treatment. With respect of health workers. Producing the right number to stunting and nutrition, Posyandu cadres can begins with better information about the dynamics play a key role in ensuring effective Behavioral of the health workforce at the national and sub- Change Communication (BCC), especially through national levels, using modern planning methods tailored personal counseling focusing on improved for health workforce production and deployment caring practices for maternal care and feeding to reflect real demand, and greater involvement behaviors for infants and young children. As by the private sector. Quality can be improved shown in other countries, regular home visits to through limiting the recruitment of public servants provide individualized support to mothers are key. to those who have been certified according to Posyandu training pilots under PNPM Generasi national standards and limiting the reimbursement could be further scaled up. of services for patients with health insurance to those services that have been provided by Gaps in access to schools are certified health personnel in both the public and gradually being closed, but private sector. At the same time, the certification, this needs to be accompanied by accreditation and licensing of health workers and improvements in the quality of health professional education can be improved. education in order to reduce Finally, deploying sufficient qualified workers to inequality. Enrolment gaps between the rich disadvantaged areas requires a public sector and poor have been closing over time, but the emphasis on the placement of medical doctors contribution of inequality of opportunity to overall in rural underserviced areas to increase the inequality has not fallen because of a persisting efficient use of public money, and trying different quality gap. This is also an important factor incentives to encourage health workers to work that is holding back higher economic growth. in remote areas than the ones used to date. For Encouraging all children to stay in school until at example, rather than financial incentives to attract least the end of high school is an important step, workers to rural and remote areas, a period of which means improving access in some areas, and working in these areas could be required of all improving the targeting, coverage, benefit levels doctors as part of their national accreditation, as and uptake of scholarships for poorer households is required in Australia, or public scholarships to everywhere, with inducements for students to medical professionals could require a one- to two- transition to the next schooling level. Nonetheless, year period of working in disadvantaged areas. there will be greater reductions in inequality of opportunity, as well as much greater gains to • Creating demand for health and sanitation economic growth, if the quality gap is addressed services through a strengthening of community (the benefits in terms of growth have been health workers (Posyandu cadres). Increasing estimated for Indonesia to be around seven times demand and knowledge for maternal, child higher for closing the quality gap than for closing health, and water and sanitation services the access gap). Broad whole-school management can be promoted through: education, social and pedagogic reforms that have worked in other encouragement and pressure, and incentives, countries may be needed, and follow-up efforts including better socialization of the importance will also be required to determine the constraints of vital behaviors; outreach from local health to these types of reform in Indonesia. However, officials, trusted community leaders and NGOs; specific actions that can help include: and incentives through conditional cash transfers such as PKH (Program Keluarga Harapan) or • Ensuring adequate financing of schools, other social assistance programs. In particular, particularly in disadvantaged areas, to attain increased professionalization of Posyandu minimum quality standards. A recent World Bank INDONESIA's Rising Divide 25 executive summary report identifies a number of options to improve value of BOS periodically to account for regional BOS (Bantuan Operasional Sekolah), including: price differences and inflation to ensure that all (i) linking funding more directly to education schools can meet operating standards; (iv) using standards in order to signal the importance of the BOS formula to provide more funding to using BOS resources to fulfill these standards; schools serving poor and vulnerable children; (ii) revising the list of eligible items under BOS and (v) phasing out the use of BOS resources to provide schools with the flexibility to invest to support the ‘out-of-pocket’ expenses of poor in quality enhancing inputs; (iii) adjusting the students in favor of existing targeted programs, INDONESIA's Rising Divide reducing inequality 26 one potential approach, by combining an equity component (rather than equal spending per person, schools in the Thousand Islands sub- district receive more funding because of the higher costs of service provision) and an incentive component (schools in the top quarter with respect to the level and increase in national test scores receive an extra allocation the following year). In addition, the targeted and performance- based DAK investments proposed in health could also be adopted for education based on district- level education gaps. • Increasing the competency of teachers everywhere, and ensuring sufficient distribution to disadvantaged areas. Strategies could include: (i) greater selectivity at entry and exit (through the use of competency tests) and institutional accrediting to help ensure an adequate supply of competent teachers; (ii) recruitment and deployment of competent teachers, particularly in disadvantaged areas, by combining financial incentives, bonding schemes and group-based postings; (iii) stronger professional development and support; and (iv) greater teacher accountability, such as through the use of annual appraisal and competency tests to determine career progression, and tying contract renewal to performance. Adequate Targeted government efforts funding of would help in providing poorer families with equitable access public family to family planning services so planning that they can control the size programs is of their households. Family sizes will critical fall as economic growth in Indonesia continues, alongside urbanization and increasing enrolment rates. Efforts are needed, however, to target poorer households so that they do not fall further behind due to higher fertility rates. This will require reducing inequalities in the knowledge, use, access and quality of family planning services, as well as ensuring that family planning is seen as a vital right. The private sector is used by 73 percent of Indonesian family planning users, so its ability to provide effective services to most Indonesians such as KIP (Kartu Indonesia Pintar). At the same needs to be strengthened, not weakened. time, local governments can be encouraged to However, the private sector is unlikely to reach use their operational support to schools (Bantuan all poorer households sufficiently since it is difficult Operasional Sekolah Daerah, or BOSDA) in ways and costly to reach marginalized and poorer groups. that complement BOS; BOS enables the meeting Therefore, greater central and local government of minimum service standards while BOSDA can efforts are required to revitalize family planning enable schools to meet higher national education programs, with strategies to target those who standards. Recent reforms in DKI Jakarta suggest need them most. Specific actions include: INDONESIA's Rising Divide 27 executive summary 96 percent of • Promoting the concept of family planning as a BKKBN, and focus on: improving the provision right for all. One of the drivers of the reversals of family planning information and services; and Indonesians in fertility trends has been increasing rates of promoting contraceptive use by couples from have access to teenage pregnancy. This comes in part from social poorer and marginalized groups in planning their skilled birth pressures against the provision of contraceptives families. More effort is then needed to address delivery, yet to adolescents and the unmarried. At the same the unmet contraceptive needs of economically time, increased rates of early marriage are also disadvantaged couples, including through a quarter of leading to earlier births and larger families. Ensuring socialization; the provision of contraceptive all births are that all have access to family planning is essential. services that are affordable for poorer households; unskilled and increasing the number of midwives who are • Helping the private sector to deliver effective qualified to insert IUDs and implants. deliveries family planning, while enabling public programs to fill gaps in coverage. With most Indonesians using • Even when households have access to services, private family planning services, the ability of the they do not always use them. New approaches private sector to support family planning needs need to be piloted to better understand what to be strengthened. Improved infrastructure and can encourage them to adopt the right behaviors. logistics would extend the reach of the private Inequality of opportunity is not always about sector into more remote areas that are currently lack of access. 96 percent of Indonesians have underserved and reduce the need for public access to skilled birth delivery, yet a quarter of provision. The Government should also examine all births are unskilled deliveries, heightening the how it can encourage private services to shift back risk of maternal mortality. Earlier born children towards longer-term and permanent methods in a family are more likely to be fully immunized for those families that have already reached their than those born later, indicating that access to ideal size; these methods are more effective health care is not the problem, but that household for this objective than short-term methods. At motivation for the right behavior drops over time. a minimum, current initiatives to criminalize the Stunting is partly due to household behaviors, private provision of contraceptives are likely to such as curtailed exclusive breastfeeding and further exacerbate current fertility trends. At the the introduction of the wrong complementary same time, with poorer households unable to foods. Knowledge can be addressed through access private sector services, adequate funding the strengthening of Posyandu cadres discussed of public family planning programs is critical. With earlier, but changes in behavior will also need family planning budgeting now a local prerogative, new and innovative approaches tested in the field, a central agreement between the National Family potentially through such non-state actors as NGOs Planning Agency (Badan Kependudukan dan and the private sector. Keluarga Berencana Nasional, or BKKBN) and the Ministry of Home Affairs (which oversees local government issues) on family planning financing 02 is vital. Local champions of family planning need Improving the skills of today’s workers to receive technical assistance and local family planning boards could be established in more districts under existing regulations. The use of DAK and providing them could be altered to allow family planning spending with better access to productive employment to focus less on infrastructure and more on operational expenses, such as training of midwives and contraceptive supplies. Indonesia could create better • Developing local strategies for revitalizing jobs by addressing the barriers targeted family planning services. Clear and constraints to productivity government strategies could improve the growth, particularly through provision of family planning information and better infrastructure and greater services, focusing on marginalized and poorer competitiveness. One key area of reform is target groups. An effective strategy would include improving infrastructure, connectivity, and logistics, a clear delineation of roles and responsibilities for discussed in detail in a subsequent section. local government, the Ministry of Health, and the Beyond that, Indonesia’s Ease of Doing Business INDONESIA's Rising Divide reducing inequality 28 In the long run, only improved access to quality health and education will reduce unequal access to good jobs; in the short run, more can be done to improve the skills of today’s workers and create more productive jobs ranking requires constant improvement, as well as facto protection. Piecemeal reform of individual access to finance for small firms looking to expand. regulations and programs is difficult due to the Both the manufacturing sector and the agricultural perceived zero-sum nature of any change in sector can be a major source of productive, industrial relations. For this reason an overall semi-skilled jobs for poor and vulnerable workers, grand bargain may be needed in order to create and consequently there is added emphasis on a thorough set of reforms that is perceived to be revitalizing those sectors. beneficial to employers, labor unions, and to job seekers. Indonesia could also implement a “grand bargain” between government, Reforms in Indonesia’s skills training emp loy e rs, and l a b o r u ni o ns t o system can allow workers to upgrade overhaul labor market regulations their skills and access better jobs. and provide more effective worker Provision of incentives to employers for needs- protection. Current labor market regulations based and results-oriented training, ideally in and worker protection in Indonesia are considered partnership with training providers, can generate among the most rigid in the region and discourage a greater degree of involvement by the private formal job creation, but also result in low de sector. Adjusting the level of subsidies to account INDONESIA's Rising Divide 29 executive summary for the type of workers being trained, for instance stocks and high prices, driving trader speculation. women, youth and people living with disabilities, Effective rice security will require an effective early can address inequalities. A partnership with the warning system and reliable real-time information private sector, particularly in the provision and about prices, stocks and flows of rice. Over the financing of training, thus frees up public funds to longer term, achieving a sustained improvement expand the training system to all provinces and in Indonesia’s rice security will require increasing disadvantaged regions. productivity through long-term structural improvements in the agriculture sector. 03 Strengthening social Effective social assistance would not only boost incomes but also protection to help enable the poor and vulnerable to households cope deal better with shocks. For those unable to cope with shocks themselves or with shocks access contributory social insurance, stronger social assistance is needed. Safety nets also Protecting households from shocks have an immediate impact on reducing poverty requires action on many fronts. and inequality. Indonesia has been building Households face shocks from many sources. and expanding a social assistance framework Further work could be done to assess the types since the Asian financial crisis. However, these of shocks that affect Indonesians the most programs are not fully effective in protecting the (such as catastrophic natural events, longer- poor and vulnerable. Further reforms should focus term environmental effects from climate change, on: improving the targeting of these programs, personal health catastrophes, or diseases that which currently target chronic poverty rather than affect livestock). This research could then inform poverty due to shocks; expanding the coverage the type of policy actions that will be required to and benefit packages of programs that work address such shocks, including coping with natural so that they provide adequate protection to all disasters, building an effective social insurance vulnerable households; and adding new programs system and ensuring adequate health services, to fill in the gaps for those risks that do not currently particularly in poorer areas. In addition, the policy have adequate protection (a public works program actions below could have a particularly strong providing short-term employment, for example). impact on reducing inequality through protecting the poor and vulnerable. In addition, for the newly implemented social insurance Government policies could mitigate programs, especially health, it is the effect of higher food prices on the poor and vulnerable. There are a number of policy areas where the Government can promote stability to prevent shocks from occurring. One important area that affects the poor is food prices, especially for rice. Domestic rice production has slowed in recent decades for a number of reasons—including slow mechanization and poor infrastructure and connectivity—and increased public spending has not spurred agricultural production. At the same time, price stabilization policies have not proved effective and may have even contributed to the problem; the current rice import regime is particularly harmful, with imports being restricted to the National Logistics Agency (Badan Urusan Logistik, or Bulog), a reluctance to import due to a national rice self- sufficiency goal by 2017, and poor data indicating constant rice surpluses despite a shortage of INDONESIA's Rising Divide reducing inequality 30 important that sufficient supply and responding appropriately. Such a system has of services accompanies expansion three components: (i) a permanent and relatively in coverage. Access to preventative and real-time monitoring system at both the national treatment health services for all Indonesians is and household levels; (ii) a pre-agreed protocol for vital to help protect against the range of illnesses when, where, and which response will be initiated; and accidents that can have catastrophic impacts and (iii) pre-agreed institutional arrangements on on household incomes, spending and savings. planning, coordination, funding and disbursement While around 90 million Indonesians, many of and monitoring and evaluation. The monitoring them poor and vulnerable, have their premiums component has already been developed and covered by the Government, there are just as implemented by the Secretariat of the National many more people, who while often not living below Team for the Acceleration of Poverty Reduction the vulnerability line would nonetheless be badly (TNP2K), but future action needs to focus on affected by a serious health shock. Many of these response protocols and institutional arrangements. people work in the informal sector, do not currently A CMRS that links closely to existing disaster pay premiums, and are not yet covered. Reaching management tools will help to adjust public these households will be the main step in achieving protection and support programs to deliver the universal health coverage. However, coverage alone right protection to the right people. does not provide adequate protection against shocks if there is not a corresponding availability of quality health services for all. The financing and 04 Using government health worker recommendations discussed under local service delivery are just as necessary to The protect against shocks as they are to provide a taxes and spending to Government can address address inequality now healthy start for all children. inequality Knowing where, when and how to and in the future through how respond when crises hit is also key. In the past, during the global financial crisis of 2008- A focus on fiscal policy is required it chooses to 09, for example, Indonesia lacked the monitoring to address inequality in the long raise and spend system to know in a quick manner where negative term. Addressing inequality of opportunity and revenue effects were being experienced and by whom, providing better jobs in the long run requires and responses were less effective as these were government spending. Many of the policies often slow and uncoordinated. Developing a that can reduce inequality of opportunity need Crisis Monitoring and Response System (CMRS) significant government investment: increased is essential for detecting the effects of a crisis health spending and continued funding of INDONESIA's Rising Divide 31 executive summary education, greater investment in infrastructure, as increased child health and nutrition, better and increased social assistance coverage, quality of education and skills development, benefits and social security for all. Aligning higher labor productivity and an environment government budgets behind these priorities is one that favors job creation. However, the design of key role that fiscal policy can play in addressing overall fiscal policy could also impact inequality long-term inequalities due to factors outside of an in the short term through a number of channels. individual’s control. Different households can have their current income affected in different ways through the However, fiscal policy could also Government’s choice of taxes, transfers, subsidies be used to address inequality in the and in-kind services. In a number of countries, the short term. In general, this is not currently Gini has declined substantially after accounting for practiced in Indonesia, but it could be. Many of fiscal policy. For example, Brazil’s Gini is 14 points the policy actions to be discussed will only have lower after all government taxes and spending are an effect on inequality in the long term, such taken into account, compared with the Gini based INDONESIA's Rising Divide reducing inequality 32 on market income alone. However, in Indonesia also help to reduce the high and volatile rice and net changes to household income from taxes other staple food prices, which disproportionally and transfers leave the Gini coefficient almost affect the poor. Finally, it has been estimated that unchanged. For example, when including in-kind Indonesia is losing more than 1 percentage point health and education spending, the Gini only of additional annual GDP growth due to under- drops a modest two points8. Aligning fiscal policy investment in infrastructure, chiefly transportation. to support lower inequality requires: Removing this constraint would lead to more jobs, higher household income and consumption, and • Spending in the right areas: social assistance, greater fiscal resources for government spending health and infrastructure. The key channel on programs, all of which would also help to level for reducing inequality is the right spending. the playing field for everyone. Indonesia has historically spent much on policies that do the least to reduce inequality, such as • While fiscal policy could be used to address subsidies, and little on those policies that have the inequality now, this should be done in a greatest effect, such as social assistance programs sustainable fashion, with spending growth not like PKH (a conditional cash transfer), BSM (now outstripping revenue growth. When too much is Kartu Indonesia Pintar, or KIP, a scholarship spent on redistribution and other social spending program for the poor), and health. Redirecting relative to revenues, the fiscal framework can spending to these more equitable areas is vital. become unsustainable. Indonesia can afford to However, spending can also be made more pro- spend more on social spending, but it is important poor. The current spending on education, health that expansions in spending are not based on and social assistance does not reduce inequality unrealistic increases in revenues, which is a risk as much as it does in other countries. In addition, both for the 2015 budget and the 2015-19 National a large part of the proposed increase in health Medium-Term Development Plan (Rencana spending in 2016 (up to 5 percent of all spending) Pembangunan Jangka Menengah Nasional, or is devoted to the national health insurance system RPJMN). Significant reforms will be required (Jaminan Kesehatan Nasional, or JKN). This to increase revenues. If “business as usual” is currently skews spending towards large hospitals assumed, with no significant reforms on revenue in the major cities, which tends to benefit richer policy or administration, baseline revenue for households more, whereas spending on greater 2015-19 is projected to stay level at between 13.3 primary health care would be more pro-poor. to 13.5 percent of GDP. If not legally constrained to keep the fiscal deficit below 3.0 percent of GDP • Infrastructure is of key importance, as it supports (i.e., the fiscal rule), this would otherwise mean policies to address inequality in all other areas. that the deficit would reach 4.6 percent of GDP in The planned reallocation of fuel subsidy savings 2015, rising to 6.0 percent of GDP by 2019. Unless into greater investments in infrastructure is also additional fiscal space is created, the Government critical. Infrastructure spending can increase will have to dramatically cut back on the planned access to services; a quarter of Indonesia’s urban (and needed) increased spending on development populations and more than half of rural dwellers and inequality priorities. have poor access to transport. Improving transport will greatly assist efforts to increase access to • The revenue mix used to achieve fiscal family planning services, maternal and child sustainability can also influence inequality today. health services, and schooling. It will also reduce The Government can pay for inequality-reducing transportation costs and increase connectivity spending in a number of ways. An important and productivity. This will have multiple benefits. consideration is who pays different taxes and Transportation problems are a major constraint non-tax revenues and how this affects inequality. for manufacturing. Reducing these constraints There are approaches that both raise revenue and will increase productivity and competitiveness, mitigate inequality for indirect taxes such as value- help to create more and better jobs, and bring added tax (VAT) and luxury taxes, personal local raw material producers closer to domestic and corporate income taxes, and non-tax markets. For instance, it is currently cheaper to revenue from resources. import oranges from China than to source them 8 See Jellema, Wai-Poi and Afkar (2015) “The Distributional Impact of Fiscal Policy in from Kalimantan. Increased connectivity for remote Indonesia” and Ministry of Finance and World Bank (2015) “Taxes and Public Spending in areas and reduced logistics costs in general will Indonesia: Who pays and who benefits?” INDONESIA's Rising Divide 33 34 our conclusion Urgent action is needed today and an immediate impact is possible. Remedial action Addressing inequality is largely a long- term effort that demands a long-term takes time to take effect, which means beginning now. policy commitment. Inequality generally changes Beginning now can also capitalize on both the political slowly over time, so a rapid reduction in the short will that currently exists to tackle inequality, as well as term is unlikely. Some key policies for addressing the current popular support for taking action (88 percent inequality, such as more equal opportunities in health of Indonesians surveyed think that addressing inequality and education for today’s children combined with better is either “very urgent” or “quite urgent”). Moreover, there jobs tomorrow, will take a generation to bear fruit. is danger in delaying. With many wealthier Indonesians Nonetheless, addressing inequality cannot be done opting out of public health, education and other services, without breaking the inter-generational transmission there is a risk that they will be neither strong proponents of poverty and inequality, a policy objective that has for better public service delivery, nor supportive of widespread support. This will require pursuing equality increased and fairer public spending on these of opportunity as quickly as possible, which in turn will services, funded through taxation. need higher revenue collection, then a redirection of spending, leading to better targeting and delivery of services, and improved quality of those services. 35 executive sumary INDONESIA's Rising Divide 36 Rising Ineq uality 10 The Recent Trend and Why It Matters 1.1 1. 2 The recent trend in Does inequality inequality matter? 37 42 10 This section summarizes the detailed analysis of various background papers. See World Bank (2015a) for evidence and analysis of people’s perceptions and preferences relating to inequality. See World Bank (2015b) for evidence and analysis of how unequal access to services and other opportunities are. Also see World Bank (forthcoming (c)) on “Top Incomes in Indonesia.” Main findings are summarized in World Bank (2014b). 37 Chapter 1 the rising inequality 1.1. The recent trend in inequality Inequality has been increasing in Indonesia as strong economic growth has not been shared equally by all Inequality has been increasing in surprisngly low. Furthermore, around half of the Indonesia since 2000. By any measure cars registered with the state police (5 million cars) of inequality, the disparity between do not appear in the survey data13. This suggests the economic living standards of that if more of the wealthier Indonesians were different households has been captured in the survey data, measured inequality increasing. In 2002, the richest 10 percent would be even higher14. Moreover, when of Indonesians consumed as much in total as the corruption is high, many of the gains from that poorest 42 percent, while by 2014, they consumed corruption—and its contribution to inequality—may as much as the poorest 54 percent. Real per capita be hidden. Indonesia’s ranking of 107 out of 175 on consumption (after adjusting for inflation) grew by the Corruption Perceptions Index (a lower ranking only 12 percent between 2002 and 2014 for the means a country is perceived as more corrupt) poorest 10 percent of Indonesians, by an average also suggests that some income inequality due of 25 percent for the poorest 80 percent, but by to corruption is not being captured (Transparency 56 percent for the second-richest 10 percent and International 2015). a massive 74 percent for the richest 10 percent (Figure 1.1). Of a number of ways of measuring The recent increase is a departure inequality (see Box 1.1), the most popular measure from historical trends and is the Gini coefficient, where 0 represents complete inequality is now the highest level equality and 100 represents complete inequality11. it has ever been since measures began. In Indonesia, the Gini coefficient increased The Gini coefficient was relatively stable during from 30 points in 2000—relatively moderate by the second half of the Suharto era, although it was international standards—to 41 points in 2014, a beginning to increase in the period leading up the fairly sharp increase over that period of time. Asian financial crisis of 1997-98. With richer households being the hardest hit during the crisis and also the Moreover, the degree of inequality slowest to recover, the Gini actually fell between is underestimated. In the household survey 1996 and 2000. However, in the subsequent data used to calculate inequality, only 2 million period of democratization, decentralization and Indonesians consume more than IDR 4 million commodities boom-fueled economic growth, per month, which is only 0.8 percent of the the Gini rose significantly from 30 in 2000 just population. Only 218,000 consume more than after the Asian financial crisis to 37 by the time of IDR 10 million per month, or less than 0.1 percent the global financial crisis of 2008-09. Indonesia of the population12. These numbers appear managed to weather this more recent crisis and 11 It is often expressed instead as a proportion between 0 and 1. represent second cars in a household (relatively rare in Indonesia), 12 Susenas household monthly per capita consumption, adjusted then around 10.5 million households in Indonesia own passenger by provincial urban-rural differences in cost of living, as measured cars, of which only 5.6 million appear in Susenas. by BPS poverty lines. A similar result is obtained if nominal 14 One of the background papers attempts to quantify how many consumption is used instead. wealthier Indonesians are missing in the survey data, and to 13 There are 11.5 million passenger cars registered with the police. estimate a more accurate measure of inequality. See World Bank Assuming around 1 million of these are for commercial use or (forthcoming (c)) “Top Incomes in Indonesia.” INDONESIA's Rising Divide Chapter 1.1. the recent trend in inequality 38 sustain robust growth, but inequality has continued to believe that at least some of the large increase to increase since then, with the Gini reaching 41 by between 2010 and 2011 was due to changes in 2014 (Figure 1.2). However, the Gini has remained survey methodologies (see Box 1.1). stable at 41 since 2011, and there may be reason Average monthly per capita consumption Source Susenas and World Bank calculations. Note All values are spatially and temporally (IDR) by decile, 2002 and 2014 (fig. 1.1) 2002 2014 adjusted, using the ratio of the national average poverty line in a fixed year over the local poverty line for the given year. Poorest 2 3 4 5 6 7 8 9 Richest 0 500 1000 1500 2000 2500 3000 Source BPS, Susenas and World Bank calculations Gini coefficient (points) and national poverty rate (percent) Note Nominal consumption Gini. The national poverty line was 1980–2014 (fig. 1.2) changed in 1998, and the 1996 rate calculated under both the new and old methodologies. Suharto era Asian D emocracy, Global Financial F inancial D ecentrali z ation and C risis & A ftermath C risis C ommodity B oom 45 40 35 30 Gini 25 20 15 10 poverty – old poverty – new 5 0 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 By regional standards, Indonesia’s it was stable or falling in fast-growing East Asian level of inequality is rising quickly, neighbors such as Malaysia, Thailand and Vietnam although it is not yet as high as in (Figure 1.4). This speed of increase is also rapid some developing countries. At the by world standards, although inequality remains beginning of the 1990s, Indonesia had the lowest higher in a number of other lower middle-income Gini coefficient in the region (Figure 1.3). However, countries, particularly in Latin America (Figure 1.5). by the late 2000s, it had caught up, or nearly so, with most other countries in the region. This was because the size of the increase in the Gini over 15 The Ginis for Indonesia in Figure 1.3 and Figure 1.5 differ this period was second-largest only to China, slightly from the Ginis in Figure 1.2. The regional comparisons and most of Indonesia’s increase has been in are based on calculations from PovcalNet, and while they use the same underlying household survey data, the methodology differs the past decade alone. Moreover, inequality was from calculating the Gini directly from the underlying data, as the rising quickly in Indonesia at the same time as official Indonesian Gini has been. INDONESIA's Rising Divide 39 Chapter 1 the rising inequality Gini coefficient in East Asia 1990s Note Consumption Ginis for all countries except Malaysia, which uses income. The periods for each country are: Indonesia 1990- & 2000s (fig. 1.3) 90's 00's 2011; Malaysia 1992-2009; Lao PDR 1992-2008; China 1990- 2008; Vietnam 1992-2008; Thailand 1990-2009; the Philippines 1991-2009; and Cambodia 1994-2008. Source Zhuang, et al. (2014). Malaysia China Philippines Thailand Indonesia Cambodia India Laos Vietnam 0 10 20 30 40 50 60 Annualized point change in Gini Fifteen years of sustained growth coefficient in East Asia, 1990s and have reduced poverty and created 2000s (fig. 1.4) a growing class of economically secure households. After recovering from the 1997-98 Asian financial crisis, Indonesia’s real GDP per capita grew at an annual average rate of 5.4 percent between 2000 and 2014. This robust 0.6 growth rate helped to pull many out of poverty; the poverty rate more than halved from 24 percent during the Asian financial crisis down to 11 percent by 2014. Growth has also helped to create a stronger middle class than ever before; there are now 45 million people (the richest 18 percent of 0.46 all Indonesians) who are economically secure and enjoying a higher quality of life. They are the 0.4 fastest growing segment of the population, at 10 percent per year since 2002 (Figure 1.6)16. However, the economically secure are now leaving the other 205 million behind. The benefits of economic growth have 0.26 been enjoyed largely by the growing middle class. Between 2003 and 2010, consumption per person for the richest 10 percent of Indonesians grew at over 6 percent per year after adjusting for inflation, but grew at less than 2 percent per year for the poorest 40 percent. This has contributed both to a slowdown in the pace of poverty reduction, with the number of poor people falling by only 2 P h i li pp i ne s Ca mbod i a percent per year since 2002, and the number of T h a il an d M alays ia Vi et nam those vulnerable to poverty falling barely at all (Figure 1.6). 