ii

INEQUALITY
OF INDONESIA
DEVELOPMENT
FROM VARIOUS
ASPECTS
Yustinus Prastowo cs
Publisher
INFID, August 2014
Design/Layout
Ahmad Mauladi
ISBN
978-979-8811-06-7
This book has been produced with the fnancial
assistance of the European Union. The contents of this
book are the sole responsibility of INFID and writers, and
can under no circumstances be regarded as refecting the
position of the European Union.
iii
CONTENTS
PREFACE
Page vii
REINTERPRETING INEQUALITY: A PRAGMATIC APPROACH
:: Yustinus Prastowo
Page 1
PROSPERITY FOR ALL? REVISITING
INEQUALITY TRENDS IN INDONESIA (1990 2010)
:: Arief Anshory Yusuf
Page 19
INEQUALITY,
THE DARK SIDE OF DEVELOPMENT
IN INDONESIA
:: Herjuno Ndaru Kinasih
Page 43
EFFECTIVENESS OF POVERTY REDUCTION POLICIES AND
PROGRAMS
:: Tursia
Page 59
INEQUITABLE ACCESS TO BANK LOANS
:: M. Firdaus
Page 77
PROMOTING OIL PALM POLICIES THAT SUPPORT SMALLHOLDERS
FOR SUSTAINABLE ENVIRONMENT
:: Irhash Ahmady
Page 93
INEQUITABLE TAXATION IN INDONESIA:
BASELINE MAPPING OF POLICY AREAS AND OPTIONS IN AN EFFORT
TO TACKLE THE ISSUE
:: Ah Maftuchan
Page 111
INEQUALITY AND EDUCATION AND HEALTH CARE PRIVATIZATION
POLICY IN INDONESIA
:: Mike Verawaty Tangka
Page 127
MAYOR OF
NEW YORK CITY, INEQUALITY AND
2014 ELECTIONS
:: Sugeng Bahagijo, et.al.
Page 149
iv
v
ACKNOWLEDGEMENTS
T
his book may not be published without assistance and cooperation
from all parties. Our highest gratitude for the writers, there are Ah.
Mafuchan, Anshory Arief Yusuf, M. Firdaus, Herjuno Ndaru Kinasih,
Irhas Ahmady, Mike Verawati Tangka, Tursiah, Justin Prastowo, and Sugeng
Bahagijo who has given their time to conduct studies until become manuscript
of this book.
Our deepest thanks also for Makmur Keliat and Enny Sri Hartati who
provided us input for enriching the manuscript of this book. Also thanks to
Leny Bettini Achas who translate entire manuscripts until it could be published
in English Language. Similarly, thanks to Tom Walsh who willing to give his
time for reading the manuscript and gave meaningful input for correction of
the book in English language. Not to forget, we also would like to say our
thanks for Zairudy who editing the manuscript in Indonesia language until it
meets the theorem of Indonesia writing. Also thanks to Ahmad Mauladi who
adjust overall layout of the manuscript so it becomes readable book.
Our last thanks to our colleagues who works in INFID, particularly
Suwarno and Jeckson Robinson who has helped all the preparation until
publishing. At the end, we would to thank all those who have helped until
the book Inequity of Indonesia Development from Various Aspects can be
published.
vi
vii
PREFACE
I
n a people-centered administration, the government has the obligation
to adopt an economic and development approach that promotes
equity and justice, to have a system in place that makes sure the
peoples needs and concerns become the basis for policy-making, and
that sees the urgency of hastening the development pace of regions
lagging behind.
Indonesia at present is caught in a critical situation. Economic growth
that has thus far been touted as a panacea for poverty and backwardness, has
now shown its dark side; the ever widening income gap between the rich and
poor, and worsening regional development disparities.
Data released by BAPPENAS reveals that regional disparity has shown
no signs of abating. In 1985, inequality between Java and other islands within
Indonesia was at 54.4 % - 45.6 %, which later rose to 57.6% - 42.4% in 2012. Tis
is an indication of how ongoing development has failed to evenly distribute
prosperity gains outside of Java.
Similarly, Indonesias agricultural sector over time has been forsaken, with
increasing reliance on imported agricultural products. A paradoxical situation
indeed for Indonesia as it has proclaimed itself to be a resource-rich, agrarian
nation. Farmers who are not duly protected by the State have switched to other
sectors for their livelihoods.
Under such circumstances, the long-standing debate on state-market
balance has once again resurfaced. Te extent to which government should
assert itself in introducing policies that tackle inequality must factor in the
paradigm that competition will only thrive in a free market mechanism which
will ultimately lead to a path of mutual prosperity.
Te book that you now hold in your hands ofers several alternatives on
which policies to reduce inequality can be built on, not limited to regional
viii
imbalances, inequitable access and wealth inequality, but also draw from the
failures of government programs. Failure stories are valuable lessons learnt.
Not only do failures mean lost opportunities and even loss of public funds, but
also bring new-found hope that circumstances will change for the better.
Another point from this publication worthy of note concerns its write-
up process which involves intensive discussions, updated data collection,
scientifc references and current contextual analysis from numerous sources
and reliable resource persons.
INFID hereby extends its indebtedness to fellow contributors who have
become an integral part of this publication, and a pool of resource persons who
generously shared alternative perspectives and ideas to produce a book worth
reading in an efort to constructively contribute towards a better Indonesia.
Enjoy your read!
Jakarta, 17 July 2014,
Beka Ulung Hapsara, Program Manager INFID
Siti Khoirun Nimah, Program Of cer INFID
1
REINTERPRETING INEQUALITY: A
PRAGMATIC APPROACH
Yustinus Prastowo
ABSTRACT
Te issue of inequality has attracted a considerable amount of research
attention in the past several decades. Instead of becoming fairer and more
equitable, the lions share of the development pie is being enjoyed by an
increasingly smaller circle of individuals and groups. Inequality has indubitably
become a matter of grave concern, undermining the peoples sense of fairness
and justice. Eforts to make sense of inequality are critical if we are to achieve
a more just society.
Te author puts forward a pragmatic approach pioneered by Amartya Sen
and pursued further by Martha Nussbaum on tackling inequality by reducing
manifest injustices. Sens capability approach provides a promising way out for
creating equal opportunities, primarily in favor of the weak and marginalized.
Papers that explore the issue of inequality through the decomposing-
recomposing method can serve as a new source of reference and alternative
for formulating more efective public policies.
2
INTRODUCTION
Alexis de Tocqueville prophetically penned in his Memoir on Pauperism
(1835; 20):
In the Middle Ages, mankind lived under equal conditions due to their
limitations and ignorance, while civilized man can create equality as they have
at their disposal the same facilities to achieve comfort and happiness. Between
the two, there exists inequitable conditions, welfare and knowledge the power
of the selected few, pauperism, ignorance and other weaknesses.
Tocquevilles fears reverberate in modern-day life as inequality has
increased dramatically in the past two decades. Numerous opinions and
theories have surfaced. Charles Piketty, a renowned economist and specialist
on wealth concentration, explores inequality in his monumental work Capital
in the 21th Century (2014). World Bank economist and inequality expert
Branko Milanovic authored Te Haves and the Have-Nots (2011), and at the
same time, economist and economic historian David Landes wrote Te Wealth
and Poverty of Nations (1999), Angus Deaton with Te Great Escape (2013),
Gregory Clark with A Farewell to Alms (2011), and lastly Daron Acemoglu
and James Robinson with Why Nations Fail (2013). Nearly all of these written
works materialized out of profound concern over widening income disparities
and alarming poverty levels that appear to have no end in sight.
Many many theories have been formulated by the experts in an attempt
to understand inequality. A long-standing malady aficting societies and
civilizations from the earliest of times, inequality is therefore a social issue
where powers and wealth are unevenly distributed. Discussions on inequality
cannot be separated from injustice, particularly regarding fair and just social
structures. Borrowing from Branko Milanovic,
1
inequality can be divided into
three types: (i) inequality among individuals within a nation (ii) inequality
between nations, and (iii) inequality among citizens of the world (global
inequality). How then should the inequality problem best be approached?
Tere is no global consensus on this matter. Nonetheless, bearing in mind
diferent pressures and dynamics that exist, solutions can be formulated
through two key approaches: a comprehensive institutional approach that
seeks to create fair institutions or the pragmatic approach that aims to uphold
justice by eliminating factors that engender injustices.
1 Branko Milanovic, The Haves and The Have-nots, Basic Books, 2011.
3
THE HISTORICAL ROOTS OF APPROACHES TO
INEQUALITY
Economists and social scientists typically approach the problem of
inequality through three key questions: (1) what causes inequality among
individuals within a nation? (2) does a common pattern of inequality exist in
a society? (3) does inequality widen in line with economic expansion, and if
yes, does it have a pro- or counter-cyclical pattern? discussions on inequality
in the modern world can be traced to David Ricardo (1772- 1823), founder
of political economy theory. He foretold a population growth that would lead
to rising demand for food and of landowners becoming wealthier. Karl Marx
(1818- 1883) argued that mechanization and automation on one hand will push
labor wages upwards, yet on the other hand will lead to diminishing returns,
which in turn will escalate into a crisis. Both Ricardo and Marx approached
the issue of inequality through the prism of social classes. It was only during
the marginalist era (period between1860-1930), with Alfred Marshall (1842-
1924) as one of the prominent thinkers, that inequality was studied from the
individual rather than social dimension.
Te earliest statistical data was available in the 20th century when Vilfredo
Pareto (1848- 1923) took an interest in measuring income distribution
following the need for an equitable taxation regime. It was an epoch that marked
signifcant ideological shifs. In upholding the principle of equality before the
law, the well-heeled are expected to pay higher taxes than the less fortunate.
Te availability of data on the have and have-nots was therefore crucial to
ensure accurately targeted fscal policies. Paretos 80/20 rule, still popularly
applied to this day, indicates a typical distributional pattern whereby 20% of
the population owned 80% of income and vice versa. One of the weaknesses
of Paretos law is that it does not allow for changes in the distributional pattern
because of emphasis on the law of fxity.
Economist and statistician Simon Kuznets in 1955 presented a theoretical
framework that makes room for changes to income distribution patterns.
According to Kuznets, the uneven distribution of income among individuals
within a nation is not the same for all societies but depends on social make-up.
An agricultural society will endure less inequality compared to an industrial
community due to insignifcant diferences in the income level of individuals.
Widening inequalities however will narrow in the long run as redistribution
and education policies are widely imposed. Tis theory is known as the
U-curve. Acemoglu and Robinson in Why Nations Fail (2013) appear to have
ascribed these dynamics to institutional factors which determines the rise or
fall of a nation. Geographical and cultural factors that predominantly framed
earlier hypotheses in the past several decades were challenged to rethink
the signifcance of the institutional dimension, both economic and political.
4
Both empirical studies show that the inclusivity of economic and political
institutions better guarantee the success of a nation in attaining prosperity than
an extractive institutional structure. Tis defeats the argument that establishes
geographical and cultural dimensions as the determining factor of inequality
among nations. Tis will create new opportunities for public participation in
shaping public policies for reducing inequalities.
GOOD INEQUALITY (EX ANTE EQUALITY) AND
BAD INEQUALITY (EX POST EQUALITY)
Inequality clearly indicates that something is amiss, whereas equality
would be the most ideal condition necessary to support the sustainability of a
nation. Martin Ravallion, a former World Bank economist, highlighted how
inequality afects pro-poor and anti-poverty programs.
2
Francine Mestrum
3

puts forward several reasons why a war should be waged against inequality.
First, out of moral obligation, particularly given the fact that disparities do
not occur because of natural consequences. Comparing Africa and Europe in
terms of inequality would be irrelevant if both continents are not economically
linked, but becomes essential if the two continents are engaged in close
economic cooperation. Second, globalization on one hand leads to capital
mobility; on the other hand it results in the concentration of labor. Tis creates
an earnings gap between workers in developing and advanced countries as a
result of barriers to immigration and capital infux into countries with low-
cost labor. Tird, in relation to political instability, inequality can create social
vulnerabilities and undermine social sustainability, an issue raised at the UN
RIO+10 Conference. Fourth, concerning political citizenship, democracy
presupposes political equality, while economic equality is an indicator of good
democratic practices. Inequality undercuts the possibility of political equality
due to the assumption that power-property relations cannot be neutral. Fifh,
the fow of debt from rich to poor countries entails unbalanced relations as
indicated in net transfers of USD 51 132 billion annually from 1988 to 2003
compared to the deposits of poor countries at USD 1460 billion in banks in
developed nations from which low-income countries also owe up to USD 700
billion in debt.
4

Under such circumstances, is inequality always bad? Milanovic
distinguishes between good inequality and bad inequality. Te former
2 Martin Ravallion, Growth, Inequality, and Poverty: Looking beyond Averages, in
Anthony Shorrock and Androlph van der Hoeven ( eds. ), Growth, Inequality, and Poverty:
Prospect fo Pro-Poor Development, Oxford University Press, 2004.
3 Mestrum, Francine, Why We Have to Fight Global Income Inequality, in Matti
Kohonen and Francine Mestrum (eds.), Tax Justice, Pluto Press, 2009.
4 Ibid., p. 34-37.
5
refers to the necessary conditions and interventions for a better society,
or in the words of John Rawls (1921- 2002), inequality and favoritism will
only be acceptable if it is to the beneft of the least-advantaged.
5
Prominent
philosopher Ronald Dworkin (1931

- 2013)
6
stresses the importance of making
a distinction between ex ante equality and ex post equality. Ex-ante equality
closer to good equality refers to equality as a benchmark whereby every
citizen is aforded with equal opportunities, while paying heed to the freedom
of every individual to the right of self-actualization. Ex-post equality promotes
the equality of outcomes customarily practiced in socialist states. In general, ex
post equality appears to be an ideal policy but when examined from the aspect
of personal obligation to self-actualize potentials, it would be an irrational
option as it ignores the possibility of individuals achieving diferent goals and
outcomes due to dissimilar choices and chances. Ex ante equality becomes a
rational option when it refers to government obligation to guarantee equal
treatment to citizens by continuing to uphold the principle that individuals
have intrinsic potential and the responsibility to realize these latent capabilities.
Dworkin clearly rejects the doctrine of a laissez faire state with minimal
government intervention. In practice, government role cannot be confned
merely to making decisions on military spending, and not for education,
health and other sectors. Te concept of a minimal state is also unsuitable for a
democratically elected government based on the assumption of equal treatment
of citizens. Acemoglu and Robinson
7
defne democracy as a situation where
political equality is created. Te implication is the transfer of de jure political
power from the elite (the rich) to citizens (the poor). Te focus is on the
responsibility of individuals to actualize their inherent potential. In this context,
the state may not eliminate this liberty in the name of equality. Te market, as
a competitive arena, should remain open, allowing for healthy competition. In
reality however market forces also cause inequalities. Markets per se are not
the issue, but rather the fact that in these markets some produce better goods,
and others have better fortunes. Redistribution through tax policies therefore
becomes relevant because taxes are levied once a person has made a choice.
Public policies can then be formulated in a fair and legitimate manner. Te
next question however is what should the state-market relationship be in order
to guarantee public policies that generate positive impact?
5 John Rawls, A Theory of Justice, Belknap Press, 1999 (1971). p. 13.
6 Ronald Dworkin, Is Democracy Possible Here? Principle for a New Political
Debate, Princeton University Press, 2006.
7 Daron Acemoglu and James A. Robinson, Economic Origin of Dictatorship and
Democracy, Oxford University Press, 2006.
6
CONTEMPORARY REFLECTIONS: STATE VERSUS
MARKET?
Given the foregoing situation, how best should the state-market
relationship be understood? Vito Tanzi in his latest work
8
explained the
relationship between the two forces. He observed how the 20th century was
marked by the governments more assertive role in the economy. Data showed
that in the wake of World War II, Western countries experienced a dramatic
surge in public spending relative to GDP, tax ratio, social contribution and
the scope of afairs administered by the state. In addition, a paradigm shif
was also evident in public administration. Te previously dominant Weberian
approach was superseded by a model more accommodating towards market
mechanisms known as the New Public Management model, then shifing to
New Public Service that allows room for democratic participation, before
eventually evolving into the Dynamic Governance model that rests on network
capacity. Tanzi also underlined the emergence of a whole new set of problems:
inequality, high poverty rates, ecological issues and rampant terrorism. In
relation to globalization, Tanzi divided the relevance of public spending into two
hypotheses: compensation hypothesis and efciency hypothesis. Compensation
hypothesis sees public spending as a risk absorber and the consequential logic is
that an increasingly open economy implies expanding expenditures. Te efciency
hypothesis on the other hand regards public spending as a contributing factor in
reducing a countrys ability to compete globally.
Empirical data has revealed that large governments with high levels of
spending do not necessarily mean satisfactory performance of economic and
social indicators. A converse relationship in fact is evident between the level
of public spending and Human Development Index (HDI). A country with
substantial expenditure does not suggest scoring high on its HDI. Tanzis pithy
summary of the situation: despite the inefciencies and mistargeting of public
spending for most countries, nearly all governments have spent their energy
on replacing the role of markets due to the assumption that markets have
failed, and not because of eforts to improve performance.
9
Te Public Sector
Performance Indicator (PSPI) of countries with leaner governments can better
deliver public services than broader administrations. Researcher Andrew
Glyn on the other hand noted that countries with sound welfare programs
such as France, German, Denmark and Sweden are more efective in reducing
inequalities as seen in Table 1.
10
8 Vito Tanzi, Government versus Markets: The Changing Economic Role of the
State, Cambridge, 2011
9 Tanzi, Vito, Government versus Markets: The Changing Economic Role of the
State, Cambridge, 2011, p. 8.
10 Andrew Glyn, Capitalism Unleashed, Oxford University Press, 2006.
7
Tabel 1: Income Inequality: OECD Countries, 19802000
Ratio of post-tax incomes at 10% from top of the distribution
to incomes 10% from bottom
Source: Luxembourg Income Survey (Glyn,2006)
In table two below, Glyn shows that welfare states are more capable of
curtailing poverty rates through welfare programs and tax redistribution.
Tabel 2: Poverty and Impact of the Beneft and Tax System, 2000
Source: Smeeding (2004); Forster and dErcole (2005). Dikutip dari Glyn (2006)
Countries c.1980 c.2000
France
Germany
Denmark
Sweden
United Kingdom United States
OECD mean
OECD std. dev.
North Europe
Liberal economies
3.5
3.1
2.8
2.4
3.5
4.7
3.4
0.8
2.9
3.9
3.4
3.3
2.7
3.0
4.6
5.4
3.7
0.8
3.1
4.5
Countries
Percentage of
population in
poverty, 2000
or late 1990s
Tax /benefts
efect
in reducing
poverty, 2000
or late (% fall in
numbers)
Tax /benefts
efect
in reducing
inequality
1990s (% fall in
Gini)
USA
UK
Canada
Australia
The Netherlands
Germany
Belgium
France
Sweden
Finland
17.0
12.3
11.9
11.2
8.9
8.2
7.9
7
6.4
5.4
- 25
-61
-52
-55
-59
-71
-75
-70
-78
-70
-18
-24
-24
-31
-40
-42
-48
-41
-42
-40
8
How then has the private sector fared? On a diferent level, the market
logics of the private sector have similarly moved towards divergence. Capital
has expanded at a staggering rate, moving unrestricted beyond the geographical
boundaries of a sovereign state. In 2013, the Organization for Economic
Cooperation and Development (OECD) released a document, Base Erosion
and Proft Shifing (BEPS), for tackling aggressive tax avoidance. Driven by
the motive of shifing profts to jurisdictions that ofer low tax rates and protect
confdentiality, multinational corporations such as Apple, Starbucks, Google
and Amazon, have further confrmed accusations leveled against multinational
enterprises (MNEs) on their business practices that threaten global economic
order. Tis initiative brought forth what is known as stateless income. Both
developing and advanced countries concur that MNEs should be declared
as a common enemy. A survey conducted by Ernst and Young (2003; 2013)
observed rising popularity in applying transfer pricing to boost tax efciency.
Nevertheless, there has been greater appreciation towards the private sector
represented by small to medium-scale enterprises (SMEs) in bringing fresh
hope, providing a strong pillar of support for the national economy. A new
chapter in the global economy now opens with the promising growth of this
particular sector known as social entrepreneurship. In view of this, how should
we understand government-market relationship typically constructed as being
hopelessly at odds with each other, irreconcilable and uncompromising? Does
not the government and markets each have their own set of weaknesses that
creates new problems? Or does the relationship between the two in fact create
other avenues that lead to a way out?
CONSIDERING THE CAPABILITY APPROACH
As described earlier, we are given the option to ideally create fair and
just institutions for attaining common goals or pragmatically strive towards
actualizing justice by dismantling barriers that give rise to injustices. In the
case of Indonesia, public spending has continued to rise as present in Graph
1 below. However, the explosion in internet usage in Indonesia has not been
directly proportional to improvements in the Human Development Index
as presented in Graph 2 below. In other words, an institutional mechanism
is absent that will ensure that information delivery and easy access directly
contribute towards improving the quality of human capital.
9
Graph 1: Expenditure Growth of Central Government
According to Function
Sumber: Kementerian Keuangan
Grafk 2: Asupan teknologi mutakhir vs Indeks Pembangunan Manusia
(HDI)
Source: Ministry of Finance (2008-2013)
Graph 2: Cutting-edge Technology Intake VS Human Development
Index (HDI)










Source: Yanuar Nugroho, 2012 (compiled from Human Development Index (2010) and
Internetworldstats (2010).
Perkembangan Belanja Pemerintah Pusat Menurut Fungsi
Asupan teknologi mutakhir VS Indeks Pembagunan Manusia (HDI)
Sumber: Yanuar Nugroho, 2012 (diolah dari Human Development Index (2010) dan
Internetworldstats (2010))
0.9%
1.9%
2.1%
2.3%
2.5%
3.5%
4.6%
5.6%
7.7%
8.4%
18.0%
0.543 0.543 0.543 0.543 0.543 0.572 0.579 0.591 0.598 0.607 0.613
0.0%
2.0%
4.0%
6.0%
8.0%
10.0%
12.0%
14.0%
16.0%
18.0%
20.0%
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
Internet users as % of
population
HDI
10
Graph 3 below further substantiates how the countrys development
path has veered sharply of course. Te upsurge in public expenditure
to combat poverty has failed to reduce the number of poor people.
Graph 3: Poverty Reduction Budget versus Poverty Rate
Source: Coordinating Ministry of Peoples Welfare, BPS (2004-2010).
Development eforts likewise have been less than successful in spreading
out wealth more evenly among citizens. Tis is evident in the disturbing trend
of wealth accumulation concentrated in high-earners (Graph 4 below) Tis
is partially attributed to a less than optimal taxation function as a means
for wealth transfer from the haves to the have-nots. Income tax revenue
that refects justice based on the principle of ability to pay has not increased
signifcantly (Graph 5 below), particularly for non-employee personal income
tax as compared to Article 21 of the Income Tax Law.
Anggaran Pengentasan Kemiskinan vs Angka Kemiskinan
Sumber: Menkokesra, BPS
18
23
42
51
63
66
94
16,7
16
17,8
16,6
15,4
14,2
13,3
0
10
20
30
40
50
60
70
80
90
100
2004 2005 2006 2007 2008 2009 2010
Anggaran Pengentasan Kemiskinan
(in triliun rupiah)
Angka Kemiskinan
(% penduduk)
11
Graph 4: Income Distribution
Source: BPS, Compiled (2002-2013).
Graph 5: Tax Revenue Structure 2006-2012
Source: Financial Notes and Ministry of Finance, compiled.
DISTRIBUSI PENDAPATAN
Grafik Struktur Penerimaan Pajak 2006 2012
12
When the course of development has lost its bearings, it would only be
ftting to call to mind Amartya Sens proposition.
11
We have thus far been
preoccupied with creating fair and just institutions intended to disentangle
the intricate web of problems. Tese institutions instead have for certain failed
to become efective agents of change. Sen has therefore ofered the capability
approach in line with his proposition to promote justice through concrete
actions for reducing and eliminating injustices. Sen has placed freedom on the
highest pedestal. Te fate and quality of life of humankind, according to Sen,
rests on the extent to which freedoms are expanded. Te expansion of freedom
is inextricably linked to his notion on justice. Sen defnes two types of freedom:
well-being freedom and agency freedom. Well-being freedom (the freedom to
improve conditions) or known as capabilities refers to the real opportunity to
achieve what a person wishes to do or to be in leading life. Agency freedom on
the other hand is the freedom to attain whatever that is considered good. Te
former denotes opportunity while the latter indicates process. Both concepts
of freedom are interdependent, analogous to two sides of the same coin..
Sen understands freedom as both the ends and means of development.
Improving the quality of life is about freedom and to this end, freedom is of
utmost importance. To illustrate this, Sen ofers an example of the correlation
between the democratic system and well-being. Democracy guarantees
freedom of the press, freedom of opinion and freedom of political life which in
turn opens up space for further improving conditions. Famines in democratic
countries, he observed, can be better anticipated compared to authoritarian
regimes. With freedom of the press and freedom of opinion, incidence of
hunger and starvation will be publicly exposed by the media and civil society,
exerting pressure on the government to take action in order to attenuate the
impact. Te future of democracy on the other hand depends on the well-being
of the people. Economic instability poses a serious threat to the future of
democracy and freedom. Sens concept of well-being freedom or capability is
directly associated with human freedom. Te poor are those denied the liberty
to achieve what they seek out to do or to be. Sen therefore does not defne
poverty according to peoples income, but the degree to which they can convert
real opportunity into the capability to achieve goals that they value. He defnes
poverty as the deprivation of basic capabilities.
11 Amartya Sen, Te Idea of Justice 2009; Inequality Reexamined, Belknap Press,
Harvard University, 1995; (Sen) Development as Freedom, Anchor, 2000; Rationality and
Freedom, Belknap, 2004. A succint explanation on Amartya Sens thoughts, see Sunaryo and
Arif Susanto, Kursus Teori Keadilan dan Pemikiran Amartya Sen, Inded, 2012 (unpublished).