16 For this report, households in the middle C h in a I nd o nes i a Lao s I nd i a -0.03 -0.04 class in Indonesia are defined as those who -0.08 are economically secure from poverty and vulnerability. See note to chart and World Bank -0.27 (forthcoming (a)) for more details. INDONESIA's Rising Divide Chapter 1.1. the recent trend in inequality 40 56.9 56.2 55.8 54 .6 53.1 52.5 52.4 51.4 50.8 50.5 4 8.8 4 8.3 4 7.4 4 7.3 4 6.2 4 5.5 4 2.9 4 2.7 4 2.4 4 1.5 4 1.3 4 1.0 4 0.8 4 0.4 4 0.2 4 0.0 39.9 38.9 38.0 37.8 3 7.6 36.7 36.7 36.5 36.5 35.7 35.5 35.5 35.2 34 .5 33.8 33.0 31.9 30.8 30.8 3 0.7 3 0.0 26.4 indonesia (income estimate) indonesia (consumption) sao tome and principe syrian arab republic egypt, arab republic west bank and gaza congo, republic of yemen, republic of corte d'lvoire south sudan timor–leste el salvador cape verde uzbekistan guatemala nicaragua philppines swaziland cameroon Honduras camb odia mongolia djiboutri paraguay sri lanka morocco thailand malaysia moldova pakistan lesotho armenia senegal georgia vietnam ukraine albania lao pdr bhutan nigeria Bolivia zambia ghana sudan belize china india iraq Gini coefficients for lower middle-income source World Development Indicators, most recent year available. Note Income Ginis are in black, consumption Ginis are in grey. Indonesian income countries (fig. 1.5) Gini is estimated as the consumption Gini plus 6.4 points, which is the average increase in Gini from consumption to income for the three years when both income and consumption Ginis were collected in Indonesia (1984, 1990 and 1993). Population share by class 2002–2014 (fig. 1.6) Source Susenas and World Bank calculations. The poor are below the national poverty line of around IDR 300,000 per person per month. The vulnerable have a greater than 10 percent chance of being poor the next year and are under 1.5 times Poor Eme rging Consum e r Cl ass the poverty line. The consumer class is economically secure, with a less than 10 annual Growth –2.2% Annual G rowth 2.4% percent chance of being poor or vulnerable next year, and consume more than IDR 1 million per person per month. The emerging consumer class is safe from poverty Vuln erable Consum e r Class but not vulnerability and lie between the vulnerability and economic security lines. A nnual Growth –0.1 % Annual G rowth 1 0% See World Bank (2015b) for more details. 100 7.0 10.1 14 . 8 17.7 80 4 1 .2 43. 3 45.9 60 44.2 40 3 3.7 28.8 26 .1 26 . 9 20 1 8 .1 17.7 13 . 3 11. 3 0 2002 2006 2010 2014 INDONESIA's Rising Divide 41 Chapter 1 the rising inequality B o x 1 .1 Measuring inequality Measures of Inequality. have all the desirable properties are the Measuring Indonesian Inequality with The Gini coefficient is the most commonly Theil indices, belonging to the family of Household Survey Data. Household used measure of inequality. It lies between generalized entropy inequality measures. consumption inequality (and official poverty) 0 (perfect equality) and 1 (perfect inequality), The general formula is given by: is measured in Indonesia using the National with a usual range between 0.3 and 0.5. Socio-economic Survey (Susenas), which Often this is expressed in points, as in this is a nationally representative household report, between 0 and 100. Gini coefficients where yi is the consumption for person i, y survey conducted annually. The sampling are typically calculated from income or is the mean consumption per person, and α methodology changed significantly in 2011, consumption distributions (with consumption is a parameter which represents the weight with the number of primary sampling units distributions usually being more equal than given to distances between consumptions (Census Blocks) surveyed roughly doubling, their income counterparts, by an average of at different parts of the income distribution and the number of households surveyed in 6.6 points; Deininger and Squire 1996). The and can take any real value. GE measures each Census Block roughly halving. While Gini is constructed from the Lorenz curve, can take values between zero and infinity, this keeps the total sample size nationally shown on the right, which compares the with zero representing equality and and for each district the same, it means cumulative frequency curve of the actual higher values representing higher levels a greater variety of neighborhoods are distribution (consumption in the case of of inequality. For lower values of α, the included. As a consequence of the new Indonesia) with the cumulative frequency measure is more sensitive to changes in the sampling methodology, the poverty and curve that would result if all individuals lower tail of the distribution, and for higher inequality series are not strictly comparable had the same consumption. The Gini is values of α, the measure is more sensitive between 2010 and before and 2011 and after. calculated as A/(A+B), where A and B are to changes that affect the upper tail. The This may explain the unusually large jump in the areas as indicated on the chart. While most common values of α used are 0,1, inequality seen between 2010 and 2011. It is the Gini satisfies many of the desirable and 2. Theil’s T index is GE(1) and Theil’s L possible that the new methodology captures properties of an inequality measure, it is index is GE(0), also known as the mean log more of the richer households who may not easily decomposable or additive across deviation measure. For more information on have been missing in earlier rounds. groups, so that the national Gini is not equal the Gini coefficient For more information on to the sum of Ginis at the sub-national level the Gini coefficient and Theil measures, see (e.g., urban-rural or regional). Haughton and Khandker (2009) Handbook Commonly used inequality measures that on Poverty and Inequality. Cumul ative percen tage o f c on s umption 100 80 60 equality ( a ) 40 20 actual distribution ( b ) 0 20 40 60 80 100 Cumul at i v e p e r ce ntag e o f p o pul at i o n Chapter 1.1. the recent trend in inequality 42 does 1.2 inequality matter? Not all inequality is bad, but inequality can be unfair when not everyone has the same initial opportunities Inequality is not always a bad thing; High levels of inequality may slow it can provide rewards for those who economic growth, while more equal work hard and take risks. Hard work and countries may grow faster. High innovation benefit society by creating new goods inequality may reduce economic growth for all, and services that everyone can enjoy, as well as if poorer people are unable to properly invest contributing to a larger economy. This, in turn, in their children’s development, if people fail can provide the Government with a greater ability to exit poverty and vulnerability and move into to provide public services to all. If this results in the consumer class, and if people fail to find an income gap between those hard workers and productive jobs. Recent research (Dabla-Norris, those who work less hard, then some inequality et al. 2015) indicates that a higher Gini coefficient may be justified and even desirable. Many leads to lower and less stable economic growth17. Indonesians share this view. When asked in a Moreover, when the share of total income held by 2014 survey whether inequality is ever acceptable, the richest 20 percent of people increases by 5 74 percent say that “inequality is sometimes percentage points, economic growth falls by 0.4 acceptable” so long as wealth acquisition is fair of a percentage point. At the same time, when and meritocratic (LSI 2014). the share of total income held by the poorest 20 percent of people increases by 5 percentage Inequality can be unfair and harmful, points, growth increases by 1.9 percentage points. however, when it is caused by factors Increased income shares for the second- and beyond the control of individuals. Not third-poorest 20 percent of the population also all Indonesians have the same opportunities in life. increases growth. Factors beyond the control of an individual—where you are born, how educated or wealthy your Inequality hurts economic growth parents are, and what access to public services when it is due to a lack of good jobs. you had when you were growing up—can have a Many of the poor cannot find good jobs because major influence on how your life turns out. Getting they lack sufficient education. At the same time, a healthy start in life and a quality education are many non-poor with better education still cannot fundamental prerequisites for getting a good job find productive work (Figure 1.8). Most of the jobs and earning a decent living in the future. Inequality created since 2001, and indeed most current jobs, of opportunity occurs when not everyone has are in low-productivity sectors. This undermines a fair start in life that, consequently, prevents economic growth, as it fails to maximize today’s those individuals from reaching their potential, labor force’s productive potential at the exact time High inequality resulting in unequal outcomes. Other factors when the demographic dividend is peaking. outside of an individual’s control that can affect can also lead to incomes, standards of living and inequality Inequality can hurt growth in other slower growth include government policies, such as food import ways as well. High levels of inequality can and poverty restrictions that increase the cost of living most There is some other empirical support to higher inequality reduction, for the poor, or patterns of government taxes and 17 spending that do not collect and channel sufficient being related to lower growth (for example, Berg and Ostry 2011), and increased although cross-country evidence has been inconclusive (Banerjee resources to help those who need them most. and Duflo 2003). conflict 43 Chapter 1 the rising inequality harm growth through a number of channels. First, Average conflict incidents for Source Calculated increased social instability can affect the economy low, medium and high inequality from NVMS by deterring investment and disturbing labor districts (fig. 1.7) conflict database relations18. Second, the inability of the poorest covering 14 provinces 40 percent to exit vulnerability and move into the from 1997- middle class weakens future middle class-driven 2013 (year coverage consumption growth. Moreover, if consumption 100 varies from growth of the poorest 40 percent remains province to province) below the national average, then the resulting and 80 higher inequality may also reduce economic DAPOER 80 used in growth through a number of other channels19. Pierskalla In the presence of credit market imperfections, and Sacks 65 (2015). investment in human capital may be lower (Galor and Zeira 1993), as may entrepreneurial activity 60 (Banerjee and Newman 1993). 52 Rising inequality also hinders progress in reducing poverty. Between 40 2003 and 2010, poverty fell from 17.4 percent to 12.0 percent, a decline of 5.4 percentage points. However, because much of the economic growth 20 during this period was enjoyed by the rich, consumption of the poor rose slowly. What would d ist r i ct d ist r i ct d ist r i ct have happened to poverty if economic growth G i ni G i ni G i ni 20 40 30 had been shared equally across all households? In 0 fact, there was sufficient economic growth to have pulled everyone under the line out of poverty; that means, official poverty would have fallen to zero if Type of jobs for senior secondary Source average consumption growth over the period had Sakernas school graduates (fig. 1.8) 2001-10 and been enjoyed by all20. Of course, Indonesia may World Bank not have experienced the same rate of economic calculations. growth in the equal-sharing scenario, but it is clear that the unequal growth pattern of the 2000s 100 17 16 meant that poverty fell more slowly than would S K I L L ED have otherwise been the case. 80 SE M I S K I L L ED High inequality can also have negative effects on Indonesia’s social 60 59 65 U NS K I L L ED cohesion. Recent research (Pierskalla and Sacks 2015) has found that districts with higher 40 inequality have more conflict. Based on the data used in that study, it is estimated that the average number of conflict events in districts with medium 20 inequality (Gini of 30) is 25 percent higher than in 23 19 0 districts with low inequality (Gini of 20); conflict in high inequality districts (Gini of 40) is 54 percent All 15-3 0 Wo r k e r s year olds higher than low inequality districts (Figure 1.7). 18 See Gupta (1990), Keefer and Knack (2002) on the effects of 20 This is the result of a Datt-Ravallion decomposition. 2003 is used political instability on economic growth, and Alesina and Rodrik as the base year for the decomposition. There is a large residual (1994), Alesina and Perotti (1994) and Persson and Tabellini (1994) which cannot be interpreted strictly as due to growth or changes on links between political economy and economic growth. in the distribution. Conservatively, all of the residual is allocated 19 See also Mason (1988) on unproductive investments, Marshall to redistribution, so growth component estimate represents the (1988) on demand patterns, Galor and Zang (1997) and Kremer and lower bound. Even under these conservative assumptions, poverty Chen (2002) on fertility, Murphy, et. al. (1989) and Mani (2001) on would have been reduced to zero. domestic market size. INDONESIA's Rising Divide Chapter 1.1. Does inequality Matter? 44 Share of national consumption by each quintile: Source World Bank (2015a) using LSI (2014) data what people think it should be, what people think it is, what it really is (percent) (fig. 1.9) P o o r e st 2 3 4 R i c h est Q u i nt il e Quintile W h at Th ey 14 16 19 23 28 t h in k it s h ou ld be W h at Th ey 7 12 18 25 38 t h in k it is W h at it 7 10 14 20 49 Ac t ua lly is 0 10 20 30 40 50 60 70 80 90 100 Most Indonesians think In fact, inequality is even higher inequality is already too high and than most Indonesians think. National household consumption survey data show that needs to be addressed urgently the richest fifth actually performs 49 percent of all consumption, compared with the 38 percent that Most Indonesians will tolerate a most Indonesians think the level of consumption degree of inequality. When people were really is, and the 28 percent they believe it should be asked whether inequality is ever acceptable, (Figure 1.9). 74 percent say that “inequality is sometimes acceptable” (LSI 2014). While there are a number Most Indonesians think that of conditions in which people feel that inequality addressing inequality is an urgent is acceptable (World Bank 2015a), generally this priority. Of those surveyed, 47 percent say it is when wealth acquisition is fair and meritocratic, is “very urgent” for the Government to address and when the rest of the country is benefitting inequality, and another 41 percent feel it is “quite through affordable food prices and lower poverty rates. urgent” (LSI 2014). However, many people think To understand what drives inequality inequality is too high. Most people in Indonesia and therefore how to surveyed think that inequality is too high. They address it, this report considers the estimate that the richest fifth of Indonesians different resources that households account for 38 percent of all consumption, have and how they generate income while they think it should only be 28 percent. from these resources. Households use Conversely, they estimate that the poorest fifth different resources to earn income. They use their receive only 7 percent and think it should be more labor to earn wages and salaries, but they can also like 14 percent (Figure 1.9). earn income from financial and property assets. Understanding why some households have better jobs and earn more, and why some households have more financial assets and earn more, is key to understanding why inequality is rising. INDONESIA's Rising Divide 45 executive sumary INDONESIA's Rising Divide 46 W h y Inequali ty Is Risi ng 2.1 2 .2 2. 3 2 .4 2 .5 A framework for Why an unfair start Why a widening gap Why financial and Why shocks make understanding in life holds the between skilled and physical assets are it even harder for inequality poor back unskilled wages is helping the rich pull many to catch up 47 53 increasing inequality away from the rest 87 71 81 This section examines the main drivers of inequality. The section many Indonesians from being able to climb up the economic starts by trying to understand why consumption is growing faster ladder. The rest of this section is divided into five parts: for richer households than other households by laying out a 1 A framework for understanding inequality; framework for understanding how households generate income. 2 Why an unfair start holds the poor back; The heart of the section looks at the main drivers of income 3 Why a widening gap between skilled and unskilled wages is inequality: how an unfair start in life means that some families do increasing inequality; not develop their human resources as well as they could; how this 4 Why financial assets are helping the rich pull away from the means that only some can benefit from the differences in wages for rest; and skilled and unskilled workers; how a small number of Indonesians 5 Why shocks make it even harder for many poor or vulnerable are benefitting from financial resources; and how differences in Indonesians to catch up. vulnerability to shocks and the ability to cope with them prevent 47 Chapter 2 why inequality is rising 2.1 A framework for understanding inequality Recent economic growth has been enjoyed more by richer households than the rest Inequality is rising because incomes households than the poorest ones (Figure 2.1 and for richer households are growing Box 2.1). The poorest 60 percent of households faster than those for the poor and had consumption growth below the mean, and those in the middle. Over the period of growth for the poor and vulnerable was close to 1996 to 2010, average annual growth in household zero in real terms. consumption grew three times faster for the richest Growth incidence curve by household per capita Source Susenas and World Bank calculations consumption percentile, 1996-2010 (fig. 2.1) 2.0 1.8 1.6 growth of the mean 1.4 1.2 1.0 0.8 0.6 0.4 growth incidence 1 996 – 2 0 1 0 0.2 0.0 1 4 7 10 13 16 19 22 25 28 31 34 37 41 43 46 49 52 55 58 61 64 67 70 73 76 79 82 85 88 91 94 97 INDONESIA's Rising Divide Chapter 2.1. A framework for understanding inequality 48 B o x . 2 .1 urban poverty line of the Special Capital Understanding inequality with Region of Jakarta (DKI Jakarta) in 2007 as the base year. Technically, to growth incidence curves obtain the real per capita consumption expenditure in other provinces, the current or nominal term of the per Growth incidence curves provide an Growth incidence curves are capita consumption expenditure for that analysis of the annualized growth rate constructed by simply calculating province in any period was multiplied of household per capita consumption growth in real per capita household by the poverty line of DKI Jakarta by percentile over given periods. They consumption for each percentile of 2007 and divided by the poverty line are useful for providing a context within the consumption distribution over a of that province for the related period. which to evaluate poverty reduction particular period, and plotting these (Indonesia uses 65 poverty lines, an performance. In reflecting the changing growth rates by percentile. In the urban line for DKI Jakarta, and an urban consumption patterns of the poorest to analysis presented here, the current and rural line for each of the other the richest, they indicate the extent to per capita consumption expenditure 32 provinces) which growth is pro-poor. was adjusted to real value using the Why are incomes for the rich growing maybe dividends. Poor households with unskilled Inequality can faster than those for the poor and labor receive a lower wage than richer, more be understood those in the middle? To understand why the educated, more skilled labor. incomes of the rich have grown faster than those of through a the poor and those in the middle, we must examine the Differences in how this income is framework of different drivers of income. used —how much is consumed and by assets how many, and how much is saved for Households earn money by generating the future —also affects inequality. income from their resources. Once income has been earned, inequality is Households potentially have access to a number also influenced by how many people in the of resources or assets. These include not only land household that income has to support; poorer and financial investments, but also their labor. Each households tend to have more children than richer of these assets can generate an income (a return). ones, meaning that their meager incomes have The labor from human resources earns a wage; to stretch even further. However, as countries physical and financial assets earn a return (rents develop and become richer, fertility rates tend to from land and housing, interest or dividends on fall. This can affect how inequality changes over investments); and physical and financial assets can time. If the size of poor households falls faster also increase incomes by gaining in value. than the size of rich households, with no change in incomes, then inequality will also fall, and vice Differences in who has these versa. Finally, unequal incomes today can lead to resources and how much they earn even more unequal incomes tomorrow through lead to inequality. Income inequality can two reinforcing feedback loops—richer households arise because not everyone has equal access save more of their higher incomes now, to resources. Richer households may be more accumulating even more savings, which leads to educated than poorer households, so they have even higher income in the future, or they invest in more valuable labor. They may also have better better health and education for their children, also access to good jobs. Poorer households often raising their income-earning ability.21 have no physical or financial investments, or they Figure 2.2 outlines this process. have less value than for richer households (e.g., 21 Compounding the investment gap is the trade-off between human capital investment and time for land and housing with an informal title). Income poorer households. Wealthier Indonesians can pay fees to seek care in the private sector and bypass inequality can also arise because not everyone long queues in the public sector. Poorer Indonesians cannot afford these fees and must pay for their care in person-time, even in the face of substantial opportunity cost. For example, while a poor woman receives the same income on each asset. Poorer must take a day off of work to seek ante-natal care, including arriving at the facility before it opens, households whose savings are in cash do not queuing for several hours, and leaving the facility around 3:00pm—a total time investment of six receive interest; richer households who have hours—a somewhat wealthier woman can pay out-of-pocket and receive an appointment after work (lower opportunity cost) with a total time investment of one hour or less. Time away from work affects access to financial markets receive interest and the accumulation of human capital as well as wages. INDONESIA's Rising Divide 49 Chapter 2 why inequality is rising Understanding inequality through an income-generating asset framework with a reinforcing feedback loop (fig.2.2) 1 2 3 Assets Income Consumption Different households Households receive Households spend income on consumption have different income that each (determining inequality today), but the more family quantities and resource generates members, the further the income is spread qualities of assets • Human resources • Human resources generate labor income Shocks increase the cost of • Financial resources • Financial resources living; e.g., food prices hocks generate interst Shocks directly 4 and rents reduce income generating assets; Shocks reduce e.g., natural disaster, illness income that can be generated from Investment assets; e.g., drought, Income not spent is invested, in better unemployment financial and human resources for their children (determining inequality tomorrow through more assets) inte rge ne rat io na l t r a nsm issi o n o f i nco m e g e ne r at io n Household resources and incomes distribution. Approximately 38 percent of are also vulnerable to shocks. All Indonesians were poor or vulnerable (Figure 1.6) households face risks in life. Richer households in 2014. Putri’s case is an illustrative example may have a better chance of avoiding them (for of the types of assets the poor and vulnerable example, taking preventative health measures) have, the incomes they generate, and how and will cope with them better. Shocks can reduce shocks may affect them.22 Similar to 44 percent household income at all points of the income- of Indonesians, Fitri has escaped vulnerability generating process (Figure 2.2). Shocks can but is not yet economically secure; she is one of affect the underlying assets that generate income; the emerging consumer class who could still fall a natural disaster might destroy the livestock back into vulnerability, but who are starting to or equipment used to make a living. They can earn disposable income. Dewi represents the 18 reduce the income that comes from these assets; percent of Indonesians who are now economically a drought might make a harvest meager. And secure from poverty and vulnerability, and form they can reduce tomorrow’s income by depleting the new middle class, while Siti is part of the today’s assets (for example, selling a sewing Indonesian upper class, whose numbers are not machine to pay for hospital care) or by preventing yet well understood.23 accumulating assets for the future (for example, lack of income due to losing a job). At the same The poor have limited resources, earn time, shocks that increase the cost of living, such low incomes from them, save little as food price shocks, decrease the quality and for the future, and are the most Shocks quantity of goods and services a vulnerable to shocks. Putri (Box 2.2) fixed income can buy. only completed primary school. Because of her can reduce low education, she works part-time at a warung household Four case studies illustrate how (roadside food stall) and receives a low informal income at all this framework might work for wage. She does own a small plot of land, which a points different parts of the consumption neighbor uses to produce rice; the neighbor keeps 22 The following cases are illustrative examples only and not real case studies. 23 However, see World Bank (forthcoming (c)) for a first attempt at estimating these numbers. INDONESIA's Rising Divide Chapter 2.1. A framework for understanding inequality 50 half the rice, while Putri’s household consumes The middle class have improving the other half. Because Putri has four children, the assets, higher incomes and better rice from the land is not enough, and they need savings. Dewi is part of the Indonesian middle to buy extra from the market, so recent rice price class (Box 2.4). She completed high school and shocks have hurt them. Over time, the land has works as a civil servant with a good salary and seen small increases in value, but the lack of a benefits. She is also receiving ongoing training formal title means that the land value is limited and skills certification through her work. She and it cannot be used as collateral to borrow to does not own any land or housing, but does have start a small business. Putri has a small amount savings that are invested in the bank and earn of savings that she keeps at home for hard times. interest. Over time her savings are accumulating With inflation and no interest earnings, the value and she is also eligible for retirement benefits. Like of these savings is actually falling over time, and Putri, she has a network of friends and family in because she dips into the savings frequently Jakarta, which helped her to find her job. Dewi and through the year, the sum does not grow. Putri also her husband have two children, which means they has social connections—friends and family in the can spend a little more on their education than if local community—and she has relied upon these she had a larger family. Dewi has health insurance people in the past to borrow money when her in case illness strikes, but if she were to lose her children’s tuition fees were due. Ongoing social job she would need to dip into her savings. activities reinforce these networks. Putri has free health insurance from the Government, but does Richer Indonesians have good not know what it covers and there is no health resources and earn high incomes center near her anyway. If she or her one of her from them. They also use this income to save, children falls sick, she will either have to borrow which in turn leads to higher income tomorrow. Siti from her family or sell her land to meet the is a member of Indonesia’s upper class (Box 2.5). health care costs. She finished university and is about to enroll in an MBA program in the United States. She receives a The emerging consumer class are high salary for managing her own company, which accumulating more education and makes a good profit. She also has investments in some savings. Fitri (Box 2.3) is a member of mutual funds and the stock market, which have Indonesia’s largest class, the emerging consumer seen strong returns in recent years. She reinvests class, who are above the vulnerability line but are the company profits back into the business to not yet economically secure, with a greater than grow it, and continues to accumulate financial 10 percent chance of being vulnerable next year. capital over time, which in turn earns even more She completed junior high school and used her income the following year. Siti is well-connected social connections to get a job on an assembly to the business and political elites, and has used line at a small, locally-owned factory which, these connections to secure lucrative licenses and because it is a small business, does not comply contracts for her company. Siti and her husband with minimum wage laws. Fitri has a small amount have one child, who is now attending university in of savings that she keeps in a basic bank account Europe. A combination of savings, insurance and for emergencies. These savings slowly accumulate preventative measures means that Siti is the over time, as she manages to save part of her least affected by shocks. salary. Fitri does not have health insurance, because she is not poor enough to receive free health insurance from the Government, and her informal job means that she does not make contributions to the public health insurance system either. INDONESIA's Rising Divide 51 Chapter 2 why inequality is rising Box.2.2 Putri is poor with limited assets and low returns Assets Intensity of Use Returns Accumulation Human Capital Works part-time Receives low None SD education at a warung informal wage Physical Capital Neighbor uses land Neighbor keeps half Small increase in value small area of land to produce rice; Putri rice, Putri’s household of land, but marginal cannot use it as collateral consumes rest because of lack of title (absence of legal title) and development F inanc ial Capital Unused; kept to smooth Negative due to inflation None. Savings depleted small savings kept at home consumption in the case and renewed throughout of a shock the year Social Capital family and Used to borrow money Allows some investment Ongoing social activities friend networks in local when children’s tuition in son’s education reinforces networks community is due Box.2.3 Fitri is an emerging consumer with minor asset accumulation Assets Intensity of Use Returns Accumulation Human Capital Works on a small-scale Receives fixed salary None, because the factory SMP education factory assembly line below minimum wage as doesn’t offer training non-unionized Physical Capital None None None None F inanc ial Capital Unused; kept to Small interest payment Salary savings small savings, no smooth consumption from basic savings pension fund in the case of a shock account Social Capital family Used friend network Factory job gives higher Ongoing social activities and friend networks to get factory job income than the informal and involvement from local community, alternatives in union activities factory worker union reinforces networks INDONESIA's Rising Divide Chapter 2.1. A framework for understanding inequality 52 Box.2.4 Dewi is part of the economically secure middle class with improving assets Assets Intensity of Use Returns Accumulation Human Ca pita l Works as a civil servant Receives good salary On-going training and SMA and benefits certification P h ys ica l Ca pita l None Neighbor keeps half Small increase in value None rice, Putri’s household of land, but marginal consumes rest because of lack of title and development F in an cia l Ca pital Invested in bank Interest received on Salary saved savings; retirement savings benefits S ocia l Ca pita l family Used to obtain civil Enables good formal Ongoing social and friend networks in servant job sector wage with benefits, and work activities Jakarta relative to informal sector reinforces networks Box.2.5 Siti is upper class with many assets and high returns Assets Intensity of Use Returns Accumulation Human Ca pita l Manages her own Receives a high Is enrolling in a US MBA Tertiary Education company salary P h ys ica l Ca pita l Lives in one house and Enjoys high imputed rent Apartments and owns apartments and rents out the others and receives good rental houses are increasing houses income quickly in value F in an cia l Ca pital Invested in financial Interest received on Dividends and capital savings; mutual funds; sector and own savings, high returns gains reinvested; stocks; equity in company company from funds and stocks; company profits re- profits from company invested in expansion S ocia l Ca pita l Uses connections to secure Company makes high Extends and reinforces well–connected to lucrative licenses and profits from licenses and elite network through business and governing contracts for her company contracts company contracts elites INDONESIA's Rising Divide 53 Chapter 2 why inequality is rising 2.2 Why an unfair start in life holds the poor back 2 . 2 .1 A significant degree of overall inequality is explained by circumstances at birth People are a household’s most between groups based on four circumstances of important resource. All households have birth: the province they were born in, whether they people, and the majority of households generate were born in an urban or rural district, the gender most of their income from working and earning an of the head of household, and an indicator of their 24 Adults’ own education is used income from their labor. Differences in the quality parents’ education. Around one-third of all inequality as an imperfect proxy for their of these human resources, and in the incomes they is due to these differences in birth circumstances, parents’ education, which is not in the data. However, analysis of can earn, drive a large degree of inequality in Indonesia. primarily parents’ education 24 and somewhat Indonesian Family Life Survey location of birth; gender has little effect.25 shows that parents’ education and income are very important However, factors outside of people’s determinants of children’s control—their circumstances at Moreover, the contribution of educational outcomes, as are availability of schools, all of birth—can affect how they develop these elements of inequality of which are themselves birth their human resources. Differences in opportunity to overall inequality circumstances. people’s circumstances at birth and while young is no longer falling. When differences 25 Outcome of a decomposition of Theil L (GE(0)) Index (all have a strong influence on how their human in consumption inequality due to these four individuals) into within- and resources develop, and ultimately their later birth circumstances are examined separately between-group differences, where the groups are head income. And when these differences are due to an for people born in different decades, the role of household gender, a proxy unfair start in life—unequal access to services and that these circumstances has played over time for parents’ education, province of birth and whether opportunities—then it makes it very difficult for the can be seen. For people born in the 1950s, the the birth location was fully poor and vulnerable to catch up later on. role of birth circumstances was the highest, urban (whether kotamadya or kabupaten). Adults’ own explaining 39 percent of today’s differences in education is taken as a proxy In fact, one -third of all inequality consumption inequality. However, this began to for their parents’ education, can be explained by just four fall, to 37 percent for people born in the 1960s, which are not in the data. Analysis of IFLS data shows circumstances at birth. The differences who were still children when Indonesia first began that parents’ education in household consumption in Indonesia can be its long-run economic expansion, and to 34 and income are important determinants of children’s divided into those due to differences between percent for those born in the 1970s, who were the educational outcomes, as are different groups, for example, differences between first to benefit from Indonesia’s massive primary availability of schools, all of which are themselves birth average urban and rural consumption, and school expansion of that decade (Duflo 2001). circumstances. In separate differences within different groups, for example, However, for those born in the 1980s and later, decompositions, the between- group contributions were differences within urban households themselves, despite increasing access to services, the role 26 percent for education, 8 or within rural households themselves. Figure of these birth circumstances in overall inequality percent for province of birth, 9 2.3 looks at how much household consumption has stopped falling and even begun to increase percent for a fully urban birth, and 0.03 percent for gender. inequality can be explained by average differences (Figure 2.4). INDONESIA's Rising Divide Chapter 2.2. Why an unfair start in 54 life holds the poor bank Percentage of consumption inequality due to differences Percentage of consumption inequality due to differences between and within groups with different birth between and within groups with different birth circumstances (fig. 2.3) circumstances, by Head of Household cohort (fig. 2.4) 38.6 37.3 36.3 33 % 34.7 67 33.9 Between–group % differences Head of Head of Head of Head of Head of household household household household household born in born in born in born in born after Within–group 1948 – 57 1958 – 67 1968 – 77 1978 – 87 1987 differences Source Susenas and World Bank calculations. Note: Decomposition of Theil L (GE(0)) Index (all individuals) into within and between group differences. Birth circumstances are head of household gender, parents’ education,* province of birth and whether the birth location was fully urban (whether kotamadya or kabupaten). *Adults’ own education is taken as a proxy for their parents’ education, which are not in the data. However, analysis of IFLS data shows that parents’ education and income are important determinants of children’s educational outcomes, as are availability of schools, all of which are themselves birth circumstances. Non-birth circumstances include children’s effort. 2.2. 2 Getting a healthy start An unfair start begins is one of the with differences in most important child health factors that allows a child to succeed later in life To be able to earn a decent income education, immunization, access to clean water as an adult, children need to get the and proper hygienic sanitation (especially around right start in life. Getting a healthy start meal preparation), access to and the use of proper is one of the most important factors that allows a treatments for diarrhea, and growing up in a clean child to succeed later in life. Children who grow up house of good condition (World Bank 2015b). well-nourished in the womb and up until 2 years old reach the right height for their age. These However, Indonesia has relatively children are more likely to develop better cognitive high rates of child mortality and skills, reach a higher educational attainment, earn malnutrition, particularly among the poor higher incomes, and enjoy better health as adults, and those living in rural areas. Indonesia has made compared with children who grow up stunted significant progress in reducing infant and child (Alderman and Behrman 2004; Victora et al. 2008). mortality, but the rates remain high compared with regional neighbors (Figure 2.5), and rural Getting the right start means that children, the poor and those born to mothers all children should receive the same with low education are most at risk. Moreover, opportunities, regardless of where stunting, the most important form of malnutrition, they are born or who their parents is particularly high in Indonesia (Figure 2.6), and are . The likelihood of a healthy child is improved is higher for children whose parents have low through use of ante- and post-natal checks by education (Figure 2.7) the mother, child growth monitoring and nutrition INDONESIA's Rising Divide 55 Chapter 2 why inequality is rising A healthy start for babies begins (Figure 2.9 and Figure 2.10) or institutional delivery, with ante - and post-natal care for which increase the chances of post-natal care (96 mothers, but not all are that lucky.26 percent of mothers who give birth at a facility go Proper health care during and after pregnancy on to receive post-natal care; World Bank 2014d). plays a role not only in keeping the mother healthy, but also the child. Proper health and nutrition for Most children begin the the mother means proper nutrition for the unborn immunization process but do not child. Moreover, post-natal health check-ups finish it, particularly children can reinforce key breastfeeding behaviors and from poor households. After being possibly identify newborns at risk. However, use born healthy, children still need protection from of ante-natal and particularly post-natal care is disease. However, while most children start lower for poorer households (Figure 2.8), putting the immunization process, around one-third Not all children these newborns at risk of a bad start in life. One of children do not complete the process and get a healthy reason for this is that poorer and rural households remain vulnerable to disease. Poorer children are start are far less likely to have a skilled birth attendant particularly at risk (Figure 2.11). Infant mortality (per 1,000 live births) (fig. 2.5) Probability of stunting by parents’ education (percent) (fig. 2.7) Malaysia 7. 3 Thailand 11. 4 38 East Asia & Pacific 17. 2 36 35 Vietnam 18. 4 27 Philippines 23 . 5 Indonesia 25. 8 Less than Junior Senior seconday Primary primary Secondary or higher Cambodia 33.9 Source IFLS and World Bank calculations. Lao DPR 54 .0 Note Extreme stunting as <-2 standard deviations z-score height- for-age using 2006 WHO standards, children 0-5 years old. Source WDI 2012. Skilled first ante-natal and post-natal care Note Infant mortality is ages 0-1 years. usage (percent) (fig. 2.8) Stunting by country (percent) (fig. 2.6) Skilled ANC Thailand 16 98 96 96 93 Malaysia 17. 5 87 Vietnam 23 Poorest Poorest National Urban Rural Philippines 33 40% 20% Skilled PNC Myanmar 35 78 85 80 71 Indonesia 39 54 Cambodia 41 Source WHO Child Nutrition Indicators Poorest Poorest National Urban Rural 40% 20% 26 Discussion on access to health services and quality issues draws from World Bank (2014a). Source Susenas 2012, World Bank 2014d. INDONESIA's Rising Divide Chapter 2.2. Why an unfair start in 56 life holds the poor bank Unskilled deliveries by region Source WDI 2012. Unskilled deliveries by per capita consumption Source Note Infant mortality is ages Susenas 2011. (percent) (fig. 2.9) 0-1 years. decile (percent) (fig. 2.10) Rural 37 1 41 Urban 12 2 32 3 27 Sumatera 19 4 24 Jawa/Bali 20 5 22 Kalimantan 31 6 20 Sulawesi 44 7 18 NT 40 8 15 Maluku 56 9 11 Papua 49 10 7 Complete immunization rates by different Source DHS 2012. Note Complete immunization according to WHO guidelines means one dose populations (percent) (fig. 2.11) of BCG vaccine, three doses each of DPT and polio vaccines, and one dose of measles vaccine. In 1997 Indonesia added four doses of Hepatitis B vaccine. None Full (inc. Hep. B) Full (excl. Hep. B) 100 80 60 40 20 0 Male feMale Urban Rural Poore st q2 q3 q4 rich est Male feMale Urban Rural Poore st q2 q3 q4 rich est Male feMale Urban Rural Poore st q2 q3 q4 rich est Many infants and young children food as well. Many older children who should be are not fed properly, and poorer receiving complementary feeding are no longer children are most at risk. being breastfed (Figure 2.12). Moreover, many Age-appropriate breastfeeding is vital for proper children are not receiving micronutrients and child growth. However, fewer than half of infants deworming treatments, which can also affect their aged 0-6 months are breastfed appropriately; development. The rates of such treatment are instead of exclusive breastfeeding, they are fed lowest among the poor (Figure 2.13). INDONESIA's Rising Divide 57 Chapter 2 why inequality is rising Age-appropriate breastfeeding by age Source Susenas 2012 for 0-6 Adequate nutrition is often not months; DHS 2012 for others. (percent) (fig. 2.12) Note Age appropriate accompanied by good hygiene and breastfeeding is exclusive sanitation, and proper treatment breastfeeding until 6 months, and then breastfeeding with of diarrhea. Even if children are being complementary foods (solids fed enough and fed correctly, their growth 100 and semi-solids) until well into 7.9 the second year of life. and development will be impaired if they are exposed to poor hygiene in food preparation and 23.6 improper sanitation, which can increase the risk of diarrhea. The gap between richer and poorer 40.3 access to clean water and proper sanitation has 80 been closing over time (Figure 2.14). Nonetheless, around 1 in 6 children aged 0-5 years have had 1.11 diarrhea in the past two weeks. Furthermore, many 50.6 of those that do suffer from diarrhea are not being treated properly with oral rehydration therapy 60 (ORT), with female children more at risk (Figure no breastfeed 0.6 2.15). inAppropriate Access to health facilities has improved but remains a serious 75.2 40 challenge in some regions ( World Appropriate Bank 2014a). Access to health facilities has 59.1 improved significantly in the past decade, with the number of hospitals nearly doubling and the number of public health clinics (Pusat Kesehatan 41.44 20 Masyarakat, or Puskesmas) up by almost 30 percent. However, the number of in-patient beds per capita is still only half of the WHO’s recommendation of 25 beds per 10,000 people, with significant provincial variation as well. 0 Moreover, while the median distance to a health 0-6 months 9-17 months 18-23 months facility in nationally was only 5km in 2011, it was over 30km in provinces such as West Papua, Micronutrient intake and deworming by Source DHS 2012. Note Deworming is important for nutrient different populations (percent) (fig. 2.13) uptake. Iron supplementation in utero indicator is whether mother took any iron supplementation during pregnancy. 100 85 80 80 79 78 71 75 66 66 64 65 60 62 62 64 60 61 58 59 53 40 34 38 29 27 27 26 27 24 20 26 25 23 21 15 16 14 14 14 14 13 14 15 11 11 8 0 4 6 – 11 12 – 23 24 –59 urban rural Male female poorest q2 q3 q4 richest Vitamin a iron iron deworming supplementation supplementation supplementation in utero after birth INDONESIA's Rising Divide Chapter 2.2. Why an unfair start in 58 life holds the poor bank Lack of access to clean water and proper Diarrhea incidence and treatment sanitation by household per capita (percent) (fig. 2.15) consumption decile (percent) (fig. 2.14) 60 50.5 50 47.8 4.6 Poor 42.3 Sanitation 2002 40 Poor Sanitation 2011 Poor 100 water 2002 30 80 20 15.6 15.7 14.1 15.4 15.6 14.3 Poor 13.2 12.9 water 2011 60 10 0 40 urban rural male female 20 0 Diarrhea in ort-treated no treatment last two weeks 1 2 3 4 5 6 7 8 9 10 Source Susenas Source DHS 2012. Note Diarrhea is incidence in last two weeks out of all children 0-59 months; treatment indicators are out of all children with diarrhea. Papua and Maluku (Figure 2.16). At the same time, eastern Indonesia (Figure 2.17). This readiness over 40 percent of people in West Sulawesi, Maluku was measured by 38 indicators covering basic and West Kalimantan took more than one hour to reach amenities, basic equipment, standard precautions a public hospital, compared with 18 percent nationally. for infection prevention, diagnostic capacity and essential medicines. Not a single Puskesmas was Health facilities are not well ready on all 38 indicators, and only half in Papua equipped to provide the basic health and Maluku reported 80 percent readiness. services mandated by law, including Of particular concern, there are significant those that affect early child health, deficiencies in key services that affect whether a particularly in eastern Indonesia child gets a healthy start. Deficiencies in service ( World Bank 2014a). The general service readiness are significant in key program areas readiness of health facilities to provide basic that influence initial child health, including family health services at minimum standards is highly planning (see later section), antenatal care, basic variable across provinces, especially in the obstetric care and routine childhood immunization.27 Availability of Puskesmas health centers (percent of villages with Source Podes 2011 Infrastructure Survey, reported Puskesmas) and distance to Puskesmas if not in village (km) (fig. 2.16) in World Bank 2014d % village with average distance puskesmas to puskesmas, if not in village 50 50 45 24 . 3 41 38 36 37 35 28 11. 9 7.2 6 3.9 4.2 4.5 1 .7 2 .7 Bali & Nusa Maluku & 27 See Figure 40 and Table 8, National Urban Rural Sumatera Java Kalimantan Sulawesi Tenggara Papua World Bank (2014a). INDONESIA's Rising Divide 59 Chapter 2 why inequality is rising Basic Basic Standard Diagnostic Essential Overall index Amenities Equipment Precaution Capacity Medicine Selected service DI Aceh 70.9 80.3 65.2 64.2 63.0 67.9 indicator scores North Sumatera 68.5 79.6 60.3 37.3 64.8 61.2 77.6 74.7 75.9 and general service West Sumatera 76.8 81.5 69.9 Riau 69.0 81.8 64.2 69.7 71.1 71.0 readiness index Jambi 70.5 83.2 62.4 71.5 71.2 71.6 for Puskesmas by South Sumatera 68.6 84.5 65.6 59.0 72.3 69.7 province, 2011 (fig. Bengkulu 66.5 83.9 59.4 49.3 65.1 64.0 2.17) Lampung 71.9 81.7 67.9 62.9 72.5 71.0 Bangka Belitung 77.3 84.5 76.7 75.7 67.5 75.4 Source Ministry of Health Riau Island 76.7 84.9 69.7 75.0 78.2 76.8 from 2011 health facility DKI Jakarta 87.0 84.1 76.4 20.2 69.7 65.7 census, reported in World West Java 76.3 85.9 79.1 58.4 74.0 74.0 Bank (2014a). Central Java 84.5 86.4 84.8 80.0 77.9 82.2 DI Yogyakarta 88.1 87.3 95.0 96.5 74.5 87.4 East java 83.6 87.7 85.7 78.0 77.9 82.0 Banten 76.4 86.7 78.0 55.6 69.0 72.1 Bali 83.6 88.3 85.5 68.3 72.1 78.5 West Nusa Tenggara 76.2 87.8 74.9 84.3 76.9 79.7 East Nusa Tenggara 63.6 86.2 65.0 53.6 63.5 65.3 West Kalimantan 66.8 84.9 65.9 71.8 68.0 70.9 Central Kalimantan 73.4 85.3 64.0 56.1 70.7 69.2 South Kalimantan 77.2 86.3 75.6 84.3 75.6 79.5 East Kalimantan 76.2 82.9 71.2 68.7 69.5 73.0 North Sulawesi 69.7 81.5 61.5 35.8 60.1 60.4 Central Sulawesi 66.2 82.0 52.2 54.9 57.1 61.4 South Sulawesi 72.4 82.5 67.3 65.6 66.1 70.1 Southeast Sulawesi 65.7 80.8 58.3 35.3 65.5 60.3 Gorontalo 71.2 84.2 68.2 39.4 61.2 63.3 West Sulawesi 55.3 81.1 49.5 55.3 47.1 56.4 Maluku 62.4 71.2 46.6 35.6 53.3 52.7 North Maluku 58.9 81.5 56.7 44.9 60.8 59.9 West Papua 55.1 75.4 49.2 34.8 63.9 55.3 Papua 53.5 72.0 41.6 29.3 56.8 50.0 Indonesia Avg. 73.9 83.7 70.7 60.6 69.9 71.1 Furthermore, while the number of (2010) found that poor accuracy of responses health workers has increased rapidly on antenatal care and child curative care were to near international standards, widespread among physicians, nurses and they are distributed very unequally midwives. and poor competency remains an issue ( World Bank 2014a). The core health worker Use of health services is also to population ratio of 2.2 per 1,000 people is affected by mothers’ education and now close to the level of 2.3 level recommended behavior. Educated mothers are much more by the WHO. However, many Puskesmas do not likely to fully immunize their children (Figure 2.18). have a doctor, especially in eastern Indonesia, They are also more likely to know about using and only three provinces have achieved the ORT to treat diarrhea, use child micronutrients and WHO’s recommendation of one physician per deworming, and take maternal iron supplements 1,000 people, and specialist physician availability while pregnant. Moreover, there is evidence to is largely biased in favor of Java. There are suggest that it is not only a lack of knowledge or also significant shortages in key health worker available services, but also motivation that leads to positions in the public sector despite the large incomplete usage of health services; immunization number of nursing graduates. Moreover, health rates fall significantly for children born fourth or worker quality remains an issue; Rokx et al. later (Figure 2.19). INDONESIA's Rising Divide Chapter 2.2. Why an unfair start in 60 life holds the poor bank Full immunization rates for children aged Immunization rates for children based on 12–23 months by mother’s education (percent) birth order (percent) (fig. 2.19) (fig. 2.18) 100 80 80 60 60 40 40 20 20 0 0 more no some Some first born 2 – 3 4 – 5 6+ primary Secondary than education primary secondary Secondary full ( no full ( hep. b) no ne full ( no full ( hep. b) none hep. b) hep. b) Source DHS 2012. Note Complete immunization according to WHO guidelines means one dose of BCG vaccine, three doses each of DPT and polio vaccines, and one dose of measles vaccine. In 1997, Indonesia added four doses of Hepatitis B vaccine. Furthermore, the most vulnerable rates. Lacking access to both good sanitation and children miss out on multiple health care increases the risk of illness and lowers opportunities all at once. It is important the chance of proper treatment. Often children in to look not only at how many children do not rural areas and eastern Indonesia are poor on a have access to critical opportunities on each number of related dimensions (World Bank 2015b). dimension, but also to understand whether it is For example, while many urban children who are the same children who are poor across multiple poor with respect to housing conditions, water dimensions. For example, if children live in an area and sanitation are deprived on only one of these 28 These results come from Hadiwidjaja, Paladines and without a school or good transportation, building (Figure 2.20), rural children are generally poor on Wai-Poi (2013), implementing a school alone may not help increase enrolment two or all three (Figure 2.21). 28 a methodology first proposed in Ferreira and Lugo (2012). Urban poverty for housing, water and Source Rural poverty for housing, water and Susenas and sanitation (fig. 2.20) sanitation (fig. 2.21) 46% 27 Podes, from % Hadiwidjaja, Paladines Poor and Wai-Poi Unclean Housing Drinking 65 (2013). % 6% Poor 19% Water Unclean Drinking Housing 4% 32% 2% Water 2% 1% 18% 2% 3% 1% 10% 25% 58 % Poor 12% Sanitation 23% 10% Poor Sanitation INDONESIA's Rising Divide 61 Chapter 2 why inequality is rising 2.2.3 Falling household Changes in fertility patterns sizes for the are also affecting inequality, poor used to both today and tomorrow help reduce inequality Household sizes fell faster for poorer households having fewer people to spread poorer households than richer their income over, their consumption per person households in the 1990s. Household rose faster than it would otherwise have done. sizes and total fertility rates have been falling in Figure 2.22 shows the actual Gini, which was 34 Indonesia for decades, as the result of an effective points in both 1993 and 2002 (spanning the Asian national family planning campaign (Jones and financial crisis and the recovery). It also shows Adioetomo 2014; Hull, forthcoming). This trend that the Gini would have been 2.5 points higher continued into the 1990s for all households, with if household sizes in 2002 had stayed the same the poorest 10 percent of households shrinking as they were in 1993, instead of seeing significant in average size from 5.6 to 4.8 people between declines for poorer households. 1993 and 2002, and the poorest 50 percent from 4.9 to 4.3 people. At the same time, while However, while richer households richer households were also getting smaller, they have continued to shrink in the were shrinking by less; the richest 50 percent of 2000s, poorer households have not, households fell in average size from 3.8 to 3.6 contributing to higher inequality. people, and the richest 10 percent of households Between 2002, the average household size of the stayed constant at 3.3 people (Table 2.1). poorer half of the population stopped falling and has remained broadly stable at 4.3, while that of This meant inequality was lower than the richer half of the population has continued to it would otherwise have been. With fall, albeit more slowly, from 3.6 to 3.4 (Table 2.2). Average household size by per capita Comparison of actual and counterfactual 2002 Gini if consumption decile, 1993 and 2002 (Tab. 2.1) household size in 2002 remained the same as in 1993 (fig. 2.22) 36.5 Decile 1993 2002 Change(%) 34.48 1 5.6 4.8 –13.7 34.48 34 2 5.1 4.4 –13.1 3 4.8 4.3 –10.8 4 4.6 4.1 –10.8 1993 2002 5 4.4 3.9 –11.2 2002 gini with 1993 6 4.2 3.9 –8.8 Actual gini household size 7 4.1 3.7 –9.9 Source Susenas and World Bank calculations 8 3.8 3.6 –7.4 Note Average household size was estimated for every per capita consumption percentile in 1993 and 2002. A baseline Gini was estimated for 1993 and 2002 9 3.6 3.4 –6.8 based on total household expenditure divided by the relevant percentile average size (rather than actual household size). A counterfactual Gini for 2002 was 10 3.3 3.3 1.1 estimated based on total household expenditure divided by the relevant percentile average size in 1993 (that is, what would have happened if demographics had remained constant). The difference between baseline and counterfactual was then Source Susenas applied to the official 2002 nominal Gini. INDONESIA's Rising Divide Chapter 2.2. Why an unfair start in 62 life holds the poor bank This has contributed to an increase in inequality Average household size by per capita over this period, with the Gini being 1.3 points consumption decile, 2002 and 2014 (Tab. 2.2) higher in 2014 than it would have been had the Decile 1993 2002 Change(%) household structures stayed the same as in 2002 (Figure 2.23). What is more, if changes in 1 4.8 4.8 –0.3% household sizes across the distribution had not 2 4.4 4.4 –0.8% only not reversed but had continued to fall faster 3 4.3 4.3 0.0% for poorer households than for richer ones—as 4 4.1 4.1 –1.4% they did between 1993 and 2002 —the Gini would 5 3.9 3.9 –1.0% have been substantially lower in 2014 by 4 points at 36.5. 6 3.9 3.8 –2.6% 7 3.7 3.6 –2.1% Demographic and fertility trends 8 3.6 3.4 –4.3% 9 3.4 3.3 –2.1% in Indonesia have changed 10 3.3 3.0 –8.6% Source Susenas Reduced fertility rates are Comparison of actual and counterfactual 2014 Gini if important not only for inequality, household size in 2014 remained the same as in 2002, and if but also help to achieve other size continued to decline at the same rate as 1993-2002 (fig. development goals; however, earlier 2.23) declines in fertility have not been sustained. 29 Having more children can mean that poorer households do not meet their desired 40.5 family sizes and instead increases per person inequality. However, it has other important 39.2 development consequences. A larger school- 36.3 age population means greater challenges in 34 achieving the current 9-year and discussed 12-year 34 compulsory education. However, Indonesia’s 34 Total Fertility Rate (TFR), considerably lower than Malaysia, India, Bangladesh and Vietnam in 1985, 2002 2014 is now higher than these neighbors. It is clear that the declines in fertility in the latter half of the last 2014 gini with 2014 gini with 2002 continued decline century have not continued into the current one, Actual gini household size in household size and may even have begun increasing.30 Source Susenas and World Bank calculations. Note Average household size was estimated for every per capita One reason is that marriage has consumption percentile in 1993 and 2002. A baseline Gini was estimated been happening at an earlier age, for 1993 and 2002 based on total household expenditure divided by the relevant percentile average size (rather than actual household size). A especially for the poor, which counterfactual Gini for 2002 was estimated based on total household influences fertility. Increased schooling, expenditure divided by the relevant percentile average size in 1993 (that is, what would have happened if demographics had remained constant). especially for girls, and greater urbanization—as The difference between baseline and counterfactual was then applied to seen in Indonesia—are usually associated with the official 2002 nominal Gini. later marriage and lower fertility. However, this has 29 This section summarizes material in Jones and Adioetomo (2014). not been the case in Indonesia; since 2005, there 30 See Hull (forthcoming) for a careful discussion of the problems with data. has been a trend towards earlier marriage (Hull, forthcoming). The reasons for this are not well understood, but many think it is due to increased religiosity among the young (Jones and Adioetomo 2014). This phenomenon has been most pronounced for poorer women; 16.7 percent of the poorest quintile and 13.7 percent of the second- poorest quintile are already mothers or pregnant by ages 15-19 years, compared with 6.6 and 2.6 percent for the second-highest and highest INDONESIA's Rising Divide 63 Chapter 2 why inequality is risi ng quintiles, respectively. This only exacerbates the other disadvantages faced by the poor. 31 Box.2.6 Another key reason is that the Strategic and effectiveness of family planning emerging issues for family in Indonesia has been reduced over the past decade, particularly for the poor. The contraceptive prevalence rate is roughly the same now as it was a decade ago: planning in 60 percent by any method in 2002, 57 percent Indonesia by modern methods; 62 percent by any method in 2012, 58 percent by modern methods (Jones There remain several strategic and and Adioetomo 2014; IDHS). The unmet need for emerging issues facing family planning. contraception is not particularly high compared Jones and Adioetomo also highlight key with other countries, but remains a major strategic issues for revitalized family reproductive health issue and has shown few signs planning in Indonesia: of falling in recent years, being 13 percent in 2002 and 11 percent in 2012 (Jones and Adioetomo 2014). Moreover, this reflects unequal access to proper family planning. Those in the richest quintile use long-term methods of contraception (IUDs, female sterilization and implants) at double the rate (30 percent) of the poorest quintile (15 1 percent), although “it is hard to imagine that the Financing and method mix poor really want to rely on short-term methods to a About 73 percent of family planning much greater extent than the wealthy” (Jones and users are served by the private Adioetomo 2014, 10). sector. However, private sector suppliers emphasize short-term Decentralization, a lack of political methods, which disadvantages those support at the local level, and who would prefer to terminate rather regulatory deficiencies have than delay childbearing, especially weakened family planning. Jones and the poor who struggle to afford the Adioetomo (2014) identify three factors limiting cost of contraceptive resupplying. contraceptive use in Indonesia. First, the National Family Planning Agency (BKKBN), previously 2 a strong, centrally-run agency, has struggled Improvements of equity in access to maintain its effectiveness in a decentralized Inequities in access and quality Indonesia, where significant responsibilities of family planning services exist for implementation and monitoring have been between provinces and districts, devolved to the districts. Moreover, the division and between the general population of roles between the BKKBN and the Ministry of and marginalized groups. Because Health continues to be unclear at the grassroots a number of groups are costly to 31 High rates of teenage level. Second, a lack of political commitment to reach for various reasons, the private marriage are a concern not sector is unlikely to address these only because of higher fertility. family planning by local governments has emerged They are also associated after decentralization, as demonstrated in access and quality issues; the public with issues of human rights insufficient budgetary support for family planning. sector will need to adopt this role. (whether the girl had a choice of husband), illegality with respect to age of marriage (16 Finally, the 2009 Law on Family Planning (Law No. 52/2009) has not been supported adequately by 3 years old in Indonesia), and Local planning & budgeting support reproductive health (earlier implementing regulations. See Box 2.6 for further childbearing and too short issues facing family planning. Family planning receives a very birth spacing are related to small share of local government worse maternal and child health outcomes, contributing budgets (between 0.04 and 0.2 to an unfair start in life for percent), due in part to the non- many children (see next section)). INDONESIA's Rising Divide Chapter 2.2. Why an unfair start in 64 life holds the poor bank involvement of local family planning officials in the budgeting process, in implants), which are the methods most needed by poorer households 8 Family planning under the new JKN and there being 27 other areas looking to limit family size. Family planning services are required by law to be funded, and a lack of integrated planning 6 included under the new National Health Insurance (Jaminan with local health bureaus (Dinas Demand creation issues Kesehatan Nasional, or JKN), Kesehatan) and the Ministry of The past success of the family although the 2013 Presidential Women’s Empowerment and Child planning program relied heavily Decree covering JKN contains Protection. Moreover, the majority on the work of family planning conflicting articles about the of districts do not provide the 30 field officials (Petugas Lapangan inclusion of family planning. Three percent of contraceptives and Keluarga Berencana, or PLKB), whose main issues arise for family planning supplies as required under the task was to encourage couples to under JKN. First, JKN is a social minimum service standards, meaning understand the benefits of smaller insurance system based on the the central BKKBN office has to families and to use contraception. concept of risk-pooling through instead. However, funding is not After decentralization, the PLKB revenue collection from members. provided for delivery costs, and fees come under local governments and Thus revenues for service providers are then charged by local providers numbers have declined significantly. are fixed (capitation). However, to users (66 percent of the users of The promotion of family planning is the focus of family planning is to public family planning pay a fee for now often neglected at the local level. recruit increasing numbers of users services). Finally, access to special funds set aside for national strategic 7 from those who have unmet needs for contraception, meaning the priorities (Dana Alokasi Khusus, or Contraceptive supply chain more family planning services are DAK) are restricted to infrastructure, management issues delivered, the less profitable it is. ruling out an alternative source of Managing the contraceptives There is already some evidence funding at the local level. logistics and delivery is another that some health centers are source of problems (Brandt and 4 Benarto 2013). Local supply levels reluctant to provide such services. Second, new regulations require BKKBN human resource capacity are based on targeted new users the BKKBN to cover contraception Various assessments of family rather than data-based underlying for all users, compared with the planning program revitalization demand; data are also poor in the current situation in which most needs have identified the lack reporting system. As a result, many users pay out of pocket. There of capacity of BKKBN staff at the clinics supplied by the BKKBN is a need to distinguish between local level,32 in particular with are often out of stock of certain those who can afford to pay the respect to basic planning, program contraceptives. Moreover, the premiums and those who are entitled implementation, and monitoring centralized warehouse approach to new services. Finally, midwives and supervision; advocacy on the used by the BKKBN lengthens who work out of clinics, while importance of family planning to the supply chain, compared with registered and accredited, cannot be executives and legislators at the the Ministry of Health’s direct contracted directly by BPJS (the JKN district level; and communication delivery of drugs and medicine to implementing agency) under current with other sectors. provinces and districts. Nor is there regulations. funding for delivery of stocks from 5 district to village level. In addition, Family planning services temperatures at central and local Private sector services are mainly storage facilities are far higher than provided by midwives (bidan). Of the 25 degrees Celsius maximum the 135,000 registered midwives, recommended, which may reduce only 40,000 provide family planning the potency of contraceptive stocks. services, which is too small relative to the scale of family planning demand. Moreover, relatively few are 32 For example, Lewis and trained in longer-term methods (only Haripurnomo (2009), Thomas and Adioetomo 44 percent in IUDs and 37 percent (2010) and Febriani (2012) INDONESIA's Rising Divide 65 Chapter 2 why inequality is risi ng 2.2.4 An unfair start in life continues with differences in skills development and education After a healthy start, people need to Years of completed education, 16-18 year olds acquire the education and skills they (percent) (fig. 2.24) need to get a good job later. The key to getting a good job later in life is going to (and staying in) school and developing key skills while 100 there. When not all children can go to school, or when they do not get the education and skills they 80 need at school, they have a much lower chance 60 of getting a good job as an adult compared with 40 those children who do receive such education. 