13
An individuals ability to attain what constitutes as valuable to that person
is not only determined by personal capacity. Sen believes that the freedom
to realize goals and ambitions depends on the complex intertwining of
external factors. Nature, the environment, public policies and political system
signifcantly contribute in guaranteeing the expansion of capabilities to bring
expectations to fruition. Sen describes agency freedom as the process to which
a person has the liberty to make choices that they perceive to be of value.
Tere at least three considerations as to why freedom in this context becomes
essential:
Intrinsic considerations. Freedom that allows people the right to self-
determination in making lifes choices of value to them, without any pressure
or coercion from others.
Instrumental considerations. Freedom as a process that provides the means
to pursue goals of their own choice.
Constructive considerations. Freedom as a process that shapes and
determines the course of life considered to be of value.
Martha Nussbaum, a disciple of Sen, has taken a step further.
12
She
criticized existing development approaches that have long been practiced,
focusing on three main approaches to development:
13
GDP approach. Tis approach follows a standard and transparent
measurement on welfare and income, but fails to provide insight on the
distribution of benefts and income.
Utilitarian approach. Tis approach highlights on the utility of population
to measure the level of satisfaction, but incapable of identifying the diferent
types of people and relative social conditions.
Resource-based approach. Tis approach emphasizes on the distribution
of resources, but overlooks the difering needs for resources and dissimilar
levels of capacity to convert resources into functionings
Nussbaum subsequently underscored the need for an approach that
appreciates individual eforts to develop themselves, regarding every person as
an end in itself and a dignifed agent of change. She built upon Sens rationale
on the issue of functionings and capabilities from only which an approach can
12 Martha Nussbaum, Creating Capabilities: Te Human Development Approach,
Belknap, 2011.
13 Compare with Joseph Stiglitz, Amartya Sen, Jean Paul-Fitoussi, Mismeasuring
Our Lives: Why GDP doesnt Add Up, New Press, 2010 as criticism against the dominant and
authoritative GDP approach.
14
fairly accommodate complex interrelations between self-development eforts
and the material and social contexts. Te capability framework pioneered by
Amartya Sen as Nussbaum contends is an approach to assess the quality of
life and a theoretical proposition of social justice. According to Nussbaum, the
capability approach should at least encompass the following principles:
Tis approach poses the key question: What is every person capable of doing
and what does the person wish to actualize?
Tis approach positions every person as an end in itself by questioning real
opportunities available to the person, and not about their income.
Tis approach focuses on choices or freedoms as people can achieve what
they wish to pursue with substantive freedoms aforded to them.
Tis approach pays heed to injustices as failures of human capabilities as a
corollary of discrimination and social exclusion.
Capabilities are related to substantive freedom that refers to a basket of
opportunities (normally interrelated) to make choices and take actions.
Capabilities denote an alternative combination of diferent functionings
that a person can actualize.
Capabilities are not simply about the intrinsic ability of a person, but also
include freedoms or opportunities as a combination of personal capability
and political, social and economic settings.
Te main focus of Sens work according to Nussbaum is to identify
capabilities as a comparable factor for assessing the quality of life. Sens
approach, although a normative theoretical framework that draws attention
to the issue of justice, does not provide a defnitive rationale for basic justice.
As a consequence, Sen has not developed 1] a detailed list of capabilities, 2]
an advanced concept on human dignity, 3] a political principle necessary for
minimum social justice. Nussbaum then directed her arguments beyond Sens
capability approach, moving towards the construction of a normative political
proposition as a theory of justice. She puts forward three types of capabilities:.
1. Basic capabilities. Te innate endowment of individuals as a basic necessity
to develop subsequent capabilities. Example: sight and hearing.
2. Internal capabilities. Further personal advancements with sufcient internal
conditions to perform functions that may require a supportive environment.
Example: ability to speak in the native language.
3. Combined capabilities. A combination between internal capabilities and
favorable external conditions for exercising functions. Example: a widow
not allowed to remarry possesses internal capabilities but hampered by
combined capabilities to actualize sexual expression.
15
Nussbaum proposed several core capabilities:
Life. Able to live to the end of the normal length of human life under decent
conditions.
Bodily health. Able to have good health; adequately nourished; decent
shelter.
Bodily integrity. Able to move freely from place to place; secure against acts
of crime; being able to freely make choices on reproduction.
Senses, imagination and thought. Able to use ones senses to imagine, think
and reason in a humane manner.
Emotions. Able to have attachments to things and people outside ourselves.
Practical reason. Able to form conception of the good and critically refect
on the planning of ones life.
Afliation. Able to live with and toward others; having the social basis for
leading life with dignity.
Other species. Able to have concern for and live with animals, plants and
the environment.
Play. Able to laugh, play and enjoy recreational activities.
Control over ones environment. Able to exercise socio-political and socio-
economic rights, and to manifest these rights through social participation.
A NEW DEVELOPMENT PATH: CULTIVATING THE
ECONOMY
Earlier sections explored a viable way out of the development dilemma of
being caught between the equally vicious jaws of the market and state. It is not
about the state or market, neither is it about market or non-market preferences,
but concerns institutional arrangements, among others on whether the market
needs to be merged? Are not development successes and faws maintained
by the inefectiveness of the state and market combined? Given the data, we
may be challenged to come up with a new ideological landscape amid rising
public spending and heightened government role, and on the other side of
equation, the private sector and its increasingly prominent role and autonomy
on a global scale.
Te theories and analyses presented in this paper are the result of a
deep concern over inconsistencies and deviations in the human development
process which appear to have intensifed. Instead of being treated as
development subjects, people are thrust further aside as mere objects of
development projects where success is measured using statistics. Tese are
16
serious attempts to probe deeper into the issue of inequality in Indonesia by
exploring, analyzing and seeking workable solutions. Similar endeavors have
been initiated in developed countries, but within the Indonesian context this
undertaking is relatively new.
A new angle that these studies have taken is to capture inequality through
a scientifc method applied by eminent thinkers prior to the rise of modernity
known as decomposing-recomposing (B. Herry-Priyono, 2007). Social
structures are broken down into smaller units and analyzed. In terms of social
spending, Tursia looked into poverty reduction programs that are far from
efective. Afer delving into each and every relevant issue, the author arrived at
the conclusion that coordination, data validation and outcome measurements
remain weak. From an ethical point of view, anti-poverty programs can be
tested by determining whether the means justify the ends. Te ultimate
purpose of poverty alleviation eforts is not to have diverse, well-intended
programs, but guaranteed quality and prosperity of the people of Indonesia,
without exception. In the same vein as Tursias, M. Firdaus examines equality
of opportunity for micro, small and medium-scale entrepreneurs in accessing
bank loans. Banking policies refect the reality of banking institutions
aversion toward MSMEs which in turn perpetuates unbalanced, unhealthy
competition. Rawls words of caution that unequal treatment is only justifable
for those who are worst-of clearly apply to Indonesias banking sector. Te
governments role as a regulator is expected to bring this persistent problem to
an end if the government stays faithful to the welfare-state ideology. Te state
must be bold enough to uphold the constitutional logic (raison dtre) versus
accounting logic (market logic).
14
A concrete example of capability deprivation
is the marginalization of oil palm growers by oil palm conglomerates. Tere has
never been a single policy that decisively takes sides with independent farmers.
Te government has even failed to enforce the law upon large corporations
that have blatantly violated the law. Tis dismal portrait of existing oil palm
policies only afrms hyperbolic narratives delivered as nothing more than
mere jargon.
Apart from the bleak outlook on social spending, this publication also
awards attention to revenue which in this case refers to taxation. Te issue on
tax revenue has long been pushed to the sidelines when it contributes 75%
to total state earnings. Ah Mafuchan investigates Indonesias problematic
tax policies that are not conducive to the equality paradigm. Taxpayers are
14 B. Herry-Priyono, Hukum Besi Ekonomi-Politik, Majalah Basis, No. 3-4, Year 63,
2014.
17
still predominantly represented by individual employees which suggest
unequal participation in the payment of taxes according to the ability to pay.
Furthermore, a lop-sided tax revenue structure refects a mere pittance in
the amount of personal income tax collected from non-employees compared
to taxes paid by workers as stipulated in Article 21, Income Tax Law. Value-
added tax is also fairly high and almost equal to corporate income tax. Tax
collection without tax policy probably fttingly describes tax practices in
Indonesia. A mixture of policies caters to the interest of large-scale businesses,
while incentives for lesser industries, the working class, women and children
are not forthcoming. Taxation as an instrument to reduce inequalities has yet
to become the governments preferred option. Lastly, Arief Anshory Yusuf
encapsulates sectoral and thematic decomposition into a single narrative
as a whole (recomposing). Te issue of inequality in Indonesia is presented
through infographics that astounds and saddens us at the same time. Arief
asserted that aggregate economic growth has been reasonably inclusive as it
manages to elevate income levels and lower poverty rates. However, in respect
to inequality, economic development and growth has not succeeded in tackling
the issue. Tis clearly proves that economic policies are not oriented towards
pro-poor growth.
Tis introduction will steer clear of having to reiterate the agony of injustices
and disparities. By presenting the lucid thoughts and concrete solutions of the
authors, this introduction proposes an approach that may serve as an antidote
for the tiresome rivalry between the state and market by creating capabilities
bolstered by civil societys broadened participation. Development must be re-
rooted in the values and needs of humans as subjects. By identifying measurable
high-quality outcomes, devising the appropriate strategies and widening
public participation, the problem of inequality and poverty can become a
point of departure for reinterpreting and refocusing the development vision.
Otherwise, we will be making the same mistakes repeatedly, falling for the same
trap if development is still presented in grandiose narratives clinging to the
assumption of anonymous, neutral development actors. Development should
genuinely mean expansion of freedom, equal opportunities and supportive
towards the most disadvantaged and marginalized. Tis anthology of papers
framed around the issue of inequality can serve as a source of reference, point
of departure and ultimate framework for re-formulating public policies in
Indonesia. It is now time for us to take the liberty to decompose and recompose
development policies and strategies. Undervaluing the essence of the papers
presented in this publication means dispensing with attempts to improve and
safeguard Indonesia, and take this nation forward.
18
REFERENCES
Acemoglu, Daron and James A. Robinson. 2006. Economic Origin of
Dictatorship and Democracy. Oxford University Press.
Acemoglu, Daron and James A. Robinson. 2011. Why Nations Fail? Oxford
University Press.
Dworkin, Ronald. 2006. Is Democracy Possible Here? Principle for a New
Political Debate, Princeton University Press.
Francine, Mestrum. 2009. Why We Have to Fight Global Income Inequality,
in Matti Kohonen and Francine Mestrum (eds.). Tax Justice. Pluto
Press.
Glyn, Andrew. 2006. Capitalism Unleashed. Oxford University Press.
Milanovic, Branko. 2011. Te Haves and Te Have-nots. Basic Books.
Nussbaum, Martha. 2011. Creating Capabilities: Te Human Development
Approach. Belknap.
Piketty, Tomas. 2014. Capital in the Twenty-frst Century, Cambridge, MA.
Piketty, Tomas. 2014. Dynamics of Inequality, New Lef Review, Jan-Feb.
Priyono, Herry B. 2014. Hukum Besi Ekonomi-Politik, Majalah Basis, No. 3-4,
Year 63.
--------------------. 2007. Dictate of Civil Society Lecture Unpublished
manuscript.
Rawls, John. 1971. A Teory of Justice, Belknap Press.
Ravallion, Martin. 2004. Growth, Inequality, and Poverty: Looking Beyond
Averages, in Anthony Shorrock and Androlph van der Hoeven (eds.),
Growth, Inequality, and Poverty: Prospect of Pro-Poor Development,
Oxford University Press.
Sandel, Michael J. 2009. Justice Whats the Right Ting to Do? FSG New York.
Sen, Amartya. 2009. Te Idea of Justice, Belknap Press.
---------------- 2004. Rationality and Freedom. Belknap Press.
-----------------2000. Development as Freedom. Anchor.
----------------- 1995. Inequality Reexamined. Harvard University. Boston.
Stiglitz, Joseph, Amartya Sen, Jean Paul-Fitoussi. 2010. Mismeasuring Our
Lives: Why GDP doesnt Add Up, New Press.
Susanto, Arif and Sunaryo. 2012. Lecture Notes for Course on Teory of Justice
and Amartya Sens Viewpoint, Inded (unpublished).
Tanzi, Vito, Government versus Markets: Te Changing Economic Role of the
State, Cambridge, 2011
19
PROSPERITY FOR ALL?
REVISITING INEQUALITY
TRENDS IN INDONESIA
(1990-2010)
Arief Anshory Yusuf
INTRODUCTION
Since the start of the New Order government in 1966, up to the 1997
Indonesian economic crisis, income per capita has increased by almost
four times. Te increasing income of the average Indonesian has also been
accompanied by a reduction in poverty. Te number of poor fell from 54.2
million people in 1976 (40.1% of the total population) to 22.5 million (11.3%
of the total population) in 1996 (Alisjahbana et al., 2003).
Tis paper will revisit inequality trends in Indonesia from the early 1990s
up to 2010. Inequality has a number of dimensions and in this paper it is
divided into inequality of outcome and inequality of opportunity. Outcome
can be measured by variables that directly measure individuals or households
welfare such as income or expenditure. On the other hand, opportunity is
referred to the inputs used by individuals or households to obtain the outcome,
such as education or health. Te inequality of outcome then can be measured
by how income or expenditure is distributed across household or individuals.
On the other hand, the inequality of opportunity can be measured by whether
access to health or education is available to segments of the society such as by
geographical location, gender, or socio-economic classes.
20
POVERTY: BEYOND THE NATIONAL POVERTY LINE
It is ofen argued that Indonesias success in eradicating poverty is overrated
because the national poverty line does not refect the real conditions on the
ground. Tis section discusses the profle of Indonesian poverty based on the
standard of USD 2 purchasing power parity/day poverty line. Graph 1 below
compares the poverty incidence of various countries (Indonesia, Tailand,
Cambodia) using various poverty line standards, including the national
poverty line, USD1.25/day, and USD 2/day poverty line. It is not surprising
that, Tailand is better in all poverty indicators. Indonesia is also better than
Cambodia in poverty incidence using the national poverty line. When using
USD 2/day as the poverty line, however, Indonesia and Cambodia are similar.
Almost 40% of the Indonesian population still lives below USD2/day (or
roughly IDR 11,000/day). Philippines and Vietnam has less (in proportion
to its total population) people living below $2/day poverty line compared to
Indonesia.
Yusuf (2013) calculated the percentage of people living below international
poverty line of USD 2 per person per day for each of the years during the period
of 1990 to 2012. Tis estimates improved the previous World Bank estimate
because it incorporates regional variations in the cost of living (Yusuf, 2013).
Graph 1: Poverty incidence in Indonesia, Tailand and Cambodia
Source: World Banks World Development Indicator
21
To calculate the proportion of people living below USD 2 a day, we frst
need to calculate the relevant poverty line. Te USD 2 a day is based on the
World Bank survey as part of their International Comparison Program (ICP)
in 2005 and estimated the Purchasing Power Parity (PPP) USD 1 is equivalent
to IDR 4,193. Te poverty line calculated in Yusuf (2013) is as follows.
PL
it
is the USD 2 poverty line that we try to measure, PPP
2005
is the
purchasing power parity exchange rate Rupiahs/$ in 2005; the CPI
it
is the
consumer price index. Te index t is year from 1990 to 2012 and the index i is
the region which consist of provinces and for each provinces we distinguished
between urban and rural areas. PLN
it
is national poverty line for each region
and for each year, while is the mean of poverty line across regions for
specifc year. CPIR
it
is the regional consumer price index, all are equal to 100
in 2005. Te result is shown in Graph 2 below.
Graph 2 suggests that for the period of 1990 to 2012, the proportion of
people living below USD 2 a day has been declining at an average rate of 2.2%
per year leaving only 36.5% in 2012. Te rate of the decline in the last ten years
(or reformasi era, 2002-2012) has been faster (2.9% a year) than during the
pre-reformasi era or the period of 1990-1996 (1.4% a year). Tis is in contrast
to a rather slow rate of the decline in the poverty incidence with national
poverty line during the reformasi era (1998-present) which was only 0.65% a
year (See Graph 2).
As can be seen in Graph 2, the poverty incidence of USD 2/day has
declined faster than poverty incidence using the national poverty line (which
is lower than USD 2/day). Tis indicates that the welfare of the middle class
has grown faster than the very poor. Tis suggests that the sluggishness in the
welfare improvement at the very bottom of the distribution.
22
Graph 2: Poverty incidence in Indonesia 1990-2012
Source: Authors calculation based on SUSENAS data
Poverty however is not the only indicator as to whether the increase in
prosperity has been shared by all. Inequality is another dimension that can be
more important. Te remaining sections will focus on this issue.
Inequality in development outcome
1
In the discourse on inequality, we should distinguish between inequality of
outcome and inequality of opportunity. Borrowing the theory by the renowned
philosopher, John Roemer of Yale University (Romer, 1993), inequality of
outcome such as income among members of a society is not only a product
of the inequality of efort or talent among individuals but also inequality in
circumstances that are beyond the control of the particular individuals. Unlike
policies of equalizing outcome, policies of equalizing opportunity that provide
support to individuals in less than conducive circumstances a level playing
feld is more acceptable approach across the political spectrum.
In this section we will discuss the inequality in outcome which is income
proxied by expenditure per capita. Tree indicators of inequality in expenditure
per capita will be discussed: Gini coefcient, income/expenditure share, and
decile dispersion ratio.
1 Tis section is heavily based on Yusuf, et al (2013).
23
1. GINI COEFFICIENT
Te Gini coefcient is the most common income inequality indicator, that
is, the extent to which the distribution of income among households deviates
from a perfectly equal distribution. A Lorenz curve plots the cumulative
percentages of total income received against the cumulative number of
recipients, starting with the poorest individual or household. Te Gini
coefcient measures the area between the Lorenz curve and a hypothetical
line of absolute equality. A Gini coefcient of 0 represents perfect equality,
while of 1 implies perfect inequality. More formally, the Gini coefcient can be
calculated with the following formula:
where y
i
is expenditure per capita of household i , and i = 1 to n indexed
in non-decreasing order .
Graph 3: Gini coefcient by urban and rural areas of Indonesia
Source: Authors calculation based on SUSENAS data
24
Graphs 4: Gini coefcient in Java and Non-Java
Source: Authors calculation based on SUSENAS data
A number of trends can be identifed from these graphs (Yusuf et al 2013).
Te gini coefcient has risen from 0.33 to 0.41 between 1990 and 2013 which is
the highest ever recorded Gini in Indonesian history. Te increase in the long-
run trend is generally similar across urban and rural areas as well as across Java
and non-Java islands suggesting that this is not local or regional phenomenon
but a national phenomenon.
Moreover, in urban areas the Gini was already 0.43 in 2012. In urban
areas of Java the Gini coefcient reached as high as 0.44 in 2011 albeit slightly
falling the following year to 0.43. In the disaggregated estimates, especially so
by regions, the level of current inequality, as measured by the gini coefcient,
seems to be worse than is currently described in the literature (Akita et al.,
2011, van der Eng, 2009).
Te Gini coefcient was stable, if not slightly decreasing, before the Asian
Financial Crisis (AFC). However, afer the AFC the Gini coefcient had a
strong upward trend. Te Gini coefcient in rural areas is stable and lower
than in urban areas. Te upward trend in the Gini coefcient is consistently
evident in both urban and rural areas, as well as across regions in Indonesia
both on and of Java.
In terms of the proportional increase, the Gini coefcient afer the AFC
(2001) was 0.34 but rose to 0.41 in 2012 or an increase of 0.1 point or 32%.
Surprisingly, the rate of change was faster in rural areas, where in 2001 the Gini
coefcient was 0.24, and in 2012 it rose to 0.33, a startling increase of almost
40%. Tis trend is slightly stronger in rural areas of non-Java compared to Java.
25
2. PALMA INDEX
Te Palma index is the ratio of the income share of the richest 10%
population to the income share of the poorest 40% population. It is based on
the work of Gabriele Palma (Palma, 2006, 2011). Tis index is based on the
observation that the middle classes tend to capture around 50% of national
income, but the other half of national income is shared between the richest
10% and the poorest 40%. Cobhan and Sumner (2013) argue that the ease
of interpretation of the Palma ratio could provide a more policy-relevant
indicator of the extent of inequality in each country, and may be particularly
relevant to poverty reduction policy.
Te Palma index is easy to interpret. If the index value is 0.25, it means it is
a perfect equality. Tere is no upper limit of the index. If the index value is 2, it
means that the 10% richest group enjoy twice the share of the national income
compared to the 40% poorest. Te Palma index for Indonesia is calculated from
1993 to 2013 and the results for both the urban and rural areas of Indonesia are
presented in Graph 5 below.
Graph 5: Palma Index Indonesia
Source: Authors calculation using SUSENAS data
As Graph 5 above indicates, the Palma Index for Indonesia in 2013 is 2.08
which can be interpreted as the income share of 10% richest population in
Indonesia is 2.08 higher than the share of the 40% poorest population. So, it is
8 times departing from perfect equality.
26
Comparing the Palma Index to the Gini coefcient, suggests that the
diference between urban and rural inequality is larger. Using the Palma
Index, the income distribution is 74% more unequal compared to the income
distribution in rural areas. With the Gini coefcient the diference is only 34%.
Tis suggests that the gap between the 10% richest and the 40% poorest in
urban area is a lot larger.
Using the Palma Index, we can see that the trend of increasing inequality
is faster compared to using Gini coefcient. With the Palma Index, for the
last 10 years inequality has risen by 60%; meanwhile with Gini coefcient it
has risen only by 30%. Tis may suggest that the rising income of the middle
class has been so fast that the gap between them and the top income is closing.
Te Gini index may capture this as a decline in inequality; whereas the Palma
Index does not capture this dynamic.
3. INCOME SHARE
Graph 6 below presents the income share by urban and rural areas. Te
fgures suggest that the income share of the 20% richest households is rather
stable from 1990 until the AFC period but increases immediately afer the
AFC (2001) and continues to do so until 2012. While in 1990 the income share
of the 20% richest households was 42.1%, in 2012 it was 49.5%. Te increase
in the income share of the 20% richest households during the last decade has
been accompanied by the decline in the income share of the 40% poorest
households and the 40% middle-income households. However, the decline of
the 40% poorest households is noticeably larger. For example, from 2001 to
2012, the 20% highest income group has gained a 5.4% additional share at
the cost of the 40% poorest income group and the 40% middle-income group
losing -4.8% and -2.8% respectively.
27
Box 1. On the under-estimation of Indonesian
Gini Coefcient
2
Is there any possibility that inequality as measured by the standard indicator like
the Gini coefcient under-represents the reality? Yes, for the following reasons:
First, inequality measured using expenditure data rather than income tend to
be lower, since upper-income groups usually save a larger proportion of their
incomes, the distribution of consumption expenditure is generally more equitable
than the distribution of income. Secondly, when the data used to calculate
inequality under-represents certain groups in the population, that is, the rich.
Ideally when total consumption from the household survey is aggregated, taking
into account sampling weight, the aggregate has to be close to the national
aggregates. In fact, even in total (not by component of expenditure), it is rarely the
case. Te fact that the aggregate from SUSENAS falls short of the aggregate from
I-O, does not imply anything to distribution of expenditure across households,
so long as, the discrepancy in its component of expenditure is more or less in the
same magnitude. However, this is not the case. Te aggregate expenditure of rice
from the SUSENAS matches closely, the aggregate rice expenditure from I-O table,
while at the same time, the discrepancy in its total is high. Tis may suggest that
the discrepancy in non-food expenditure is a lot wider than the discrepancy in
food expenditure. Tis situation will be associated with distribution of expenditure
since the non-food consumption basket is higher among the top income class
rather than among lower income class. Terefore, those who believe that national
account is more accurate will speculate that the non-food expenditure from
household survey is under-estimated.
Te calculation using the most recent 2003 I-O table and 2002 SUSENAS 2002
shows this inconsistency. While aggregate food expenditure from SUSENAS falls
short from the I-O table by a factor of 1.7, non-food expenditure falls short a
lot more by a factor of 3.7. While, non-food expenditure share calculated from
SUSENAS is around 64%, national accounts data suggest it is around 77%,
suggesting a markedly-diferent expenditure pattern.
Te possible reasons include under-reporting of non-food expenditure by the
higher income groups, or the higher-income group are under-represented in the
sample. Te under-representation of high income groups could be due to non-
response rate or even the sampling frame itself. In this sort of situation, inequality
in expenditure per capita, as measured, for example by Gini coefcient will be
under-estimated.
By re-estimating the sampling weight using the optimization method and
2 Tis is based on Yusuf (2006)
28
synchronizing the two sources of data, Yusuf (2006) recalculated the Indonesian
Gini coefcient in 2003. Te results indicate a severe under-estimation of inequality
in Indonesia. Te under-estimation appears to be insignifcant in rural areas, but
substantial in urban areas. Te Jakarta factor, the possible under-representation
of the rich in the nations capital seems to account mostly for this result.
For example, the new Gini coefcient (urban and rural combined) is 0.59
compared to 0.35, a jump by 0.24. Broken down into urban and rural inequality,
the magnitude of the under-estimation is relatively very low in rural areas than in
urban areas. Te Gini coefcient in rural areas does not really change much, while
in urban areas it is quite signifcant. Tis result is quite intuitive, since, if the source
of this under-estimation is the under-representation of the very rich in household
survey, it is hard to fnd, the super rich in rural areas, than in urban areas like
Jakarta. Te breakdown of calculating Gini coefcient among provinces suggests
that the magnitude of the under-estimation is highest in Jakarta where the under-
estimation is as high as 0.24 point. Tis again could be explained since the under-
representation of top highest income group will be signifcant in the capital. Given
this fnding, overall Gini coefcient excluding Jakarta, is calculated to fnd out how
the Jakarta factor contributes to the under-estimation of inequality in Indonesia.
Te results suggest that, excluding Jakarta, the new Gini coefcient is higher by
0.9 point instead of 0.24 point. Te overall Gini coefcient in Indonesia (urban
and rural) is 0.42 compared to 0.33. Even with a Gini coefcient of 0.42 (in 2003),
Indonesia, will no longer belong to countries with the highest level of equality.
With a Gini coefcient higher than 0.5 will place Indonesia near the top of the
list of countries with the highest inequality For example, Indonesia will be in a
group with some Latin American countries like Brazil (0.61), African countries
like Sierra Leone (0.63), or even Malaysia (0.50).
Since the under-estimation of inequality as suggested by this exercise is not merely
speculation, but based on the actual inconsistency between two sources of data,
it may be concluded that the inequality in Indonesia, especially in Jakarta, is a
lot higher than expected. Tis has policy implications, but most importantly
Indonesia is not among the most equal nations.
Another approach is to use information from past information where inequality
indicator was calculated based on both expenditure and income. According to the
data compiled in the World Income Inequality Database, there were some years
where the information exist for Indonesia.
Taking into account the countries using the Gini (Figure 1 below), during the
period 2001 to 2011, Indonesia moved from low income, low inequality (lower-
lef quadrant) to low income, high inequality (upper lef quadrant).
29
Figure 1. Gini index and income by countries
Source: CIA Database
30
Graph 6. Expenditure share by income groups in urban and
rural areas (%)
Source: Authors calculation based on the National Socioeconomic Survey (SUSENAS) data
Te widening gap as measured by the income share of the three income
groups are common across urban and rural areas. One particular observation
in rural areas deserves more attention. In 1990, the share of the 40% middle-
income group was 39.3% while that of the 20% richest group 37.1%, making
the former slightly higher than the latter. Tis remained the same for the
following 15 years. However from 2007 onwards, the share of the 20% richest
household was consistently above the 40% middle-income household.
Graph 6 above also shows that from 1990 to 2003 the income share of
the 40% poorest households increased albeit slowly. From 2004 onwards their
income share started declining and that decline increased beginning in 2007.
During this period, the income share of the 40% poorest declined by 4%. Tis
means on average that the 40% poorest households in rural areas saw their
income share reduced by 0.5% every year.
31
4. RATIO OF TOP TO BOTTOM INCOME (DECILE DISPERTION RATIO)
Decile dispersion ration is the ratio of the average consumption (or
income) of the richest 10 percent of the population to the average consumption
(or income) of the poorest 10 per-cent, or:
where y
10
is the average consumption per capita of the decile 10 i.e. richest
10 percent group of the population and y
1
is the decile 0, the poorest 10 percent
group of the population. Graph 7 below shows the trend in decile dispersion
ratio in Indonesia.
Graph 7: Ratio of mean expenditure of 10% richest to 10% poorest
households
Source: Authors calculation based on SUSENAS data
Te decile dispersion ratio is the ratio of the mean expenditure of the 10%
richest households to that of the 10% poorest households. Te above graph
shows the evolution of the decile dispersion ratio from 1990 to 2012 for all of
Indonesia, urban areas, rural areas. Over the period from 1990 to 2012, the
decile dispersion ratio tended to decline moderately prior to the AFC period,
falling even further during the AFC period, but increasing rapidly afer the
AFC period up to 2012.
32
Te decile dispersion ratio trend for the last decade suggests a picture of
rising inequality that is more signifcant than that made visible by the Gini
coefcient. For example, from 2001 to 2012, the decile ratio for all Indonesia
rose by 65% or 0.44 points every year. Tis is quadruple the 0.13 point a
year rise between 1990 and 1997. Te rising decile dispersion ratio is more
prominent for urban areas and in Java. In urban areas the gap between the
10% richest and the 10% poorest from 2001 to 2012 widened by around 70%.
Te gap between the top and bottom income group also grew tremendously in
rural areas, albeit slower than in urban areas.
INEQUALITY IN OPPORTUNITY
1. EDUCATION
3
Education is important when discussing inequality because it is the
investment of human capital which in turns will create capacity to generate
earning. Inequality in earning can contribute to inequality in education
outcome.
For the last twenty years, as Graph 8 below shows, the education outcome
indicator has grown quite fast particularly the Net Enrollment Rate in
junior and senior secondary school and during the schooling years. Te Net
Enrollment rate in for higher education was relatively stable until about 2008,
then there is a big jump.
3 Te data used in this section is taken from Fahmi & Satriatna (2013)
www.keberpihakan.org.
33
Graph 8: Indicator of education outcome (national average)
Source: www.keberpihakan.org and Fahmi and Satriatna (2013).
Te national average could, however, be misleading. Te national
average can be driven by the extreme rich and thus it does not refect the real
representation of the majority. In the next section those indicators will be
disentangled into various diferent groupings such as urban-rural, gender, and
20% poorest versus 20% richest.
1.1. Urban-Rural gap in education outcome
In Graph 9 below the education outcome indicators are broken down by
urban and rural households. As can be seen from the graphs, the gap between
urban and rural literacy has been improving albeit slowly. Second, the gap
between urban and rural years of schooling does not change much. Tird, the
gap between urban and rural net enrollment in junior secondary schools has
been very fast, and so for the senior secondary but with rather slower rate. Te
gap between urban and rural net enrollment rate in university has been closing
but it still remains large.
34
Graph 9: Various indicators of education outcome by urban-rural areas
Source: www.keberpihakan.org and Fahmi and Satriatna (2013).
1.2. Gender gap in education outcome
In Graph 10 below, the same education outcome indicator are broken
down by gender (male and female). Te graph suggests that there is still gender
gap in literacy and schooling years. In the case of the latter, the gap does not
seem to be closing over the years. However, there seems to be no gap between
gender in terms of school enrollment. Both male and female enrollment rates
increase at the same growth rate.
35
Graph 10: Various indicators of education outcome by gende
Source: www.keberpihakan.org and Fahmi and Satriatna (2013).
INCOME-CLASS GAP IN EDUCATION OUTCOME
Graph 11 below shows various education outcome indicators
distinguishing between household at the bottom 20% and those in the top 20%.
Te graphs show that only one indicator, which is net enrollment rate in junior
secondary school has improved for all. Te 20% poorest households have been
catching up. Te 20% poorest has also been catching up in senior secondary
enrollment, but the current gap remains big. Years of schooling, one of the
most important indicators for education outcomes, has been progressing but
there is no tendency of declining disparity between the 20% poorest and 20%
richest households. Te gap becomes greater beginning around 2008. For net
enrollment in tertiary education, there the gap appears to be growing even
wider beginning around 2008.
36
Graph 11: Various education outcome indicators for the 20% poorest and
the 20% richest households
4
Source: www.keberpihakan.org and Fahmi and Satriatna (2013).