20 Enrollment The first step is making sure that 0 rates drop more children make the transition dramatically 1 2 3 4 5 6 7 8 9 between school levels. By far the greatest between rate of school dropout occurs in the transition school levels between school levels, rather than during each Poorest 2 3 4 Richest level. This is the case for all children, but especially for the poor. For example, enrolment rates in year six of primary school are almost 100 percent for children from the richest quintile, but also near Source Susenas 2012. 90 percent for the poorest quintile (Figure 2.24). During the transition to the first year of junior high Years of completed education, 19-21 year olds (percent) (fig. 2.25) school (seventh year of school), enrolment rates drop to 94 percent for the richest quintile, a fall of 5 percentage points. However, they drop far 100 more dramatically for the poorest quintile, by 17 percentage points to 73 percent. A similar pattern 80 is observed between years nine and ten during the 60 transition from junior to senior secondary school 40 (Figure 2.25); enrolment rates for children from the 20 richest quintile fall from 89 to 76 percent, but for those from the poorest quintile fall from 59 to 33 0 percent, or three times as fast. 7 8 9 10 11 12 Sometimes there are not enough schools at the next level, but Poorest 2 3 4 Richest generally schools are accessible and have room for more students. Access to public senior secondary or vocational schools is an Source Susenas 2012. issue in some sub-districts, especially in Papua and Maluku, but also in East Nusa Tenggara (less than 70 percent access), North Sulawesi, North Maluku, South Kalimantan, and West, Central and East Java (all less than 80 percent access).33 However, junior and secondary schools are generally available. INDONESIA's Rising Divide Chapter 2.2. Why an unfair start in 66 life holds the poor bank Moreover, when they are available, they are not Annual schooling costs by school level (IDR Source Susenas too full to take on additional students. According thousand) (fig. 2.26) 2014 and to Susenas, nearly half of all junior and senior World Bank calculations secondary schools have less than 180 students, from World with average class sizes below 25.34 Bank (2015e). Some children do not re -enroll sd smp sma because costs rise sharply between levels, and few poor children receive scholarships, even when they are other fees eligible. An important driver of dropping out is supplies the significant increase in schooling costs when making the transition between school levels. tuition Costs increase from around IDR 500,000 per year on average for primary school to over IDR 800,000 at junior secondary level, and to IDR 1.6 million at senior secondary level (Figure 2.26). 95 This can make schooling unaffordable for poorer households. Put another way, the annual costs 525 of junior secondary school are 25 percent of the per capita poverty line, those of senior secondary school rise to 50 percent of the poverty line. At the same time, relatively few of the poor and 67 vulnerable are currently receiving scholarships (Figure 2.27) despite expanded coverage and 425 improved targeting, and scholarship benefit levels 31 975 are insufficient to meet all schooling costs (World 278 Bank 2012a and 2012c). 357 33 Analysis of Podes Village Census data. 183 34 Susenas education module 2012. Percentage of households with school-aged children receiving a scholarship Source Susenas 2014 and World Bank calculations from by household per capita expenditure deciles (percent) (fig. 2.27) urban rural World Bank (2015e). 30 25 27 25.1 20 18.5 15 17.7 15.1 14.5 13.1 13.6 10 11.6 10.6 9.7 8.6 5 7.1 7.4 6.9 5.6 5.5 4.8 1.2 2.3 0 1 2 3 4 5 6 7 8 9 10 INDONESIA's Rising Divide 67 Chapter 2 why inequality is risi ng Others drop out because they can tertiary education, or are in the poorest quintile help boost household income by and richest quintile, has halved in the past decade working. While data on the level of child wages (Figure 2.29 and Figure 2.30). below the age of 15 years old are poor, the survey data on those aged 15 to 18 years old indicate Nonetheless, greater years of that the monthly income that can be earned is education are not translating into nearly three times higher than the monthly poverty higher incomes. There has been a long- line, making contributing to household income term trend towards great mobility in education: attractive for poor children (Figure 2.28). children born in the 1960s and 1970s to parents with no education are considerably more likely However, despite continued to have received more education than their disparities, Indonesia has done well parents compared with those born in the 1950s. at closing the education enrolment For example, of children whose parents did gap between the urban and rural, not complete primary school, compared with rich and poor, and male and female. those born in the 1950s, those born in the 1960s Historically, richer, urban, male children born to and 1970s are less likely to have no education more educated parents were more likely to be themselves (11 and 37 percent less likely, enrolled than poorer, rural, female children born respectively), and more likely to achieve a higher to less educated parents. However, the gender, final attainment than their parents (Figure 2.31 urban-rural, rich-poor, educated-less-educated and World Bank 2015b). However, as adults, their parental gaps have been closing. For example, the chance of moving up the income distribution as junior high school (SMP) enrolment gap between adults has been little more than their older, less children whose parents have no education and educated colleagues (Figure 2.32). Median monthly incomes of children aged Source Sakernas 2013 15-18 years old (rupiah) (fig. 2.28) National 800000 Urban 900000 Rural 650000 Sumatera 800000 Java 800000 Kalimantan 1000000 Sulawesi 700000 Bali & Nusa Tenggara 500000 Maluku & Papua 900000 Male 800000 Female 800000 Enrolment of 13-15 year olds by parents’ Enrolment of 13-15 year olds by parents’ consumption quintile (fig. 2.29) education (fig. 2.30) 100 100 tertiary Sma q5 90 90 q4 smp 80 q3 80 sd q2 70 70 60 60 none q1 50 50 2004 2007 2011 2013 2004 2007 2011 2013 Source Susenas. Note Highest of both parents’ education; parents’ per capita household consumption quintile. INDONESIA's Rising Divide Chapter 2.2. Why an unfair start in 68 life holds the poor bank One reason is that not all children 10km from the village (Figure 2.35). Only around half receive the same benefits from of rural villages have an ECD center, and it is an schooling due to not enjoying a average of 20km to the nearest one otherwise. Only healthy and smart start previously. 10 percent of villages in Papua and Maluku have Disadvantages at an early age limit educational an ECD center, and for the rest it is an extremely benefits from schooling later on. We have already prohibitive average of 50km to the nearest one, seen that children whose parents have lower virtually ensuring non-enrolment and attendance. education and income are more likely to be Even when ECD centers are accessible, not all children stunted (Figure 2.7 previously and World Bank enroll. For example, a typical 4-year-old child in 2015b). They are also less likely to be enrolled in an urban area has a 30 percent chance of being early childhood development (ECD) programs, as enrolled, while a typical 4-year-old in a rural area are those in eastern Indonesia (Figure 2.33). As only has a 21 percent chance. However, for an urban a consequence of these and other factors, they child with a highly educated mother, this probability more likely to be in the lowest cognitive quintile (and increases from 30 to 36 percent, while for a rural less likely to be in the highest quintile (Figure 2.34). child with a poorly educated mother, this probability decreases from 21 to only 9 percent (Hasan et al. Limited access to ECD centers plays a 2013). Similarly, a typical child from the richest 20 role, as does parental background. Only percent has a 40 percent chance of being enrolled, in urban areas and in Java are ECD centers either in compared with a 16 percent chance for a child from the the village (around 90 percent of the time) or under poorest 20 percent. Educational attainment probability of children Adult income quintile probability of children born in the 1960s and 1970s with parents who born in the 1960s and 1970s with parents who did not complete primary, relative to the 1950s did not complete primary, relative to the 1950s cohort (percent) (fig. 2.31) cohort (percent) (fig. 2.32) 20 5 10 0 none –10 Sd smp sma 0 –20 –30 q1 q2 q3 –5 –40 Cohort Cohort Cohort Cohort born born born born 1962 – 71 1972 – 81 1962 – 71 1972 – 81 Source Susenas. Note: Highest of both parents’ education; parents’ per capita household consumption quintile. ECD enrolment rates for 5-6 year olds by Probability of 7-14 year old children being in the top or bottom quintile region, gender and income (percent) (fig. 2.33) of cognitive scores by parents’ education (percent) (fig. 2.34) National 37 Urban 42.9 29 Rural 3 1.6 28 Sumatera 27.5 25 Jawa 45 25 Kalimantan 31.2 Sulawesi 31.9 21 Bali & Nusa Tenggara 3 2.3 19 Maluku & Papua 14.3 17 Male 3 6.3 16 Female 38.1 Poorest 10% 25 < sd sd smp sma Poorest 40 % 31.4 Fhh 38 top score bottom score quintile quintile Mhh 42 Source Susenas. Source IFLS and World Bank calculations.. 10 INDONESIA's Rising Divide 69 Chapter 2 why inequality is risi ng A key reason why more education does 3 children in Java read 26 words faster per minute not translate to higher incomes is than those in Nusa Tenggara, Maluku or Papua, because of differences in the quality and 10-12 words faster than elsewhere (Table 2.3). of that education. Poor children may be Similarly, children from the middle of the income more likely to attend school than before, but the distribution read 6-12 words faster than poorer quality of their skill development is hampered children and richer children 18 words faster. These by the quality of their education. This negatively advantages are in addition to an 11-word-faster affects the learning outcomes of poorer students reading ability for those who attended ECD. and those in remote regions. For example, Grade ECD availability in village (percent) and distance to nearest average distance to ecd facilities, % village with ecd facilities center if not in village (km) by region (fig. 2.35) if not in village Source Podes 2011 Infrastructure Survey. 90.3 89.5 5 2. 3 69 60.3 54.6 57.3 54.1 41.5 23 . 4 19 19.7 16 . 2 16.8 8 .2 6.1 8. 8 2 .8 National Urban Rural Sumatera Java Kalimantan Sulawesi Bali & Nusa Maluku & Tenggara Papua Oral reading fluency advantages based on ECD participation, location Source USAID (2014) and wealth (words per minute faster than reference)(Tab. 2.3) Advantages to location: words Advantages to wealth: words Advantages to ECD: words per per minute faster than children per minute faster than children minute faster than children who from Maluku, Nusa Tenggara from the poorest wealth did not attend preschool and Papua quartile 12.2 Kalimantan-Sulawesi 5.8 Lower-middle 11.5 Attended 15.5 Sumatra 11.8 Upper-middle 26.5 Java-Bali 18.0 Highest Source Podes 2011 Quality of schooling facilities Infrastructure Survey and teachers (percent) (fig. 2.36) 98 92 86 86 77 national 68 62 61 55 rural 49 45 33 urban maluku/papua All schools: share smp with share schools av. share of teachers laboratory with electricity with diploma INDONESIA's Rising Divide Chapter 2.2. Why an unfair start in 70 life holds the poor bank One constraint on children’s As a consequence of unequal access to achievement is the quality of both quality education for many children, facilities and teachers; another is nearly three - quarters of Indonesian that poorer children are also less children lack even basic skills in likely to study. A constraint on the quality mathematics and science. In the OECD of education that many Indonesian children face international educational test scores (Programme is the quality of education facilities and teachers. for International Student Assessment, or PISA), This is even more problematic for rural children 15-year-old children need to score 420 or more and especially those in eastern Indonesia (Figure in order to be considered as having basic skills 2.36). Moreover, 11 percent of junior secondary in mathematics and science. With 74 percent of students in Papua and Maluku say their teacher is Indonesian children scoring below 420, it has the often or always late or absent, compared with just fifth-worst share of 15-year-old children without 1 percent nationally.35 At the same time, access basic skills of the 83 countries included in the data to quality education is not enough to develop the (Figure 2.39, OECD 2015). right skills for all children. Poor children are not only less likely to have a school nearby with good teachers, they are also less likely to study (Figure 2.37 and Figure 2.38). 35 Susenas education module, 2012. Children who reported reading a text book in the past week (percent) (fig. 2.37) non poor poor Sma age Smp age sd age 0 20 40 60 80 100 Children who reported reading a science book in the past week (percent) (fig. 2.38) non poor poor Sma age Smp age sd age 0 20 40 60 Source Susenas education module 2012. Percentage of 15-year olds with international PISA Source OECD 2015 mathematics and science scores below Level 2 (basic skills, 420 points) (fig. 2.39) 8 9.2 87.2 85 .6 78 .9 73 .8 73 .7 67.7 67.6 67.0 65 .0 64 .6 64 .3 63 .9 6 1.4 61 .2 61 .1 59.9 59.1 57.0 56 .0 55.3 5 4.9 53 .8 53 .6 53 .4 5 2.5 51 .1 49.8 46 .3 45 .3 44.7 44. 2 42.7 42.0 41 .6 3 9.1 3 6.4 3 2.7 3 2.5 28.8 28 .3 26 .1 25 .1 24.7 24.5 24.4 23 .5 23 .3 23.2 23 .0 22.5 22.3 21 .8 21 .1 20.7 19.6 19.6 18.7 1 8.5 18 .1 1 7.7 1 7.7 1 7.4 16 .1 15 .1 15 .1 13 .8 1 3.7 13 .1 12.7 1 2.3 1 1 .3 10.7 10.7 10.4 9.8 8 .6 8.5 7.5 Ghan a Honduras Sout h Africa M orocc o Indone sia Peru Qatar Colomb ia Botswa na Om an Syria Bra zil Tu nisia Jordan Sau di Arabia Argent ina Palest ine Alba nia M ace donia Monte negro Leb anon Ge orgia Mexic o U ru guay Ba hrain Costa Rica Ma laysia Iran Ka za khstan C hile Arme nia T hailand UAE Bulgaria Roma nia Se rbia Tu rkey Israel* Greec e Slova k Republ ic Ukra ine Sw eden C roat ia Lu xemb ou rg Hungary I celan d U nited Stat es Portu gal Ita ly Russia Lithua nia Norway Franc e Spain N ew Zealan d Belgi um Un ited K ingdom Czec h Republ ic Austria Den mark Australia Slove nia Latv ia Germany Ne the rlan ds Irelan d Swit ze rlan d Liec hte nst ein Ca nada Polan d Ta iwan Viet nam Finlan d Macao Ja pan Sin ga pore Kore a Estonia Hong Kong INDONESIA's Rising Divide 71 Chapter 2 why inequality is rising 2.3 Why a widening gap between skilled and unskilled wages is increasing inequality 2 . 3.1 Increasing demand for and shortage of skilled workers is driving their wages higher, which benefits those children who got the right start in life In the modern, dynamic, global completed school and benefitted from a high economy, technological advances, quality education in the first place, highlighting the especially in information consequences of unequal opportunity from birth. technology, mean that skills are becoming increasingly important. In Indonesia, employers are Technological progress has brought significant increasingly demanding more skilled benefits in recent decades, with cheaper workers, but are struggling to transportation and cheaper goods, greater find them. Employers in Indonesia are also access to markets for those in remote areas, looking for workers with higher skill levels. The and improved communication and knowledge proportion of jobs requiring senior high school sharing. The new technologies underpinning these or tertiary education has increased over the past advances are demanding increasingly more skill decade from 22 percent in 2002 to 35 percent in to use and improve. As a consequence, demand 2013 (Figure 2.40). However, despite increasing for skilled workers in many sectors has increased educational attainment, half of all workers have in most countries around the world. And these no more than a primary level of education. Only skilled workers tend to be those children who 6.3 percent have a university, or 4-year diploma, INDONESIA's Rising Divide Chapter 2.3. Why a widening gap between skilled and 72 unskilled wages is increasing inequality degree (Figure 2.41). Moreover, education levels Employment by education level, 2002-13 (percent) (fig. 2.40) are not the same as skills. A survey in 2011 found that employers ranked basic skill as the most important, followed by thinking and behavioral tertiary sma smp sd or less skills (World Bank 2011). However, 35 to 40 percent of those surveyed identified a “skill gap in staff” in 2002 2013 thinking and behavior, and around 13 percent thought even basic skills were lacking (Figure 2.42). 4.7 9.4 17 Moreover, workers from poorer 25 background have limited ability to 16 find good jobs, which typically relies 18 on using social connections. There are many ways that young workers and prospective employers can find each other: advertisements, 60 job fairs, university career services, and 46 customized recruitment strategies by firms. Most Indonesians, and youth in particular, however, rely on personal connections with family and friends to find a job (Figures 2.43 and Figure 2.44). This Education decomposition of labor force (fig. 2.41) means that young workers from richer households with good connections tend to get better jobs. This, however, leaves young workers from poorer 70 households with fewer social connections at a elementary or lower 60 disadvantage. 50 upper & lower secondary At the same time, with limited access 40 to “second -chance” skills training 30 opportunities, less skilled workers 20 find it difficult to improve their skills to find better jobs. Much of the 10 university or 4–yr diploma Indonesian workforce leaves school without basic 0 skills because of incomplete and poor quality education. There are limited opportunities for 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 these workers to develop such skills later in life. Less than 1 percent of youths aged 19 to 24 years old have attended training courses in engineering, Important skills identified by Source World Bank (2011) employers, and skill gaps (percent) very Skill Gap IT or languages, in part because of limited supply important in staff (fig.2.42) (Figure 2.45). In addition, significantly fewer Indonesian firms offer training opportunities than elsewhere in East Asia or throughout the world (Figure 2.46). Large firms are much more likely to Basic Skills do so than smaller ones, but the proportion is still less than half. Exporting firms and foreign firms are Thinking Skills also more likely than non-exporting and domestic firms to provide formal training, but the rates are still low. Moreover, since employees at large, Behavioral Skills exporting, foreign-owned firms are more likely to be already skilled, the training that is available Computer Skills probably does little to reduce the skilled wage gap. English Skills 0 10 20 30 40 50 INDONESIA's Rising Divide 73 Chapter 2 why inequality is rising Method for finding job, youth aged Method for finding job, all workers 15-24 years old (percent) (fig. 2.43) aged 25 years and older (percent) (fig. 2.44) 14% 13% 5% 2% 5% 67% 12% 55% 4% 18% friends and relatives contacted by company job fairs contacted company advertisement Source IFLS and World Bank calculations. Youths aged 19-24 years who have attended or competed training course (percent) (fig. 2.45) rural urban nasional Source Susenas education module 2012. Engineering IT Language 0.0 0.5 1.0 1.5 2.0 Share of firms providing formal training (percent) (fig. 2.46) Source World Bank 2011. Indonesia Eap world Large (100+) Medium (20–99) Small (5–19) Non Exporter Exporters (>10% of sales) Foreign (more than 10%) Domestic 0 20 40 60 80 INDONESIA's Rising Divide Chapter 2.3. Why a widening gap between skilled and 74 unskilled wages is increasing inequality Annualized wage growth (2001-14) versus sectoral productivity (2012 annual value added per worker, IDR million) (fig. 2.47) 5% 4% 3% Wage growth 2% 1% 0% 100 200 300 400 500 600 –1 % –2 % –3 % Source Sakernas, National Accounts, World Bank calculations. As a consequence, wages for skilled telecommunications and some manufacturing 36 Labor productivity is measured here as the value workers —those who are most likely sectors, have risen faster than in those in lower of GDP output in the sector to have benefitted from a healthy productivity sectors. On average, every extra IDR divided by the number of start and good education—have been workers. Worker productivity 200 million of annual labor productivity enjoyed ranges from around IDR 20 increasing faster than those for by a sector corresponded to 1 percentage point million of GDP in very low unskilled workers. There is an increasing higher real wage growth each year between 2001 productivity sectors, such as agriculture, to IDR 100-200 wage gap between skilled and unskilled and 2014 (Figure 2.47).36 In this labor market, million in higher productivity workers. Skills, rather than education, are hard workers from richer households, who are more sectors in manufacturing and financial services, to over IDR to identify in workforce surveys. However, on the likely to be better educated and more skilled, are 500 million in non-oil and gas whole, wages in higher productivity sectors that benefitting from higher wages. mining. demand more skill, such as financial services, INDONESIA's Rising Divide 75 Chapter 2 why inequality is rising 2 . 3. 2 At the same time, most workers are trapped in low-paying jobs Most existing and new jobs are in Share of total employment, 2014 low-productivity sectors. Most existing (percent) (fig.2.48) jobs are in low-productivity sectors. In fact, in 2014, three of the lowest productivity sectors accounted for 60 percent of all jobs (Figure Social and 2.48): agriculture and hunting (32 percent of jobs, community 10. 2 average value-added per worker IDR 21 million per year), wholesale and retail trade (18 percent wholesale and retail of jobs, average value-added IDR 19 million per year) trading and community, social and personal services (10 17. 5 percent of jobs, average value-added IDR 5 million per year). Moreover, most of the 20 million new Agriculture jobs created between 2001 and 2012 have been and hunting concentrated in low-productivity, non-skill-intensive sectors (Figure 2.49). Out of total employment 3 1. 8 growth, 30 percent occurred in community, social and personal services and 28 percent in wholesale, Source Sakernas, World Bank trade and retail, while manufacturing contributed calculations. only 16 percent of total growth (3.3 million jobs). Note: Agriculture excludes forestry and fisheries. Employment and labor productivity growth by sector, 2001-12 (percent) (fig.2.49) Employment growth and labor productivity growth and negatively correlated 140 120 Transport 45% 100 80 60 40 Agriculture Trade & retail 35.1% 20.9% 20 Soc. & Pers services Construction 15.4% 6.1% 0 –20 Finance 2.4% Manufacturing –40 13.9% –60 Mining 1.4% –20 0 20 40 60 80 100 120 140 Employment growth rate INDONESIA's Rising Divide Chapter 2.3. Why a widening gap between skilled and 76 unskilled wages is increasing inequality As a consequence, many low- skill the number of employers with permanent workers workers from poorer households is increasing, those with temporary workers still are trapped in informal or low- represent 82 percent of total employers. Finally, productivity work. A large informal sector workers on their own account (or self-employed still employs more than 50 percent of total workers in a strict sense), who are more likely to be (70 percent in rural areas), and remains one of vulnerable and less productive, although declining, the most serious challenges for the Indonesian still add up to some 18.5 million (16.6 percent labor market. Although the share of “good jobs” of total employment). in total employment (defined here simply as the share of formal dependent employees) rose from A number of factors restrict the 27.7 to 36.4 percent between August 2001 and creation of more productive and August 2012 (Figure 2.50), a large share of the better paid jobs. In addition to the low employed pool is still highly vulnerable, with nearly productivity of most workers on the labor supply 18 million unpaid family workers and some 11.5 side, which has already been discussed, there million casual workers (16 percent and 10 percent are two main constraints to the generation of of the total, respectively). Many of these workers better, more productive jobs in Indonesia. The are concentrated in the low-skill, low-productivity first is a range of barriers to competitiveness sectors with high informality and low wages, such and productivity, including underinvestment in as agriculture, construction, transportation, and infrastructure; a complicated and long process wholesale and services (Figure 2.51). In addition, to establish new businesses; a lack of access to a decrease in the number of casual workers in finance for productive firms; and the need for agriculture has been offset by the rise of casual higher productivity in the agricultural sector; and a workers in non-agriculture sectors, and although revitalized manufacturing sector (see World Bank Employment composition by status, percent (fig.2.50) Cas ual Source BPS; World Bank employees employers workers calculations. Dependent employment is on the rise, but most workers are still employed in vulnerable form of work unpaid family self 36.4 workers employed 32.7 29 30.1 27.7 28.1 28.1 27.3 27.2 27.5 27.8 26.9 27.1 26 26.0 26.1 25.4 23.9 23.9 24.2 23.8 20.3 20.4 23.1 20.4 20.3 20.1 22.5 19.4 19.2 19.5 19.4 18.4 20.4 17.4 18.5 16.6 17.6 18.2 18.0 16.9 16.9 17.3 17.3 16.9 17.3 16.2 10.5 10.6 11.0 11.0 10.5 10.4 10.1 10.4 8.8 8.5 8.7 6.7 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 % of informal workers by sector, 2012 (fig.2.51) Low-productivity sectors tend to have higher levels of informality Source BPS Agriculture 88 Construction 55 Transport 53 Wholesale & retail 49 Mining 39 Manufacturing 22 Pers. service 17 Finance 8 Electricity & gas 7 INDONESIA's Rising Divide 77 Chapter 2 why inequality is rising 2014c for an extended discussion). The second is Another major issue that contributes a rigid labor market with regulations that deter the to the poor investment climate is creation of better jobs and prevent workers from the (lack of) ease of doing business switching from lower productivity firms and sectors in Indonesia. Obtaining business licenses is into higher productivity ones. very complicated, expensive and time-consuming. Indonesia ranks 114th out of 189 countries in Underinvestment in infrastructure the Ease of Doing Business index (Table 2.4; is a particular problem for firm World Bank 2014e), worse than Malaysia (18th), and worker productivity and Thailand (26th), Vietnam (78th), China (90th) and competitiveness in general in the Philippines (95th). For example, obtaining Indonesia. Investment in infrastructure in the licenses necessary to start a new business in Indonesia collapsed during the Asian financial manufacturing takes 794 days by law, although crisis and, unlike its peers, has not fully recovered actual implementation can be slower still. Within since. Annual total infrastructure investment the energy sector, the growth of which has been declined from an average 7 percent in 1995-97 identified by government as a key policy priority, to around 3-4 percent of GDP in recent years, investors report that obtaining the various permits compared with over 7 percent in Thailand and and licenses needed to establish a power plant Vietnam, and 10 percent in China over the past can take over 4 years. And it takes 101 days to get decade. Despite rising government spending an electricity connection, compared with just in recent years, Indonesia’s core infrastructure 35 in Thailand. stock, such as road networks, ports, electricity, telecommunication facilities, has failed to keep Indonesia’s labor market regulations pace with economic growth. It is estimated that are among the most rigid in the Indonesia has lost more than 1 percentage point of region. The 2003 Labor Law (Law No. 13/2003) additional GDP growth due to under-investment in significantly expanded workers’ rights, but made infrastructure, chiefly transportation (World Bank it more costly to dismiss them, with a minimum 2014c). Problems with transportation are among severance pay of at least 100 weeks of wages. the worst business constraints for manufacturing As a consequence, firms are less likely to employ firms and prohibitive transport costs undermine workers formally, especially young educated their competitiveness. Raw material producers find ones. This also makes Indonesia’s labor market themselves unable to tap growing opportunities regulations among the most rigid in the region linked to final consumer demand. It is cheaper to (Figure 2.52). Most companies respond by import oranges from China than to source them not using formal contracts or using short-term from Kalimantan. contracts. Those that do sign formal contracts face higher labor costs, as they need to deposit an accrual for severance pay in a secured account. Labor market legislation Specific requirements for regulations on temporary forms protection of permanent workers Source OECD Employment Protection index across countries colective disposal of employment against (individual) Dismissal Legislation Database (fig.2.52) (2008-10 values) 4.0 3.5 3.0 2.5 2.0 1.5 1.0 0.5 0.0 United States Singapore Canada United Kingdom Malaysia New Zealand Ireland Australia Brunei Japan Switzerland Mongolia Korea Denmark Slovak Republic Czech Republic Hungary Sweden Netherlands Finland Thailand Lao PDR Cambodia Poland Austria Philippines Vietnam Germany Iceland Italy Belgium Luxembourg Norway China France Portugal Greece Indonesia Spain Mexico Turkey ASEAN+ OECD – 30 ECA INDONESIA's Rising Divide Chapter 2.3. Why a widening gap between skilled and 78 unskilled wages is increasing inequality Consequently, hiring formal workers payment at all (66 percent), while those who do is discouraged while most workers receive payments usually receive less than they remain nonetheless unprotected. are entitled to (27 percent); only 7 percent of The legislation protects only a small number of fired workers receive the full payment workers. Most workers receive no severance (World Bank 2010c). Ease of doing business in East Asia Pacific (Tab. 2.4) Source World Bank (2014e) R e g io na l r a nk ing Paying Taxes Construction World Rank Registering Insolvency Protecting Resolving Electricity Contracts Starting a Enforcing Economy Investors Business Property Minority Borders Trading Permits Getting Getting Across Credit Singapore 1 1 2 2 2 2 2 2 1 1 2 Hong Kong SAR, China 3 2 1 4 14 3 1 1 2 2 3 Malaysia 18 3 8 9 10 3 3 5 3 5 4 Taiwan, China 19 4 5 1 7 8 6 6 4 14 1 Thailand 26 9 3 3 3 17 5 10 5 4 5 Samoa 67 5 12 7 8 21 8 14 12 13 16 Tonga 69 7 6 11 22 5 20 11 11 8 17 Mongolia 72 6 16 24 4 9 4 12 25 3 11 Vanuatu 76 17 17 18 13 5 17 7 20 12 13 Vietnam 78 14 7 22 5 5 15 25 10 7 14 Fiji 81 21 15 15 9 11 13 15 21 10 12 Solomon Islands 87 10 9 13 20 11 9 9 14 19 18 China * 90 15 24 20 6 11 16 19 16 6 7 Philippines 95 22 20 6 16 19 18 20 8 16 6 Brunei Darussalam 101 23 11 12 21 17 13 4 6 18 10 Palau 113 12 14 17 1 11 23 23 18 17 21 Indonesia * 114 20 23 16 17 11 7 24 7 21 8 Papua New Guinea 133 16 22 8 12 24 11 16 23 23 19 Kiribati 134 13 13 25 18 22 18 3 13 11 23 Cambodia 135 24 25 23 15 1 9 13 22 22 9 Marshall Islands 139 8 4 14 23 11 23 21 9 9 22 Micronesia, Fed. Sts. 145 18 10 10 23 9 25 17 19 20 15 Lao PDR 148 19 18 21 11 20 21 22 24 15 23 Timor-Leste 172 11 19 5 23 22 12 8 15 25 23 Myanmar 177 25 21 19 19 25 21 18 17 24 20 INDONESIA's Rising Divide 79 Chapter 2 why inequality is rising The minimum wage setting process has employers in manufacturing and services. At the also been problematic, discourages same time, the legislation applies to very few formal job creation and fails to workers (World Bank 2014c), since many workers benefit most workers. After a decade of are self-employed (61 percent in 2011), informal moderate increases in the minimum wage, the (54 percent), or do not have a contract (over 80 rate of increase has surged since 2010. In 2013, percent) even if they are formal, while government 25 provinces increased their minimum wage by capacity to enforce compliance is low. As we go an average of 30 percent and Jakarta increased to print, the Government has enacted Government it by 44 percent, taking it even further above Regulation No. 78/2015, which introduces a new Thailand and Vietnam, but also likely above China formula for annually adjusting minimum wages and the Philippines, making it the second-highest linked to inflation and growth in GDP. While this in the region after Malaysia. This despite the fact is progress, it still leaves scope for uncertainty that Indonesia has one of the lowest levels of in allowing further discretionary adjustments by labor productivity (Figure 2.53 and World Bank provincial governors, and the effectiveness of its 2014c). As a consequence, there is considerable implementation remains to be seen. cost uncertainty over time for labor-intensive Minimum wages in selected East Asian vietnam indonesia philippines Source World Bank (2012d and 2014c) countries (US$ per month) (fig.2.53) thailand china Malaysia 250 200 150 100 50 0 2007 2008 2009 2010 2011 2012 2013 2 . 3. 3 The widening wage gap between few skilled workers and the majority of unskilled workers is one of the main drivers of increasing inequality in the past decade Workers from richer households, who been increasing (Figure 2.54 and Figure 2.55). At are more likely to be more highly the same time, workers trapped in low-productivity, skilled and better educated, are informal and vulnerable forms of work have less benefitting from increasingly higher protection against risk and shocks, are not able wage premiums. Workers with more education to access to worker protection benefits, and earn have always received a higher wage than those lower incomes. As of August 2012, casual workers with less education (education is used here as a and self-employed average earnings amount to proxy for skill; returns to skill are likely to be even 48 percent and 65 percent of employees’ average higher since there is considerable skill variation wage, respectively, compared with 45 percent and within each education level). However, the wage 75 percent as of 2001, which could explain part of and consumption premiums for the educated have the overall rise in inequality. INDONESIA's Rising Divide Chapter 2.3. Why a widening gap between skilled and 80 unskilled wages is increasing inequality Worker wage premium over those with Household per capita consumption premium primary education or less, 2003-10 over those with head of household primary (percent) (fig.2.54) education or less, 2003-10 (percent) (fig.2.55) 100.1 97.2 2003 2010 2003 2010 82.9 71.6 41.2 39.7 36.6 31.2 20.5 17.42 17.4 15.7 SMP SMA Tertiary SMP SMA Tertiary Source Sakernas, Susenas and World Bank calculations. Worker wage premium represents how much higher wages workers at each level of education receive compared with workers with primary or less education, controlling for experience, gender, work status, location and other factors. Household consumption premium represents the same thing for per capita consumption and head of household’s education. The increasing skilled wage gap is returns to education, which is one indicator of the reflected in higher wage inequality skills that a worker has (Table 2.5). However, the and is one key reason why inequality flattening out of the wage Gini trend in the past is increasing. 40 The primary wage Gini 5 years, compared with a still rising consumption coefficient increased by around 5 points over Gini, suggests that either a factor outside of wage the 2000s, contributing to higher inequality inequality is still playing an important role, or that (Figure 2.56). In fact, by one measure, around 28 recent consumption data have been affected by percent of the increase in consumption inequality methodological changes at a time when the wage in the 2000s can be explained by increasing data methodology has remained unchanged (Box 1.1). Primary wage Gini coefficient, 2000-13 (fig.2.56) full timers full timers all all income employee all employees earners Source Sakernas and World Bank calculations. 50 45 40 35 30 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 Change in consumption Gini 2003-10 decomposed (percentage of change explained) (Tab. 2.5) K e y c h a n ges lead in g to K e y cha ng e s l e a d i ng to hi g h er in equa lity low e r ine qua l i t y Change in consumption Gini Percent of total Change in consumption Gini Percent of total 2003-10 decomposed change explained 2003-10 decomposed change explained Increasing returns to education 28 Increased endowments -28 Changing returns to sector of work 12 (e.g., urban migration, higher education, more formal work) Decreasing urban-rural gap -23 Decreasing provincial gaps -16 40 Gender wage gaps also play a role, but they have been falling. Decreasing work type gaps -8 INDONESIA's Rising Divide 81 Chapter 2 why inequality is rising Why financial and physical assets are helping the rich pull away from the rest In addition, a small number of Indonesians are benefitting from 2.4 high returns from financial and physical assets today, which in turn drives higher incomes tomorrow Internationally, income from capital The returns to some types of savings is becoming more important and and investments have been very high. income from labor less important; Since 2003, the Indonesian stock market has this is also the case in Indonesia. increased nearly 900 percent (Figure 2.59), while The income share of labor has been falling in high-end Jakarta apartments have doubled in a majority of countries, while that of capital has value over the past 6 years (Figure 2.60). This is been becoming more important (Figure 2.57). despite the fact that the rich were the hit hardest This has also been happening in the Indonesian segment during the Asian financial crisis and the manufacturing (Figure 2.58) and is likely to be slowest to recover. occurring the broader economy as well. Labor share of income, 10-year change 10 Source Karabarbounis and Neiman (2014). (percentage points) (fig.2.57) 5 CHN can usa ger Fra jpn ita GBR –5 –10 –15 INDONESIA's Rising Divide Chapter 2.4. Why financial and physical assets are 82 helping the rich pull away from the rest Labor share of Indonesian Source OECD 2012, manufacturing income (percent) reported (fig.2.58) in Zhuang, et al.Rhee (2014). 32 30 28 mid–1990's early–2000s mid–2000s Jakarta Composite Index, 1997-2014 (fig.2.59) Source JCI. 6.000 5,000 4,000 3,000 2,000 1,000 0 July – 97 July – 98 July – 99 July – 00 July – 01 July – 02 July – 03 July – 04 July – 05 July – 06 July – 07 July – 08 July – 09 July – 10 July – 11 July – 12 July – 13 Jakarta residential condominium market (fig.2.60) Source Jones Lang LaSalle 2013. 35000000 Rp per square meter 30000000 upper 25000000 20000000 15000000 middle 10000000 5000000 Lower middle 1Q07 2Q07 3Q07 4Q07 1Q08 2Q08 3Q08 4Q08 1Q09 2Q09 3Q09 4Q09 1Q10 2Q10 3Q10 4Q10 1Q11 2Q11 3Q11 4Q11 1Q12 2Q12 3Q12 4Q12 1Q13 2Q13 3Q13 INDONESIA's Rising Divide 83 Chapter 2 why inequality is rising However, only the richest stock market are theoretically subject to personal Indonesians own these assets. At most, income tax, but are not subject to withholding only 4.5 million Indonesians have direct or indirect taxes. With weak monitoring and compliance on investments in stocks and securities. About 439,000 personal income taxes, low withholding rates often Indonesians have securities accounts, 170,000 mean less tax paid. Meanwhile, for many workers, Indonesians are invested in mutual funds, and 3.6 income tax on salaries and wages is withheld by million Indonesians have formal pensions that may the employer, ensuring a degree of compliance include securities investments.41 Furthermore, for labor income. As a consequence, around only 1 percent of Indonesians have a mortgage, 95 percent of personal income taxes (around suggesting that very few are benefitting from the 20 percent of total income taxes) are collected current housing boom (World Bank forthcoming (c)). through withholding, mostly on salaries, and only 41 However, public pensions the remaining 5 percent from capital income.42 are not based on individually invested accounts, but rather Moreover, taxes raised from capital are ‘pay-as-you-go’, which income are much lower than for Households earn income not only means that public pensions do not have an exposure to the labor income, although compliance through jobs but also from financial stock market. is problematic for both. Some income and physical assets, which are highly 42 Ministry of Finance, from capital benefits from a lower withholding concentrated among the richest Realisasi APBN, Rincian Penerimaan Perpajakan. tax than labor income. For example, dividend households. The share of income generated Nonetheless, a significant withholding tax is only 10 percent (and earned by labor has been falling and the share generated portion of the labor income tax base is not subject to interest withholding is only 20 percent), lower than by capital, such as financial and property assets, withholding, for example all but one labor income tax rate and considerably has been increasing—in Indonesia as elsewhere independent professionals such as lawyers, doctors, lower than the 30 percent top marginal tax rate in the world. In Indonesia, this partly reflects accountants, and so forth, most dividend earners would otherwise be paying. the strong returns to these assets over the past which significantly reduces overall labor income tax At the same time, the significant capital gains that decade. It is largely rich households, however, compliance. have been made from the housing boom and the that have access to these resources. As discussed INDONESIA's Rising Divide Chapter 2.4. Why financial and physical assets are 84 helping the rich pull away from the rest in the Executive Summary, the richest 1 percent Furthermore, accumulated wealth own half of all the wealth in Indonesia (Figure xiii), generates even higher incomes in the which is the second-highest (along with Thailand) future, driving inequality higher. after Russia from a set of 38 countries. Moreover, Financial and physical assets are generating the richest 10 percent of Indonesians own an higher incomes for only a few wealthy households estimated 77 percent of all wealth, which is equal in Indonesia, and these households are then second-highest (along with Turkey and Hong Kong) saving this income as even more wealth. The after Russia from a set of 46 countries (Figure 2.61). share of wealth owned by the richest 10 percent This means that income from financial and physical in Indonesia increased by 7 percentage points assets benefits fewer households in Indonesia than between 2007 and 2014, in the top-10 of 46 almost anywhere else. countries over that period (Figure 2.62). These increased financial and physical assets today generate even higher incomes tomorrow. Share of total wealth held by richest 10 percent of households (percent) (fig.2.61) Source Credit Suisse (2014) Russia 84.8 Turkey 77.7 Hong Kong 77.5 Indonesia 77.2 Philippines 76 Thailand 75 United States 74.6 India 74 Egypt 73.3 Brazil 73.3 Peru 73.3 Switzerland 71.9 Argentina 71.8 Malaysia 71.8 South Africa 71.7 Chile 68.9 Sweden 68.6 Denmark 67.5 Israel 67.3 Czech Republic 67.3 Saudi Arabia 66.4 Norway 65.8 Colombia 65.2 Mexico 64.4 China 64 Austria 63.8 Korea 62.8 Poland 62.8 Taiwan 62 Germany 61.7 United Arab Em irates 60.4 Singapore 59.6 Ireland 58.5 Portugal 58.3 Canada 57 New Zealand 57 Greece 56.1 Spain 55.6 Netherlands 54.8 Finland 54.5 United Kingdom 54.1 France 53.1 Italy 51.5 Australia 51.1 Japan 48.5 Belgium 47.2 INDONESIA's Rising Divide 85 Chapter 2 why inequality is rising Change in share of total wealth held Source Credit Suisse (2014) by richest 10 percent of households (percentage points) (fig.2.62) So uth Afr ica Nether land s New Zealand Saud i Ar abia Switz er land Philippines Singapo r e Co lo mbia Malaysia Ger many Denmar k B elg ium F inland No r way Canada Swed en Po land F r ance Mex ico Japan Italy -6.9 -0.5 -0.5 -2.5 -5.2 -4.5 -4.5 -6.4 -2.2 -0.4 -4.2 -5.3 -0.3 -3.3 -1.5 -1.2 -1.4 -7.1 -1.1 -1.1 -3 China 15.4 Egypt 12.3 11.9 11 9.6 8.7 8.1 7.7 7.7 6 4.9 4.6 3.9 2.6 1.5 1.3 1.3 1.3 0.8 0.6 0.5 0.3 0 0 0 Ho ng Ko ng Tur key Ko r ea Ar gentina Ind ia Russia Taiwan Ind o nesia Isr ael Cz ech Republic B r az il United Kingd o m Spain Chile Gr eece United Ar ab Emir ates Austr ia Thailand Po rtugal Ir eland Per u Austr alia United States High wealth concentration, even performance on international indices of corruption, when fair, can have negative such analytical narratives may well be relevant. consequences for inequality, in However, this is an issue requiring far more research. terms of underinvestment in human capital and elite capture of political Finally, the commodities boom may and economic institutions. Even have contributed to rising inequality without illegal or unfair accumulation, a high in the 2000s, but does not explain all concentration of wealth might be bad for two of the increases in inequality. If the reasons. First, it transmits unequal opportunities commodities boom had been the main driver of across generations, both in terms of greater increasing inequality in Indonesia then, given financial resources and their earning ability, as its apparent end, concerns that it will continue well as facilitating greater investment in the human increasing might be lessened. However, inequality capital of the children in wealthier households. rose only moderately in the 1970s despite another Second, high wealth may facilitate the capture of commodities boom, in the capital-intensive oil and policies and institutions. For example, the wealthy gas sector (therefore concentrating the benefits may use their financial and political influence to on relatively few). With the recent commodities make tax rates on capital lower than labor, or boom being both less concentrated than oil and subvert the legal process to avoid prosecution for gas, as well as occurring in the context of a more corruption. North, Wallis, and Weingast (2009), decentralized and diffused rent-allocation system, for example, describe “limited access orders” in there are reasons to believe that the impact of the which an elite-level bargain is reached whereby 2000s commodities boom on inequality would economic rents are divided up as a means to have been no larger than during the 1970s boom, maintain stability and limit violence. To protect which saw the Gini only 4 points higher at the rents the elite must restrict access of non-elites height of the boom in 1978 (Hill 2000). While many to the economic and political playing field. mineral extractives are capital- rather than labor- Similarly, Acemoglu and Robinson (2012) describe intensive sectors, much of the boom in the 2000s “extractive” economic and political institutions was in estate crops, such as palm oil, rubber and that function to concentrate the rents from the cocoa, as well as coal, which are labor-intensive economy into the hands of a small elite, and raise industries. Moreover, inequality had begun to rise barriers to entry to economic competitors, thereby in the mid-1990s and again in the early 2000s, well eliminating the possibility of “creative destruction” before the second boom started in around 2003 in the economy. Given the high concentration (see Box 2.7 for further discussion). wealth in Indonesia and its consistently poor INDONESIA's Rising Divide Chapter 2.4. Why financial and physical assets are 86 helping the rich pull away from the rest B o x 2 .7 The rise in inequality began before the period between 1999 and 2003, during Increasing 2000s commodities boom and is likely to continue despite its apparent end. the recovery from the Asian financial crsis but before the beginning of the inequality: The Gini coefficient had begun to rise commodities boom (everyone was not just the between 1993 and 1996 after a long hit during the crisis, but the rich more period of stability. This is reflected in than the poor, which is reflected in the commodities the upward sloping (pro-rich) pattern downward-sloping GIC). That is, there of growth in household consumption was upward pressure on inequality boom at the national level over this period before the commodities boom; to the (Figure 2.63), where the rich enjoyed extent the factors driving it then are still better growth than the poor or those in active, inequality is likely to the middle, as can also be seen in the continue increasing. Growth incidence curve, 1993-2014 (annual real per capita consumption growth by household per capita consumption quintile, percent) (fig.2.63) 2 1993 – 1996 –1 1996 – 1999 5 1999 – 2003 1 –2 4 0 –3 3 –1 –4 2 –2 –5 1 –3 –6 0 1 2 3 4 5 6 7 8 9 10 1 2 3 4 5 6 7 8 9 10 1 2 3 4 5 6 7 8 9 10 5 2003 – 2007 5 2007 – 2010 4 4 3 3 Source Susenas and World Bank 2 2 calculations. 1 1 Note All growth is real, deflated by the ratio of the national average poverty line in 0 0 a fixed year over the local poverty line for 1 2 3 4 5 6 7 8 9 10 1 2 3 4 5 6 7 8 9 10 the given year. However, there are key differences New Order was in equality-enhancing oil and gas windfalls were channelled between contexts of the oil and gas sectors. The rice sector performed back into development projects and boom of the 1970s and the more strongly; the food crops sector tends employment-generation schemes in diverse commodities boom of the to be associated more inherently with rural areas, as well as through a major 2000s, which need to be considered more even distributions of income emphasis on education and literacy. when thinking about inequality. Hill and wealth due to the technologies Large investments in infrastructure (2000) identifies a number of factors employed, cultivation processes and assisted poor farmers and increased behind the relatively good record predominance of smallholders. In personal mobility and consequently on distribution in the 1970s and addition, growth of export-oriented, employment opportunities. 1980s. A number no longer apply labor-intensive manufacturing also in the new Indonesia. First, much tends to promote more equal growth of Indonesia’s growth under the (World Bank 1993). Second, much of the INDONESIA's Rising Divide 87 Chapter 2 why inequality is rising 2.5 Why shocks make it even harder for many to catch up Poor and vulnerable households are also affected more by shocks in life, which can prevent them from climbing up the economic ladder There are many shocks that can However, many Indonesians lack the affect household resources and formal mechanisms to deal with incomes. There are many risks in life, and they these shocks. Many Indonesians lack health can affect everyone, from the individual and insurance (Figure 2.64) and few have pensions. household, up to the community, national and even Civil servants and the wealthy have access to international level. Households can be affected health and employment insurance and pensions, by economic, health, social and political shocks, and the Government previously ran a social as well as natural disasters. Moreover, an aging assistance program that waived health fees for population is more prone to non-communicable individuals from poor and vulnerable households diseases (NCDs), meaning the incidence of health (Jamkesmas). In 2014, the goal of universal health shocks is likely to increase (World Bank 2014a). coverage began to be implemented under the These shocks can reduce household income National Social Security Law (SJSN). Around 90 through a number of channels. They can affect the million poor and vulnerable Indonesians have underlying assets that generate income; a natural their premiums covered by the Government as disaster might destroy the livestock or equipment part of Jaminan Kesehatan Nasional (JKN, or used to make a living. They can reduce the income national health insurance). However, there are tens that comes from these assets; a drought might of millions more Indonesians who are informal make a harvest meager. They can also reduce workers are not currently covered. With coverage how far that income goes in the case of food price depending upon contributions, expansion in shocks. And they can reduce tomorrow’s income coverage to these households may be years by depleting today’s assets (for example, selling away, despite the fact that every year one in 20 a sewing machine to pay for hospital care) or by Indonesians faces catastrophic health costs that preventing accumulating assets for the future (for represent 5 percent of their total consumption and example, lack of income due to losing a job). one in 10 face costs equivalent to 10 percent of their total consumption (Bredenkamp, et al. 2011). INDONESIA's Rising Divide Chapter 2.5. Why shocks make it 88 even harder for many to catch up Access to health insurance (percent) (fig.2.64) Access to pensions (percent) (fig.2.65) 41.2 49.4 50.0 44.9 6.2 2.4 0.9 0.5 Poor vulnerable Emerging consumer Poor vulnerable Emerging consumer consumer class consumer class class class Source: Susenas and World Bank (forthcoming (a)). Note: The poor are under the national poverty line, around PPP US$1.30; the vulnerable are under 1.5 times the poverty line, around US$1.90; the emerging consumer class are under 3.5 times the poverty line, around US$4.50; and the consumer class are above this. See World Bank (forthcoming (a)) for details. Moreover, even when the poor and those services (Figure 2.66). While it is too early vulnerable are technically covered to evaluate JKN, the lessons from Jamkesmas, by social security schemes, they may which has been incorporated into JKN as the not be benefitting. Not only are many non-contributory component for the poor and millions of Indonesians not covered by JKN, vulnerable, may be relevant. This is because “on but even those who are covered may not be balance, the effect of the program on protecting receiving the same level of protection as richer the poor, both in terms of promoting health care households. Universal health coverage is not just utilization and in terms of reducing the impact of about coverage of the population, but also about out-of-pocket payments, is not as large as one adequate health services and user affordability of might expect given the generosity of the benefit The three dimensions of universal World Health health coverage (fig.2.66) Report, WHO 2010. Direct costs proportion of the costs covered Reduce cost sharing and fees include other services Current Extend to pooled non–covered funds Services: which servicess are covered? Population: who is covered INDONESIA's Rising Divide 89 Chapter 2 why inequality is rising package” (Bredenkamp, et al. 2011). First, many times of shock, they use informal ones. Usually, poorer beneficiaries do not know what services this means turning to family and friends. However, their health insurance entitle them to and are often this does not provide enough support to fully therefore unlikely to make use of it (World Bank cope, and can be impossible when a shock hits an 2012a and 2012d). Second, limitations on service entire community, such as a natural disaster. When availability, especially in poorer areas, mean that informal borrowing is not enough, households may they cannot always use their insurance (World resort to steps that reduce their future income, Bank 2012a, 2012d and 2014a). As a consequence, such as selling productive assets or pulling poorer and informally employed households may children out of school.43 not have the same effective access to nutrition and health-related investments in human capital (while In addition, prices have risen faster health care utilization rates are higher among for the poor and vulnerable than Jamkesmas beneficiaries than the uninsured, out- for other households, meaning their of-pocket health care costs are the same per capita standard of living is falling even and as a share of total consumption; Harimurti et further behind. Between October 2007 and al. 2013). Universal health coverage is an important December 2013, prices for the average consumer policy step in protecting all Indonesians, but its increased by 144 percent (Figure 2.67). However, effectiveness will depend upon implementation. the price for goods and services used by the poor increased by 161 percent over the same period. 43 For a detailed exploration of Instead, people often rely on friends This is driven primarily by high food price inflation, the risks households face and the mechanisms they use to and family, which can be inadequate, which comprises the majority of poor household cope, see World Bank (2015c) or take steps that inadvertently consumption. Food prices for the poor rose by 175 Risk and Informal Risk reduce future earnings. When people do percent during this period, while non-food prices Management among the Rural Poor in Indonesia. not have access to formal coping mechanisms in for the poor rose by only 138 percent (Figure 2.68). CPI and CPI for the poor, 2002-13 (fig.2.67) CPI poor (food) and CPI poor (non-food), 2002-13 (fig.2.68) SOURCE World BPS and World Bank. SOURCE World BPS and World Bank. 200 120 Poor c pi P o o r cp i F OOD 100 150 80 100 60 40 cpi 50 20 P o o r cp i NON– F OOD 0 0 Jan-02 Jan-03 Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 Jan-10 Jan-11 Jan-12 Jan-13 Jan-02 Jan-03 Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 Jan-10 Jan-11 Jan-12 Jan-13 INDONESIA's Rising Divide Chapter 2.5. Why shocks make it 90 even harder for many to catch up Poverty and vulnerability rates in Indonesia, 2014 (percent) (fig. 2.69) 11.3% 26.9 % ( 6 8 m i ll i o n ) ( 2 8 m i ll i o n ) v ul n e r a bl e poor 0 5 10 15 20 25 30 35 40 Source Susenas and World Bank calculations. With vulnerability high, small Proportion of poor who were poor Source Susenas shocks can easily reduce incomes. the year before (fig. 2.70) panel While 28 million Indonesians live below the 2008-10 and World Bank poverty line, many more—a further 68 million—live calculations. on less than 50 percent above it (Figure 2.69). As a consequence, small shocks can easily send the vulnerable into poverty; in fact, around half of the poor each year were not poor the year before (Figure 2.70). 44% Meanwhile, richer households can better withstand these shocks and 56 % NE W LY P OOR EXIS T ING P OOR tend to stay rich. Many Indonesians climb out of poverty and vulnerability, while many more fall into poverty. Of the poorest 20 percent of Indonesian households by income in 1993, two- thirds were in a richer income quintile 14 years later in 2007 (Table 2.6). Thirty-six percent climbed into the second quintile, 19 percent into the third, and a small number into the richest two quintiles. Household income mobility Of the households in the middle three income matrix, 1993-2007 (tab. 2.6) quintiles (Q2-Q4), many households climbed into a higher income quintile (41, 23 and 21 percent, 2007 income quintile respectively). At the same time, many fell into Q1 Q2 Q3 Q4 Q5 a lower income quintile (31, 50 and 52 percent, 1993 Income Quintile respectively). It is only the richest 20 percent of Q1 37% 36% 19% 6% 2% households in 1993 that had a better-than-even Q2 31% 28% 19% 14% 8% chance of staying there: all other quintiles had a Q3 23% 27% 28% 13% 10% 26 to 37 percent chance of staying in the same place as 14 years earlier; the richest quintile had a Q4 12% 18% 22% 26% 21% 56 percent chance. A key driver of this outcome is Q5 8% 8% 11% 18% 56% that the rich are better able to protect their assets and income from shocks, both protecting income Source: Indonesian Family Life today, as well as income tomorrow, reinforcing Survey and World Bank calculations. future inequality. INDONESIA's Rising Divide 91 executive sumary INDONESIA's Rising Divide How Inequality Can B e Addressed Inequality in Indonesia depends upon households’ human and financial resources, and how much those resources earn. Based on the income-generating asset model used in this report, we can gain an overall understanding of how the drivers explained in the previous section have led to increasing inequality (Table 3.1). 3.1 . 3. 3. 3. 5. Improving local Ensuring protection Implementing service delivery from shocks policies that have 97 111 broad-based support while 3.2 . 3.4 . communicating the Promoting better The right fiscal importance of those jobs and skills policy that do not 107 117 125 93 Chapter 3 How Inequality Can Be Addressed Drivers of inequality, based on the income-generating asset model (tab. 3.1) Human Capital Physical and Financial Capital Household Resources Ineq ua l i ty R e d u ci n g I n e q ua l i ty I n cr e a s i n g Access gap between rich Wealth is becoming more and poor has been closing concentrated among the Quality gap remains, reducing richest 10 percent impact of closing access gap Returns to Household Ineq ua l i ty I n cr e a s i n g I n e q ua l i ty I n cr e a s i n g Resources Gap between skilled and unskilled Returns to capital have been significant, wages widening accessible by relatively few Impact of Shocks Ineq ua l i ty I n cr e a s i n g N e ut r a l Rich households are better able to Rich households are more affected prevent shocks (e.g., preventative by financial crises because they health, less manual labor), and own most of the assets (e.g., Asian have the assets or insurance to financial crisis). However, non-rich cope this shocks if they occur. Poor households may be less able to households may be more prone cope with natural disasters, and to shocks, and need to resort more likely to sell productive to reducing key expenditures assets in times of health or (education, health) or pulling unemployment shocks. children out of school to work. However, high and rising inequality 3.3). This indicates that rising inequality is not an is not inevitable; regional neighbors unavoidable byproduct of rapid growth. In fact, have grown without increasing some countries, such as Brazil, have been able disparity between the rich and the to slow and eventually reverse rising inequality poor. While inequality has been rising quickly through a planned policy approach (see Box 3.1). in Indonesia, economic growth in Thailand and Consumption growth of the poorest 40 percent in Vietnam over a similar period in the 2000s was Brazil during the 2000s was over four times higher shared relatively similarly by the rich, poor and than that of the richest 10 percent (Figure 3.4). those in the middle (Figure 3.1, Figure 3.2, Figure Growth incidence curve, Thailand 2000-06 Growth incidence curve, Thailand 2006-10 (fig. 3.1) (fig. 3.2) growth rate in 7 6 mean GIC GIC 6 4 5 2 4 95% Confidence interval 0 95% 3 growth Confidence rate in interval mean 2 –2 0 20 40 60 80 100 0 20 40 60 80 100 Source: World Bank using household socio-economic survey data. INDONESIA's Rising Divide 94 Growth incidence curve, Vietnam 2004-12 (fig.3.3) Growth incidence curve, Brazil 2001-09 (fig.3.4) SOURCE World Bank calculations using SOURCE World Bank (2012e). household socio-economic survey data (World Bank 2014g) 11.78 pe rce ntile growth 8 2004 – 12 7 8.3 Ac tua l g r owt h r at e ( % ) 6 7.45 6.69 5 me an 6.06 growth 5.63 4 2004 – 12 4.79 3 3.86 2 2.89 1 1.61 0 0 10 20 30 40 50 60 70 80 90 100 income percentile 1 2 3 4 5 6 7 8 9 10 Inequality can be tackled through investment climate and a more flexible policies that reduce the impact regulatory approach. of factors outside an individual’s control from affecting their • Section 3.3: Ensuring protection from shocks: outcomes. Not all inequality needs to be Government policies can reduce the frequency addressed; the Government should aim to address and severity of shocks, as well as provide the inequality that arises due to factors outside an coping mechanisms to ensure that all households individual’s control, while leaving inequality that have access to adequate protection from shocks rewards individuals for hard work, risk-taking and when these do occur. innovation. To do this, policymakers have a range of instruments at their disposal. They should • Section 3.4: The right fiscal policy: Spending use tools that both address the main drivers of in the right areas allows a government to create rising inequality previously identified and that are more equal opportunities for the future and feasible (Table 3.2). The remainder of this report better jobs now. How it funds this spending can focuses on the main policies required to reduce also affect inequality today, as well as potentially inequality, both now and in the future. address some unfair aspects of wealth concentration. • Section 3.1: Improving local service delivery: A key to a better start for the next generation • Section 3.5: Implementing policies that have is improved local service delivery, which can broad-based support while communicating the improve health, education and family planning importance of those that do not. Most of the opportunities for all. recommended policies in Section 3 have broad- based public support as a means to tackle poverty. • Section 3.2: Promoting better jobs and skills: The Government should not be afraid to pursue Today’s workers who had an unfair start can these policies. At the same time, an effective still improve their skills. When they do, the communications strategy will be needed for the Government can help to make sure there are small number of policies that do not better jobs available through a more conducive have much support. INDONESIA's Rising Divide 95 Chapter 3 How Inequality Can Be Addressed Drivers of inequality,based on the income- generating asset model (tab. 3.2) Driver of inequality Possible tools to address it Gap in opportunities • The right fiscal policy (spending on services) to access health and • Improving local service delivery (health, education, family planning) education • Increased investments in infrastructure Gaps in wages and • The right fiscal policy access to skilled jobs • Promoting better jobs and skills • Increased investments in infrastructure Shocks • Ensuring protection from shocks • Increased investments in infrastructure Gaps in access and • The right fiscal policy (taxation reform and enforcement) return to financial • Supporting policies (reduce corruption) assets B o x 3 .1 How Brazil reduced inequality 44 Brazil was effective in reducing average in the Latin American region, a number of relevant lessons to be inequality in the 2000s, albeit from a which also saw declining inequality learned on how inequality can be very unequal starting point. Between over the 2000s. reduced. Brazil resembles Indonesia 2001 and 2009, Brazil’s income Gini in a number of ways: it has a large, coefficient fell by 5 points, from 58.8 With Brazil having many similarities natural resource-based economy that to 53.7.45 This was a greater fall than to the Indonesian context, there are has enjoyed strong growth over the Gini coefficient in Brazil and Latin Source World Bank (2012e). America (fig.3.5) 0.60 0.588 0.583 0.58 0.576 Brazil 0.566 0.564 0.56 0.559 0.548 0.542 0.537 0.54 0.52 l at i n a m e r i c a 0.50 (17 countries) 0.48 0.46 0.44 0.42 0.40 2001 2001 2001 2001 2001 2001 2001 2001 2001 44 This summary is based on World Bank (2012e), Inequality in Focus. 45 Income Ginis are higher than consumption Ginis because rich households save more income, meaning consumption is more equally distributed than income. The Indonesian income Gini was 6.4 points higher than the consumption Gini, based on the average difference for the three years when both income and consumption Ginis were collected in Indonesia (1984, 1990 and 1993). 96 2000s; it has a highly decentralized to falling inequality. Nearly half of strong mandate from the President political system; it has already made all government spending is social himself; (iv) new major policy proposals the transition to become an upper spending, including cash transfers, in all ministries and agencies are middle-income country as Indonesia health and education. An important examined for possible effects on is in the processing of now doing; and role in reducing inequality was inequality; and (v) key policies and it suffers from high income inequality played by a large expansion in social programs aiming to reduce inequality and inequalities of opportunity. Given assistance spending. Increased are well-designed, funded and this context, the four drivers behind contributory and non-contributory implemented. falling inequality in Brazil should be of government transfers accounted interest to Indonesia: (i) macroeconomic for around 30 percent of the Gini stability; (ii) an expansion of primary reduction between 2001 and 2009. and secondary education; (iii) pro-poor Most important was the expansion of social spending; and (iv) an expansion Bolsa Familia, Brazil’s conditional cash of social assistance. transfer program, similar to PKH in Indonesia. Unlike PKH, which covers Growth incidence curve for Brazil, Macroeconomic stability and economic only about 5 percent of households 2001-2009 (fig.3.6) growth have benefitted the poor. in Indonesia, Bolsa Familia has grown Since the poor do not have access to to cover 25 percent of Brazilian r a t e o f a n n u a l g r o wt h ( i n % ) the financial instruments that would households, and is viewed as the most protect them from inflation, a stable cost-effective contribution in reaching macroeconomic environment that the poor and reducing inequality. 11.78 Source: keeps prices low has benefitted the Other programs such as Beneficio de World Bank poor and vulnerable in Brazil. At the Prestacao Continuada (non-contributory (2012e). same time, strong economic expansion pensions) provide greater benefit has driven job creation, allowing poorer levels than Bolsa Familia, but play less 8.30 households to earn better incomes. of a role in reducing inequality, while 7.45 generous formal and public sector 6.69 Expansion in primary and secondary social security programs have been 6.06 5.63 education has changed the labor force highly regressive. 