HEALTH INEQUALITY
From national perspective, the three health indicators shown in Graph
12 below (clean water access, sanitation access, and birth assisted by health
workers) has improved over time. However, as the graph 13 indicates, there is
still a large gap between urban and rural areas.
4 www.keberpihakan.org and Fahmi and Satriatna (2013).
37
Graph 12: Various health indicators (national average)
Source: www.keberpihakan.org and Siregar & Pitriyan (2013)
Graph 13: Various health indicators by urban-rural areas
Source: www.keberpihakan.org and Siregar & Pitriyan (2013).
From graph 14 below, we can see that the growth of access to clean water
has been faster for the 20% richest household compared to the 20% poorest
households. As a result there is a widening gap between the two. For sanitation,
the gap also seems to persist. For access to safer birth, there is a slightly faster
improvement for 20% poor households.
38
Graph 14: Various health indicators by 20% poorest and 20%
richest households
Source: www.keberpihakan.org and Siregar & Pitriyan (2013).
LABOR MARKET OPPORTUNITY
Access to the formal labor market, the key to improved earnings and
livelihoods, has been slowly increasing over time. However, it should be noted
that there has been a decline in the access to formal labor market by 20% urban
households during the most recent period. As a result the overall gap in the
access to formal labor market between top 20% and bottom 20% has been
widening.
39
Graph 15: Access to formal labor market (%)
5
CONCLUSION
So what is the verdict? Has Indonesias increased prosperity, as measured
by standard economic indicators such as economic growth or per capita
income, been shared by all? When the criterion is that almost everyone gets
the share of that prosperity through the increase in their income, the answer
is yes. Indonesian economic growth over the last 20 years has been relatively
high, and poverty incidence has been in decline. Tis cannot happen when
the poor did not beneft from the growth. With this criterion, we can say that
economic growth is inclusive.
However, development that reduces disparity and inequality, the rate of
growth in the standard of living of the poor has to be faster than the non-
5 Purnagunawan (2013) and www.keberpihakan.org
40
poor. Ten we have inequality-reducing growth, or pro-poor growth. From
this criterion, the answer is no.
Inequality in development outcome, measured by various indicators such as
Gini coefcient, income share, and decile dispersion ratio suggest that equality
has been on the rise particularly during the last 10 years. Te magnitude of the
increasing inequality has been quite serious in time comparison (reaching the
highest in history) as well as in cross-country comparison.
Tere seems to be little progress in reducing disparities in inequality
of opportunity. Access to the formal labor market for the poor is in decline
especially in urban areas. Te poor have less and less access to higher paying
jobs in urban areas. Tere are also clear signs that the gap in education between
the poor and the rich has not been improving, particularly the opportunity to
access education that guarantee better life like higher education. On the health
front, a similar picture can be drawn. Access to clean water has been progressing
faster for the top income households, slower for lower income households
making it impossible for disparity to decline. Te inequality of opportunity
is a fundamental element of inequality in earning and development outcome.
Indonesia is facing one of the greatest development challenges, that is,
increasing inequality on many fronts. It is one of the greatest challenges because
the solution to this problem is less clear-cut than other kind of challenges such
as poverty. Reducing inequality involves more collective decision making on
how the nation allocates it resources among groups. Inequality needs to be
taken seriously amongst policy makers.
41
REFERENCES
Alisjahbana, A., Yusuf, A., Chotib, Yasin, M., & Soeprobo, T. 2003. Understanding
the Determinants and Consequences of Income Inequality in Indonesia.
Bangkok, East Asian Development Network (EADN).
Akita, T. 2002. Regional Income Inequality in Indonesia and the Initial Impact
of the Economic Crisis. Bulletin of Indonesian Economic Studies 38(2),
201-222.
Cobham, Alex, and Andy Sumner. 2013. PUTTING THE GINI BACK
IN THE BOTTLE?. Te Palmaas a policy-relevant measure of
inequality. Available [online] from: http://www. kcl. ac. uk/aboutkings/
worldwide/initiatives/global/intdev/people/Sumner/Cobham-Sumner-
15March2013. pdf).
Fahmi, Mohamad and Ben Satriatna. 2013. Development in Education Sector:
Are the Poor Catching Up?, Working Papers in Economics and
Development Studies (WoPEDS) 201315, Department of Economics,
Padjadjaran University, revised Jul 2013.
Palma, J.G. 2006. Globalizing inequality: Centrifugal and centripetal forces
at work DESA Working Paper 35, New York: UN Department of
Economic and Social Afairs.
Palma, J.G. 2011. Homogeneous middles vs. heterogeneous tails, and the
end of the Inverted-U: Te share of the rich is what its all about,
Cambridge Working Papers in Economics 1111, Cambridge:
University of Cambridge Department of Economics (later published in
Development and Change, 42, 1, 87-153).
Pipit Pitriyan and Adiatma Y.M Siregar. 2013.Health inequity in Indonesia: is
it declining?,Working Papers in Economics and Development Studies
(WoPEDS) 201316, Department of Economics, Padjadjaran University,
revised Jul 2013.
Van der Eng, P. 2009. Growth and Inequality: Te Case of Indonesia, 1960-
1997. MPRA Paper 12725. Munich: Munich Personal RePEc Archive.
Yusuf, Arief Anshory. 2006. On the re-assessment of inequality in Indonesia:
household survey or national account? Working Papers in Economics
and Development Studies (WoPEDS) 200605, Department of
Economics, Padjadjaran University, revised Aug 2006.
Yusuf, Arief Anshory and Irlan A. Rum. 2013. Living beyond $2 a day:
How Indonesia has progressed, Working Papers in Economics and
Development Studies (WoPEDS) 2013XX, Department of Economics,
Padjadjaran University.
Yusuf, Arief Anshory, Andrew Sumner and Irlan A. Rum. 2012. Long-run
evolution of inequality in Indonesia, (WoPEDS) 2013XX, Department
of Economics, Padjadjaran University.
42
43
INEQUALITY,
THE DARK SIDE OF
DEVELOPMENT
IN INDONESIA
Herjuno Ndaru Kinasih
ABSTRACT
Inequality has further widened in Indonesia as indicated in the countrys
Gini coefcient which has risen since 2004. Indonesias Gini index in 2013
reached 0.42, a record high since the 1960s. Worsening inequality is attributed
to two key factors: economic policy and institutional factors. Economic
policies that maintain economic dualism, agricultural laws that are more
favorable toward corporations and structural transformation failures have
led to disparities. Furthermore, biased, corrupt institutions dominated by the
oligarchic elite have also contributed to growing inequalities. In Indonesia,
livestock imports are an example put forward in this study to examine how
the institutional factor impacts on inequality. To narrow existing gaps, this
study recommends measures that promote equality through asset, land and
income redistribution. Second, the government needs to strengthen social
policies that allow people to improve their well-being. Tird, the government
must more systematically empower the poor and local communities. Eforts
to reduce inequalities should also adopt a sectoral approach by paying specifc
attention to the agricultural sector, primarily in responding to structural
transformations.
44
INTRODUCTION
Human development is the end - economic growth a means. So, the
purpose of growth should be to enrich peoples lives. But far too ofen it does
not. Te recent decades show all too clearly that there is no automatic link
between growth and development. And even when links are established, they
may gradually be eroded.... United Nations Development Programme
Te foregoing excerpt taken from a United Nations Development
Programme (UNDP) report in 1996 refects how global economic growth has
not been translated into socio-economic policies capable of elevating the well-
being and dignity of the poor and marginalized. In the report, UNDP brought
to attention the fve undesirable forms of economic growth within global
capitalism which many countries worldwide have embraced: jobless, voiceless,
futureless, rootless, and ruthless. (UNDP,1996). Te UNDP report highlights
on disparities among countries in which the income of 20% of the worlds
poorest has declined from 2.3% of total global income to a mere 1.4% from
1960 to 1996. Meanwhile, the wealthiest 20% percent of the worlds population
hold 70% of global income in the 1960s which increased to 85% in 1996. Tis
has led to a widening rich-poor wealth gap of 30 : 1 in 1996, which doubled
from 30 years ago at 61 : 1 in the 1960s (UNDP, 1996).
How is the development situation today? In November 2013, the World
Economic Forum (WEF) published the Outlook on the Global Agenda which
ranks income inequality as one of the key global issues of the future that will
further worsen and be of greater risk. Tis trend is not only highlighted by
WEF, but also by international humanitarian organizations and academicians.
According to Oxfam, an international humanitarian aid agency, a total of 210
people have become new billionaires in the past year joining the existing 1,436
billionaires with a combined net worth of $5.4 trillion annually. Te worlds
wealthiest 1% earns $110 trillion, or 65 times the total wealth of the bottom
half of the global population. What about Indonesia? An Oxfam report reveals
a similar situation for Indonesia with an ever widening divide from year to
year. Tis is illustrated in Graph 1 below.
45
Graph 1: Income Inequality in Indonesia
Source: Oxfam, 2013
Te graph shows Indonesias increasing inequality, particularly afer 1999,
where the disparity between the richest 10% and the poorest 40% further
widens due to a drastic drop in the income share of 40% of the countrys
poorest compared to the wealthiest 10%.
Similarly, the Asian Economic Policy Review also emphasized on rising
inequality in East Asia, including Indonesia. Hal Hill (2008) wrote that
Indonesias economic growth is enjoyed more by those living in regions where
economic activities are concentrated. Regions isolated from these growth
hubs tend to lag behind, leading to the emergence of new, more prosperous
areas such as East Kalimantan and Riau. Papua and Nusa Tenggara on the
other hand remain lef behind as indicated in their extremely low level Human
Development Index.
One of the standard indicators of economic inequality is the Gini coefcient
with values between 0 and 1. Te closer the coefcient to 1, the greater the
inequality and vice versa. Te Indonesian Central Bureau of Statistics (BPS)
recently released Indonesias Gini coefcient for 2012 which scored 0.42, an
increase from 0.41 in 2011. Tis is the frst time in history that the countrys
Gini coefcient reached the level of 0.4. Te index is reported to have sharply
increased, particularly in urban areas which remain higher compared to rural
areas. Tis is illustrated in Graph 2 below.
46
Graph 2: Indonesias Gini Index, 1999-2012
Source: Arief Anshory Yusuf, 2014
Economic development under capitalism has failed to open up ample
room for the poor and marginalized to engage in the development process.
Global economic growth in 2013 reached 2.9% and in Asia Pacifc it is reported
to be 6.9%. Indonesia managed to post an impressive 6.2% in economic growth
in 2013, one of the highest in Southeast Asia.
Other development indicators also showed a positive trajectory.
Investments in Indonesia rose more than 50% from 2009 to 2012. Tax and
non-tax revenue similarly experienced an upward trend. Te International
Monetary Fund (IMF) in 2011 forecasted that Indonesia will develop into
one of the worlds economic powerhouses, predicting its economic share
will reach USD 7 trillion by 2050, and will be ranked 7
th
afer China, United
States, India, Brazil, Mexico and Russia. Price Waterhouse Coopers (2013), an
economic research consultancy frm, foresees Indonesia to be the worlds 8th
largest economy capturing an economic share of USD 6.3 trillion. Te World
Bank (2011) predicts that Indonesia will be among the six countries with the
largest contribution to global economic growth by 2025.
What does this signify for human development? According to data
from BPS and the World Bank, Indonesias poverty rates have decreased over
time. In reference to the World Bank standard, Indonesias poor population
accounts for 15.4% in 2008, and later dropped to 14.2% in 2009 before falling
further to 13.3% in 2010. In 2011, the poverty rate was 12.5% and in 2012
the proportion of the population which the World Bank categorized as poor
decreased to 12%. Inequality on the contrary has worsened. Indonesias Gini
47
index reveals a widening gap. Tis disparity is not only inconsistent with the
decline in poverty rates but more substantially with Indonesias GDP which
has consistently moved upwards.
Apart from the Gini measure for income, other equally important factors
to serve as reference point and benchmark in analyzing inequality are the
Gini ratio for wealth and land ownership. Wealth plays a crucial role for an
individuals pursuit of income. According to Hernando De Soto (2003), all
types of assets can be utilized to generate income. Within this context, asset
inequality can bring about potential disparities in the long run.
A study conducted by Rand Institute (1997) found that 1% of Indonesias
wealthiest people have taken control of 28.7% of total assets, whereas the richest
5% and 10% own 56% and 65.4% of total assets. Te wealth of Indonesias
richest 10% (65.4%) is far above their income share of 30%. In relation to
this, Indonesia is ranked 17th position among 150 countries surveyed with
the highest inequality in terms of its Gini measure of wealth (Davies, 2009).
Davies (2009) contends that the concentration of asset control is an indication
of the poor quality of services and public goods, such as health care, public
transport or public space, and an increasingly lack of resources which all can
enjoy such as water and air.
Behind these statistics are the unequal control of assets and land that
national policies need serious attention. In Indonesia, the redistribution of
assets and land (land reform) remains relatively hard to implement, even
though the government committed to agrarian reform when President Susilo
Bambang Yudhoyono frst came to power.
Improvements to social services and human development can serve as an
indicator of inequality reduction. A UNDP report in 2013 ranked Indonesia at
121st position with regard to its Human Development Index (HDI), considered
an average score in Southeast Asia. Neighboring countries such as Singapore,
Brunei Darussalam, Malaysia, Tailand and the Philippines have higher HDI.
Indonesia, however, has performed better than Vietnam, Cambodia, Laos and
Myanmar. Compared to ASEANs economic growth, Indonesia ranks among
the highest. Nevertheless, the rate at which Indonesias HDI has improved
has not been as fast at its economic progress. Te Philippines and Brunei
Darussalam for example have much higher HDI but with less rapid economic
growth compared to Indonesia. From 2009 to 2012, Indonesias economy has
consistently grown above 6% annually, whereas other ASEAN member states,
such as the Philippines, were only able to surpass 6% afer 2013.
Wilkinson and Pickett (2010) in their book Te Spirit Level, observed a
close link between inequality and the quality of life or well-being of a nation.
48
Tey explained how weak social cohesion is a consequence of inequalities that
exist in society. Te well-being of a nation can be undermined by social confict,
increased crime rates, lower level of happiness, worsening health status, eroding
social trust and political instability. Social and income inequalities therefore
are not simply economic issues but also pertain to the peoples resilience and
sense of security.
ECONOMIC POLICY FACTOR
Seen from a historical lens, Indonesias economic structure, that it inherited
from the colonial period, has created a divide between the informal and formal
sectors (Hill, 2008). Tis is also known as the phenomenon of economic
dualism. Te formal-informal gap has excluded the informal sector from the
economic development process. As a consequence of this exclusion, the formal
sector has continued to move forward without a gradual transformation from
the agricultural sector to agroindustry. Te agricultural sector has failed to
transform into an industry with added value (Wickramasinghe et al., 2012).
Farmers are therefore caught in a cycle of low productivity. Tis is evident
from the agricultural sectors minor contribution to GDP yet has a high labor
absorption rate. According to data from the Ministry of Agriculture (2012),
the agricultural sector (including the plantation sub-sector that covers oil
palm, rubber, cocoa and others) only contributed 15.14% to GDP and employs
39% of the countrys population. A UNESCAP study found that the lack
of high value-added activities in the agricultural sector is indicated in the
insubstantial amount of credit channeled to the agricultural sector reported
to only account for 6% of total loans ofered by banking institutions in 2012
(Siregar in Wickramasinghe et al., 2012).
Because growth has not been based on the local economy, several
observers such as Indonesian Institute for Research (Lembaga Ilmu
Pengetahuan Indonesia LIPI) LIPI, National Agency for Technological
Research and Application (Badan Pengkajian dan Penerapan Teknologi
BPPT) and Bandung Insitute of Technology (Institut Teknologi Bandung
ITB), predict that Indonesia will be at risk of de-industrialization (http://www.
technology-indonesia.com/ict/layanan-informasi/106-indonesia-mengalami-
de-industrialisasi and Kompas, 22 December 2010). De-industrialization is
due to the weakening competitiveness of the industrial sector accompanied by
the agricultural sectors declining contribution to GDP.
In the agricultural sector, investments in terms of quantity have expanded.
In 2008, the Ministry of Agriculture recorded domestic investments worth
49
USD 107 million which then rose to USD 875 million in 2012. Foreign direct
investments on the other hand amounted to USD 147 million in 2008 which
surged to USD 1.271 billion in 2012 (Koran Sindo, 28 August 2013).
A boost in agricultural investments has lowered farmers terms of trade
(FTT). Te farmers terms of trade refers to the ratio between the index of
prices received by farmers and the index of prices paid by farmers expressed
as a percentage. In terms of concept, FTT measures the trading position of
agricultural goods (products) produced by farmers relative to goods or services
needed for household consumption and for agricultural inputs.
On a national scale, FTT for 2014 reached 101.95. Tis means that a farmer
who has paid IDR 100,000 in expenses will generate profts worth IDR 1,950.
Te farmers proft margin is therefore only 2% from total production cost.
Food crop farmers receive far less economic gains with FTT at 99.88 which
results in a loss of USD 10,9 when a farmer incurs USD 9 in production costs.
Figures vary for horticultural growers and smallholder farmers. Table 1 below
presents the FTT for each agricultural sub-sector from 2011 to 2014.
Table 1: National Farmers Terms of Trade per Year by Sub-sector
(Source: Central Bureau of Statistics, 2014)
Te table above shows a declining trend in the FTT of Indonesian farmers
despite an increase in investment realization in 2012. Food crop farmers in
fact sufer losses and based on FTT calculations did not generate any profts
in 2014. Te FTT for food crop, horticulture and plantation sub-sectors
decreased over the years, while the animal husbandry sector experienced an
improvement in its terms of trade. At the regional (sub-national) level, BPS found
that many regions across Indonesia have an FTT of less than 100 in 2014. Farmers
are therefore struggling with losses as their production inputs have not been in
proportion to their earnings. Provinces with a negative FTT include Aceh, North
Sumatra, Riau, Jambi, Bengkulu, West Nusa Tenggara, East Nusa Tenggara, West
50
Kalimantan, Maluku, West Papua, and Papua. Meanwhile, provinces with the
highest FTT are Banten and South Sulawesi (Bantens FTT in 2014 at 105.00 and
South Sulawesi at 104.98). West Kalimantan has the lowest FTT at 96.62.
In relation to increases in agricultural investments, the issue of inequality
where much attention has been focused on policies that lean toward
corporatism. Corporatism refers to an industrial policy that prioritizes major
players compared to non-corporate actors and other lesser players. Numerous
studies, such as the one conducted by UNDESA (2014), reveal how corporatism
has mainstreamed into the agricultural policies of many countries, including
Switzerland, China and Austria. Tese countries have modernized their
agricultural sector by giving precedence to corporate investments rather than
developing smallholders. Tis trend towards corporatism has also surfaced
in countless other countries under the contract farming scheme. Indonesia
has long applied the contract farming approach. Tambunan (2012) observed
that the contract farming business model has failed to empower farmers even
though in terms of business relations, products produced by farmers under
this scheme are purchased by companies. In certain cases however, this
approach has worked against small farmers. An example is Nestles contract
farming scheme with dairy farmers in Kanjuruan, East Java whereby the Dairy
Processing Industry (IPS) in which Nestle is also a part of, has not set a fair
and reasonable price for dairy farmers. Another contract farming case that
has also caught public attention concerns corn growers in East Java who have
entered into a production contract with Pioneer, a corn seed producer. In the
business contract, farmers buying seed from the company will break the law
if they locally cultivate their own corn seeds. Corn farmers in East Java will
be liable to 17 counts of violations should they insist on developing their own
corn seeds. (Aliansi Petani Indonesia, 2012)
Corporatism is believed to be one of the causes of inequality, specifcally
for farmers, plantation growers and fshermen who rely on these commodities
as their main livelihoods. In Aldersons work titled Globalization and the
Great U Turn, corporatism is mentioned as one of the dimensions related to
the institutional factor that has led to income inequality in 16 OECD member
countries. Tis income gap has in turn brought about disparities in wage setting,
lower school enrolments and womens increased labor force participation.
Under such circumstances, the relationship among relevant actors
therefore needs to be directed toward narrowing inequalities. Industrial and
trade policies favorable to small-scale farmers must be promoted and realized
in various sub-sectors. Partnership arrangements between corporations and
farmers need to be re-examined in order to ensure a fairer and more balanced
relationship.
51
Inequalities in the real sector of the economy are also refected in the
many cases of confict between corporations and the local community.
Prayogo (2010) recorded a number of cases involving mining corporations
from 1998 to 2003, including Kaltim Prima Coal, Unocal, Kideco Jaya Agung,
Kelian Equatorial Mining, Tinto Harum, Indomuro Kencana, Expans Tomori
Sulawesi, Permata Karya Graha Sakti, Meares Soputan Mining, Prima Lestari,
Pulau Indah Teknik, Inco, Newmont Minahasa Raya, Newmont Nusa
Tenggara, Freeport Indonesia, Newcrest Halmahera, and Exxon Mobil in
Aceh. A particular case that drew national attention was the alleged industrial
pollution in North Sulawesi perpetrated by Newmont Minahasa Raya, and in
2006 involving Freeport Indonesia in Papua and Newmont Nusa Tenggara in
Sumbawa. Research conducted from 1999 to 2003 found a similar phenomenon
for Unocal, BP, BHP-Arutmin, Newmont Sumbawa, Banpu, and KPC, Banpu
and Berau Coal (Prayogo, 2010).
Banking policies that have not been inclusive enough have also made
inequality worse. Indonesias banking sector is reported to place priority
on gaining high net interest margin (above 5% annually) instead of credit
absorption by micro, small and medium-sized enterprises (MSMEs).
Consequently, banking customers and small businesses, particularly
micro enterprises, are lef with uncertainties and banks not fulflling their
intermediation function for local businesses in Indonesia. Tis poor quality
of intermediary role is evident in the banking sectors imposition of high
interest rates for loans channeled to micro and small-scale enterprises. Interest
rates for small businesses applied by private banks can reach 93.5% of total
loans for a three-year repayment period. Tis exceeds the limit set by Bank
Indonesia. Indonesian banks have opted for growth in interest income and
high net interest margin (NIM). Banking institutions in Indonesia on average
have higher NIM compared to other ASEAN countries, such as Malaysia and
Singapore. Bank executives in Indonesia are also reported to being paid higher
salaries than those in neighboring countries, such as Malaysia (Malaysian
Insider, 10 January 2014).
Te structural factors mentioned above illustrate how existing inequalities
are attributed to an economic growth that is not supported by adequate
economic policies that provide smallholder farmers the opportunity to grow
and develop. On the other hand, corporatism that entrusts economic power
to large corporations has prompted a shif towards a more oligarchic form of
economic control, concentrated only on major business elites. A development
process under such circumstances is not being complemented with high
quality human capital through adequate social services.
52
INSTITUTIONAL FACTOR
Te institutional factor refers to the key causes of inequality (Canada
Board Conference, 2012). Institutional support is crucial in the design of a
countrys economic structure. Krugman (2009) holds a fairly extreme view by
arguing that inequality is the result of institutional preferences, shifing norms
and political bias, and not merely due to market forces.
Te institutional factor is refected in various government policies, while
institutional character is evident from their policy leanings; whether biased
towards certain groups or capable of maintaining integrity by making equality
a priority.
In the book, Why Nations Fail? Daron Acemoglu and James Robinson
(2012) shed light on the importance of political and economic institutions
in promoting progress and equality. When a country opts for inclusive
economic and political institutions, it will be able to create prosperity and
equality. According to Acemoglu and Robinson (2012), inclusive economic
and political institutions present each and every citizen the opportunity to be
involved in economic and political activities without discriminatory treatment.
Exclusive institutions on the contrary will only aford certain groups with such
opportunities.
If political institutions are in the hands of a selected few, an oligarchic
structure will emerge in which they will collaborate with the economic powers
(Winters, 2011). Next are the rent-seekers who constitute a group that reap
economic gains without much efort or proft from information asymmetries
(Stiglitz, 2012).
Tis phenomenon of rent-seeking economy has manifested in several
sectors, including agriculture, animal farming and construction. A concrete
example of rent-seeking economy that the mass media has brought to light
is the livestock sector. Despite having 14 million locally bred cattle which
is the equivalent of 430,000 tons of beef, Indonesia still imports beef from
Australia and Latin American countries. Following the exposure of the cartel
involved in beef import corruption, the Corruption Eradication Commission
(KPK) estimated a loss of IDR 18.7 trillion arising from the failed Agricultural
Ministrys beef self-sufciency program (PSDSK). Tis fnancial loss is
calculated from the total budget allocated in the APBN (national budget) for
2009-2014. Tis program in fact is intended to empower farmers and cattle
breeders in Indonesia. Te fnancial damage caused has adversely afected 6.2
million small and medium-scale livestock breeders. (Republika, 20 February
2013).
53
Box 1: Livestock Sector In Indonesia: Corporate
and Cartel Domination
Te animal farming industry in Indonesia still lags behind in terms of
development. Tis is evident in the countrys reliance on imports, both for milk
powder and beef.
Under Indonesias livestock sub-sector, the dairy industry has seen slow growth
due to heavy dependence on imported raw materials. According to research
conducted by the Bogor Institute of Agriculture (IPB), 70 percent of dairy raw
materials are still brought in from other countries in the form of skimmed milk
and cream. Fresh milk supply from domestic farmers can only meet 30 percent
of the raw material demand of the dairy industry.
Te infux of imports following the removal of import tarifs for skimmed
milk and milk powder, has allowed producers to freely choose their preferred
source of raw materials which can either come from abroad or local farmers.
Te problem lies in the high standards of dairy manufacturers that impede local
farmers from being able to supply raw materials in bulk. Furthermore, many
farmers have not thought of expanding their businesses due to low prices.
In the dairy sector, the Dairy Processing Industry (IPS) is an association
of producers that set the price of fresh milk. IPS membership consists of PT
Nestle Indonesia, PT Ultra Jaya, PT Frisian Flag, PT Sari Husada and PT
Indolacto. Te majority of these companies are corporations with foreign
investments, including Sari Husada. To ensure an uninterrupted supply of milk,
IPS has entered into a contract with cattle breeders, guaranteeing that all milk
production is sold to IPS. At least 80-90 percent of milk produced by Indonesias
farmers is absorbed by the dairy industry but at a low price. In 2012 for example,
farmers in East Java are only paid IDR 3,200-3,500 per liter of milk. Indonesia
has the cheapest fresh milk price compared to other Southeast Asian countries
for the same year. In Malaysia, the average price is IDR 5,400, Tailand IDR
5,200, Philippines IDR 4,800, and Vietnam IDR 4,200 per liter in 2012.
As all milk production must be handed over to IPS, the national industry
lacks the capacity to establish its own dairy plant. Small and medium-scale
enterprises are incapable of breaking the domination of the six major dairy
producers. Farmers are also powerless in terms of pricing because the National
Dairy Council (DPN) has not been functioning as it should, thus giving IPS
plenty of leeway to set prices.
Not only in the dairy business, beef cattle farmers have also been rendered
powerless in facing the livestock cartel which refects rent-seeking economy.
A KPK study showed that 93% of Indonesian livestock farmers in fact are able
to meet national beef demand, but locally produced meat will have difculty
54
Source: Anti Corruption Commission (Komisi Pemberantasan Korupsi), Kajian Kebijakan
Tata Niaga Komoditas Strategis : Daging Sapi (Study of Strategic Commodity Chain), 20
February 2013, http://acch.kpk.go.id/documents/10157/27926/Kajian-kebijakan-tata-niaga-
komoditas-strategis-KPK.pdf and Kegagalan Swasembada Sapi Capai Rp. 187 Triliun. (Te
Failure of Cow Self-Sufciency Reached IDR 187 trillion), 20 Februari 2013
http://www.republika.co.id/berita/ekonomi/makro/13/02/20/miieqh-kegagalan-
swasembada-sapi-capai-rp-187-triliun
How does this rent-seeking economy impact on inequality in Indonesia?
A rent-seeking economy encourages the concentration of fnancial gains
to cartels and certain networks rather than the widespread distribution of
economic benefts for the people. Furthermore, social programs designed for
the people are no longer efective despite budget realizations for this purpose.
Te existence of rent-seekers has become a phenomenon distinct to
developing countries with wide economic disparities. African countries such
as Zimbabwe, Uganda and Congo are classic examples of nations weighed
down by chronically exclusive economic and political institutions. Indonesia
during the New Order regime and the Philippines under Marcos rule are other
examples in Southeast Asia. Te economic crisis in Indonesia followed by the
countrys political turmoil eventually led to their demise. When conditions
have not become too chronic, remedial eforts are possible by improving the
political and economic systems. According to Acemoglu and Robinson (2012),
if there is the need to prioritize, eforts to create inclusive, democratic political
institutions could be given precedence.
Te institutional factor is also essential in promoting policies aimed
at reducing inequalities, for example through innovative tax instruments.
penetrating the Jakarta market due to imported beef directly fown into the
capital city. Beef from West Nusa Tenggara for example cannot enter the Jakarta
market compared to the easy access of meat imported from Darwin, Australia.
Tis constitutes a cartel as a group of people takes control over the market
circulation of beef. Tis is not surprising due to the lucrative nature of the
beef import business. From KPKs investigation it was found that for every
kilogram of imported beef, cartel players receive IDR 5,000 in commission. As
a consequence, small farmers are lef in a weak position, unable to compete
with others who are at a more advantageous footing within the cartel system.
In light of this, the national logistics system should be improved to reduce
the inequitable access to distribution from the eastern to the western part of
Indonesia, and vice versa.
55
With a democratic political and economic system in place, taxes can serve
as an efective means to ensure an evenly balanced growth (Antara News, 5
September 2013).
THE WAY FORWARD
Indonesias remarkable economic growth of late followed by widening
income inequalities in society is an indication of the countrys fawed
development concept. Te Gini index at 0.42 is the worst since Indonesia
gained independence. Tis means that progress achieved in the business sector
in aggregate has failed to heighten the collective well-being of the people which
is one of the goals that the State should uphold.
What policies can be promoted to reduce inequalities? First, equality
is crucial either through the redistribution of assets, land or income, or
taxation. Tax instruments have thus far not been given due attention from the
government as a means to narrow social disparities. Second, the government
should specifcally pay heed to marginalized groups and micro entrepreneurs,
including farmers and fshermen, whose well-being relies on natural resources,
particularly with regard to business and technological development. Tird, the
government needs to strengthen social policies that allow the people to attain
higher levels of well-being. Fourth, the government should systematically
empower the poor and local communities. Fifh, the government ought to
seriously work towards creating equal opportunities for economic activities
pertaining to access to capital and fnancing for micro and informal businesses.
Inequalities can also be reduced by adopting a sectoral approach. For
Indonesia, specifc attention should be given to the agricultural sector which
employs 39% of the labor force yet only contributes 13% to GDP. Tese fgures
have experienced a declining trend over time as refected in agricultural sector
growth at an average of 2.2%, lower than GDP growth even though agricultural
investments have increased. Furthermore, limited land ownership for farmers
also poses a serious challenge for the countrys agricultural sector, making
agrarian reform an increasingly pressing agenda.
In addition, gender-based poverty reduction eforts also need to be
scaled up. Women should have better access to education, health care, poverty
alleviation programs and micro-credit, and to be more involved in household
economic activities in order to improve their standard of living.
Various measures to deal with inequalities need to be undertaken seriously
through a more efective development paradigm. Development ultimately is
56
not about accumulating economic gains. Human capital is in fact the nations
essential asset. Te main development purpose is to create environments
conducive for the people to lead better lives, in terms of health, education,
housing and productive activities.
REFERENCES
Acemoglu, D., Robinson J. Why Nations Fail, Te Origins of Power, Prosperity
and Poverty. London: Profle Book Ltd. 2012.
Antara News. Takaran Pajak Harus Jelas. 5 September 2013.
Alderson, A. Globalization and U Turn. Paper for Social Stratifcation
Research Committee (RC 28) of the International Sociological
Association in Mannheim, Germany , 26-28 April 2001. Downloaded
from: http://www.unc.edu/~nielsen/soci850/odocs/ajs01.pdf
Badan Pusat Statistik. Nilai Tukar Petani. 2014. Downloaded from: http://
www.bps.go.id/menutab.php?tabel=1&kat=2&id_subyek=22
Berita Satu. KPK Temukan Banyak Kartel Sapi di Indonesia. 9 September
2013. Downloaded from: http://www.beritasatu.com/nasional/137031-
kpk-temukan-banyak-kartel-sapi-di-indonesia.html
De Soto, Hernando. Te Mystery of Capital: Why Capitalism Triumphs in the
West and
Fails Everywhere Else. Basic Books. 2003.
Hill, Hal. Globalization, Inequality, and Local Level Dynamism: Te Case of
Indonesia and the Philippines in Asian Economic Policy Review Vol.
3 No.1 June 2008. Tokyo: Japan Center for Economic Research. 2008.
International Monetary Fund. Indonesia: Selected Issues in IMF Country
Report No. 11/310. Washington DC: IMF. 2011. Downloaded from:
http://www.imf.org/external/pubs/f/scr/2011/cr11310.pdf
Kompas. LIPI: Indonesia Menuju Deindustrialisasi. 22 December 20100.
Krugman, Paul, in Wilkinson Richard & Pickett Kate. Te Spirit Level: Why
Equality is Better for Everyone. London: Bloomsbury Press. 2011.
Malaysian Insider. Kadar Naik Gaji Malaysia 2.6%, Indonesia 10%, Dakwa
Rafzi. 10 January 2014.
57
Milanovic, B. World Income Inequality, Is the World Becoming More
Unequal? Toronto: Te Conference Board of Canada. 2013. Accessed
from http://www.conferenceboard.ca/hcp/hot-topics/worldinequality.
aspx
Prayoga,Anatomi Konfik antara Korporasi dan Komunitas Lokal. Jurnal
Makara Sosial Humaniora. Vol. 14 No. 1 July 2010. Depok: University
of Indonesia.
Pricewaterhouse Coopers. World in 2050, Te BRICs and Beyond: Prospect,
Challenges and Opportunities. Pricewaterhouse Coopers. 2013.
Accessed from http://www.pwc.com/en_GX/gx/world-2050/assets/
pwc-world-in-2050-report-january-2013.pdf
Rand Institute. Indonesia Family Life Survey. in Davies J.B., Sandstrom S.,
Shorrocks A.B., Wolf E.N.Te Level and Distribution of Global
Household Wealth, NBER Working paper Series, Washington DC :
National Bureau of Economic Research. 2009.
Republika. KPK: Ada Mafa Kartel di Perdagangan Sapi. 20 February 2013.
Tambunan, Tulus. A Survey of Business Models for Agricultural Investment
in Indonesia. TKN Report December 2012. Manitoba: International
Institute for Sustainable Development.
Technology Indonesia. Indonesia Mengalami Deindustrialisasi. Downloaded
from: http://www.technology-indonesia.com/ict/layanan-
informasi/106-indonesia-mengalami-de-industrialisasi
United Nations Development Program. Human Development Report 1996.
New York: UNDP & Oxord University Press. 1996.
World Bank. Te Indonesia Competitiveness Report 2011: Sustaining the
Growth Momentum. World Economic Forum. 2011. Downloaded
from: http://www3.weforum.org/docs/WEF_GCR_Indonesia_
Report_2011.pdf
Wickramasinghe, Upali, et.al. (ed.) Te Role of Policies in Agricultural
Transformation
Lessons from Brazil, Indonesia and the Republic of Korea in UNESCAP
Working Paper No. 106. Bogor: CAPSA & UNESCAP. 2012.
Downloaded from: http://www.uncapsa.org/publication/WP106.pdf
Wilkinson, Richard & Pickett Kate, (2011), Te Spirit Level: Why Equality is
Better for Everyone, Publisher: Bloomsbury Press.
Yusuf, Arif Anshori. Recent Trend in Inequality in Indonesia presented at the
INFID Workshop on Inequality. 18 December 2013. Jakarta.
58
59
EFFECTIVENESS OF
POVERTY REDUCTION
POLICIES AND PROGRAMS
Tursia
ABSTRACT
Poverty is an unfnished agenda that cannot be addressed with half
measures from the government. It should be meticulously examined, from
its root causes to viable solutions. Te confusion and ambiguity, pros and
cons, and all other issues arising from poverty reduction eforts, including the
institutional and policy dimension can be minimized from the outset in order
to prevent new problems from surfacing. Synergy and coordination among
state ministries is the cornerstone for efective implementation of poverty
reduction programs in Indonesia. Te issue of poverty is not simply about the
sum and percentage of the poor. A whole list of other dimensions need to
be factored in, one of which is the depth and gravity of poverty. Apart from
efectiveness in reducing the number of poor people, anti-poverty policies
should also be able to narrow the rich-poor gap, reduce the depth and gravity
indices, and explain the root cause of poverty. Only then will policies be able to
bring forth programs genuinely oriented toward alleviating poverty. Laws and
regulations upon which poverty reduction programs are based should ideally
be complemented with accurately targeted implementation in a measurable
and sustainable fashion to ensure that these programs do not merely address
seasonal poverty (poverty as a result of certain conditions).
60
INTRODUCTION
1. POVERTY REDUCTION PROGRAMS IN INDONESIA
Poverty is ofen equated with an individuals inability to meet his or her
minimum standard of living. Poverty essentially is a social phenomenon not
exclusive to developing nations such as Indonesia, but is also an issue that
persists in more economically advanced countries with better living standards.
Tis need to address poverty has galvanized global movements such as
the the World Summit on Social Development in Copenhagen in 1995 which
included the issues of poverty, unemployment and social exclusion as key
areas of concern. At the national level, Indonesias 1945 Constitution identifes
poverty as one of the countrys priority agendas
1
. Alas, poverty remains an
unrelenting issue for Indonesia. Absolute poverty may show signs of abating
since the 1990s
2
, but those on the brink of poverty are vulnerable to slipping
back into destitution.
Te number and percentage of poor people from 1996 to 2008 has
fuctuated over time, despite a declining trend in 2000-2005. From 1996 to
1999, an additional 13.96 million people who were afected by the economic
crisis joined the ranks of the poor, making it a total of 47.97 million people
living in destitution in 1999 compared to 34.01 million in 1996. In terms of
percentage, the poor population swelled from 17.47% to 23.43% for the same
period. In 1999-2002, at least 9.57 million people have escaped poverty which
means a drop in poverty headcount from 47.97 million people in 1999 to 38.40
million in 2002. Te proportion of the population living in poverty also shrunk
from 23.43% in 1999 to 18.20% in 2002.
1 Article 28H (1), 1945 Constitution stipulates that every person is entitled to lead
full and satisfying lives, mentally and physically, to decent housing and a safe and healthy
environment, and the right to health care. In Article 35 clause 2, the State shall develop a
social security system for every citizen and empower the weak and underprivileged to honor
their diginity as human beings.
2 Poverty statistics saw a downward trend from 47.97 million or 23.43% by the
end of 1990 to 30.02 million or 12.49% in 2011, and fell further to 28.07 million people or
11.37% (TNP2K, 2013). Since 1994, the government of Indonesia has developed a wide range
of poverty reduction programs to provide social protection to its citizens. Over the years,
programs have evolved from the Underdeveloped Village Program (IDT) introduced in
1993-1997 to the Family Welfare Development Program implemented from 1996 to January
2003. Other smaller scale anti-poverty programs were also launched, such as the program on
increasing the income of small-scale farmers/fshermen (P4K) carried out in 1997-2005. In
1998, the sub-district development program (PPK) and urban poverty reduction program
(P2KP) were developed to empower urban communities.
61
From 2002 to 2005, another 3.3 million people were lifed out of poverty,
signifying a further reduction from 38.40 million people in 2002 to 35.10
million people in 2005. In relative terms, the percentage of the poor decreased
from 18.20% in 2002 to 15.97% in 2005. In 2005-2006 however, the number
increased from 35.10 million in 2005 to 39.30 million people in 2006, or 35.10
million more poor people, thus a corresponding increase in percentages from
15.97% to 17.75%. From 2006 to 2008, the number of poor people decreased
to as many as 4.34 million people, making it a total of 34.96 million people in
2008 from 39.30 million in 2006. Tis has lowered the percentage from 17.75%
to 15.42% for the same period.
Tese fuctuating poverty levels were mostly triggered by the social and
political situation at the time. From 1980 to 1990, the government initiated
several anti-poverty programs in response to the social crisis, risks and turmoil
blighting the country. Tese programs were then recognized as social safety
nets, but eventually evolved in line with the development of other global issues
from merely being safety nets to more comprehensive programs through the
social protection agenda (Barrientos & Hulme, 2008; Holzman, 2001).
During the 1990s, the government developed a wide range of poverty
reduction programs to provide social protection for its citizens. Over the
years, programs have evolved from the Underdeveloped Village Program
(IDT) introduced in 1993-1997 to the Family Welfare Development Program
implemented from 1996 to January 2003. Other smaller scale anti-poverty
programs were also launched, such as the program on increasing the income
of small-scale farmers/fshermen (P4K) carried out in 1997-2005. In 1998,
the sub-district development program (PPK) and urban poverty reduction
program (P2KP) were developed to empower urban communities.
Te social protection agenda should be able to deal with the root causes
of poverty, instead of only scratching the surface and addressing symptoms
(World Bank, 2001). A number of laws and regulations were passed following
the economic crisis in 1998. Since then, numerous poverty reduction programs
have been introduced. To strengthen the implementation of these programs,
the government passed the law on the National Social Security System (UU
SJSN)
3
. Tere were high expectations that this new legal framework would
efectively reduce poverty rates. Yet, as Graph 1 below indicates, the poverty
level in fact rose from 11.37% to 11.47% in 2013 (March 2013). Tis was higher
3 Law 40/2004 sets out the implementation mechanism of diferent forms of social
security schemes that include health insurance, occupational accident insurance, retirement
insurance benefts and life insurance provided universally to citizens to be implemented by the
Social Security Agency.
62
than the target set in the national budget to lower poverty rates to 9.5% -10.5%.