4.79 profile. Brazil’s inequality in labor 3.86 2.89 income had been driven in large part As a consequence of these policies, 1.61 by inequality in education. Brazil began poorer Brazilians saw the highest a concerted policy effort to expand increases in income over the period. education for poorer households. This Average income growth for the poorer expansion was highly successful; in half of the Brazilian population was 1993, a child of a father with no formal above the national average, and education would complete four years particularly benefitted the poorest, of schooling, whereas now students whose annual average per capita complete 9-11 years, regardless of income growth of nearly 12 percent was parents’ education. As more workers twice the national average and 10 times become skilled, they benefit from that of the richest 10 percent. higher wages. At the same time, this means there are fewer unskilled The Brazilian case illustrates that workers. With economic growth significant reductions in inequality also increasing demand for unskilled are possible. It is clear that Indonesia workers, unskilled wages increased can go beyond slowing the increase as well. It has been estimated that in inequality, and can actually begin 1 2 3 4 5 6 7 8 9 10 the falling wage differences between to reduce inequality itself, provided decile skilled and unskilled labor represents that: (i) it becomes a key government two-thirds of the fall in inequality. priority; (ii) a coherent and explicit Av e r ag e o f i n c o m e p e r strategy is developed; (iii) accountability c a p i t a g r o wt h r a t e s 5.91% A move towards more pro-poor social for overseeing and implementing this spending, and a significant expansion strategy is a key responsibility for a in social assistance, also contributed senior government minister with a 97 Chapter 3 How Inequality Can Be Addressed 3.1 Improving local service delivery, particularly for health, education and family planning Improving the quality of education Key policy actions can underpin and health-related services requires improvements in all areas of local overhauling the current system for service delivery. Local service delivery can delivering services through local be improved by building the capacities of local governments. The delivery of services and government to deliver services, moving towards infrastructure in a country as vast and dispersed a more performance-based transfer system and as Indonesia requires the active involvement of providing the tools for citizens to monitor local local governments and communities. However, service delivery. Some priorities for improving more than a decade after decentralization, and local service delivery that cross sectors include: despite significant increases in decentralized changes in the way central budgeting allocations public spending (about half of total government are made; changes in the incentives local spending), the quality of services remains budgeting face; incentives for achieving local persistently low and unevenly distributed delivery standards; and increased demand for across regions. The problem is that most local public accountability. In particular, we look at how governments do not have adequate capacity to this might be achieved in health, education and deliver services, nor are they accountable for family planning. results to the central government and their citizens. 3 .1 .1 A healthy start for children Ensuring all children receive is the most a fair start in life through important step quality health care Ensuring good health for all a healthy start are: children means better equipped and I. Addressing the financing of health facilities to staffed facilities, accessible by all, ensure adequate access and equipment; and demand for their services by II. Ensuring a supply of sufficient and competent those who need them most. The three health workers, with greater distribution to main actions required to make sure all children get disadvantaged areas; and INDONESIA's Rising Divide Chapter 3.1. Improving local service delivery, 98 particularly for health, education and family planning III. Generating greater demand for health spending at around 5 percent of GDP (Figure 3.7). What is services from those who need them most. The high out-of-pocket spending in Indonesia needed is not means health shocks impact inequality not only Indonesia’s public health spending— indirectly through reduced access to better just greater one of the lowest in the world — health, but directly through households falling into spending, but needs to increase substantially, as is poverty when illness strikes. The administration also better the plan in the 2016 budget, but with of President Joko Widodo has increased the spending a greater emphasis on primary health health budget in 2016 to 5 percent of total state care. 46 Until recently, Indonesia had the fifth- spending. However, much of this increase is lowest health spending to GDP ratio out of 188 devoted to the national health insurance system countries, at 1.2 percent of GDP, and relatively high (Jaminan Kesehatan Nasional, or JKN). This out-of-pocket health spending as a percentage currently skews spending towards large hospitals of total health spending. Most countries that have in the major cities, which tends to benefit richer reduced out-of-pocket health spending below households more, whereas greater spending on the WHO’s recommended target of 15 to 20 primary health care would be more pro-poor. percent have done so with levels of public health Public health spending (percent of GDP) and out-of-pocket spending Source: World Development 46 This section contains the Indicators and World Bank key recommendations for (percent of total health spending) internationally (fig.3.7) (2014a). improved health financing and delivery from World Bank (2014a). 70 Myanmar Cambodia 60 Sri Lanka Philippines 50 Indonesia Vietnam 40 Lao PDR Malaysia Korea 30 China Fiji 20 Japan Thailand Papua New Guinea 10 0 2.5 5 7.5 10 12.5 15 INDONESIA's Rising Divide 99 Chapter 3 How Inequality Can Be Addressed Changes in real health expenditure (percent, Source Changes in real health expenditure (percent, Source Ministry of Ministry of 2003-11) and change in immunization Finance 2003-11) and change in immunization Finance coverage (percent, 2003-11) (fig.3.8) and BPS, as coverage (percent, 2003-11) (fig.3.9) and BPS, as reported in reported in World Bank World Bank 100 2014a. 80 2014a). Note Note Sample Sample of of 154 147 districts districts for for which which data 80 data are 60 are available available in in both years. both years. 60 40 40 20 20 0 0 100 300 500 0 200 400 600 Public health spending also needs to done successfully in countries such as Colombia. improve by making local governments Subsequent transfers can also be linked to more accountable and better able progress in closing gaps. to deliver health services on the ground. Districts have had the main responsibility Another approach is to design for delivering health services since 2001, with provider payments in a manner the rationale that decentralization would improve that supports effective service service quality by more local-level decision-making delivery. Provider payment systems in the (particularly for a country as vast and diverse as former Jamkesmas program are currently being Indonesia). However, there has been no relationship adapted for use by the Ministry of Health and between the levels and changes in district health BPJS. An analysis of potential efficiency gains spending and some key outcomes (Figure 3.8 and from the strengthening of these payment systems’ Figure 3.9, World Bank 2014a). focus on primary care and limiting any overuse of high-cost services may include: (i) analysis One approach is to use targeted of the share of insurance payments made to investments with built-in incentives. primary, secondary, and tertiary care to possibly Increased Dana Alokasi Khusus (DAK) multi-year inform benchmarking for increasing allocations to transfers to districts could be linked to measurable primary care; (ii) analysis of the rate of potentially gaps in key health services relative to basic avoidable hospitalizations for primary care- standards, such as those related to maternal and sensitive conditions; and (iii) analysis of drug child health. Districts’ contributions to DAK would prices and reimbursement relative to international be reimbursed provided districts show these benchmarks and neighboring countries. services are being provided, as has been piloted successfully in a number of provinces for DAK Reforms will need to be underpinned infrastructure transfers. by high quality data. The success of the proposed schemes relies heavily on the ability to Districts that underperform could collect regular and relevant facility-level data (in be supported, provided that the a sample of facilities representative at the district problem is a weak capacity to deliver. level, including private facilities) and ensure that If needed, the central government could consider data collected reflect national guidelines and taking over the service temporarily, as has been norms. This would help to shed light not just on INDONESIA's Rising Divide Chapter 3.1. Improving local service delivery, 100 particularly for health, education and family planning where the deficiencies lie but also why they exist. workers to disadvantaged areas are: Such data collection efforts would be independent i. Provide better information about the dynamics and, ideally, separate from routine administrative of the health workforce at the national and data monitoring, which is also crucial. If possible, subnational levels; data would also be collected from a sample of ii. Limit the recruitment of publicly-funded medical beneficiaries to ensure that service provision doctors in urban areas; is occurring as intended and that patients are iii. Modernize health workforce policies using an receiving the care they are entitled to. There are evidence-based evaluation of past policies; and other dimensions of service delivery—including iv. Strengthen not only the clinical competence of the ability and effort of providers—that capture nurses and midwives, but also compensate them higher dimensions of provision of care that could for providing clinical services in remote areas. also be assessed and improved systematically and regularly. These could include efforts to ensure Provide better information about the that the basic equipment in facilities is not just dynamics of the health workforce at available but also properly calibrated and utilized, the national and sub -national levels. and assessments made of whether or not health A total of 5,500 medical doctors, 34,000 nurses workers have the necessary skills and motivation and 10,000 midwives graduate each year. At the to provide high-quality services. same time, data on the stock of health workers report small increases per year. It is clear that Better socialization of the recently the current information does not track accurately introduced Universal Health where the health workers take up jobs; whether Coverage (UHC) is needed for local this is in the private or public sector, rural or governments, beneficiaries and urban areas; who they serve; and whether they providers. In some cases, the issue is likely not maintain their skills after graduation. In addition, one of additional resources but more to do with better information is needed regarding allied and greater knowledge of, and ongoing preparations administrative health workers and this need should for, UHC among local governments, beneficiaries be given a high priority in the future research and providers. The Government could ensure agenda and Human Resource Information that clear supply-side implications are specified System development. Finally, there is very little based on the JKN benefits package, and that information on the salaries and incomes of health this information is effectively disseminated and workers; information that is needed for a better fed into operational priorities. This would cover understanding of incentive structures. Improving the equipment, training, diagnostic capabilities, these data are key to knowing how well-served and medicines to be provided at different levels disadvantaged areas are, how to match these of care. It would also specify accountabilities for needs with new graduates, and the degree of this provision and finance appropriate referrals additional incentives that may be needed, as needed. In this regard, BPJS could consider implementing a regular and independent Limit the recruitment of publicly- accreditation process for public funded medical doctors in urban and private facilities. areas. Given the fact that more medical doctors settle in urban areas because of private practice Improving the supply, opportunities, it appears logical for the public distribution & competence of sector to emphasize the placement of medical health workers47 doctors in underserviced rural areas to increase the efficient use of public money. A number of ways have been identified to address problems of Modernize health workforce adequate, competent health workers policies based on an evidence -based everywhere. The problems of not having evaluation of past policies. Allowing enough competent health workers, particularly in dual practice, the impact of decentralization, the disadvantaged areas, has already been discussed. contracted doctors’ scheme (Pegawai Tidale 47 This section contains the The World Bank (2009) has highlighted nine ways Tetap, or PTT), which is the practice of contracting key recommendations for improved a supply of health to improve this. Of these, the most important for doctors on higher remuneration packages in workers from World Bank ensuring the adequate supply of quality health remote areas and so forth, are policies that may (2009). INDONESIA's Rising Divide 101 Chapter 3 How Inequality Can Be Addressed not have provided the impact foreseen for a encouragement and pressure, or incentives, including: variety of reasons. It is worthwhile trying different i. Better socialization of the importance of vital incentive initiatives to motivate health workers to behaviors, as well as teaching poor mothers which work in remote areas. Other countries use point services they should be receiving at Posyandus systems (Bangladesh) to allocate credits towards and Puskesmas; a future posting to a more appealing location, or ii. A reinvigorated and enhanced Posyandu cadre; require a period of working in rural and remote iii. Outreach from Puskesmas officials; areas as part of doctors’ national accreditation iv. Outreach from trusted community leaders (Australia). In the United States, where medical (tokoh), who need to be provided the necessary education is very expensive, subsidized medical messages to deliver; education is provided on condition of service in v. Outreach from NGOs; remote areas. Of course, getting the provider to vi. Explore how community groups and forums the remote area, even with a good salary, does can encourage or motivate increased utilization not entice them to provide a quality service among the poor, e.g., through PNPM-Generasi or (unless altruism is sufficiently strong). Introducing PNPM-Rural; competition was suggested by Hammer and Jack vii. Consider incentives through PKH or other (2001). However, this can be introduced only if the social assistance programs; market allows it, which is a question for doctors viii. Most vital behaviors are already required as assigned to rural areas. PKH condition; and ix. The planned expansion of PKH over time will Strengthen not only the clinical bring these conditionalities to other poor women. competence of nurses and midwives, but also compensate them for In particular, increased providing clinical services in remote professionalization of Posyandu areas. The importance of nurses and midwives cadres is needed, through improved for basic care at the community level in rural areas training quality, performance -based is evident. Studies clearly show that, in those incentives, and strong supervision areas, nurses and midwives are taking on many from Puskesmas. These cadres can visit every responsibilities beyond their skill level and without community to make sure that pregnant women legal support. Improving the skills and legalizing receive routine prenatal care, encourage mothers the practice will improve the provision of health to bring children for immunization, ensure that services in remote and rural areas. children with fevers are seen immediately for a malaria diagnosis, and other basic steps that Generating greater demand for reduce the threat of illness, as well as the high health services from those who costs of late treatment. With respect to stunting and nutrition, Posyandu cadres can play a key need them most role in ensuring effective Behavioral Change Communication (BCC), especially tailored personal Increased use of skilled birth counselling focusing on improved caring practices delivery at proper facilities, ante - for maternal care and feeding behaviors for infants and post-natal care, immunization, and young children. As shown in other countries, maternal and child micronutrient regular home visits to provide individualized intake, and effective treatment of support to caregivers are key. Posyandu training diarrhea for the poor and vulnerable pilots under PNPM-Generasi could be is needed. These activities should be promoted further scaled up. among this population through education, social INDONESIA's Rising Divide Chapter 3.1. Improving local service delivery, 102 particularly for health, education and family planning 3 .1 . 2 Ensuring all children receive a fair start Improved quality of in life through quality education education for all that Closing the quality gap in education i. Ensuring that both central and local financing is more important for reduced mechanisms give schools the money and will have the inequality than continued resources they need; greatest impact improvements in access gaps. To ensure ii. Increasing the competency of teachers on both growth that all children get a fair start in life through everywhere, and ensuring sufficient distribution to and inequality quality education means: improving access to early disadvantaged areas; and childhood development (ECD) for all; increasing iii. Improving accountability to parents through transition rates for poorer children between better information on the quality of education. school levels; and closing the quality gaps that persist despite closing access gaps. However, Improving quality by addressing it is improvements in schooling quality that will financing for disadvantaged areas most reduce inequality. Enrolment gaps between Making sure all schools have students from rich and poor households have sufficient financial resources means been closing over time, but this is not reflected rethinking the current BOS financing in the contribution of inequality of opportunity to mechanism. 48 The main mechanism for overall inequality because of a continuing quality school-level funding in Indonesia is through the gap. Reducing the role of education in inequality BOS (Bantuan Operasional Sekolah) program. will require closing this quality gap. The objectives of the program are to reduce the public’s financial burden of education in Improved quality rather than higher the framework of providing nine years of good enrolment rates is also the more quality compulsory education and to support important factor for increasing school-based management (SBM) reforms. These economic growth. The OECD (2015) objectives are designed to raise overall education analyzed two different scenarios: bringing all outcomes through three main channels: increased current students to basic skills by 2030 (closing state funding of schools and reduced burden the quality gap) and full participation in secondary on households; direct financial support to poor school at current quality levels (closing the access students; and strengthened SBM through the gap). For Indonesia, they estimated the benefits establishment of rules and responsibilities of in terms of economic growth to be around seven schools and local communities in managing BOS. times higher for closing the quality gap compared with closing the access gap. Closing the quality Significant increases in BOS funding gap: Bringing all current students to basic skills have been associated with reduced by 2030 (level 2, 420 points) would mean a 62 education costs for households percent higher GDP in 2095, 0.92 higher long-run and increased enrolment rates, growth and 14.5 percent higher discounted future particularly for poorer households, GDP. Closing the access gap: Full participation in although not commensurate with the secondary school at current quality would mean a level of funding ( World Bank 2015g). 7 percent higher 2095 GDP, 0.13 higher long-run The real value of the per-student allocation growth and 1.8 percent higher discounted future has more than doubled since the introduction GDP. Closing both gaps: a 84 percent higher 2095 of the program in 2005. In 2014, the BOS GDP, 1.16 higher long-run growth and 19 percent program provided funds to the average primary higher discounted future GDP. ( junior secondary) school of about US$10,000 (US$20,000). This seems to have initially reduced As with health service quality, the education costs faced by households and improving the quality of education increased enrolment rates. Moreover, drops in for all means improving local service household education spending directly after the 48 The discussion and recommendations for BPS delivery. The three main actions required to introduction of the BOS program were relatively come from World Bank make sure all children get a good start are: larger for the poorest 20 percent of households (2014f and 2015g). INDONESIA's Rising Divide 103 Chapter 3 How Inequality Can Be Addressed differences and inflation to ensure that all schools can meet operating standards. Indonesia is a large and diverse country and providing the same amount of per- student funding to schools in areas with high costs is unfair. At the minimum, consideration should be given to adjusting the BOS funding formula periodically for geographical cost differences and inflation. Use both the BOS formula and DAK to provide more funding to schools serving poor and vulnerable children. in Indonesia. However, the drop in education Schools serving poor and disadvantaged students costs faced by households appears to have been need additional support to ensure that they are relatively small compared with the size of the able to provide a quality of schooling similar per-student grants given to schools. While the to schools in wealthier areas of Indonesia. In analysis is only indicative, it suggests that where addition, the targeted and performance-based overall drops in household per-student spending DAK investments proposed in health could also be occurred, these were relatively small, particularly adopted for education based on at primary school, when compared with the per- district-level education gaps. student amount given to schools through BOS. Drops in household spending for the poorest Phase out the use of BOS resources to households were equivalent to around 5 percent support the ‘out- of-pocket’ expenses of the BOS grant at primary school and around 30 of poor students in favor of existing percent at the junior secondary level. The limited targeted programs. Existing guidelines on use of BOS funding to reduce charges faced by BOS allow schools to cover the education costs households is further supported by the significant of poor households. However, large cash transfer increase in discretionary resources that schools programs (e.g., Kartu Indonesia Pintar) already appeared to have after the introduction of BOS, exist that are perhaps more effective at supporting often spent on hiring additional teachers instead. these costs. While these programs require strengthening, they should be the principal way of The World Bank (2014f) recommends a reducing the direct costs of schooling. number of improvements to BOS. A number of recommendations, such as linking At the same time, BOSDA can be used BOS funding or directly to education standards to complement BOS in order to reach and reviewing the eligible items under BOS to higher quality standards, as well as provide schools with the flexibility to invest in to provide equity and performance quality enhancing inputs, are aimed at enhancing components. Local education funds (Bantuan the focus on improving education quality. Three in Operasional Sekolah Daerah, or BOSDA) need particular are aimed at strengthening the poverty to be used as a complement to BOS, rather than and equity focus of BOS: a substitute. BOS funding is designed to enable i. Adjust the value of BOS periodically to account schools to meet the national minimum service for regional price differences and inflation to standards. However, schools should aspire to the ensure that all schools can meet operating higher national education standards, and local standards; governments can use BOSDA to help them reach ii. Use the BOS formula to provide more funding these higher standards. In addition, BOSDA can to schools serving poor and vulnerable children; include equity and performance components. The and equity focus would increase funding to remote and iii. Phase out the use of BOS resources to disadvantaged areas, reflecting the higher costs support the ‘out-of-pocket’ expenses of poor of service delivery. The performance component students in favor of existing targeted programs. would provide incentives for schools for improving student performance. Recent reforms in DKI Adjust the value of BOS periodically Jakarta suggest a potential approach. to account for regional price INDONESIA's Rising Divide Chapter 3.1. Improving local service delivery, 104 particularly for health, education and family planning Box 3.2 Innovations in Recent reforms in DKI Jakarta suggest a potential approach, combining an equity improving delivery of component (rather than equal spending per person, schools in the Thousand Islands education services sub-district receive more funding because of the higher costs of service provision) and an incentive component (schools in Recent reforms in DKI the top quarter with respect to the level Jakarta show how BOSDA and increase in national test scores receive an extra allocation the following year). In can complement BOS to help addition, BOSDA (known as BOP in Jakarta) schools reach higher quality funds are being used to help DKI Jakarta reach national education standards. The standards, support schools provincial government conducted a study of the resources required to reach the in disadvantaged areas, and minimum service standards (MSS) and national encourage higher performance education standards (NES), finding that the BOS and BOP funds combined fell short of the NES (Table 3.3), and is now adjusting BOP funding to ensure that schools have sufficient funds to reach the NES. Costs and funding in DKI Jakarta to reach different World Bank (2014f). education standards (IDR ’000) (tab. 3.3) Estimated per-student needs for Current per-student allocations different standards (IDR ’000s) (IDR ’000s) MS S NES BO S BO P Total Primary schools 1,084 1,783 580 720 1,300 Junior secondary schools 1,261 2,142 710 1,320 2,030 Improvements are needed Evidence from Indonesia and globally suggests in teacher competency and a number of options for building an effective teaching force in Indonesia, including the following: ensuring good teachers reach poorer areas i. Pre-service and induction: Partly attracted by the increase in teachers’ pay, there are now 1 million Teacher competencies in general students in teacher training colleges, one-third in Indonesia need significant of the total university enrollment, and way above strengthening; evidence from current needs. Greater selectivity at entry and Indonesia and globally suggests exit (through the use of competency tests) and a number of options for building institutional accrediting can help to ensure an an effective teaching force in adequate supply of competent teachers. Indonesia. Over half of Indonesia’s teachers ii. Recruitment and deployment of competent do not reach the 60 percent level of competency teachers, particularly in disadvantaged areas: across a range of skills needed for basic Make the hiring of teachers into schools more competency. In addition, there is significant transparent and merit-based; and strengthen the regional variation in teacher competency as well. program to recruit and deploy competent teachers 105 Chapter 3 How Inequality Can Be Addressed to disadvantaged areas by combining financial working groups supported by district cadre of incentives, bonding schemes and group-based experts (proven successful for geometry in a World postings. Bank study (forthcoming b)) and ICT. iii. Professional development and support—large iv. Teacher accountability: Make use of annual payoffs in the short to medium term: Strengthen appraisal and competency test to determine the role of school principals in identifying needs career progression; use of new term contracts through annual appraisal; develop and test for public employees (P3K) for new teachers training modules, and accompanying lesson plans (including existing honorarium teachers); and tying to improve subject knowledge and teaching renewal to performance. practices; and deliver support through teacher 3.1 . 3 Revitalizing family planning to help poor households to have the family sizes they want Helping households have smaller, A number of policy recommendations healthier families will help to have already been identified to reduce inequality both directly revitalize family planning in and indirectly. We have already seen that Indonesia. Jones and Adioetomo (2014) spreading household income across smaller identify a number of strategies to revitalize family families for poorer households will help to planning, including: assisting the private sector to reduce inequality in Indonesia. However, it will better meet the needs of the its users, who make also contribute to better maternal and child up 73 percent of the population; strengthening health outcomes. Improved birth spacing allows contraceptive supply chain management; the mother’s body to recover and deliver more assisting the National Family Planning Agency nutrients, helping babies to be born at a healthy (Badan Kependudukan dan Keluarga Berencana weight. It also means that more attention can Nasional, or BKKBN) to better serve the needs be devoted to each child, helping prepare them of the poorer sections of the community when better for entering preschool. Reduced rates of the cost of contraceptives is likely to be an teenage pregnancy can decrease maternal and obstacle to use; reinvigorating the BKKBN’s child mortality rates, as well as the incidence post-partum, post-abortion and workplace-based of low birth weight. Healthier children born into family planning programs; facilitating cooperation poorer families in turn can reduce inequality between the BKKBN, local health agencies and because they have had a better start in life. local government at the district level to improve INDONESIA's Rising Divide Chapter 3.1. Improving local service delivery, 106 particularly for health, education and family planning the effectiveness of family planning programs; resulting from contraceptive use through more following a midwife-focused strategy for ensuring effective counselling and increased availability of the effective provision of family planning trained personnel. services with high quality of services; mounting a communications program through the BKKBN and Supporting later marriage would supportive local government agencies, workplaces also disproportionally benefit and schools to foster later marriage; and meeting poorer households. Since early marriage is the reproductive health needs of the unmarried more likely among poorer households, reducing through a communication program and this trend is important. Four actions include: provision of services. advocacy to politicians, officials, religious and community leaders on the benefits of delayed Of these, the ones that focus on marriage, and encouraging local government smaller household sizes and later commitment to counter under-age marriage; marriage and fertility among enforcing the current legal minimum marriage the poor will have the biggest age of 16 years old for girls; enforcing regulations contribution to addressing that keep children in school longer (currently 9 inequality. The most important policies for years, with 12 years being considered), facilitated helping poorer households have fewer, for poorer households through better targeting healthier children are: and take-up of scholarships; and IEC programs to i. Demand creation among the poor for particular parents and children on the benefits of later marriage. BKKBN programs; ii. A focus by the BKKBN on the family planning Finally, with poorer households needs of poorer households; less able to access private sector iii. Support for later marriage; and services, adequate funding of public iv. Financing the family planning program. family planning programs is critical. With family planning budgeting now a local Greater demand for family prerogative, a central agreement between the planning among the poor can be BKKBN and the Ministry of Home Affairs (which pursued through revitalized oversees local government issues) on family BKKBN communications programs. 49 planning financing is needed. Local champions of These include the Behavior Communication family planning (Satuan Kerja Perangkat Daerah Change (BCC) and Information Education and Keluarga Berencana, or SKPD-KB) need to receive Communication (IEC) programs, which would help technical assistance and local family planning poorer households to understand the benefits boards (BKKBD) need to be established in more of small family sizes through key messages such districts under existing regulations. The use of DAK as: improved mother and child health; greater (special allocation budget for national priorities) financial ability to meet the basic needs of for family planning also needs to focus less on children and invest more in their education; the infrastructure and more on operational expenses, such intergenerational gains in welfare; and reduction in as training of midwives and contraceptive supplies. poverty and vulnerability. The effectiveness of these policies More effort is then needed to will depend upon implementation. address the unmet contraceptive Many of the key recommendations of Jones needs of economically disadvantaged and Adioetomo have already been incorporated couples. In addition to communication about into the 2015-19 Medium-Term Development the use of contraceptives through a life-cycle Plan (RPJM) of the State Development Planning approach (spacing and limiting), this includes: Agency (Bappenas). A focus now is needed on making sure that information and services relating effective implementation to ensure that these to long-acting methods are available (especially recommendations are successful in reducing for limiting); providing access to contraceptive family sizes for the poorest half of Indonesians. services that are affordable for poorer households; increasing the number of midwives who are 49 Each of the following set qualified to insert IUDs and implants; and reducing of recommendations is from the side-effects and health-related problems Jones and Adioetomo (2014). INDONESIA's Rising Divide 107 Chapter 3 How Inequality Can Be Addressed Improving the skills of today’s workforce and providing them with more productive jobs The impact of improved public services will be felt in the long term. In the shorter term, more can be done to improve the skills of today’s workforce and provide workers with more productive jobs and better protection. 3.2 3. 2 .1 Creating more jobs Creating more formal, entry-level, under the following fiscal policy section, while semi- skilled jobs for the many access to finance, revitalizing manufacturing and workers in unproductive jobs would modernizing agriculture are discussed in World help to address inequality through Bank (2014c). Summarizing the World Bank (2015d), higher labor incomes for these the following section will focus on reducing the time workers. Most of today’s workforce will not be and complexity of starting a business. able to perform highly skilled (and well-paid) jobs even with post-schooling and on-the-job training. Previous attempts to improve However, they should not have to spend their entire business licensing and develop working lives in unproductive and poorly paid jobs. one - stop services for licenses have If there were more entry-level semi-skilled jobs in yielded few results, but the new the formal sector, the millions of informal and casual administration has put business workers could become more productive, boosting licensing back at the top of the economic growth, as well as earning higher reform agenda. A number of initiatives incomes, and thereby reducing inequality. were undertaken to improve and simplify licensing application processes at the national There are five keys to removing and sub-national levels during the previous existing barriers to job creation, administration, but with limited results (see World most crucially among them being Bank 2015d). A key failure has been that lack of underinvestment in infrastructure progress in creating a single point of contact for and the ease of doing business. The five investors’ license applications and an institutional key actions include: (i) improving infrastructure, setting in which inter-agency collaboration connectivity, logistics, transport efficiency; (ii) and simplification, or streamlining of licensing reducing time and procedures to start up and run processes, generally becomes easier and more a business; (iii) improving access to finance for compelling: a centralized “One-Stop Services” productive firms; (iv) revitalizing manufacturing; and (OSS) at the national level with simplifying (v) modernizing the agriculture sector. Infrastructure, application procedures for faster issuance of which is perhaps the most critical area, is discussed business licenses. The new administration has INDONESIA's Rising Divide Chapter 3.2. Improving the skills of today’s 108 workforce and providing them with more productive jobs publicly committed itself to improving the business integrated OSS. In addition, applications for licensing environment and making it easier, cheaper, processed by sectoral ministries’ and agencies’ and faster for firms to comply with regulatory liaison officers dropped in the weeks following the requirements, including a central OSS. The aim is integration of the central OSS in January. The fact that to make it possible for investors to visit only the many investors continue to submit their applications Investment Coordinating Board (Badan Koordinasi directly to the sectoral ministries and agencies, or Penanaman Model, or BKPM) to apply for licenses have delayed their submissions, suggests limited at the national level, instead of various ministries familiarity with how the central OSS works. and agencies as currently. The intended result is Achieving fully integrated licensing quick, simple, transparent and integrated licensing will require a credible reform plan services. The President has also announced and adequate resources. The current that he intends to pressure governors, district central OSS is not yet a fully integrated service. heads and city mayors to implement effective For example, investors still need to go from desk sub-national one-stop services, with possible to desk within BKPM to obtain each license and budget transfer consequences for those failing to apply for the next one in the chain, and BKPM implement the changes (World Bank 2015d). still only processes licenses for about 300 business types out of a total of 1,200. The design Initial reform momentum has been and implementation of a credible reform plan strong. BKPM has begun reforming its services will require considerable resources and strong to meet ambitious targets. An initial mapping of coordination across various agencies at both business licensing procedures for selected sectors national and sub-national levels. Special taskforces and identified potential areas for reform has been have been assigned to carry out this work and have conducted, and its online application has been already identified priority areas where revision of made mandatory, although limited pilot testing existing regulations governing required licenses has been done of the system or private sector will be needed (for example, regarding forestry familiarization with the new processes. To prepare and land use, and environmental requirements). for the launch of the central OSS in 2015, BKPM has BKPM plans to pursue regulatory simplification to worked with the relevant ministries and agencies reduce the number of steps and days required towards achieving four key milestones: (i) the for all licenses, starting with selected priority development and issuance of ministerial decrees sectors, including the electricity, labor-intensive on the delegation of authority to BKPM, and the manufacturing, agriculture, and maritime sectors. assignment of liaison officers from ministries and The second phase of central OSS implementation agencies to the central OSS; (ii) the development will include further sectors at the national level, and and issuance of ministerial regulations on standard sub-national OSS piloting will begin this year. operating procedures for all licensing processes under the central OSS; (iii) the organizational set-up BKPM will need additional of the central OSS; and (iv) the initial engagement of human resources and a reformed the private sector in the reform process. As a result, organizational set-up, and following BKPM now provides a single physical location through on high level commitments at which investors can apply for many national and managing implementation risks licenses. However, while this is a significant step will be important. New business processes forward, many challenges remain before realizing will require significant organizational changes. the goal of truly integrated investment licensing. With some staff from ministries and agencies having so far only been temporarily assigned However, there are teething to work for the central OSS in BKPM, the problems with the newly organizational set-up of BKPM, and the issue of implemented online application human resources for business licensing, requires system. Following the launch of the central OSS, careful attention if longer-term sustainability is to several implementation issues have been identified. be achieved. Moreover, the targets are ambitious Investors complain that the online application system and the systematic and sustained implementation is not reliable and lacks user-friendliness, so most of new regulatory processes, across not just continue to visit the central OSS in person to consult BKPM but all ministries and agencies, will be with staff. This raises concerns regarding BKPM’s challenging. Implementation difficulties and delays current ICT system and its capacity to support a fully could quickly come under the spotlight, and the INDONESIA's Rising Divide 109 Chapter 3 How Inequality Can Be Addressed Government will need to carefully manage the sustained and translated through the reform risks associated with the reform plan. Much now implementation strategy into new and improved depends on the extent to which high-level support processes. at all relevant ministries and agencies is achieved, 3. 2 . 2 Improving protection for low-income and vulnerable workers50 Strong labor regulations on paper of more and better jobs. In general, bi-partite deliver little protection to workers negotiations are too polarized around minimum in reality due to low compliance, wages and do not discuss productivity or training, resulting in a lose-lose scenario. With collective bargaining agreements are not common, full receipt of severance pay at only 7 percent (Figure and real wages for the poor are stagnant. 3.10) and a high rate of non-compliance with the minimum wage, even for richer formal employees The new minimum wage setting (Figure 3.11), the current regulations deter job creation process notwithstanding, achieving and switching but fail to protect most workers. a complete set of reforms across all strategic labor regulation Recent changes in the minimum wage dimensions will politically require setting process make it simpler and a “grand bargain” between employers, more certain, but the mechanism labor unions, and the Government. remains to be tested. The Government Individual reforms are unlikely to gain political recently enacted Government Regulation No. traction due to the sensitive and perceived zero- 78/2015, which introduces a new formula for sum nature of labor-market regulations. Thus, annually adjusting minimum wages linked effective reform can only be carried out with a to inflation and growth in GDP. While this is regulatory overhaul that is perceived as beneficial progress, and helps to simplify the calculation and to all parties. Broad and evidence-based social 50 World Bank (2014c) provides render the mechanism more predictable, it still dialogue should be initiated, which would set up a a detailed discussion (of which leaves scope for uncertainty in allowing further “grand bargain” for labor regulation and workers’ this section is a summary) on Indonesia’s rigid labor laws, discretionary adjustments by provincial governors. protection, to move from the largely lose-lose which impose high costs to The new process remains untested but could current situation to a win-win, where protection firms and impede formal employment and productivity still generate conflicts of interest, and leads to a and regulation are improved for all workers, not growth (p115-118). “lose-lose” scenario not conducive to the creation just a small subset of formal workers. Receipt of severance pay, as reported Source Employees receiving less than minimum wage Sakernas by workers (percent) (fig. 3.10) by consumption quintile (percent) (fig. 3.11) 7 51 % 45 C o mplia n t: full s e veran ce 37 31 27 % 22 66% P a r t i a lly c o mpl i a n t : l e s s t h a n full severance N o n - c o mpl i a n t : no severance Poorest Richest 2 3 4 qu i n t i l e Quintile Source Sakernas. Note: Predicted per capita consumption quintile. INDONESIA's Rising Divide Chapter 3.2. Improving the skills of today’s 110 workforce and providing them with more productive jobs 3 .2. 3 Reforming the skills training system to enable workers to access jobs In order to gain access to productive in particular training activities. The main role of jobs, the poor and vulnerable need the Government should be to ensure that all to be able to upgrade their skills. the elements necessary for an efficient market In Indonesia’s current skills training system, the in training provision are in place. The two main pillars of an effective skills development system elements of such a market are: (i) availability of exist: competency standards, competency-based information (e.g., quality assurance system); and training, certification, accreditation, and labor-market (ii) the setting of the right incentives (e.g., through information. However, the system does not function financing of skills training). well because the elements are not implemented properly. In addition, as mentioned in the previous An increase in private sector chapter, private sector involvement in training spending can allow public resources programs is low, with the majority of programs being to be spent on vulnerable groups. government-run. Thus, comprehensive, gradual There is a need to increase the contribution of firms reform can build on existing elements to improve to the overall cost of training, as firms benefit from the implementation of the skills training system. skilled and productive employees. If this occurs, pubic resources could be used strategically to The skills training system should subsidize and incentivize training for vulnerable become more demand -driven, with a groups, such as the poor, women, youth, and people stronger role for the private sector. living with disabilities. As employers are best placed to identify their skills needs, and will benefit most from a training Other reform elements can also be system that caters specifically to those needs, they tailored to focus more attention on should be the main drivers of the development vulnerable groups. The training system of competency standards. Employers should also should be made accessible in all provinces in utilize their facilities and expertise to play a more Indonesia and for all segments of the population. active role in training provision and A larger and more comprehensive system can allow professional certification. for a better targeting of public resources to those most in needs and ensure that locally relevant The Government should play a strong economic activities are supported by the training role in quality assurance and setting system. Specific training programs can also be incentives for the private sector. developed that cater to specific employee needs, While employers need to play a stronger role in for example, for people living with disabilities. Both the system, the role of the Government is also the regional expansion of the training system and crucial in acting as a regulator and facilitator the inclusion of vulnerable groups can contribute and, in the initial stages, a funder of the reforms greatly to decreasing inequality. INDONESIA's Rising Divide 111 Chapter 3 How Inequality Can Be Addressed 3.3 Ensuring all households have effective protection from shocks Protecting households from shocks focus here on those policies that are likely to requires action on many fronts. have the greatest impact on reducing inequality Households face shocks from multiple sources. through protecting the poor and vulnerable: Many of the policies required to address these i. Addressing high and volatile rice prices; have been covered in detail elsewhere.51 Besides ii. Strengthening social protection; and ensuring adequate health services, particularly iii. Building a permanent crisis monitoring and in poorer areas (as discussed in Section 3.1.1), we response system. 3. 3.1 Addressing high and volatile rice prices There are a number of policy areas in help them. Slowing rice production and import which the Government can promote restrictions mean that domestic rice prices stability to prevent shocks from are higher than international prices, adversely occurring. 52 One important area that affects affecting the poor; when rice prices soared the poor is food prices, especially for rice. 53 in 2005-06, the poverty rate increased by 2 The poor and vulnerable are most affected by percentage points. food price increases, given that food accounts for 65 percent of all poor household consumption Domestic rice production has (World Bank forthcoming (a)). They are particularly slowed in recent decades for a vulnerable to high rice prices, which are held number of reasons, including slow artificially high in Indonesia. Poor households mechanization, coupled with poor spend 25 percent of their income on rice alone, infrastructure and connectivity. and while some poor households do produce Total rice production growth in Indonesia has their own rice, they are usually still net consumers, slowed from between 4.3 and 5.4 percent per meaning that higher rice prices hurt rather than year in the 1960s to the 1980s to less than 2.5 51 World Bank 2014c (coping with natural disasters; see also Jha and Stanton-Geddes 2012) and World Bank (2014a), Indonesia Economic Quarterly, December 2014 (Building an effective social insurance system). 52 A continued focus on sound macro-fiscal management is key for continued economic growth: sustainable fiscal and external sector balances; the need to avoid boom-and-bust cycles; and an enhanced policy certainty and credibility to support investment. It is also needed to help to protect the poor. Without access to financial instruments to manage price risk, inflation acts as a tax on the poor. For greater discussion, see World Bank (2014c). 53 For an extended discussion on rice prices in Indonesia, their impact on the poor and vulnerable (including rice farmers), how government policies are currently exacerbating this, and what could help, see World Bank (2015d) of which this section is a summary. INDONESIA's Rising Divide Chapter 3.3. Ensuring all households have effective 112 protection from shocks percent in the 1990s and 2000s. 54 Productivity Raskin (a major social subsidized rice social has been hampered by a number of factors, assistance program) directly affect only a small including low productivity (smaller farms with share of total rice production. The small amount less mechanization), poor infrastructure and of OP released, at less than 1 percent of total rice connectivity, low levels of technology and production, likely explains why this mechanism information (such as the adoption of innovative has had no significant impact on reducing high-yielding and high-variety seeds), low prices (Kusumaningrum, et al. 2015). Perversely, agricultural research and extension spending, although the OP, Raskin and import volumes are and land administration bottlenecks (limiting the relatively low, they may contribute to rice price process of land titling that is commonly needed for volatility when forecasted stocks are low, as in for loan collateral). Poor infrastructure (irrigation, water example February 2015; traders may restrict their resources, road access to markets) and high logistics sales, waiting for price-stability mechanisms to costs also weigh on Indonesia’s rice market. be deployed. Problematic information regarding production, consumption and stocks, can Increased public spending on combine with government operations to create agriculture has failed to spur uncertainties about true rice availability, distorting production. Public spending on agriculture, the market and creating space for including rice, has increased significantly, but short-term speculation. allocations have not been effective in supporting domestic productivity growth. The ratio of public Effective rice security requires both agricultural spending to GDP in agriculture better information, and addressing increased from 9 percent in 1970-80 to 35 percent the constraints to productivity in 2009 and the agriculture share of the budget growth. Rice is Indonesia’s staple food, and the doubled from 3 percent in 2001 to 6 percent international market for rice is very thin (only 6 to by 2008. But this increase did not result in a 7 percent of total global rice production is traded corresponding rise in agricultural production, across international borders). 55 In this context, which increased by an average of 3 percent concerns over achieving secure rice supply, in between 2001 and 2009 (Armas, et al. 2010). The Indonesia as elsewhere, are valid. However, weak apparent impact of spending on productivity recent experience shows that the current price can be attributed to the poor allocation of policy mix and implementation has had limited spending; agriculture subsidies on private inputs effectiveness in achieving the stated government such as fertilizer increased by four times between objective of protecting the poor and farmers. 2001 and 2009, while public spending for irrigation Policies that have the effect of keeping rice remained flat. Research on Indonesia has shown prices high also increase poverty and distort the that spending on public goods such as irrigation domestic rice market, including by encouraging has a positive and significant impact on GDP per illegal imports, and generating wider inflationary capita growth in agriculture, while public spending pressures. While market operations can play a role for fertilizer subsidies has a negative impact in smoothing price volatility, interventions should (Armas, et al. 2010). be timely, appropriately sized and well-targeted. This will require an effective early warning system At the same time, price stabilization and reliable real-time information about prices, policies are ineffective and may stocks and flows of rice. Over the longer term, even contribute to the problem. While achieving a sustained improvement in Indonesia’s agricultural productivity and connectivity are the rice security will require increasing productivity long-term drivers of rice prices, the Government through long-term, structural improvements in the uses various mechanisms to stabilize prices in the agriculture sector. short term, including market operations (Operasi Pasar, or OP) and rice imports, both controlled by the Government’s Logistics Agency (Badan Urusan Logistik, or Bulog). OP is the main price- 54 However, poor quality data on both rice production and stabilization mechanism, while Bulog effectively consumption adversely affect proper analysis and informed has a rules-based import monopoly. However, policy decisions. See World Bank (2015d).55 World Bank 2012g, “Using Trade Policy to Overcome Food Insecurity,” in Food Prices, neither mechanisms appear to have significantly Nutrition, and the Millennium Development Goals, available stabilized prices. Together, OP, rice imports, and online, p.119. INDONESIA's Rising Divide 113 Chapter 3 How Inequality Can Be Addressed 3. 3. 2 Strengthening social protection Greater social protection will and death insurance. These matter not just for require a strong social security the poor, but also for the economically secure system. Social security not only promotes consumer class, who can be more vulnerable social and economic transformation, but it can to financial shocks than often assumed, and also help to reduce poverty, vulnerability and particularly to health shocks. inequality through helping prevent elderly poverty for workers who have to exit the workforce and Strong leadership is required for protecting against employment shocks for active implementation due to the large workers. It will also establish universal access to number of stakeholders with health care, helping all households prevent or diverging interests, the significant cope with health shocks, including government impact of these programs to the subsidies for poor and vulnerable households. social structure of the country, and the significant potential impact on This means the upcoming expansion of the state budget, the labor market social insurance needs to be designed and the macro economy. The nationwide and implemented effectively and SJSN programs will differ in both design and sustainably. 57 Universal social insurance coverage from the existing programs and will (SJSN) is legally mandated by law for health (by include a newly defined benefit pension program. 2014) and employment (by 2015) under the SJSN Law.58 To be effective and sustainable, the system For those unable to cope with shocks will require appropriate benefit levels, sound fiscal themselves or access contributory risk management, sound institutional development social insurance, stronger social and management, and non-contributory coverage assistance is needed. Social assistance, in of the poor and vulnerable, while at the same time the form of non-contributory government programs collecting contributions from those who can afford that help to protect the poor from shocks, invest to pay. Since most of the poor and vulnerable are in their human capital, and promote them out of in the non-salaried work force, it is important to poverty is, alongside social insurance, the other extend the SJSN programs to these groups. For essential component of a comprehensive social the health program, it is the "missing middle" that protection framework. is of concern, since the poor are paid for by the Government. Also of concern are the poor whose Safety nets have an immediate impact premiums are not covered due to mis-targeting. on reducing poverty and inequality. For the employment programs, the Government Safety nets enable households to make better may have to fully or partially subsidize the investments in their future to help the next contributions to the four programs for those generation escape from poverty and vulnerability. who cannot afford to pay. This is permitted but Safety nets also protect people from falling into not required by the SJSN Law. There is also the poverty, and reduce their need to rely on bad 57 This section summarizes the issue of providing income security to non-salaried coping behaviors.58 social insurance discussion on Indonesia: Avoiding the Trap workers when (or if) they retire. The SJSN pension (World Bank 2014c). program only covers salaried workers; how will Indonesia has been building and 58 Under the 2004 National Social Security Law (Law others be covered? This could be through social expanding a social assistance No. 40/2004, the SJSN Law, assistance or minimum income types of programs, framework since the Asian financial (Sistem Jaminan Sosial Nasional) and the 2011 Social through social pensions on a universal or means- crisis, but it is not yet fully Security Administrators Law tested basis, or in other ways. Nonetheless, SJSN effective at protecting households (Law No. 24/2011, BPJS Law, is a key building block for a more equal society by from shocks. Key programs include Raskin Badan Penyelenggara Jaminan Sosial). providing important protection against financial (subsidized rice for the poor), Jamkesmas (now 58 See Indonesia: Avoiding the shocks and assuring income following exit from rolled into JKN, where the Government pays Trap (World Bank 2014c) for more details. the labor force, as well as health, work accident premiums on behalf of the poor and vulnerable), INDONESIA's Rising Divide Chapter 3.3. Ensuring all households have effective 114 protection from shocks Indonesia Pintar (scholarships for the poor) and for the poor. Targeting outcomes have been PKH (a conditional cash transfer). However, there improved since the Unified Database—a registry of are a number of problems with many of the about 40 percent of the population that has been programs (World Bank 2012a, 2012b). Benefits are identified as poor and vulnerable—has been used often too little, do not reach the right people, or for social assistance beneficiary identification. are not received at the right time. Some vulnerable Further improvements, however, are required. groups are not covered, and some risks are not These include updating the Unified Database to protected against. Other programs have been capture newly poor and vulnerable households, shown to work, but are too small. Further reforms and shifting to a dynamic updating process that are needed to strengthen safety nets (see World relies on on-demand applications. Bank 2012a, 2012b and 2014c). In addition to allocating more budget for a comprehensive and Reform those programs, such as integrated social assistance system appropriate Raskin, that are costly and provide for a middle-income country, those that are most ineffective protection. Raskin has important for addressing risk and shocks include: positive potential: the consistent provision of a basic food package could protect poor households i. Improved targeting to better reach the target from food-price volatility, calorie scarcity, and population; malnutrition. However, in its operation Raskin ii. Reform of Raskin for better food security; and fails to achieve most of these fundamental social iii. Piloting of public works programs to provide assistance goals. Dilution of benefits, missing employment options in times of job loss or rice, and hidden financing burdens all reduce the underemployment. transfer values provided to target households. If serious reform remains out of reach, Raskin should Improved targeting underpins the be encouraged to focus on implementing agency effectiveness of social assistance strengths such as price stabilization. 115 Chapter 3 How Inequality Can Be Addressed Pilot a public works program, to such as fragmentation under various agencies, too address the employment risks that high a wage that displaced workers and caused are not yet covered by current social tension, and non-labor intensive works, programs. A short-term public works program, reducing the benefits available to workers. Box Padat Karya, was used in response to the Asian 3.2 discusses how a new public works program financial crisis. However, recent reviews of the might be developed in Indonesia. A number of program (e.g., World Bank 2010c) suggest that international case studies exist that provide useful it largely failed to protect the most vulnerable lessons learned, including cases from South Africa, workers due to critical flaws in program design, India, Morocco and Ethiopia. Box 3.3 A public works program for Indonesia Public works programs typically 3. Bridge to permanent employment. basis. There is also a need to expand have three primary objectives: In Bangladesh, the Rural Maintenance survey questions to better monitor program requires participating the extent of vulnerability among 1. Mitigation of covariate shocks women to attend income-generation workers. These data can feed into a (unexpected and seasonal). An and skills training. In addition, they permanent monitoring system that example: the World Bank alone must agree to save Tk 10 of the Tk 51 can detect future shocks, including helped at least 24 countries to they are paid each day to participate. wage and employment shocks. mobilize public works programs in The purpose of the program is to response to the food, finance, and create new microentrepreneurs who 2. One of the pillars of a national fuel crises of 2007-09. Pre-existing have the requisite skills and seed shock response system should be a safety nets and administrative capital to take up self-employment public works program. The framework capacity have been proven to enable in the informal sector (Hashemi and should govern when, where and how a timely response to sudden covariate Rosenberg 2006). employment generating projects will shocks in many countries. This be delivered in anticipation of a range enabled India to promptly expand its Recommendations for Indonesia of potential shocks. This could include program when the country was hit by (World Bank 2010c) the identification of triggers that will a massive drought in 1987 (Rao et al. launch public works projects or increase 1988). 1. Increasing the frequency and allocations for existing labor intensive improving the comprehensiveness of programs. For example, the National 2. Mitigation of idiosyncratic shocks labor data can help to detect shocks Community Empowerment Program (in response to a temporary or in time and accurately pinpoint (Program Nasional Pemberdayaan structural job crisis). In India, the affected workers. Protecting workers Masyarakat Mandiri, or PNPM-Mandiri) MGNREGS guarantees a certain from shocks requires collecting up-to- can channel funds to support labor- number of days of employment for date information for early detection intensive, locally-identified development anyone needing a job (self-selection). and pinpointing which regions and projects in rural areas where this has This acts as an insurance program. households are most affected. The been shown to reduce unemployment Beneficiaries are disproportionally Central Statistics Agency (BPS) can rates. Additional projects or channels poor even though the program does increase the timeliness of data while, must also be identified to provide not specifically target the poor (i.e., at the same time reducing costs, by temporary assistance to workers when poverty is not a requirement for adopting a quarterly or continuous needed in urban areas. At the same participation). survey approach that can provide time, the response system can maintain labor data on a quarterly or monthly a standing list of ongoing and planned INDONESIA's Rising Divide Chapter 3.3. Ensuring all households have effective 116 protection from shocks infrastructure projects that can quickly workers who would benefit the most 5. Appoint one single, central absorb workers during shocks in both from a second chance. The Ministry institution to be responsible for overall urban and rural areas. of Manpower should take the lead strategic leadership and monitoring in strategic planning and monitoring of the public works program. Other 3. A successful public works the performance of the implementing program features could include: program in Indonesia can include agencies. Supporting private-public systematic use of geographic targeting a skills building component to help partnerships will help to build links with to determine program locations; wages poor workers transition into gainful prospective employers and ensure set below market level for unskilled employment. New skills training that training providers survey local works so that workers will self-select programs can help to strengthen the employers to ascertain the needs of themselves into the program; female skills of poor workers who often have the local labor market. participation encouraged by modifying not had access to formal education program design elements; and or public training facilities. A new 4. In the medium term, commission labor-intensive projects selected that comprehensive training program a technical team to develop a have been identified by communities can form the second component strategic plan for the creation of a or infrastructure programs that of a national strategy to equip permanent public works program. have already been identified by workers with job relevant skills. The Include: objectives, design features, development strategy/plans to ensure program can support vulnerable and delivery mechanisms, institutional that the works created are useful and disadvantaged workers, especially arrangements and a step-by-step productive. targeting young, poor and informal roadmap. 3.3.3 Crisis monitoring and response: developing a permanent and comprehensive system Even when the right tools have been Developing a Crisis Monitoring and 59 For example, see World Bank (2010a and 2010b) for a available, Indonesia has not always Response System (CMRS) is essential detailed discussion of the effect known when, where and how to for detecting the effects of a crisis of the global financial crisis on Indonesia and the limitations respond when crises strike. In the past, and responding appropriately. 55 Even of its response. when Indonesia has been exposed to economic with the right social protection tools in place, a and price shocks, such as the 2005/06 food and CMRS is needed to make them work in times of fuel price shock, the 2008/09 global financial crisis. Such a system will allow the Government crisis, and the 2010 global food price shock, to know whether a potential shock is occurring, government responses were hampered, as a who is being affected, and where and how, and formalized monitoring and response was not in how it should respond. Such a system has three place. This meant that the Government did not components: a permanent and relatively real- know whether the effects of the crises were being time monitoring system at both the national and transmitted, through what channels, to where household levels; a pre-agreed protocol for when, and to whom. As a consequence, formulating the where and which response will be initiated; and right response was difficult. Moreover, even if pre-agreed institutional arrangements on planning, the appropriate response had been known, the coordination, funding and disbursement, and fiscal and operational protocols to enable such as monitoring and evaluation. response to be quick and effective were absent. INDONESIA's Rising Divide 117 Chapter 3 How Inequality Can Be Addressed 3.4 Aligning government taxes and spending to better address inequality 3. 