Graph 1: National Poverty Rates 2004-2014
Source: BPS, 2013
Tese fuctuating rates can be attributed to the economic crisis and
fuel price hikes. Te most profound impact has been on the prices of basic
commodities such as rice and vegetables, which for the poor make up 74%
of total household spending. Tis percentage is obtained from economic
calculations that put more weight on purchasing power.
In 2010, the government through the National Team for Accelerating
Poverty Reduction (TNP2K) set a target of lowering the poverty rate by
8% - 10% by the end of 2014 (TNP2K, 2013)
4
. To this end, the government
increased the amount of social aid from year to year, totaling IDR 29.7 trillion
(US$ 3.3 billion). Tis is indeed a substantial amount for a newly launched
agenda accounting for 2.6% of the national budget in 2010 (World Bank,
2012). Te amount later surged to USD 4,56 billion in 2013
5
.
4 To meet this poverty reduction target, the government has made budget projections
for fnancing the necessary anti-poverty programs.
5 Priority is given to 3 programs: temporary cash transfer (BLSM), subsidized rice for
the poor (raskin) and Family of Hope Program (PKH) that come under cluster I for poverty
reduction.
Target of poverty level
Precentage of poor people Number of poor people
63
2. POVERTY IN INDONESIA: A REALITY CHECK
Over 60 million people subsist on less than $ 1/per day. Tis is not
solely due to the scarcity of employment opportunities, but also as a result
of structural issues and absence of any guarantee from the state in upholding
peoples fundamental rights. Being poor in Indonesia means leading life at
its most difcult. Having to bear burdens that they can hardly carry which
for the poor means a day-to-day struggle to survive. Even the middle-class is
increasingly at risk of entering poverty. In the event of a crisis, people will be
caught in a domino efect which is mostly beyond their control.
In almost every problem related to peoples basic needs, such as education,
health care and livelihoods, the state is conveniently absent, leaving the people
under dire circumstances, expecting them to pull themselves out of poverty.
Te easiest way out for most people living in poverty in Indonesia is to borrow
from a moneylender or closest relative who usually is also struggling to get by.
Another equally disturbing issue is that there are more than 10 million
neglected children in Indonesia, many of whom are abused and trafcked.
Meanwhile, 26 million children with a primary education have dropped out
of school. Most of them live in remote areas and are not served by government
programs.
Furthermore, disability issues have also surfaced in an increasingly complex
manner. Social exclusion (isolated indigenous communities, people with HIV/
AIDS), and issues related to the homelessness, physically handicapped and hearing
impaired are cause for serious concern, yet they have not been given due attention
by the government. Tere are approximately 2,429,708 people with disabilities or
1.2% of total population who are denied adequate services. With their physical
shortcomings, they are forced to struggle in order to cope with life.
Another issue concerns natural disasters and the considerable number
of people afected by them. Not to mention discrimination against women
and stigmatization made worse by a development paradigm that has not
been favorable towards women and the poor. Te numbers will continue to
rise unless the government makes a thorough analysis and evaluation of the
situation by involving the poor as the target group in the program planning
process.
Government-initiated poverty reduction programs are typically transient
in nature. Nearly all existing programs (e.g., raskin and BLSM) deal only with
the peoples inability to buy basic commodities, instead of broadening the scope
64
to include other basic needs such as education
6
, health care and livelihoods,
primarily with regard to much-needed capital.
Poverty reduction in Indonesia has clearly deviated away from its main
purpose of creating a prosperous nation as enshrined in the 1945 Constitution
7
.
Te government of Indonesia should measure social welfare with regards to
several indicators related to public services:
1. Educational attainment
2. Health status
3. Clean water availability
4. Sanitation, individual and neighborhood level
5. Asset ownership, primarily housing
6. Use of electrically powered equipment (including access to technology).
All six indicators should be the basis for the government to measure the
level of social welfare. Te government however does not include economic
indicators, including access to capital in gauging the peoples well-being. Tis
component in fact is crucial for determining the extent to which capital and
economic access can help lif a person out of poverty.
In reality, the six indicators are only applied in relation to infrastructure
development, instead of access for poor communities. Despite being included as
one of the welfare indicators that the government must meet, education remains
to a critical issue for Indonesia. Tis is refected in Indonesias Education for All
(EFA) Development Index which has continued to decline over the years
8
.
Falling school enrolment rates are attributed to the continual increase
in dropout rates. Furthermore, inaccessibility and poor infrastructure are
6 In reality, the benefciaries of programs that focus on the education sector such as
BSM and on household welfare such as PKH are not accurately targeted.
7 Article 33, 1945 Constitution reads (1) Te economy is to be structured as a
collective endeavor based on familial principles. (2) Production sectors which are vital to the
State and which impact on the livelihoods of many shall be under the control of the State.
(3) Land and the waters, and natural riches therein shall be controlled by the State for the
well-being of the people to the greatest extent possible. (4) Te national economy shall be
administered based on economic democracy consistent with the principles of togetherness,
efciency by upholding justice, sustainability, environmentally conscious and self-reliant, by
maintaining the balance between national economic progress and unity. Tis is reinforced by
subsequent Article 34 that reads: (1) Indigent persons and abandoned children shall be taken
into care by the State. (2) Te State shall develop a social security system for all and empower
the weak and underprivileged in preserving their dignity as human beings. (3) Te State shall
be responsible for making available proper health care and public service facilities.
8 In 2010, Indonesia was ranked 65th in terms of EFA and in 2011 slid to 69th place
out of 127 countries. Based on education data in 2010, some 1.3 million children aged 7-15
have dropped out of school.
65
core issues that Indonesias education sector needs to address.Te situation is
worsened by unfavorable regional conditions and inequitable distribution of
educators
9
. Tis has made it difcult for Indonesia to meet its education sector
targets. Educational facilities in isolated regions are also unevenly dispersed.
Te countrys poverty enclaves are mostly found in these far-fung areas
(inaccessible areas such as forests and mountainous regions).
Apart from education, another equally important welfare indicator is
health. Maternal mortality rates have reached alarming levels
10
due to limited
access to health facilities and government health programs. Many regions in
the eastern part of Indonesia (NTT, NTB and Papua) have to make do with
extremely minimum health facilities, including referral hospitals, with severe
shortages of health workers.
Another indicator that warrants more government attention concerns the
availability of potable water, sanitation, asset ownership and access to technology.
Te government has indeed introduced programs to deal with these issues, yet in
reality service providers related to all six welfare indicators have been privatized,
making access more difcult and unafordable for the poor.
Anti-poverty policies have failed to extricate the underprivileged from
poverty, but have instead aggravated the poverty situation mainly because
government programs are merely curative interventions that are not carried
out in a simultaneous or sustainable manner. Many factors contribute to
poverty, including the following:
1. Te poor are voiceless and powerless in facing state institutions and
society at large
2. Vulnerable to economic turbulence and incapable of dealing with it.
Te inability to make their voices heard refers to the lack of opportunities
for the people to oversee and evaluate government programs. Despite the
government making available to the people a mechanism known as musrenbang
(deliberative development planning forums), it is merely a formality with
no room for evaluation and monitoring. Te development planning process
should ideally be part of public control of government performance.
9 Based on data from the Indonesian Ministry of National Education, there are
899,016 primary school classrooms of which 293,098 are damaged. Tis means that only
605,918 classrooms in primary schools can be utilized. Lower secondary schools in Indonesia
have a total of 298,268 classrooms from which 125,320 are in poor condition, leaving only
172,948 functioning classrooms. In terms of school teachers, there is a 21% shortage in urban
areas, 37% in rural areas and 66% in remote areas.
10 In 2010, maternal deaths reached 288 per 1000 live births and rose to 359 per 1000
live births in 2011. Te target by 2015 is 102 deaths per 1000 live births.
66
In reality, the peoples role and control function in the development
planning process is ceremonial in order to comply with requirements, and not
oriented towards substantive matters. In nearly all regions across Indonesia,
musrenbang has evolved into a negotiation arena for personal gain among the
elite few from the village to provincial level. Even if the people take part in the
process in an oversight role such as through reporting on irregularities and
misappropriations, all too ofen they are the ones the will face the law which
only further complicates their situation. As a consequence, the people
are reluctant to carry out their oversight function which in turn has
resulted in inaccurately targeted anti-poverty programs that do not meet the
peoples needs.
POLITICS AND POVERTY REDUCTION
POLICIES AND PROGRAMS
1. POLITICS AND STRATEGY
In the annals of Indonesias development history, poverty reduction
policies and programs is nothing new. Government attempts at reducing
poverty are manifested in the issuance of laws and regulations as supporting
programs. Tis can be seen in Graph 2 below, where poverty reduction is a
central element of the governments national mid-term development plans.
Tese eforts however have not been efective in curtailing poverty, and
whatever progress achieved has been at snails pace. Te Worldfactbook, BPS
and World Bank found that the number of poor people in Indonesia has fallen
faster than Cambodia, Tailand, China and Brazil who have only managed to
register a 0.1% annual drop in poverty rates. In contrast, Indonesia claimed to
have lowered the number of poor from 2005 to 2009 at a rate of 0.8% per year.
11