4.1 Fiscal policy as a tool to address inequality, now as well as in the future Addressing inequalities of opportunity of subsidized goods and services such as fuel and and better jobs in the long run will food, health and education. The net effect of these require additional government different channels means that final incomes (after spending. Many of the policies required to all taxes are paid and all spending enjoyed) can be address inequality discussed already require more or less equal to market incomes. significant government expenditures: increased health spending and continued funding of education, Currently, fiscal policy in Indonesia greater investment in infrastructure, increased social neither significantly increases nor assistance coverage and benefits, and social security decreases inequality today. Recent for all. Aligning government budgets behind these research (Jellema et. al. 2015; Ministry of Finance priorities is one key role that fiscal policy can play and World Bank 2015) looks at what impact in addressing long-term inequalities due to factors different government taxes and spending have outside of an individual’s control. on inequality. It finds that the net changes to household income from taxes and transfers leave However, fiscal policy can also be the Gini coefficient almost unchanged; including used to address inequality in the in-kind health and education spending, it only short term. Many of the policy actions drops a modest 1 point. discussed will only have an impact on inequality in the long term, such as increased child health However, fiscal policy has been used and nutrition, better quality of education and skills in other countries to significantly development, higher labor productivity and an redistribute wealth and reduce environment that favors job creation. However, inequality. In Latin America, where inequality how overall fiscal policy is designed can impact is the highest in the world, many governments inequality almost immediately through a number of have taken conscious steps, along with other channels. The income that a household receives policy actions, to use fiscal policy in a more from wages and salaries, income from capital equalizing manner. Figure 3.12 shows how much and private transfers—its market income—can be selected countries reduce inequality (as measured reduced through taxes, excises and social security by the Gini) through different fiscal policies. While contributions, increased directly through social each country reduces inequality in a different security payments and social assistance benefits, way, all of them reduce it significantly more than or increased indirectly through the consumption Indonesian fiscal policy does. INDONESIA's Rising Divide Chapter 3.4. Aligning government taxes and 118 spending to better address inequality Reduction in the Gini coefficient through fiscal policy, selected countries (points) (fig. 3.12) So ut h Af ri ca (2 0 1 0 ) el salvad o r (2 0 1 1 ) guatemala (2 0 1 0 ) Co sta ri ca (2 0 1 0 ) In d o n es i a (2 0 1 2 ) uruguay (2 0 0 9 ) ethi o pi a (2 0 1 1 ) armen i a (2 0 1 1 ) bo li vi a (2 0 0 9 ) mexi co (2 0 1 0 ) Braz i l (2 0 0 9 ) peru (2 0 0 9 ) –2 –3 –3 –4 –4 –5 –6 –8 –10 –12 –14 –18 Source Armenia (Younger and Khachatryan 2014); Bolivia (Paz et al. 2014); Brazil (Higgins and Pereira 2014); Ethiopia (Woldehanna et al. 2014); Mexico (Scott 2014); Peru (Jaramillo 2014); Uruguay (Bucheli et al. 2014); Lustig(2014) based on Costa Rica (Sauma et al. 2014), El Salvador (Beneke de Sanfeliu et al. 2014), and Guatemala (Cabrera et al. 2014); South Africa (Inchauste et al. 2014); and Jellema, et al. (2015) for Indonesia based on Susenas 2012. 3 .4 . 2 Spending choices are likely to have the greatest influence on current inequality Indonesia has historically spent most reduced by more for the given percent of GDP on those programs and policies that spent on it than an area with a lower bar. What this least reduce inequality in the short figure indicates is that the programs that reduce 60 Richer households consume far more fuel and so benefit far term, and little on those that have inequality the most per rupiah (PKH is by far the more from energy subsidies the greatest impact. Figure 3.13 compares most effective, followed other social assistance in absolute terms, but they also have much higher market how much the Government spends in different programs such as Raskin and BSM [now called incomes, so the value of the areas, such as health, social assistance, subsidies Indonesia Pintar], as well as health) receive the subsidy as a percentage of their income (which is how taxes and education. This is indicated by the bubble least spending; social assistance in particular, and spending affect the Gini) for each area. For example, in 2012 Indonesia which is the most effective and reducing inequality, is broadly similar to that of spent 3.7 percent of GDP on energy subsidies, poorer households that use less receives the least spending overall. At the same but earn less. For education, the largest share of central government spending time, the areas receiving the most spending while richer children are outside of transfers to local governments. The (subsidies, 3.7 percent of GDP, and education, more likely to be enrolled in higher levels of education, figure also shows how much immediate inequality 2.6 percent of GDP) have no significant effect on which are considerably more was reduced by each type of spending, relative to inequality.60 Furthermore, even the spending that expensive, poorer households have more children in total, so its size; this is the Effectiveness Index (EI), which does the most to reduce inequality now, such as they consume more schooling is marked by the blue bar. The EI is a measure of on education, health and social assistance, is not through quantity, largely offsetting at each level until the inequality reducing cost-effectiveness of each as pro-poor as it is in other countries (Jellema, et al. tertiary (where the poor have spending. A larger bar means that the Gini was 2015). near-zero enrolment). INDONESIA's Rising Divide 119 Chapter 3 How Inequality Can Be Addressed Inequality reducing effectiveness (EI) and e x p e nd itu r e s ( % o f g d p ) government spending on different programs and policies, 2012 (fig. 3.13) e ff e ct iv e ne ss ind e x ( e i ) 4.3 4 .0 3.7 3 .1 2.9 1. 2 1. 2 1.1 0. 9 0.8 0.5 0.4 0.4 0. 4 0.3 0. 4 0. 2 0.0 0.0 –0.1 0.0 0.0 0.0 – 0.1 0.02 0.0 8 pkh bsm raskin energy sbsidy all taxes vat excise all in-kind health primary educ. junior secondary educ. senior secondary educ. university educ. Source Ministry of Finance and World Bank (2015). Moreover, spending that reduces can help their children to get a fairer start in life inequality now also reduces and therefore earn a better income tomorrow. inequality in the future. Not only do the Social assistance helps mothers and children to living standards of poorer households increase receive health and education services; health and today from spending on social assistance (higher education spending helps to make sure the quality incomes), health and education (reduced out- of those services is providing equal opportunities of-pocket expenditures), the same spending for these children to succeed later in life. 3. 4. 3 Closing the large infrastructure gap can reduce inequality in Indonesia by strengthening growth, stimulating job, improving access to public services, and lowering food prices Indonesia’s investment in telecommunication facilities, has not kept infrastructure has fallen behind. pace with economic growth. In real terms, the Despite rising government spending in recent infrastructure stock grew by only 3 percent years, Indonesia’s core infrastructure stock, annually in 2001-11, against 5.3 percent for such as road networks, ports, electricity, GDP growth. Slow growth in the infrastructure INDONESIA's Rising Divide Chapter 3.4. Aligning government taxes and 120 spending to better address inequality capital stock, in a context of high economic and farmers better access to markets, which in turn vehicle fleet growth, contributes to serious major will improve their productivity and ability to create gaps, congestion problems and poor logistics better work opportunities for agricultural workers. performance, seriously undermining productivity growth, competitiveness and poverty reduction Infrastructure can help to address efforts. Greater investments—and the right inequalities of opportunity by investments—in infrastructure can help to reduce improving access to government inequality in a number of ways.61 services. One-quarter of urban populations and more than half of rural dwellers have poor access Closing Indonesia’s infrastructure to transport (World Bank 2014c). This directly gap will help to sustain economic affects poorer and remote households that rely growth. Sustained growth is necessary for on road infrastructure to access family planning reducing inequality. It has been estimated, services, maternal and child health services, and however, that Indonesia has lost more than 1 schools. There is a need to increase spending on 61 The analysis in Section 3.5 percentage point of additional GDP growth due roads to ensure access to these services. At the on which type of government to under-investment in infrastructure, chiefly same time, attention must be paid and budget spending reduces inequality the most excludes the transportation. Closing the infrastructure gap allocated to road maintenance, which is typically a inequality-reducing impacts would support growth through several channels. lower priority than the construction of new roads. of infrastructure spending, As the investments are being made, the spending It is estimated that adequate subnational road which is analytically difficult to isolate. A joint World effect would support short-term growth and jobs. maintenance will require doubling the current level Bank-Fiscal Policy Office As the investments translate into infrastructure of spending (World Bank 2012f). effort, however, is underway to include infrastructure stock, private investment is crowded-in and the spending in updated fiscal productive capacity, productivity and long-term Infrastructure can also help reduce incidence analysis work. See Ministry of Finance and World growth are supported.62 This increased growth food prices, which makes a major Bank (2015). can lead to higher household incomes and difference in the lives of poorer 62 Theoretically, augmenting the stock of public capital consumption, and greater fiscal resources for households. Infrastructure investments— through investment in government spending on programs that help to particularly in roads and ports—will also bring infrastructure directly raises level the playing field for everyone. local raw material producers closer to domestic the productivity of other factors (e.g., labor, land) markets. It is currently cheaper to import oranges and stimulates economic Investments in infrastructure will from China than to source them from Kalimantan output. As shown by Barro (1990), it can increase the help to create more and better work (World Bank 2014c). Increased connectivity for long-term growth trajectory opportunities for lower- skilled remote areas and reduced logistics costs in of an economy under certain conditions, for example the workers. It will also support the type of job general will also help to reduce the high and presence of economies of creation that is needed to tackle inequality. Firm volatile rice price and other food prices that scale. There are indirect effects as well. The availability of surveys show that problems with transportation disproportionally affect the poor. high-quality infrastructure are among the main business constraints may reduce the need for for manufacturing firms, which are critical for The World Bank (2014c) includes own-provision of certain inputs such as roads, water generating job opportunities for lower-income and an entire chapter focused on the or electricity (Agenor and lower-skilled workers. Reducing these constraints need to improve infrastructure in Moreno-Dodson 2006) and support the formation of will improve productivity and competitiveness in Indonesia and how this can be done; human capital (Galaini et al. this sector. Better roads and ports will also give Box 3.3 summarizes these recommendations. 2005). Box 3.4 The previous Susilo Bambang Yudhoyono administration planned to close Improving the infrastructure gap through the Medium-Term Development Plan (Rencana Pembangunan Jangka Menengah Nasional, or RPJMN) and the Master Plan infrastructure for the Acceleration and Expansion of Indonesia Economic Development in Indonesia (Master Plan Percepatandan Perluasan Pembangunan Ekonomi Indonesia, or MP3EI). A number of policies and initiatives were introduced, including significant budget increases for capital spending and a strengthened institutional and regulatory framework for public-private partnerships (PPP). However, overall progress on infrastructure output and services on the ground was slow, due to a range of implementation and coordination INDONESIA's Rising Divide 121 Chapter 3 How Inequality Can Be Addressed challenges. The 2015 and 2016 to seek additional infrastructure cooperation initiatives and investment budgets under the new Joko Widodo financing, thanks to the low debt projects to better connect member administration included large increases level (the debt-to-GDP ratio stood at states through three types of in investment for infrastructure, funded 24 percent of GDP in 2014), which connectivity: physical, institutional, and by the savings of the 2015 fuel subsidy can be supplemented by subnational people-to-people. reform. However, disbursement of this governments’ investments and private spending has remained slow. sector financing. c. Clarify land acquisitions regulations and guidelines. There is a lack of clarity Making progress in closing the gap will b. Continue coordination and in the regulations that govern land need three main actions: engagement with ASEAN regional acquisition and the compensation to partners. These countries have landowners. This is one of the main a. Mobilize funding for infrastructure committed to implementing the ASEAN reasons behind delays in infrastructure development. In recent years, the Economic Community (AEC) Blueprint projects, particularly for toll roads. It central government has spent much less by the end of 2015. To realize this is also perhaps a key factor behind on infrastructure (less than 1 percent of goal, member states will set up trade the reluctance of the private sector to GDP) than it has on fuel subsidies (about facilitation by establishing “single invest in this sector on a large scale. A 2.6 percent of GDP). It will be important window” facilities to enhance customs revised Land Acquisition Law signed to continue and maintain recent policy data exchange, increase the use of under Presidential Decree No. 30/2015, decisions to eliminate or reduce ICT for border agencies and increase however, is expected to improve the subsidies. Also, increasing revenue transparency in border clearance clarity and transparency of the land collection could further increase the processes. There is also an ASEAN acquisition process, and strengthen public fiscal space for higher infrastructure Connectivity Master Plan that will confidence in the Government’s efforts to spending. The Government has space accelerate the implementation of advance the infrastructure agenda. 3. 4. 4 However, fiscal policy needs to remain sustainable While fiscal policy can be used to increases in revenues. The 2015 national address inequality now, it must be budget (APBN) includes significant increases in done in a sustainable fashion. Many spending, notably on infrastructure, health and Latin American countries have significantly social assistance. As this report has argued, reduced inequality through fiscal policies. these are needed increases in vital areas for Progressive taxing and spending that primarily both increasing economic growth and reducing benefits the poor and vulnerable are important inequality. However, while some of the new tools for tackling inequality. However, they must spending in these areas comes from reallocating be used in sustainable ways. When too much is fuel subsidy spending, some is funded through spent on redistribution and other social spending significant increases in budgeted revenues. If relative to revenues, the fiscal framework can these ambitious revenue targets are not met and become unsustainable. In Brazil, for example, spending budgets are, Indonesia risks exceeding cash transfers now represent 4 percent of GDP. In the legal limit of the central fiscal deficit of 2.5 addition, when social transfers are too large, this percent of GDP.63 can create a disincentive to work. For instance, cash transfers are now worth 70 percent of market Significant reforms will be required income to the poorest decile in Argentina (Lustig to increase revenues. If a “business-as- 63 Historically, however, and Pessino 2014). usual” scenario is assumed, with no significant Indonesia’s actual spending has been around 8 percent reforms on revenue policy or administration, lower than budgeted, reducing Indonesia can and should spend baseline revenue for 2015-19 is projected to stay the risk of a ballooning deficit, especially since infrastructure more on social spending, but it level at between 13.3 and 13.5 percent of GDP. disbursements have been should make sure that expansions in Without being constrained by the fiscal rule, the particularly lower than planned. spending are not based on unrealistic fiscal deficit would reach 4.6 percent of GDP INDONESIA's Rising Divide Chapter 3.4. Aligning government taxes and 122 spending to better address inequality in 2015, rising to 6.0 percent of GDP by 2019. additional fiscal space, the Government will have Additional fiscal space is needed—from 2.1 percent to dramatically cut back on the planned increases in 2015 rising to 3.5 percent of GDP by 2019—to for spending on development priorities. Box 3.4 stay within the fiscal deficit rule of 2.5 percent discusses what mix of policies might achieve this. for the central government. Without creating Box 3.5 Achieving fiscal sustainability: priority actions Additional fiscal space will have to the Government, a sustained major potentially raise additional revenues of come from a massive effort to mobilize effort to mobilize revenues is critical. 1 percent of GDP in 2016, rising to over revenue—in particular non-oil and gas Revenue policy reforms to broaden 4 percent of GDP by 2019. 64 Second, tax and non-tax revenue by improving the tax base, simplify tax structures, growth in average central personnel tax administration and compliance and rationalize tax types, and selectively spending could be tempered to grow optimizing tax policy. Relative to its revise certain rates to be in line with in line with inflation (CPI) rather than regional and emerging market peers, international levels, could help to raise at 5 to 8 percent above inflation, as Indonesia has one of the lowest ratios revenues, as well as reduce economic has been the case in recent years. of revenue-to-GDP (15.2 percent in distortions and lower administration costs. Personnel spending grew from 2.4 2014) and tax-to-GDP (11.3 percent percent of GDP in 2014 to 2.7 percent in 2014). This is not due to lower tax In addition, improving tax and non- in the 2015 revised budget. Maintaining potential; by one estimate, Indonesia tax revenue administration and central personnel spending flat in real is collecting less than 50 percent of its compliance through a more strategic, terms would free up 0.5 percent of GDP total potential tax revenue (Fenochietto risk-based approach to compliance per year by 2019. Taken together, these and Pessino 2013). With continued management, and additional efforts measures have the potential to expand moderation in oil and other commodity to increase voluntary compliance, the available fiscal space by 1.1 percent prices, revenue-to-GDP may fall to will also be critical. A comprehensive of GDP in 2015, rising to 4.7 percent as low as 13.5 percent in 2015 and package of revenue policy (including of GDP by 2019. This would result in a stay in that range in the medium term the optimization of tobacco and vehicle declining fiscal deficit over the medium under a “business-as-usual” scenario excise taxes) and administration term, eventually meeting the fiscal rule due to significantly lower revenues (including improvement of non-oil of 2.5 percent of GDP in 2018. from oil, gas and other commodities. and gas income tax, VAT and mining Consequently, and as emphasized by non-tax revenue compliance) could 3 .4 . 5 The revenue mix used to achieve fiscal sustainability can also influence inequality today Taxes are primarily about revenue as Brazil, Mexico and Uruguay, their impact on 64 In line with the IMF collection, but they can also inequality is less than that of targeted cash transfers estimates of a medium-term influence inequality directly. The or (considerably so) health and education spending target for tax-to-GDP of between 13.4 and 16.4 percent role that taxes play in a fiscal policy framework (see Jellema, et al. 2015). Nonetheless, different of GDP. IMF, 2011a, “Revenue designed to address inequality is largely to fund taxes are collected from households to different Mobilization in Developing Countries”, IMF Policy Paper. equality-promoting spending. Even in countries degrees and this should be at least considered IMF, 2011b, “IMF Country with particularly progressive income taxes, such when the Government thinks about tax policy. Report: Indonesia”, No. 11/30. INDONESIA's Rising Divide 123 Chapter 3 How Inequality Can Be Addressed The goods and services that are VAT Increasing revenue in Indonesia exempt affect both revenue and through indirect taxes can avoid a inequality. The incidence of Indonesia’s VAT— significant impact on inequality to which households pay VAT and how much—is the extent that it focuses on goods neutral across the consumption distribution. The and services that are not heavily poorest 10 percent pay around 3.5 percent of consumed by the poor. These might include: their market income in VAT, which is about the extending taxes on luxury goods and high-end same for the richest 10 percent and everyone in property (recently mooted in Indonesia), 67 as between, although tobacco excises are slightly well as increasing compliance with existing taxes; regressive (Jellema, et al. 2015).65 This is in and closing the compliance gap by addressing contrast to some other countries, where the poor transfer pricing would increase revenue to its pay far more in indirect taxes such as VAT and potential 0.5 percent of GDP from its actual 0.2 excises as a percentage of their market income percent of GDP while reducing inequality, as the than other households. 66 From Figure 3.14 it is incidence is on higher income households. 68 It clear that there are two categories of countries: also means removing VAT exemptions for those those with neutral or even progressive indirect goods and services that are not equity-enhancing. tax incidences, but for whom revenues from This could mean domestic electricity consumption indirect taxes are lower; and those with much at thresholds above that level normally used by higher revenues from indirect taxes (as a share the poor (e.g., in households with more than 450W of GDP), but where the poor are paying a much or 900W installed capacity), piped water (used by greater share of their market incomes (as high as relatively few poor) and agricultural, plantation, 30 percent in Brazil). This difference is largely due forestry, farm and animal husbandry products to the number of exemptions on basic foods and (most poor and vulnerable are agricultural laborers staples in the first set of countries. rather than farming their own land). 65 Although richer households pay more in absolute terms because their market incomes are higher. 66 This comparison includes not only VAT but other indirect taxes such as excises. Indonesia’s data in this figure include the impact of the tobacco excise, which has a higher incidence on the poor and middle than the rich, see Jellema, et al. (2015). 67 Although there is debate over whether it would be effective. For example, see http://thejakartaglobe.beritasatu.com/business/indonesia- risks-killing-golden-goose-5-super-luxury-tax. 68 World Bank estimates. Incidence of indirect taxes in selected countries Source: For Latin America see: Lustig and Pessino 2014; Paz et al. 2014; Higgins and Pereira 2014; Scott 2014; Jaramillo 2014; Bucheli, et al. 2014; Lustig et al. 2013. For (percent of market income) (fig. 3.14) Armenia and Sri Lanka, results are preliminary by Arunatilake, et al. (2014) and Younger and Khachatryan (2014). 35 % 16 % 14 % 30 % 12 % 25 % 10 % 20 % 8 % 15 % 6 % 10 % 4 % 5 % 2 % 0 % 0 % boliv ia brazil me xic o pe r u u r u g uay a r m e nia sr i l a nk a i nd o ne sia poore st de cile r iche st d e ci l e S ha r e o f g d p ( r ig ht a x i s) INDONESIA's Rising Divide Chapter 3.4. Aligning government taxes and 124 spending to better address inequality Increased corporate income and for key development priorities resource - sharing compliance would and reduce income inequality both increase state revenues and tomorrow. The concentration of wealth in reduce inequality. In addition, Indonesia the richest 10 percent of households (and most currently receives mining royalties (classified as likely concentrated in a much smaller number of non-tax revenue, or NTR), which is set as a fixed Indonesians than that) is one of the highest in the share of sales revenue. As commodity prices dataset. This indirectly increases future inequality increase, royalties as a share of profits decrease, by conferring significant advantages in life on meaning wealthier shareholders benefit most the children of rich households through better in boom times. Revenue could be increased education, health and social connections. It also from the extractive sectors (and inequality directly increases future inequality by allowing the potentially reduced) by both improving mining children of wealthy parents to enjoy income from NTR compliance, as well as by making the mining their inherited wealth, which concentrates wealth royalty regime more progressive (for example, further (and may decrease incentives for working). linking the royalty rate to prices), so the state An estate tax on inheritance could be used to collects more when profits are increasing. address this intergenerational reinforcement of inequality, although this would likely receive little Finally, an estate tax would be very public support in Indonesia currently (Table 3.4) difficult to implement but may help and compliance can be difficult to enforce, even in address the high concentration of developed countries with high wealth, raise additional revenue tax administrative capacity. INDONESIA's Rising Divide 125 Chapter 3 How Inequality Can Be Addressed 3.5 Most of the recommended policies have broad–based public support for tackling INEQUALITY Most Indonesians think something while around another 40 percent think that while needs to be done about inequality; this is difficult it is still achievable. what sort of policies will they These beliefs about sources of support? Using survey data on Indonesian’s wealth and poverty are reflected perceptions of inequality collected by LSI, the in the policies most popular for World Bank (2015a) examined how Indonesians addressing inequality. People were asked think the rich get rich, the poor become poor; what to choose 3 out of 15 policy options as the most they think about inequality; and what they think important for reducing inequality. The results are should be done about it. presented in Table 3.4. Many Indonesians think that wealth The policies viewed as most important is obtained through hard work, but for reducing inequality fall into they also think that luck and family three large groups: providing background play a big part. Some opportunities for hard work, attribute wealth to corruption. Around 45 percent providing protection from shocks of those surveyed think that talent and hard work and circumstance, and eradicating are the most important factors in becoming rich. corruption. The policies that are most often Around the same number believe external factors chosen as top priorities are social protection such as luck, family background and education programs, job creation, eradicating corruption, free and connections are more important. The other 10 education, credit for SMEs, and free health care percent think that corruption is the main driver. (Table 3.4). Job creation, credit for SMEs, and free education are all ways to provide opportunities for At the same time, while many believe people to work hard and earn a higher income. that hard work can pull people Social protection programs and free health are out of poverty, circumstances out ways to protect people from bad luck and a of people’s control (bad luck and a poor background. Finally, the high prioritization poor family background) are often of eradicating corruption shows the perceived responsible for poverty. Around 50 importance of preventing ill-gotten gains. percent believe that it is easy for people to improve their economic status through hard work, INDONESIA's Rising Divide Chapter 3.5. Most of the recommended policies 126 have broad -based public support for tackling poverty Providing opportunities for hard work, protecting people from shocks, and eradicating corruption are seen as top priorities for reducing inequality. (tab. 3.4) Question “What are the three most important policies for reducing inequality?” Policy Top 3 priority? Social protection programs (Raskin, BLT, BSM, health insurance, etc) 49% Creating more jobs 48% Eradicating corruption 37% Free education for all 30% SME credit 27% Free health care for all 17% Increasing the minimum wage 17% Infrastructure improvements (roads, power, etc) 14% More subsidies (e.g., for agriculture, fuel, etc) 14% Improving schools 10% Grants to village level (e.g., PNPM) 7% Loans for the poor (not business loans) 7% Increasing the tax on the rich 2% Unemployment insurance 2% Equitable asset ownership (e.g., for land, forests, mines, etc) 2% These preferences are largely by only 14 percent. A vocal minority advocate for constant across all education and higher minimum wages, but this policy does not income groups. Social protection, more jobs receive broad support. and eradicating corruption are the top three for all subsets by income and education. While wealthier However, some policies that are and more educated respondents prefer jobs to key government priorities or that social protection and poorer and less educated would be most effective in reducing respondents prefer social protection to jobs, both inequality are not popular either. policies are chosen in the top three by at least 40 Two major government initiatives, investment percent of all groups. in infrastructure and village-level transfers, also receive little support; 14 percent choose the first Policies that are unlikely to in the top three and only 7 percent choose the significantly reduce inequality second. The lack of support for infrastructure in receive little support, meaning there particular is worrying, as it is key to boosting growth is little pressure to enact them. and creating jobs. Government communications on Fortunately, policies that are unlikely to reduce infrastructure spending need to be stronger and inequality receive relatively little support. Subsidies clearer. With the strong support for jobs and lack (including agricultural and fuel subsidies), which are of support for growth,71 linking infrastructure to job wasteful of resources and do not tend to benefit creation rather than economic growth may be more the poor and vulnerable, are chosen in the top effective. Furthermore, increasing taxes on the three by only 17 percent of people surveyed. While rich receives only 2 percent of support, meaning 71 The survey results find that 61 percent of respondents most Indonesians want cheaper fuel, they think any efforts to broaden the personal income tax said they would prefer “lower there are more important priorities for government base will need to be presented as compliance income growth and lower inequality” over “higher spending. Minimum wages, which are harmful for with existing laws (“people paying their fair income growth and higher productive job creation if set too high, are chosen share”) rather than tax increases. inequality.” INDONESIA's Rising Divide 127 our 128 conclusion Addressing inequality takes time; it is urgent to begin now perceptions suggest that it is widespread, and high profile cases provide vivid examples of how the rules of game are being biased in favor of insiders or circumvented altogether without Addressing inequality is largely legal consequences. Both forms of corruption a long-term issue. Inequality generally seem highly likely to be linked to inequality changes slowly over time, so a rapid reduction through lower growth, high wealth concentration in the short term is unlikely. Some key policies and policymaking that exacerbates inequality for addressing inequality, such as more equal (for example, rigid labor markets that prevent opportunities in health and education for today’s productive job creation or switching, or import children combined with better jobs tomorrow, will restrictions that drive food prices higher). However, take a generation to bear fruit. a political economy analysis is needed to identify the underlying causes. Which aspects of the It is urgent to take steps now. Remedial political, economic and legal institutions in Indonesia action takes time to have an effect, which means provide the incentives for such rent-seeking to beginning now. Beginning now can also capitalize take place? When is it due to a lack of appropriate on both the political will that currently exists to checks and balances, and when is it due to a lack tackle inequality, as well as the current popular of enforcement of these checks (whether through support for taking action. Moreover, there is discretion on investigation and prosecution of danger in delay. With many wealthier Indonesians potential corruption or the outright subversion of the opting out of public health, education and other legal process through judicial capture)? services, there is the danger that they will neither be a strong driver for better public service delivery, In other areas, such as nor supportive of increased and fairer public infrastructure, a careful analysis spending on these services funded through taxes. is required to map local needs to investment. The future research agenda also In some areas, more needs to needs to look into how infrastructure can best be known; the future research be improved at the local level. For example, in agenda should also be a priority different locations, different types of infrastructure might be needed to help improve access to services and markets or to generate jobs. The In some areas, particularly the solution to access constraints might be bridges political economy of Indonesia’s in one place, rural roads in another, and a port in institutions and the nature of yet another again. A detailed infrastructure needs corruption, not enough is known analysis could be done using Indonesia’s rich about the nature of the problem local-level data, including sub-district and village and the best actions to take. Not level poverty maps, and district, sub-district and enough is known about the nature of corruption village level facility data. in Indonesia and how it drives inequality. 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