At the international level, poverty reduction has become a pressing issue
in line with the global commitment to achieve the Millennium Development
Goals (MDGs), one of which is to bring poverty rates down globally
12
. Tis is
also consistent with Indonesias development agenda laid down in the National
Medium-Term Development Plan (RPJMN) for 2010-2014
13
. Te RPJMN
11 In the poverty reduction agenda of Indonesias 2nd United Ministerial Cabinet.
12 In Indonesia, government commitments among others are manifested through
the National Poverty Reduction Strategy (SNPK) and the establishment of a special agency
responsible for ensuring that poverty reduction targets are met. Te agency is known as the
Poverty Reduction Coordination Team (TKPK).
13 RPJMN will be spelled out through the annual government work plan (RKP).
RKP 2010 focused on Recovery of National Economy and Developing Peoples Welfare. Te
67
2010-2014 has set the following economic development targets which include
improving the peoples welfare:
1. Economic growth projected at 7.0% 7.7% in 2014
2. Reduce unemployment rates to 5% 6 % by end of 2014
3. Reduce poverty rates to 8% 10% by end of 2014
RPJMN and RKP (government work plan) refer to the ten Presidential
Directives presented before the working meeting with ministers, governors as
well as economic and technology experts held at Tampak Siring Palace (Bali) in
2010: (1) higher economic growth; (2) reduce unemployment rates by creating
more employment opportunities; (3) reduce poverty rates; (4) increase income
per capita, (5) maintain economic stability; (6) increase domestic fnancing;
(7) enhance food and water security; (8) enhance energy security; (9) improve
competitiveness of national economy; (10) promote an eco-friendly economy
14

(2nd United Ministerial Cabinets Poverty Reduction Program, Ministry of
Communication and Informatics, 2011).
Nearly all programs and policies introduced by the government have yet to
generate optimal results. RPJMN has in fact adopted SNPK (National Poverty
Reduction Strategy) as a document crafed for the actualization of vision and
mission statements under the incumbent President. SNPK serves as a national
strategy document which entails the obligation of every local government at
the provincial, city and district level to draw up their own Regional Poverty
Reduction Strategy (SPKD)
15
.
SPKD is expected to bring forth strategy formulations by key stakeholders
at the sub-national level on how best to tackle the poverty situation according
to local context. Poverty reduction eforts will therefore be structured around
local characteristics. Te strategy document also sets out certain aspects related
to process and substance. In terms of process, SPKD should be formulated
overarching development theme for RKP 2011 was Accelerating Fair and Balanced Economic
Growth Supported by Good Governance and Central-Local Synergy.
14 Te government has devised three development strategies: (1) pro-growth to
boost the economy through investments, therefore the need to improve the investment
climate by enhancing the quality of government spending through exports and increasing
consumption; (2) pro-job to ensure that economic growth creates the widest possible
employment opportunities by prioritizing labor-intensive investments; (3) pro-poor to ensure
that economic growth curtails the number of poor people to the greatest extent possible by
improving the social protection system, broadening access to basic services and empowering
the people.
15 SPKD is a document prepared at the sub-national level in compliance with
Presidential Regulation No. 15/2010 on the need to speed up progress in alleviating the
poverty situation in Indonesia.
68
in adherence to agreed principles and preconditions such as participatory
processes engaging multi-stakeholders. With regard to substance, SPKD
should draw up policies in favor of the poor by duly accommodating their
needs and aspirations. Alas, not all regions have created an SPKD document.
Te district of Jembrana, for example, only began to prepare the document in
2013. Tis calls into question Jembranas commitment to poverty reduction
given that 2014 is election year.
Regions are expected to establish a special team for implementing poverty
reduction programs known as TKPKD
16
, a cross-sectoral forum involving
relevant parties for the purpose of coordinating and aligning strategies,
policies, programs and activities to ease poverty at the sub-national level. Te
TKPKD is to be established in provinces, districts and cities.
Te government has issued a policy on the National Social Security
System (SJSN). Social protection should work towards seeking answers to the
root cause of poverty, instead of simply scratching the surface and dealing only
with symptoms (World Bank, 2001). An array of anti-poverty programs was
subsequently launched. To bolster poverty reduction eforts, the government
enacted the SJSN Law
17
. Te law, however, has incited public protests and on
several occasions it has been challenged at the Constitutional Court. Public
resistance tos the law primarily concerns the imposition of a compulsory fee in
order to be covered by the social insurance scheme. Tis shifs the governments
obligation to provide universal social security to citizens and the private sector,
16 TKPKD is established in pursuant to the following legislation: Law No.17/2003 on
State Finances, Law No.25/2004 on National Development Planning System, Law No.32/2004
on Regional Governments, Law No.33/2004 on Fiscal Balance between Central and Regional
Government, Government Regulation No.72/2005 on Rural Areas, Government Regulation
No.73/2005 on Urban Wards, Government Regulation No.17/2005 on Medium-Term
Development Plan 2004 2009, Government Regulation No.54/2005 on Poverty Reduction
Coordination Team, Home Afairs Ministerial Circular Letter No.412.6/3186/SJ on Follow-
Up to Government Regulation No.54/2005 on Poverty Reduction Coordination Team,
and Ministerial Decree, Peoples Welfare Coordinator acting as Head of Poverty Reduction
Coordination Team No.052/KEP/MENKO/KESRA/II/2006 on Basic Guidelines and Working
Group for the Poverty Reduction Coordination Team.
Not all regions however have set up their own TKPKD , nor do they fully understand the
function of TKPKD. In several regions (Garut, Ciamis, Tasikmalaya, Sukabumi, Jembrana,
Subang, Serdang Bedagai, South Sulawesi and NTB) the TKPKD has only been in operation
since 2010.
17 Law No.40/2004 outlines the procedure for implementing social security programs
that cover health insurance, occupational accident insurance, old-age beneft, retirement
insurance beneft and life insurance provided universally to all citizens and to be implemented
by the Social Security Agency.
69
and this may create diferential treatment in accessing services
18
.
Tis scheme was no longer heard of amid other programs rolled out by the
government. By early 2014, however, SJSN resurfaced through a new scheme
known as JKN (National Health Insurance) managed by BPJS. Te BPJS has
come under criticism for having a fnancing mechanism that is considered to
be irrelevant and the claims procedure to be too complicated. Tis scheme
(specifcally health care) is touted to be the cornerstone of the governments
national social protection agenda. Existing social protection programs,
however, have strayed away from the original purpose and substance of the
agenda. Tis is refected in the inclination to pass on the states obligation to
the private sector or the people, the commercialization of public services and
reduction in the obligation to deliver these services.
2. POVERTY REDUCTION POLICIES AND PROGRAMS
Te social protection concept in Indonesia is translated into two key
models:
1. Social Security is a program initiated to provide social protection
to the people through a paying mechanism such as jamkesmas
(public health insurance) and workers protection. Tis means that
jamkesmas is also part of social protection specifcally for non-paying
participants.
2. Social Protection is a program initiated to provide social protection
for the poorest of the poor in a bid to fulfll their fundamental rights
such as for health care, education and sanitation. Programs under
the social protection category include BLSM, PKH, BSM, raskin
and jampersal (maternity insurance), a derivative of the jamkesmas
program.
From these two models, the implementation of anti-poverty programs in
18 See Constitutional Court Decision No. 50/PUU-XIII/2010). Te Constitutional
Court however ruled against the petition for a judicial review by arguing that even though the
1945 Constitution expressly stipulates on the obligation of the State to develop a social security
system, it does not however make it mandatory for the State to adopt or prefer a specifc
system for developing the said social security system. Concerning this, the 1945 Constitution,
Article 34 clause (2) only lays down the constitutional criteria which also serves as the main
purpose of the social security system that the State should develop, which refers to a universal
system for the purpose of empowering the weak and underprivileged to preserve their dignity
as human beings.
70
Indonesia is based on policies drawn up by the government to meet poverty
reduction targets. Te government has introduced a broad range of programs
claimed to be part of government efort to lower poverty levels by grouping
poverty reduction programs into several clusters:
1. Cluster 1 consists of household-based integrated social assistance for
easing the burden of poor families by increasing access to health care,
education, clean water and sanitation (PKH, BOS, BSM, Jamkesmas,
Raskin, BLSM)
2. Cluster 2 refers to poverty reduction eforts through community
empowerment in order to develop the potential and capacity of poor
communities to engage in the development process consistent with
the principles of empowerment (PNPM or the national community
empowerment program)
19
.
3. Cluster 3 aims to reduce poverty by empowering micro and small-scale
enterprises with better economic access and capacity (microfnance
and collective enterprises)
4. Cluster 4 focuses on measures that help promote and scale up pro-
people programs.
20
19 Cluster 2 has the most variants including PNPM Mandiri Perdesaan (rural
development program), PNPM Perdesaan R2PN (Rehabilitation and Reconstruction of Nias
Island), PNPM Mandiri Agribisnis/SADI (Smallholder Agribusiness Development Initiative),
PNPM Generasi Sehat dan Cerdas (PNPM-Healthy and Learned Generation), PNPM
lingkungan Mandiri Perdesaan (PNPM-Rural Environment), Participatory Development
System (P2SPP) or known as PNPM Integrasi, PNPM Mandiri Respek (Village Development
Strategic Plan) for the people of Papua, PNPM Mandiri-Rural Infrastructure, Regional Socio-
Economic Infrastructure Development (PISEW), Community-Based Clean Water Supply
Program (PAMSIMAS), PNPM Mandiri-Underdeveloped Areas and acceleration of the
development of underdeveloped and special regions (P2DTK), PNPM Mandiri-Maritime
and Fisheries (PNPM-Mandiri KP), PNPM Mandiri-Tourism, PNPM Mandiri-Housing and
Settlement. Under Cluster 2, programs are also introduced for expanding and developing job
opportunities or labor-intensive enterprises. Te government recently launched PNPM Peduli
that focuses on serving community groups that other PNPM programs are unable to reach.
20 Tis program was launched in accordance with Presidential Decree No.10/2011 on
Coordination Team for Promoting and Broadening Pro-People Programs through (1) low-cost
housing (2) afordable public transport
(3) clean water supply (4) afordable and economical electricity supply (5) improving the lives
of fshing communities (6) improving the lives of the urban poor.
71
POVERTY REDUCTION POLICY
IMPLEMENTATION AND IMPACT
1. CLUSTER IMPLEMENTATION: THE REALITY
From all four clusters, cluster one is the only one that does not emphasize
physical or infrastructure development compared to the other three clusters.
Poverty reduction programs should be consistent with RPJMN 2010-2014 and the
ten resolutions reached by the presidential working meeting with cabinet ministers
held in Bali. Te governments half-hearted attempts at realizing its policies through
programs of which physical infrastructure development appears to the focal point
are exacerbated by poor coordination and lack of synergy.
Field fndings on the implementation of Cluster one are as follows: 1)
mistargeted program benefciaries (many of whom are in fact undeserving
of assistance); 2) discrepancy in the actual amount of aid distributed and the
amount promised. In several regions, programs under cluster one are meant
to minimize confict (distribution of subsidized rice), while inconsistencies
have been detected in the implementation of PKH program with regard to the
amount of aid received; 3) lack of sensitization to benefciaries at the village
level which has led to inconsistencies in who should be eligible to receive aid;
4) women-household heads have difculty accessing assistance provided by
poverty-reduction programs, while many poor households have not obtained
their social protection cards. Clusters 2, 3 and 4 on the other hand place
priority on programs related to physical infrastructure development
21
.
Another issue observed on the ground concerns data accuracy in terms of
inclusion error (those who do not meet the benefciary criteria but are included
in the list of recipients) and exclusion error (poor individuals who should be
registered as benefciaries but are not). Te percentage of exclusion error is
high. In Jakarta and many other regions, it is commonplace to fnd indigent
persons who are excluded from receiving direct assistance.
Another glimpse of reality is the fact that poverty wears a womans face. In
nearly all of the policy-making processes, from the village to national level are
gender biased and unsupportive of womens needs and aspirations. Tis is refected
in womens low attendance in musrenbang only reaching less than 30%.
21 With the exception of the SPP program which is part of Cluster 2 but does not focus
on physical infrastructure development.
72
In Serdang Bedagai, South Sulawesi, Garut, Sukabumi, Ciamis,
Tasikmalaya, Subang, Bandung, Jembrana and Kupang
22
, women household
heads have difculty accessing poverty reduction programs under any cluster.
Tese women typically run into problems when accessing health insurance
(most of whom do not earn any income to pay for administration fee for the
application process) or capital assistance (microfnance or setting up collective
enterprises) primarily because one of the requirements is having a bank
account. Most women household heads cannot apply for a loan as it would
mean the ability to provide collateral.
Numerous international studies, such as research conducted by the Asian
Development Bank (2013), found that social protection programs have no
signifcant impact on women. Te number of female benefciaries are much
less than their male counterparts for all three social protection programs,
primarily for social insurance coverage, because women have more limited
access to employment opportunities in the formal sector. Te social protection
index (SPI) for women is only 41.8% for the three social protection programs
for both male and female (ADB, 2013).
2. POVERTY REDUCTION PROGRAMS AND INSTITUTIONAL ISSUES
Te state of powerlessness facing the poor is refected in the following
three core issues:
1. Poor communities lack access to decision and policy-making
processes. Existing institutions such as musrenbang or other
deliberative forums cannot be relied on for the common people to
channel their opinions and aspirations. Institutions such as TKPD and
SKPD have unilaterally identifed and defned what the poor needs
by determining the program format, including what programs to
implement. Tis hampers innovation and discourages vital feedback
that can help tangibly deal with the peoples needs. As a consequence,
poverty will remain an unfnished business.
2. Government policies give precedence to economic interests and large-
scale capital investments that focus on industrial sectors not oriented
22 SAPA (Strategic Alliance for Poverty Alleviation) program under the Ministry of
Peoples Welfare prioritizes on womens participation in the planning and budgeting process at
the village to district level.
73
to existing potential and resources. Tis leaves the people with no
opportunity to develop their potential that can help them escape
poverty. In order to bring poverty to an end, the government needs to
have a regulatory framework in place in order to guarantee the people
the opportunity to innovate and develop as a way out of poverty.
3. Policy-making and implementation has not been transparent and open,
making these policies accessible to a selected few. Regulations are drawn
up and imposed by policy-makers without engaging the poor.
Furthermore, the political elites tight grip on power at the village to national
level adds to the long list of causes perpetuating poverty. It is commonplace to
see the power elites or those in the inner circle of policy-makers to be the ones
enjoying the privileges of anti-poverty programs in rural and urban areas. In
certain regions, social assistance does not reach the hands of the poor, but
instead ends up in the pockets of those not entitled to such aid.
From feld data on poverty reduction programs, several factors impede
their efective implementation including data accuracy, access to programs,
program impact on the well-being of benefciaries, power relations, weak
evaluation and feld monitoring, and negligible public participation (Ahmadi,
et.al. 2010; Hastuti 2013; Holmes & Jones, 2010).
Coordination is also an issue given the inter-agency sectoral ego that
remains high in the respective government implementing agency (SKPD) and
other technical implementers. To maximize institutional function and create
synergies, the government has issued a national policy Presidential Regulation
No. 15/2010 to emphasize on the need to accelerate poverty reduction
eforts in Indonesia. Te presidential regulation puts pressure on provincial,
district and city governments to prepare an integrated program package to
prevent relevant agencies or institutions from going their separate ways and
avoid partial implementation of programs. To promote efective inter-agency
partnerships, Home Afairs Ministerial Regulation No. 42/2010 was issued
concerning the coordination team for poverty reduction eforts at the province
and district/city level. Tis policy foresees the risk of inefciencies and counter-
productivity in engaging multi-stakeholders in anti-poverty programs. Hence
the need for stringent, well-defned policies at the sub-national level. Te
Governor of East Java for example responded by issuing Decree No 465.05/
kep.1483-Bapp/2010 on the Provincial TKPKD. Tis gubernatorial decree
serves as the legal basis for SKPDs within the East Java provincial government
to launch a range of poverty reduction programs. Tese programs however are
introduced in a partial manner, despite the establishment of a coordination
team that directly oversees work jointly conducted by SKPDs.
74
As a result, programs undertaken by SKPDs are ofen inconsistent with
the anti-poverty agenda referred to by TKPKD and RPJMD in the respective
district or city. TKPKD is in fact tasked to integrate and speed up tangible
measures to curtail poverty at the provincial, district and city level. TKPKD
is responsible for carrying out the following functions: (1) coordinate the
formulation of anti-poverty policies and align the implementation process
at the local level; (2) facilitate cross-sectoral implementing agencies, build
interactive communication and disseminate information on poverty reduction;
(3) monitor and evaluate the implementation of poverty reduction policies and
programs; (4) ensure the implementation of TKPKD functions at the district/city
level and foster cooperation among districts/cities and promote partnerships for
accelerating poverty reduction for TKPKD at the provincial level.
As a cross-sectoral forum it is expected to fulfll its mandate in a
participatory manner with representatives represent from various elements
within the local government, the private sector and the public which includes
poor communities, religious leaders, non-governmental organizations,
research institutes and universities. Tis cross-sectoral forum in reality
is dominated by local government agencies, while the public is typically
represented by prominent community fgures who have close ties with the
local government. Similarly, non-governmental organizations and research
institutes are normally established by the local government simply for the
purpose of meeting requirements. Tis prevents the TKPKD from efectively
performing its monitoring and evaluation function. It appears that TKPKD
is established plainly for satisfying requirements in order to be allowed to
run poverty reduction programs. Furthermore, the TKPKD is not fnancially
supported by the regional budget. Tis imposes an additional burden for the local
government to allocate funds for TKPKD operation. Tese issues are among the
reasons why provinces are reluctant to maximize TKPKDs role and function.
Te question then is how do anti-poverty programs that have been
divided into 4 clusters ft into the strategy applied by TKPKD? An answer
to this question is crucial to make sure that programs grouped into these
clusters are not detached from programs conducted by SKPDs. Te situation is
made worse by a rural planning model that consists of two processes: PNPM
program planning (known as PNPM musrenbang) and regular musrenbang.
Although the government has launched an integrated PNPM program in an
attempt to deal with the diferent forms of planning mechanisms, in actual
implementation in nearly all regions planning processes are poorly aligned
without a coherent document and budget plan. Programs that materialize from
these planning processes tend to lean towards infrastructure development.
Under such circumstances, the implementation of ongoing poverty
75
reduction programs will most certainly be less than optimal. Tis is attributed
to lack of integration and synergy among poverty reduction programs. Program
targeting, benefciaries and management will therefore be inconsistent with
the initial plan and expected goals. As a consequence, anti-poverty programs
will be inefective in lowering poverty levels.
CONCLUSION AND RECOMMENDATIONS
Poverty in Indonesia cannot simply be resolved through the introduction
of policies. Anti-poverty policies can instead deepen and aggravate the situation
if they are not grounded in valid feld data and facts. Tis is compounded by the
lack of synergy and coordination among program implementing agencies and
the half-hearted commitment of the government in ensuring maximum results
from ongoing programs. Te following measures are therefore recommended:
1. Clearly defne the planning mechanisms and processes for poverty
reduction programs at the village to district level to guarantee that
planning documents represent and accommodate poverty-related
issues.
2. More in-depth analysis of TKPKDs role and function as, primarily in
monitoring and assessing the implementation of poverty reduction
policies and programs.
3. Build the commitment of the central/national government in
maximizing TKPKDs role and function by setting aside the necessary
budget for its operations and not put a strain on the regional budget.
4. A more extensive analysis is necessary of existing anti-poverty
programs of which the outcomes should help formulate programs
that efectively address the needs of the respective region, and not
simply become a partial agenda that focuses on labor intensity.
5. Te government should be urged to validate data on the number
of poor people to ensure that programs are accurately targeted for
eligible benefciaries
76
REFERENCES
Akhmadi, Asri Y, Budiyati. S, Yumna A .2010. Access to Justice; Empowering
female heads of household in Indonesia. Case studies in Nangro Aceh
Darussalam, West Java, West Kalimantan, and East Nusa Tenggara.
Smeru Research Institute. Jakarta
Asian Development Bank.2013. Te Social Protection Index; Assessing the
Results for Asia and the Pacifc. Manila
Hastuti, Usman. S, Sulaksono. B, Mawardi. S, Syukri.M.2013. Pemantauan
Cepat Pelaksanaan Bantuan Langsung Sementara Masyarakat (BLSM)
2013. Lembaga Penelitian Smeru, Jakarta.
Hickey, S. 2008. Conceptualizing the politics of sosial protection in Africa.
GOVERNMENT DOCUMENTS
Kementerian PPN/Bappenas; Kerangka Dasar RPJMN 2015-2019
Perlindungan Sosial.
Tim Nasional Percepatan Penanggulangan Kemiskinan (TNP2K)
Penanggulangan Kemiskinan situasi terkini, target pemerintah, dan
program percepatan.
77
INEQUITABLE ACCESS
TO BANK LOANS
M. Firdaus
ABSTRACT
Te banking sector of a modern state assumes a crucial role. It sets the
pace in which a countrys economy develops through capital allocations in
terms of quality and quantity. In line with this, Indonesias banking institutions
also envision to elevate the standard of living of the common people through
a broad range of activities. Alas, the countrys banking sector has not been
entirely focused on economic sectors, such as the MSMEs micro, small and
medium-scale enterprises (MSMEs), from which most of the people depend
on for their livelihoods. To date, the proportion of credit disbursed by national
banks to MSMEs remains below 21% from total bank loans, with the exception
of BRI at 39.05%. A national bank has even imposed restrictions on MSMEs,
specifcally micro-enterprises, by making it a requirement for them to apply for
loans with a co-applicant such as a cooperative. Credit interest rates for micro-
entrepreneurs are higher than for medium-scale businesses. Neighboring
countries such as China, Malaysia, South Korea and Tailand in contrast have
been kinder to small businesses by setting aside over 50% of their loans. Te
banking sector typically serves large-to-medium-scale businesses. Anything
less, including the agricultural business, is considered unbankable sectors.
Small wonder if the fnancial gains reaped by national banks consistently show
an upward trend over time. In 2013, the average proft earned reached 14-17
percent. In comparison, banking institutions in nearby countries bring in an
average proft of only 1-4 percent. Banks in Malaysia post a 3.03% proft, the
Philippines at 3.92%, Vietnam at 3.34% and Singapore at 1.79%. Te banking
industrys negligible attention to micro and small entrepreneurs and farmers
raises doubts over its commitment to improve the peoples welfare as it should
among others guarantee the fnancial inclusion of citizens. MSMEs in fact
absorb 101.72 million workers (97.3%), and contribute 57.12% to the countrys
Gross Domestic Product (GDP). Tese substantial fgures are generated by
a total of 55.2 million MSMEs or 99.98% of all business units in Indonesia.
Tis sector acts as a bufer by absorbing labor when the formal sector is
pushed further aside, and the agricultural industry can no longer sustain the
economy, and manufacturing slows down. Hence, MSMEs and the agricultural
business becomes a highly strategic vehicle for improving the peoples lives and
alleviating the poverty situation.
78
INTRODUCTION
1. BANKING INSTITUTIONS AND CAPTIAL POLICY
Te strength of a countrys economy is indirectly associated with the
performance and dynamics of the banking sector. Banks are business entities
that accumulate and safeguard public funds to be channeled for economic
development through business undertakings and expansion. Te pace at
which an economy develops hinges on the quality and quantity of capital fows
that may originate from banking institutions. Banks therefore function as an
intermediary where members of the public may deposit their money in banks
to be re-invested to those in need of funds. Tis mechanism is set forth in
Law 14/1967 on Principles of Banking and later improved by Law 10/1998
that defnes fnancial institutions as entities involved in the fnancial service
sector by drawing funds from the public and re-channeled back to the public.
Furthermore, Law 10/1998 on Amendments to Law 7/1992 describes a bank as
a legal entity that amasses funds from the public as savings and channels the
money to the public through credit and or other forms in a view to improve
the peoples standard of living.
Kasmir (2013)
1
also emphasized the banking sectors indispensable role
primarily as a fnancial intermediary that transfers funds from groups with
surplus money to those in defcit, in addition to facilitating the delivery of
other fnancial services. Tis illustrates the vital role that banking institutions
play in national economic development. Should the banking sector fail to carry
out its function accordingly, it will impede national economic development
which in turn will undermine eforts to improve the peoples welfare.
Various studies have similarly highlighted the positive correlation between
satisfactory growth in the banking sector and overall economic development.
Sunarsip and Salamun (2003), following Diamond (1984) argued that fnancial
intermediaries can help lower the cost of monitoring the utilization of funds
from creditors. Tis implies that the intermediation of fnancial institutions
will contribute to elevating the well-being of the people. Tis illustrates how
the fnancial sector is essential for the economic development of a nation.
2

Alas, the strategic and noble role of the banking sector as an intermediary
that envisions improving the lives of the people is still being questioned. Te
1 Dr. Kasmir. 2013. Bank dan Lembaga Keuangan Lainnya. PT Raja Grafndo Persada,
12
th
print. Jakarta.
2 Sunarsip and Suyono Salamun, Phd. 2003. Jurnal Keuangan Publik, 1:1, September.
Finance Education and Training Agency, Indonesian Ministry of Finance.
79
banking sector still needs to improve its performance if it is to play a key role
in keeping the nations economic engine running. Erani Yustika (2013), the
Director of Institute for Development of Economics and Finance (INDEF)
noted that the banking business thus far has focused more on the non-tradable
sector rather than the real/agricultural sector (tradable). A considerable
proportion of the population, however, depends on the real and tradable sector
for their livelihoods. As a result of the lack of attention to this sector poverty
and unemployment has increased. Consequently, improvements in the well-
being of the people at all layers of society has been sluggish.
3
Table 1 below
shows the lackluster growth in the tradable sector due to minimum fnancial
support, including from the banking sector.
Table 1: Economic Growth by Sector
Source: Compiled from BPS, 2011
Tis paper therefore questions why growth has been slow in sectors
involving the majority of the populations economic activities, such as micro,
small and medium-scale enterprises and farmers as well as other real sectors.
Is this because of the lack of capital support from fnancial institutions? If
3 Koalisi Masyarakat Sipil Untuk APBN Kesejahteraan. 2013. APBN Konstitusi 2014,
Fitra. Jakarta. p.9.
80
the answer is yes, what and how has been the role and performance of the
banking sector thus far in supporting eforts to improve the peoples welfare?
Te foregoing questions are the point of departure for the author to
examine the problems related to fnancial institutions, including banks, as
entities that seek to make the peoples lives better but appear to simply be
more inclined to reaping profts.
2. ANALYSIS OF BANK LOANS FOR IMPROVING PEOPLES WELFARE
In the past several years the banking industry has been under public
scrutiny relating to the utilization of funds accumulated from the public
through various schemes. A portion of funds held by banking institutions
(domestic or foreign) has in fact not been channeled in the form of credit. Tese
funds are instead parked or transferred into SBI (central banks certifcates of
deposit) and SUN (government bonds). Tis banking practice is corroborated
by the Bank of Indonesia that found that by May 2010 bank funds held in the
form of SBI amounted to USD 25,36 billion, while funds deposited with FASBI
or the deposit facility reached USD 4,2 billion, and funds invested in securities
in addition to other receivables were worth USD 30 billion.
4

With regard to credit, the national banking sector has set high interest
rates, even though the Bank of Indonesia has attempted to lower its interest
rate (BI rate). With a monetary policy model based on infation, currently kept
at a relatively low rate, the Bank of Indonesia should make sure that national
banking institutions follow suit and bring down their interest rates on loans.
5

Tis situation is illustrated in table 2 below.
4 Dr. Ahmad Erani Yustika. 2010. Kebijakan Reformasi dan Kerapuhan Kelembagaan
Ekonomi: Ikhtiar Meluruskan Arah Perekonomian Nasional Brawijaya University, Malang.
5 Setyo Budiantoro and Wiko Saputra. 2013. Rezim Suku Bunga Tinggi dan Kebijakan
Moneter pro Kemiskinan, Prakarsa, Policy Brief. Jakarta
81
Table 2: Trend in BI Rate and Loan Interest Rate, 2007-2012
Source: Prakarsa 2013, compiled from Bank of Indonesia report 2013
However, compared to the interest rates of neighboring countries, the
BI rate is considered high. In 2009 for example, Indonesias credit interest
rate was 14.5%, whereas Malaysia was much lower at 5.08%, Tailand at
5.96%, South Korea at 5.00%, and China at 5.31%.
6
. Tis lofy interest rate has
compelled Indonesia entrepreneurs and other debtors of banking institutions
to reassess their business performance and make the necessary adjustments
such as enhancing efciencies, cutting down production, lowering the quality
of raw material and reducing the number of employees.
In terms of proft, national banks net interest margin
7
in 2009 reached the
level of 5% - 6%. In 2013, although the national economy was beset by a host
of misfortunes such as an infation rate at 8.22% and Rupiah exchange rate at
IDR 12,000 per 1 USD, national banks in general have managed to register
profts from 14% -17%. BRI (Bank Rakyat Indonesia) for example posted USD
1,96 billion in profts, Bank Mandiri USD 1,65 billion, Bank Danamon USD
6 Dr. Ahmad Erani Yustika. 2013. Menata Kembali Sektor Perbankan, 11 April.
http://ahmaderani.com/menata-kembali-sektor-perbankan.html.
7 NIM (net interest margin) represents the diference between interest earned and
interest paid out to lenders calculated on a tax-equivalent basis. Source: http://www.bi.go.id/id/
Kamus.aspx?id=L.
82
363 million, and BTN USD 142 million.
8
In comparison, the average proft
for banks in neighboring countries ranges between 1% and 4%. According to
statistics, the banking sector in Malaysia only managed to bring in 3.03% in
profts, the Philippines 3.92%, Vietnam 3.43%, and Singapore 1.79%. As a
consequence, the loan-to-deposit ratio (LDR)
9
of banking institutions reached
a low level, yet at the same time earned immense profts. Tis means that while
other economic sectors were struggling to sustain a satisfactory performance,
the banking sector enjoyed prodigious profts.
10
Te net interest margin (NIM) of national banks reached 5.5% compared
to less than 2% among other ASEAN countries. Tis higher net interest margin
has pushed the interest rates for bank loans further upwards as described
earlier which has in turn hampered the growth of the business sector. Tis is
compounded by the less than optimal efciency of national banks as indicated
by a high CIR or cost-to-income ratio
11
which was at the level of 74.1% in 2012
(Graph 1). According to some experts, the reason for banking institutions high
NIM is none other than the need to cover the cost of inefciencies.
12

Graph 1: Trend in NIM, CIR and CAR of Commercial Banks
Source: Erani, 2013
Banking institutions have also been miserly in their support of the real
8 A Tony Prasetiantono. 2014. Bencana Alam dan Perbankan, Kompas, 17 February.
9 LDR represents the ratio between total loans channeled by banks and total deposits
from various sources. LDR can also be defned as the fnancial ratio of banking institutions
associated with their liquidity. See Dr. Kasmir, Ibid.
10 Dr. Ahmad Erani Yustika. Ibid.
11 CIR refers to the banks efciency ratio that measures operating expense against
operating income. Te higher the expense-to-income ratio, the less efcient the banking
operation. Source: BI glossary (http://www.bi.go.id/id/Kamus.aspx.id=L).
12 Koalisi Masyarakat Sipil Untuk APBN Kesejahteraan, Ibid.
83
sector, primarily micro, small and medium-scale enterprises (MSMEs), as
well as the agricultural industry. At least 48% of the countrys poor relies on
the agricultural sector for their main livelihood. Banking institutions on the
other hand appear to be purely proft-oriented, refusing to be involved in less
lucrative sectors such as agriculture. Tis is evident in the banking institutions
negligible credit allocation for certain sectors as shown in Figure 1 below.
Figure 1: Loan Portfolio of Banking Institutions 2013
Source: Enny Sri Hartati, 2013
Banking institutions in general do not consider MSMEs (may also include
agriculture) as bankable businesses, seeing them as a high-risk sector which
will increase banks vulnerability towards non-performing loans. Credit
dispersed to MSMEs by private and public national banks is below 21% of total
bank loans, except for BRI which is at 39.05% (Table 1). National banks such as
BNI have even imposed restrictions on MSMEs specifcally micro businesses
making it a requirement for them to apply for loans with a co-applicant such
as a co-operative. Interest rates for micro-entrepreneurs are considerably high
compared to medium-size businesses. Tis clearly shows how credit channeled
to MSMEs from banking institutions has been unfavorable toward small
businesses as decisions are made purely for business reasons.
13

13 Herjuno Ndaru Kinasih and Rachmi Hertanti. 2011.Berburu Pundi di Negeri
Selatan: Kajian Kritis terhadap Peran Bank Asing dan Bank Nasional di Indonesia dalam
84
Table 3: Percentage of Credit to Micro and Small Enterprises
against Total Credit Disbursed
Source: Consolidated fnancial statements of banks, September 2011
Furthermore, the credit report for the previous year (2012) revealed a
similar trend. Based on data compiled by Bank of Indonesia and Financial
Institutions Capital Market in 2012, the amount of fnancing allocated to
MSMEs was only 20.1% from total bank loans. From total loans disbursed
to MSMEs in Indonesia, only 20.7% were intended for micro businesses
amounting to only IDR 612 trillion
14
. In 2013, credit set aside for MSMEs was
less than 20% or roughly USD 54 billion from total bank loans to the tune of
USD 300 billion. Graph two below presents the percentage of loans to MSMEs
and non-MSMEs in 2011 and 2012.
Graph 2: Percentage of loans to MSMEs and non-MSMEs
Source: Prakarsa Foundation, 2013, compiled from BI report 2013
Penyaluran Kredit ke Usaha Mikro dan Kecil, IGJ. Jakarta
14 Kompas, Friday, 25 October 2013.
85
Tis is substantiated by a Bank of Indonesia (BI) survey at the end of 2012
which shows that high-income individuals mostly prefer to borrow from banks
than those earning low income. If this is the case, how do low-income earners
acquire capital? Tey secure capital loans from non-fnancial institutions,
that is, individual owners of capital who can provide the money upon request.
Credit facilities from banks on the other hand are mainly accessed by upper-
middle-income earners. Tis is an undeniable indication of the dismal state of
formal fnancial services that are not accessable by all layers of society.
15
A similar situation was also detected by ASPPUK (Association for Support
of Women in Small Businesses) from a survey of women micro-entrepreneurs
in 20 provinces which showed that 80.52% of these women who represent
small-micro businesses have never borrowed capital from banks, leaving
only 10% of entrepreneurs accessing bank loan facilities. Te reasons for their
reluctance in dealing with banks include the following: 30.80% of small-micro
entrepreneurs mentioned the complicated loan application process, 11.65%
admitted to not having collateral, and 21.19% have never come into contact
with banks.
16

Te manner in which banking institutions treat MSMEs primarily
micro businesses has remain unchanged since 2001. At that time, the author
highlighted several reasons cited by micro-entrepreneurs (specifcally women
small-micro entrepreneurs) on their difculties in accessing capital loans from
banks. First, micro-entrepreneurs live far from where banking institutions
are located. Second, their small-scale businesses only require a small amount
of additional funds whereas banks do not provide small amount credit for
efciency purposes. Tird, micro-entrepreneurs have yet to manage their
fnances according to the banks bookkeeping standards. Fourth, there are
limitations in asset ownership that can formally qualify as collateral.
17

Box 1 below provides an example of a female micro-entrepreneur and her
attempts at obtaining capital for the continuity of her business. Afer repeated
attempts, Sri Rejeki who hails from Solo, fnally managed to borrow from a
cooperative located not far from where she lives.
15 Ryan Kiryanto, Strategi Implementasi Program Inklusi Keuangan di Indonesia,
www.infobanknews.com (Accessed 27 August 2012 ).
16 Asosiasi Pendamping Perempuan Usaha Kecil (ASPPUK). 2008. Unpublished report.
17 M. Firdaus, et.al. 2001. Aspek Pemberdayaan Perempuan di Balik Lembaga
Keuangan Mikro, Jurnal Analisis Sosial, 6:3, December.41:51.
86
Box 1: Sri Rejeki Sets up a Sewing
Business
Sri Rejeki runs a sewing business in the village of Purwodiningratan,
Solo. In July 2007, Sri Rejeki came to know of an opportunity to join a
cooperative named LKP (Womens Financial Institution) JARPUK Solo.
She has long yearned to open her own sewing business but lack of start-
up capital has prevented her from doing so. One month afer joining
LKP, she discussed with the LKP management on the possibility of
borrowing IDR 1 million to help her buy a new overlock machine in her
bid to start up her own business. Once her application was approved, it
took a month for the institution to disburse the loan as it had it wait for
installments from other members in order to accumulate the required
amount.
While waiting for the funds to be disbursed, Sri Rejeki enrolled in a
sewing course. She paid IDR 500,000 to be registered at a sewing school
located within reaching distance from her village. Although the course
was for three months, Sri Rejeki only needed a month to master the
skills.
Coincidentally, she received the LKP loan soon afer she acquired her
sewing skills. By combining the loan with her savings, she bought
a sewing machine for IDR 1.7 million to start her own business. She
does not serve individual customers, but takes orders from a clothing
wholesaler. She manages to work on 15-20 dozens of fabric on a daily
basis, paid at a price of IDR 1,500 per dozen. She now earns an average
daily income of IDR 22,500 30,000 (ASPPUK Monitoring Records, 2007).
Tis is a real-life example of how the uniqueness and potential of micro-
businesses is overlooked by the banking sector. A multimodel approach is
necessary to identify the business potential of micro-entrepreneurs with the
view to help them lead better lives.
Under such circumstances, it is not surprising if data from Infobanks research
bureau showed that nearly all micro-entrepreneurs from the lower economic rung
known as the productive poor totaling 38 million people remain unserved by
formal fnancial service providers (table 2). A classic reason ofen cited by banking
institutions is that this underserved portion of the population are far from bankable
and likely to have difculty in paying of loans.
87
Table 4: Loans for Entrepreneurs
Source: Kartono Muhammad, Ada Zona Biru, Siapa Berani Masuk?, Jakarta:
Infobank, No. 403, October 2012, p.33.
Tis indicates that despite being a member state of G20, access to fnance
for the people of Indonesia remains at the level of 20%. In other words, 80%
of the population has not been able to access formal fnancial institutions.
Even at the ASEAN level, Indonesia occupies the lowest position in terms
of outstanding third party funds as a percentage of gross domestic product
(GDP) is 36.41% and has a credit-to-GDP ratio of only 27.49% (Graph 4). A
World Bank study (2012) confrmed these fndings. From a group of sample
respondents, it found that only 20% of Indonesias population holds bank
accounts (or from formal fnancial institutions) from which only 8% use their
accounts solely for salary transfers.
18
Graph 3: Trend in Credit-to-GDP Ratio (%)
Sumber: Erani, 2013
18 Ryan Kiryanto, op.cit. p.3.
88
Rendahnya perhatian perbankan kepada sektor riil yang menjadi
tumpuan hidup para pelaku usaha UMKM dan petani, menyisakan tanda
tanya atas keberpihakan perbankan kepada peningkatan kesejahteraan bagi
semua kalangan, seperti cita-cita inklusi keuangan. Padahal, kontribusi
UMKM terhadap penyerapan tenaga kerja mencapai 101,72 juta tenaga kerja
(97,3 %). Sementara itu kontribusi terhadap Produk Domestik Bruto (PDB)
mencapai 57,12 persen. Suatu hal yang wajar, karena menurut data Kemenkop
dan UMKM (2013) menyebutkan bahwa jumlah Usaha Mikro, Kecil dan
Menengah (UMKM) 55.2 juta (99,98 %) dari seluruh unit usaha di Indonesia.
Fakta dan data tersebut menunjukkan bahwa sektor UMKM sangat strategis
untuk upaya peningkatan kesejahteraan sekaligus penanggulangan masalah
kemiskinan.
Demikian pula di sektor pertanian tampaknya tak jauh berbeda. Minimnya
dukungan perbankan di sektor ini menjadi salah satu sebab lambannya
perkembangan hasil pertanian Indonesia. Bahkan selama periode 2005 -
2012, jumlah impor beras, jagung, kentang dan kubis malah melonjak hampir
sepuluh kali lipat, atau naik hampir 100 persen setiap tahun. Kondisi tidak
jauh berbeda pada produk beras yang impornya melonjak hingga mencapai
150 persen setiap tahun. Sementara impor produk ubi kayu olahan meningkat
hingga 8 kali lipat, dan dalam kurun waktu yang sama impor pisang mencapai
5 kali lipat. Parahnya, impor produk cabai segar juga meningkat tajam hingga
7 kali lipat selama empat tahun terakhir.
19

CONCLUSION AND RECOMMENDATIONS
From the foregoing discussion it is evident that the banking sector is
not contributing to the betterment of people from all layers of society. Policy
breakthroughs are therefore crucial through the following measures:
First, there is a need to build the governments political and economic
support of MSMEs through favorable monetary policies that include low
interest rates. As shown in the past four years, consistently high bank interest
rates impose a heavier burden on the real sector. Indonesia needs to learn from
developed countries that have been paying heed to MSMEs by introducing
eco-friendly lending policies.
Second, with regard to capital loans for MSMEs, apart from making the
most of banking institutions in addressing poverty issues, micro fnance can
19 Setyo Budiontoro, Pertumbuhan Tanpa Pembangunan, Kompas, rabu 12Februari
2014, hal. 5.
89
also be an appealing option. According to Agus Martowardoyo, the Governor
of Bank of Indonesia, at least 600,000 micro-credit institutions in Indonesia
are now being assessed by the Financial Services Authority (OJK) which is
responsible for overseeing and issuing permits for all types of fnancial service
providers.
20
Tis is purely a peoples initiative that merits appreciation in their
efort to meet their fnancing needs for improving their lives. It is now time
to create synergies between microcredit institutions and formal banking
institutions and undertake coherent measures to optimize the role and function
of fnancial institutions in enhancing the welfare of the nation.
In the short term, eforts should be made to enhance the interconnectedness
between banks and microcredit institutions to more efectively apply a results-
oriented approach for improving the peoples well-being. In the long run,
fnancial inclusion should work towards bringing banking institutions closer
to the people and function as a source of fnancing for business development
through various schemes.
21
By drawing from local practices applied across
Indonesia in accessing capital funds for optimizing the function of banking
institutions in creating a prosperous society, the issue of scarcity of fnancing
and its utilization can therefore be surmounted Tird, the author has long
held the opinion that given the current banking sector performance that
appears to be purely proft-seeking, it is hard to expect banking institutions to
make a signifcant diference to the lives of many. However, if banks move away
from the proft motive, as noted by M. Dawam Rahardjo (2014), an expert on
the Pancasila economic system, and focus on maximizing the benefts that their
customers can enjoy, the situation may be reversed. Tis means that banks will
evolve into fnancial institutions focused on improving peoples quality of life
and become ethically-oriented banks.
Rahardjo stated that these values are expected to bring about social and
environmental benefts. At the global level, these ethical banks are already
in operations and known as social banks. Like-minded banks have banded
together under an organization called Te Global Bank Based on Ethical Value
(GBEV). Alas, banks like these are sorely absent in Indonesia, and neither are
they recognized in Indonesias banking laws, including Law 10/1998.
22
At this
particular juncture, the injustices and inequalities in accessing capital funds
from banking institutions must be addressed.
20 Dewi Meisari Haryanti. 2014. What does fnancial inclusion really mean?, Te
Jakarta Post, February 12, 2014.
21 Andreas Maryoto. 2013. Perbankan Nirkantor, Sebuah babak Baru, Kompas, 25
October.
22 M. Dawam Rahardjo. 2014. Inklusi Finansial, Kompas, 6 January.
90
Fourth, banks must be encouraged to pay attention to natural resource-
based development such as agriculture, marine and forestry, supported by
competent human capital. Industrialization based on the agricultural, marine
and forestry sectors under a pro-people economic regime such as co-
operatives represents a viable model that needs to be taken into account by
the banking sector. Te world is now taking notice of food production in the
marine, forestry and agricultural sectors to ensure global food security. Hence,
there is no reason to resist the initiative to establish agricultural banks.
Tese recommended measures to improve banking sector performance in
Indonesia are expected to put an end to inequalities across the banking sector
with a view to generating long-lasting impacts and benefts for the betterment
of the nation.
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perempuan usaha kecil. Unpublished report. Jakarta.
Budiantoro, Setyo and Saputra, Wiko. 2013. Rezim Suku Bunga
Tinggi dan Kebijakan Moneter pro Kemiskinan, Prakarsa,
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Firdaus, M. et. al. 2001. Aspek Pemberdayaan Perempuan di Balik
Lembaga Keuangan Mikro, Jurnal Analisis Sosial, 6:3.
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Heriyanto, Deddy and Firdaus, M. 2007. Lembaga Keuangan
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Kasmir, 2013. Bank dan Lembaga Keuangan Lainnya, PT Raja
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th
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Mikro dan Kecil. IGJ. Jakarta
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RI, Jurnal Keuangan Publik, Vol. I/N0.1, September.
Yustika, Dr. Ahmad Erani. 2010. Kebijakan Reformasi dan
Kerapuhan Kelembagaan Ekonomi: Ikhtiar Meluruskan
Arah Perekonomian Nasional, Malang: Brawijaya University,
30 December 2010. Inaugural speech for professorship in
institutional economics at the Faculty of Economics, Brawijaya
University.
NEWSPAPERS AND MAGAZINES
Budiontoro, Setyo. 2014. Pertumbuhan Tanpa Pembangunan,
Kompas, Wednesday 12 February. p. 5.
Haryanti, Dewi Meisari. 2014. What does fnancial inclusion really
mean? Te Jakarta Post, February 12.
Kiryanto, Ryan. Strategi Implementasi Program Inklusi Keuangan di
Indonesia, www.infobanknews.com .
Kompas. Friday, 25 October 2013.
Maryoto, Andreas. 2013. Perbankan Nirkantor, Sebuah Babak Baru,
Kompas, 25 October.
Muhammad, Kartono. Ada Zona Biru, Siapa Berani Masuk?
Infobank, No.403, October 2012, p.33.
Prasetiantono, A. Tony. 2014. Bencana Alam dan Perbankan,
Kompas, 17 February.
Rahardjo, M. Dawam. 2014. Inklusi Finansial, Kompas, Monday, 6
January.Koran Kompas, JUMAT, 25 OKTOBER 2013.
Ryan Kiryanto, Strategi Implementasi Program Inklusi Keuangan di
Indonesia, www.infobanknews.com (27 August 2012 15:42
WIB).
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Perempuan Usaha Kecil (ASPPUK), 2008 (tidak diterbitkan).
M. Firdaus, dkk, Aspek Pemberdayaan Perempuan di Balik Lembaga
Keuangan Mikro, satu tulisan di Jurnal Analisis Sosial, Vol.6
No.3, Desember 2001, hal.41-51.
Catatan Monitoring ASPPUK, tahun 2007. Sejumlah catatan itu
telah diterbitkan dalam Deddy Heriyanto dan M. Firdaus,
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Dampak), Jakarta: ASPPUK & NZAID, Desember 2007.
92
Kartono Muhammad, Ada Zona Biru, Siapa Berani Masuk?, Jakarta:
Infobank, N0.403, Oktober 2012, h.33.
Setyo Budiontoro, Pertumbuhan Tanpa Pembangunan, Kompas,
Rabu 12 Februari 2014, hal. 5.
Dewi Meisari Haryanti, What does fnancial inclusion really mean?,
Te Jakarta Post, February 12, 2014.
Andreas Maryoto, Perbankan Nirkantor, Sebuah Babak Baru,
Kompas, 25 Oktober 2013.
M. Dawam Rahardjo, Inklusi Finansial, Kompas, senin,
6 Januari 2014.
93
PROMOTING OIL PALM
POLICIES THAT SUPPORT
SMALLHOLDERS
FOR SUSTAINABLE
ENVIRONMENT
Irhash Ahmady
ABSTRACT
Based on plans drawn up by the Directorate General of Plantations under
the Ministry of Forestry in 2010 through its Palm Oil Plantation Road Map
until 2014, palm oil is considered a strategic commodity upon which Indonesia
can rely on for the long term. Te continual expansion of palm oil plantations
from year to year, specifcally in the past decade, refects todays reality. A
slew of issues have emerged, from the conversion of forests and peatlands
into oil palm estates, worsening environmental degradation, imperiled local
biodiversity to the loss of innocent lives due to oil palm-related conficts.
Tere are numerous elements of Indonesias successful expansion of
oil palm plantations have now become burdensome. Te crude palm oil
(CPO) business almost came to a standstill, despite having the Roundtable
on Sustainable Palm Oil (RSPO) or Indonesian Sustainable Palm Oil (ISPO)
mechanisms in place for the purpose of minimizing confict and environmental
impacts. Tese solutions however failed to efectively deal with the root cause
of issues confronting oil palm farmers or other crop growers whose land has
been seized, while the environmental crisis took a turn for the worse.
Te Palm Oil Development Road Map paves the way for scaling up the
expansion of the palm oil sector. Palm oil is a prime commodity vied for by
countries worldwide either for food or energy consumption. Meanwhile, instead
of bringing prosperity to the local communities, palm oil plantations have
substantially widened inequalities in all facets of life. It is becoming impossible to
guarantee the people a sense of security and safety and improve their well-being.
Te rapid pace of development has also signifcantly weakened the environments
capacity to heal itself.
If palm oil development has failed to make a diference in the welfare of
independent farmers and the people as a whole in the past decade, and neither has
it contributed to the overall progress of Indonesia, then where is Indonesias palm
oil development road map leading us?
94
INTRODUCTION
Te palm oil business has been on an upward trend as the global demand
for palm oil continues to expand. In 2009, Indonesia became the worlds
largest palm oil producer with a production capacity of 20.6 million tons of
palm oil, followed by Malaysia with a production volume of 17.57 million
tons. In 2012 alone, Indonesias CPO production reached 26.5 million tons
1
.
Te bulk of Indonesias palm oil production is exported, accounting for 80%
of total production by 2008. India is the main export destination, taking in
33% of Indonesias total palm oil export, following by China for 13% and the
Netherlands for 9% (Oil World, 2010).
Given these trends, the Directorate General of Plantations formulated an Palm
Oil Development Road Map for 2010-2014 which sets out the macro development
goals for the plantation sector and agroindustry that include: increasing this sectors
contribution to the GDP from 2.97% to 3.19% (constant 2000 prices), employment
opportunities (from 19.78 million to 21.42 million people), investment (from USD
4,1 billion to USD 6,2 billion), agricultural trade surplus (from US$ 28.86 to US$
59 billion), plantation farmers income (from US$ 1600 to US$ 1840/household/2
ha), plantation crop exports (from US$ 31.89 to US$ 61.25 billion), and Farmers
Terms of Trade or FTT (from 105.2 to 109.28).
Mounting demand coupled with substantial income potential has
prompted the expansion of palm oil estates across Indonesia. Based on the
road map prepared by the Directorate General of Plantations, from 2010 to
2020 palm oil plantations are expected to grow 22 million hectares throughout
Indonesia with the possibility of expanding and developing further. Te
successful development of Indonesias palm oil industry is inextricably linked
to government intervention in facilitating investors to expand their business
in Indonesia. Palm oil plantations are now being developed in more than 20
provinces. Te largest concentration is found in Sumatra, Kalimantan, Sulawesi
and Papua, and even now on lesser islands such as Bangka Belitung.
According to Walhi (Indonesian Forum for the Environment) in 2013
2
,
over 39 large corporations have been granted land use concessions (HGU)
to operate on the small island of Bangka Belitung. Te island is practically
besieged by large-scale investments with 5 companies operating in West
Bangka, 6 companies in Central Bangka, 4 companies in South Bangka, 10
companies in Bangka Induk, 6 companies in Belitung and 8 companies in East
1 Directorate General of Plantations, Ministry of Agriculture, 2013.
2 Walhi. 2013. Menghentikan Tambang Tumbuh Sawit. Jakarta
95
Belitung. Extending across a total area of 240,000 ha, more than 50% of Bangka-
Belitung is under the control of major corporations. Te largest concession for
the development of palm oil plantations in Bangka-Belitung has been awarded
to Sinar Mas, palm oil giant in Indonesia, and Cargill, a transnational company
(TNC). In Central Kalimantan, from a total investment area of 13,090,772 ha or
85% of total area, HGU palm oil concessions for 4,254,804.773 ha are given out
to over 340 large corporations. Among the largest is Wilmar Group, a Malaysian
company with HGU concession rights in Central Kalimantan for 200,000 ha.
In Nanggroe Aceh Darussalam, according to data from KUALA (Coalition
for Acehnese Maritime), in the district of Aceh Tamiang from roughly 20,000
hectares of mangrove forests, including those within protection forests, 85% (or
17,000 ha) have been planted with palm oil trees of which 5,700 ha are within
protection forests. Meanwhile in West Kalimantan, in the Pinang Luar and
Sungai Arus Deras protection peat swamp forests in the district of Kubu Raya,
some 4,034 hectares have been converted into industrial palm oil plantations.
Tis forest conversion process in fact has not secured the necessary permit
from the Minister of Forestry (Kompas, 2/07/2010).
Much attention has been given to policies regulating the national palm oil
industry. Apart from mounting global market demand, this is also due to the
rapidly dwindling of fossil fuel energy sources, such as coal and oil. Given the
fact that the global climate has become increasingly unpredictable as a result
of unbridled consumption of dirty energy, palm oil as a renewable source of
biofuel has given fresh hope for sustainable energy.
Te palm oil industry in Indonesia has become a lucrative business at the macro
scale, and its massive expansion has created a whole set of problems that demands
solutions. Te existing regulatory framework provides immense opportunities for
opening up large-scale plantations. As a consequence, land disputes are among
the many issues that have emerged, ofen escalating into agrarian confict pitting
the people against corporations. Productive land and farms available to the local
people for the cultivation of oil palm or other food crops have increasingly shrunk
in size. Not to mention environmental destruction as a result of unrestrained
expansion and land conversion in favor of massive estates.
Tis policy paper will focus on government policies that have broadened
the ownership gap for productive agricultural land and that contribute to the
devastation of the environment and biodiversity. Oil palm policies appear to
grant corporations with numerous privileges and facilities, whereas farmers
as legitimate land owners are instead systematically pushed aside. Tis policy
paper is expected to provide the basis for initiating fundamental changes to
the governments road map on oil palm development in order to ofer fairer
solutions to ever widening inequalities and worsening environmental issues.
96
POLICY REVIEW ON OIL PALM
DEVELOPMENT IN INDONESIA
OVERVIEW
Based on the plantation development strategy for 2010-2014, the
Directorate General of Plantations has decided to focus more on 15 national
prime commodities: rubber, oil palm, cocoa, coconut, jatropha, tea, cofee,
cashew nut, pepper, clove, cotton, tobacco, sugarcane, patchouli and Reutealis
trisperma. With an annual average growth projected at 2.04%, total area set
aside for national prime commodities will expand from 20,394 million hectares
in 2010 to 22,144 million hectares by 2014, with the exception of tobacco
which is predicted to develop at a constant rate of 205 thousand hectares in
the next fve years
3
.
In the same strategy document, the expansion of oil palm plantations has
also been included as part of the development agenda for 2010-2014, known
as the Road Map for Oil Palm Development and Palm Oil Management in
Indonesia. Tis serves as the primary basis for reviewing Indonesias oil palm
development policies and strategies until 2014.
In this ofcial government document, the main purpose of plantation
development is to boost production and productivity, improve quality, added
value and competitiveness with a view to increasing the income and well-
being of the people. It is also aimed at increasing national revenue, both from
plantations and sub-sector plantations, supplying raw material for food and
non-food consumption (e.g., biodiesel) and managing resources in a prudent
and sustainable manner. All these constitute as part of the national agenda
which in its ofcial document clearly covers numerous development aspects.
On a macro-economic scale, the oil palm industry promises bright
prospects particularly as it serves as the basis for the national agroindustry.
Plantation expansion has therefore become part of the road map on oil
palm development, including revitalization eforts to boost agricultural
productivity. Alas, the inclination has been more towards pushing for massive
land conversion. Table 1 below presents the expansion of the oil palm industry
in Indonesia.
3 Rencana Strategis Direktorat Jenderal Perkebunan 2010 2014 [Strategic Plan of
Directorate General for Plantations 2010 2014], Directorate General of Plantations, Ministry
of Agriculture, Jakarta 2011, pp. 45 46.
97
Table 1: Expansion of the Oil Palm Industry 2006-2009
Source: Compiled data, Directorate General of Plantations in Sawit Watch
At the macro level, from 2010 to 2014 plantations and agribusiness are
developed through the following measures: employment opportunities (from
19.78 million to 21.42 million people), investment (from IDR 45.18 trillion to
IDR 68.49 trillion), agricultural trade surplus (from US$ 28.86 to US$ 59 billion),
plantation growers income (from US$ 1600 to US$ 1840/household/2 ha),
plantation commodity exports (from US$ 31.89 to US$ 61.25 billion), and farmers
terms of trade or FTT (from 105.2 to 109.28). Based on these calculations their
contribution to the GDP will increase from 2.97% to 3.19% (constant 2000 prices).
At the micro level, oil palm development targets cover the following:
increase hectarage from 8,127 thousand ha to 8,987 thousand ha, CPO
production from 23,200 thousand tons to 28,439 thousand tons, and
plantation productivity from 3.9 tons of CPO/ha to 4.3 tons of CPO/ha. In
2010-2014, oil palm development is expected to meet the target of establishing
a manufacturing cluster for palm oil and palm oil derivatives in the provinces
of North Sumatra and Riau. Tis target can only be reached in a favorable
business and investment climate.
To meet the foregoing plantation development goals and targets, at the farm
level the development vision is to focus on boosting production, productivity
and quality of plantation crops in a sustainable manner in order to improve the
welfare of the plantation community. Meanwhile, the mission is to facilitate
eforts to improve production, productivity and quality of plantation crops;
make available high quality seeds and production equipment; protect crops
and deal with business interruptions; develop the plantation business and foster
partnerships among plantation growers in a sustainable manner; develop and
empower farmers institutions; promote public participation to ensure better
alignment between the economic, social and ecological aspects; and services
with regard to planning, legislation, plantation development management and
other technical services in a coordinated, efcient and efective manner.
Te oil palm development strategy is spelled out in eight key measures:
(1) increase production, productivity and quality of sustainable oil palm
98
plantations, (2) develop palm oil as a commodity, (3) bolster support for a food
security system, (4) increase investment in the oil palm sector, (5) develop
a plantation management information system, (6) develop human capital,
(7) develop institutions and partnerships, and (8) build support for natural
resource and environmental development. Te plantation development
strategy essentially focuses on resource and environmental development
oriented towards commodity (CPO) production. Tis strategy is supported by
eleven policies that seek to increase production for sustainable and transparent
oil palm development. Te eleven policies are; (i) develop smallholder
plantations through the estate revitalization program, (ii) boost productivity,
(iii) use and distribute prime plants, (iv) integrated pest control, (v) human
resource development, (vi) recycle waste and by-products, (vii) infrastructure
development, (viii) business development, (ix) foster business partnerships,
(x) apply a sustainable oil palm plantation approach, and (xi) develop an
information system.
Tese estate development policies are still production oriented. When
these policies are linked to other regulations, the focus on production-driven
development becomes even clearer. Te strategies and policies mentioned earlier
have applied the necessary cultivation and manufacturing technology for palm oil
and its derivatives. However, this strategy has failed to take into account emerging
issues related to oil palm expansion, specifcally with regard to sustainable oil palm
development (social, environmental and governance dimensions).
Te estate development strategies and policies also tend to emphasize
the technological and macro-economic aspects. Aside from the regulatory
framework, the orientation of oil palm development should also take into
consideration other sectoral policies that support oil palm development in
Indonesia. In view of this, the existing strategies and policies therefore need
to be revised and improved in a view to reduce inequalities and minimize
environmental issues and social conficts.
PLANTATION LEGISLATION EXPANDS INDUSTRIAL
ESTATES, SHRINKS SMALLHOLDER PLANTATIONS
Biofuels are integrating agricultural and energy industries and opening
new roles for some countries in the global economy, the global political
dynamics that they reveal are less novel. Tese dynamics appear likely to
mimic the patterns that others have observed in the palm oil industry, with the
emerging economies of the South integrating their economies with Northern
countries and multinational companies, in complex relationships that blur the
99
lines between donors and recipients of aid, and producers and consumers of
goods (Dauvergne and Neville 2009;1097-8).
1. LEGISLATION WIDENS THE INEQUALITIES
Long before Indonesia gained independence, a good portion of the country
had already been turned into plantations, among others for the cultivation
of clove, nutmeg, cocoa, tea, rubber and oil palm. Te opening up of forests
for estates by Governor General Van den Bosch through the Cultuurstelsel
program marked a historic milestone for Indonesias plantation sector. At the
time it was done in response to the growing demand for spices by European
countries, primarily the Netherlands.
Te development of oil palm plantations during the post-independence
era further intensifed. Known also as Elaeis, the oil palm has changed
Indonesias development landscape, specifcally in the plantation industry. In
1958, Dutch-owned estates were nationalized, bringing them under the control
of a state-run company. Te process however was short-lived due to the failure
of Soekarnos Old Order nationalization agenda.
When the New Order came to power, Law 1/1967 on Foreign Investment
was issued. Te law provided an entry point for large-scale foreign investments
into Indonesia along with various privileges and facilities, including in the
plantation sector. In 2007, a new foreign investment law was issued through
Law 25/2007 on Capital Investment by revising the previous policy which
now confers investors with more freedom and making no distinction between
foreign and domestic investment. Although the oil palm industry boomed
in the 1980s, it only saw rapid growth in the past decade in line with the fossil
fuels energy crisis and climate change.
Given the ongoing fossil fuel depletion crisis and an increasingly erratic global
climate, Indonesia has shifed its orientation to renewable energy such as biofuel.
Te development of agrofuel, particularly biodiesel from palm oil is inextricably
linked to a European Union policy on biofuel. Te EU is the largest consumer of
this type of renewable energy. Based on the biofuel action plan and strategy, in
December 2005 the EU has set a 10 percent consumption target for biofuel as a
source of energy by 2020 or roughly 1 1.5 million tons of biofuel.
Te EU has prepared several evaluation reports on biofuel known as the
Assessment of EU Commission on Biofuel. According to the assessment report,
the ambitious biofuel consumption target requires substantial economic
investments. A holistic policy is therefore necessary to bring down economic
costs incurred for meeting the target. In the report, the EU Commission
recognizes the fact the tropical countries have the highest biofuel productivity
100
(ethanol, biodiesel), and that biofuel production costs are lower in developing
countries. Te report explicitly highlighted biodiesel production in Indonesia
and Malaysia, and their export potential
4
.
The government has also shown considerable support for agrofuel
development in Indonesia, especially with respect to palm oil and
sugarcane as the raw material. As Table 2 below indicates the legal
framework for agrofuel development was initiated along with the
supporting regulations from departments other than the Department
of Agriculture.
Table 2: Government Policies in Support of Agrofuel Development
4 Communication From Te Commission- An EU Strategy for Biofuels, p. 6.
101
Matters related to plantations are regulated by Law 18/2004 on Plantations.
Agricultural Ministerial Regulation No 26/2007 was then issued to provide
guidelines for plantation permits and was later revised in 2013. Te expansion
of several programs, specifcally through the plantation revitalization agenda
and fnancing guarantee from the banking sector, is governed through
Finance Ministerial Regulation 117 on Bioenergy Development Loans which
constitutes as political support for massive oil palm expansion in Indonesia.
Tese policies illustrate that high CPO consumption levels to feed global
energy demand have impelled and reinforced the adoption of a development
paradigm oriented towards large-scale oil palm plantations in Indonesia. It
should be of no surprise when corporations are awarded various privileges and
facilities to step up expansion eforts.
In terms of control over oil palm plantations in Indonesia, at present a wide
gap is evident whereby 65% (major private corporations 55% and state-owned
companies 10%) are industrial estates and the remaining 35% are smallholder
plantations. Data from the Directorate General of Plantations shows that in
2006 the composition was still balanced between smallholder plantations and
corporate-run estates (Table 3 below).
Table 3: Palm Oil Plantations in Hectares (2006)
Source: BPS, Directorate General of Plantations, 2006 data compilation
Papua is projected to be the next target of the national oil palm development
scheme. Tis is refected in various government policies such as MP3EI that
sets aside land for large-scale plantations in the central and eastern part of
Indonesia, one of which is the Merauke Integrated Food and Energy Estate
102
(MIFEE). In the original plan, MIFEE was to extend across 2.6 million ha but
was later rationalized to 1.2 million ha.

2. MARGINALIZED OIL PALM GROWERS
One of the key stakeholders in the oil palm industry is the farmers. Yet
farmers cultivate only 36% of Indonesias oil palm plantations at an average size
of 2 ha/household. According to GAPKI, (Te Palm Oil Farmers Association)
the proportion owned by farmers is much higher at 42% of total oil palm
hectarage. Smallholdings at present cover roughly 3,773,526 ha. Meanwhile,
private plantations stretch across 4,617,686 ha and state-owned oil palm
estates have reached 683,227 ha. Plantations cultivated by smallholders cover
more than 1,920,000 ha.
As noted above, access and control of land favours the large landowners
versus the small land owners. Te main contributing factor is Law 18/2004
on Plantations that only allow individual farmers to manage 2 25 hectares
of land for oil palm cultivation. Tis is reinforced by Agricultural Ministerial
Regulation 26/2007 which sets a 20% limit for smallholders. Tis is much
diferent than the policy undertaken by the New Order administration which
allows the farmers control over up to 60% of estates (see Agricultural Ministerial
Decree No. 333/kpts/KB.50/6/1986)
5
. Existing policies only impose an upper
limit in land size held by a company within a given region.
Land control is among the many elements that refect inequality in terms
of land size, not to mention other agricultural inputs such as technology, seed
and fertilizer nearly all of which are under the control of major corporations.
Furthermore, banking policies also curb access to much needed fnancing by
oil palm smallholders. Te Palm Oil Farmers Union (SPKS) has identifed
several persistent issues confronting palm oil growers.
a. Legality of Farming Business
Te majority of independent farmers in Indonesia do not hold a palm
oil plantation certifcate. Generally, farmers only have a land-use notifcation
letter issued by the village chief. Tis is due to the prohibitive fees in applying
for a plantation certifcate which can cost farmers as much as USD 300 to USD
5 Te previous nucleus-plasma plantation policy Agricultural Ministerial Decree
No. 333/1986, Article 10 clause 2a stipulates a 20 : 80 ratio between nucleus and plasma estates,
whereas Agricultural Ministerial Regulation No. 26/2007 specifcally Article 11 states that
plantations set aside for the people should be at a minimum of 20% of total area cultivated by
companies.
103
400. Bureaucratic red tape and a lengthy process add to farmers reluctance in
arranging for a plantation certifcate.
On the other hand, corporations can lay claim to a piece of land simply by
presenting a HGU permit issued by the local government through BPN (National
Land Agency). Not surprisingly this has led to land disputes in various regions.
b. Palm Oil Seeds
Apart from the issue of the business legality for yields to be acceptable to
the market through the green mechanism promoted by international bodies
such as APEC, (Asian Pacifc Economic Cooperation) farmers also face
difculty in accessing certifed oil palm seeds. Large corporations on the other
hand can easily obtain these seeds; some may even be able to independently
produce them because these companies have secured green certifcation from
competent institutions. Tus far, palm oil farmers have been obtaining their
seeds from suppliers without defnite legal status. As a consequence, crop
yields cannot be exported due to absence of green certifcation. Furthermore,
nurseries and seed producers can only be found in Sumatra. Many independent
farmers have bought pre-nursery seedlings which they then develop on their
own. Tere are eight seed producers that control nearly the entire domestic
palm oil seed business, and among the largest is PT London Sumatra, one of
the earliest palm oil plantation owners in Indonesia
6
.
c. Land Size and Dispersed Plantations
Despite data showing that palm oil growers have fairly large parcels of
land to cultivate on, the state through its regulations only allow farmers to own
less than 25 hectares. In reality, land tenure varies depending on the size of the
land owned by farmers. Lands are also located at a distance from each other
due to HGU permits awarded to corporations by the government.
d. Palm Oil Marketing System
On the marketing front, farmers are unable to haul their agricultural
yields to the processing plant due to the lack of fnancing for transportation.
Crop yields will therefore almost certainly be handed over to middlemen
at a lower selling price. It is rare for farmers to independently market their
products directly to the palm oil mill.
6 La Via Campesina. Industrial Agrofuel. 2009.
104
e. Transport Infrastructure
Independent palm oil plantations passed on from one generation to the
next typically have poor road infrastructure, made worse by the fact that these
estates are not within the same contiguous location. Bad road conditions
make it difcult to transport yields. Te considerable distance between the
plantation and processing facility has lef farmers with no other choice but to
rely on middlemen selling way below market price.
f. Access to Financing and Credit
In diferent parts of Indonesia, a common issue among farmers is capital
shortage for increasing agricultural production. Tis also applies to palm oil
growers. Alas, credit facilities ofered by both national and multinational banks
are mainly targeted at large-scale oil palm plantations. Two banks in particular
HSBC and Bank Mandiri give specifc attention to the fnancing of oil palm
estates. By May 2010, Bank Mandiri has disbursed 76.91% from a staggering
USD 2,9 billion worth of loans for the plantation and manufacturing/trade
sector to oil palm estates alone!
Te amount of credit channeled to the oil palm sector and its
manufacturing industry also continues to see an upward trend. In 2008, bank
loans amounted to IDR 19,041 trillion and surged to IDR 25,283 trillion in
2010. From this huge amount of bank loans set aside for oil palm plantations,
virtually none were received by independent growers who total three million
people. Banking institutions have mentioned that they are unwilling to take
on the risk of providing credit to smallholders. Tis only serves to widen the
disparity between independent oil palm growers and industrial plantations.
g. Oil Palm Puts Other Food Crops At Risk
Te massive expansion of oil palm plantations poses a serious threat to
food security. In the province of Jambi, oil palm estates cover 819,237 hectares
or eight times the size of remaining rice felds which only cover 143,034
hectares. In 2008-2010, converted croplands reached 75,560 hectares in this
province, most of which were turned into transmigration areas (Trans-PIR)
whereby the entire 60,000 hectares of land allocated for food crops were
converted into oil palm estates. Tis places Jambi at the top priority among
regions most vulnerable to food insecurity
7
. Tis large-scale conversion of rice
felds means that Jambi can only meet 11.7 percent of its rice needs or a mere
350 tons annually from a minimum demand of 3,000 tons each year
8
. To meet
7 Kompas, 19 July 2010.
8 Bulog Divisi Jambi, 2010 in a joint hearing with Commission III of Jambis
105
the rice needs of the province, Jambi must import from other provinces such
as West Sumatra, South Sumatra, Central Java and East Java.
According to Ign Kristanto, the expansion of land area for the cultivation
of oil palm is made possible by clearing large swathes of forestlands in Sumatra
and Kalimantan. At the current rate, hectarage will expand twenty-three-fold
in the next 30 years. Te size of forest areas converted into oil palm estates
has increased from year to year. In 2007 the total area reached 4,741,194 ha
and continues to expand. In the province of Riau alone, land allocated for oil
palm cultivation covers 1,1611,859.68 ha, in Central Kalimantan at 619,868.37
ha, while total oil palm plantation expansion in Kalimantans forests reached
3,360,851.1 ha. Tis is directly proportional to Kalimantans rate of deforestation
which currently has lost 58% of its forests at a rate of 2,83 million ha/year.
Data from the Indonesia Farmers Union (SPI) concerning the conversion
of productive cropland in Upang Delta and Telang Delta II in Banyu Asin, South
Sumatra shows that since 1969 these regions are known as food producers
contributing 50% to South Sumatras rice supply, but due to the opening up
of road access in 2000 existing lands were taken over by oil palm investors.
Another example of land conversion is in the district of West Pasaman in
West Sumatra. Before 1990, this region was a rice production centre with rice
felds covering 27,168 hectares, but this number continues to drop following
investments in oil palm plantations beginning in 1981.
Between 2005 and 2007, the amount of land allocated for food production
(rice and corn) in West Pasaman declined from 16,127 to 14,840 ha (BPS,
2008). According to the local agricultural ofce of Pesisir Selatan, West
Sumatra (Padang Today 2/4/2009) at least 1,293 hectares of rice felds in Pesisir
Selatan also grew smaller in size in the past fve years due to conversions into
plantations and for housing. Only 30,466 ha of rice felds are lef from which
each farmers household own a mere 0.5 ha of land.
9
BPS data (2010) shows that land conversion arising from oil palm expansion
tends to increase each year. In North Sumatra for example, at least 39,669 ha of
agricultural land was converted in 2005-2006 or approximately 7.55 percent of
irrigated rice felds in the region. Land was transformed into oil palm plantations
and other sub-sectors other than food crops. Nearly 40 thousand hectares of
land in North Sumatra were converted in 2005-2006 across 13 districts. Land
conversions primarily took place in South Tapanuli, Asahan and Labuhan Batu,
each stretching across 10,455 ha, 7,373 ha and 6,809 ha respectively. In Labuhan
provincial parliament by Yayasan Setara
9 http://ww.spi.or.id/?p=3047
106
Batu, one of North Sumatras main rice producers, the conversion of rice felds into
oil palm estates reached an average of 5,000 ha annually. Te conversion process
gathered pace following massive oil palm expansion in North Sumatra. According
to data released by Sawit Watch, plantations expanded to over 1,913,224 ha in
2008 which later increased to 1,956,331 ha in 2009. By 2012, this fgure reached
over 2,000,149 ha (Medan Daily).
h. Oil Palm and the Green Ambition
In reference to the road map prepared by the Directorate General of
Plantations, it is clear that production will be stepped up if need be to meet
global demand, specifcally from European countries. Amid growing concerns
over environmental (green) issues due to the worsening fossil fuel energy
crisis, bioenergy will undoubtedly be given greater attention within the global
energy scheme. Consequently, oil palm development policies will be directed
toward meeting this need for renewable energy. What may on paper appear to
be a viable strategy to move away from fossil fuels and tackle energy shortages
and climate change is creating numerous environmental and social problems.
Te green agenda, it appears, is not so clean.
FAO data reveals how the oil palm business adds to greenhouse gas
emissions due to the production, distribution and consumption of biofuel,
sometimes even much more than fossil fuels. Tis is due to a shif in land-
use patterns required for the massive expansion of oil palm plantations. It is
impossible for biofuel production to signifcantly enhance the energy security
of developed countries. Tis requires extensive land allocation, thus making it
impossible (FAO, 2009; 4-5).
Existing biofuel policies are simply replacing one problem with another,
and shifing the burden from the middle class to the poor. Te fuel needs of the
middle class with their culture of consumerism along with growing demand
for energy are being satiated through the systemic marginalization of the poor
and underprivileged
10
.
Te World Development Report 1992 responded to the development and
environmental challenge by calling for environmental protection to be an
essential part of development. Without adequate environmental protection,
development will be undermined; without development, there will be a scarcity
of resources for the required investments, and environmental protection will
fail ...growth has ofen caused serious environmental damage (p.2).
10 Jagdesh Rao, New Agriculturist, March 2008.
107
Apart from the alarming rates at which deforestation is taking place, oil
palm expansion also puts biodiversity at serious risk. IUCN data reveals that
the existence of at least 236 plant species and 51 wildlife species in Kalimantan
are endangered and this situation shows no signs of abating. Te main cause
is the unbridled clearance of forests for the expansion of oil palm estates. To
date, Indonesia has the worlds longest list of endangered species, a total of
1170 species. Tis excludes species that have not been named but are already
extinct
11
.
Another equally important environmental issue, apart from land
conversion and biodiversity loss, concerns the production process itself. Te
oil palm cultivation process requires an uninterrupted supply of water. As
a consequence, oil palm plantations are mostly found in areas close to the
sources of water such as rivers. Opening up land for estates also leads to soil
compaction. Trough this monoculture approach, the upper fertile layer of soil
is worn away by erosion. Oil palm needs 20-30 liters of water/day/tree. Apart
from being water-hungry plants, oil palms also take in plenty of nutrients, thus
are heavy users of fertilizer. If non-organic fertilizers are applied, the soil will
become nutrient defcient and will have implications for other areas.
CONCLUSION AND RECOMMENDATIONS
1. ALTERNATIVE STRATEGY AND POLICY
Te oil palm development paradigm needs to be transformed from
being oriented towards productivity, technology and macro-economy for
export purposes to meeting the domestic demand for palm oil. Te oil palm
development road map for 2014-2018 has been revised to be more oriented
towards sustainable plantations for smallholders by empowering millions of
oil palm growers in Indonesia to be able to cultivate the crop without having to
open up new forest areas or peatlands.
Plantation revitalization can be further optimized through legislation that
focuses on allocating land for smallholders, enabling them to work collectively
by promoting oil palm farmers co-operatives in a bid to boost agricultural
productivity and ultimately allow the people of Indonesia to prosper. Tis
policy is expected to help prevent social conficts.
Changing the orientation of bioenergy policy from merely focusing on
oil palm to all other agricultural commodities that can produce biofuel will
contribute signifcantly in tackling issues on greenhouse gas emissions and
11 www.iucnredlist.org
108
biodiversity depletion. Estate development policies should push for collective
actions that promote commodity ownership without prioritizing oil palm
which has clearly undermined eforts to ensure the peoples safety and well-
being and conserve the environment.
RECOMMENDATIONS
To efectively deal with various dimensions of inequality in existing oil
palm policies, the following preconditions should be met:
Bring an end to corporate oil palm expansion, while optimizing small
holder plantations. Tis calls for genuine agrarian reform that includes land
redistribution in favor of farm workers and smallholders in rural areas which
should be accompanied with the ability to self-determine food crops that the
people prefer to cultivate.
Strengthen independent farmers in the oil palm sector to improve their
production process in order to meet national palm oil demand. Tis requires
solid and formidable oil palm farmers organizations that can protect their
estates from being pressured by the nucleus-plasma scheme.
Provide access and privileges to individual farmers in obtaining the
required production facilities and equipment, and loans.
Corporations must apply the principle of free, prior and informed consent
and withdraw (or terminate) company operations in areas where their presence
is rejected by the local community.
Minimize environmental impacts through good governance that makes it
obligatory for corporations to comply with prevailing environmental laws and
regulations, adopt an integrated pest management approach without pesticides
and recycle wastewater from palm oil mills.
Te government needs to conduct an environmental and social audit
of the oil palm industry and impose stringent sanctions for violations and
undesirable consequences, and fully provide legal protection for afected
communities.
109
REFERENCES
Colchester, Marcus. 2007. Promised Land: palm oil and land
acquisition in Indonesia-Implications for Local Communities
and Indigenous Peoples. Forest People Programme, Moreton-
in-Marsh and Sawit Watch. Bogor.
Dauvergne, Peter and Kate J. Neville (2009) Te Changing North-
South and South-South Political Economy of Biofuel, Tird
World Quarterly 30 (6), 2009:1087-1102.
EU Commission. 2006.Communication From Te Commission- An
EU Strategy for Biofuels.
GAPKI. 2009. Membangun Indonesia dengan Kelapa Sawit. Infosawit,
Jakarta
Hambali, E. 2009. Contribution of Higher Education and Research
Institutions
Medan Business Daily. 2013. Konversi Lahan Pertanian Picu Kenaikan
Harga Pangan
Http://medanbisnisdaily.com/news/read/2013/04/06/22000/
konversi_lahan_pertanian_picu_kenaikan_harga_pangan/#.
UyqeJ6iSxk0
Jiwan, N.2009. Political economy of the Indonesian palm oil industry:
A critical analysis.
Presentation at ISEAS Workshop on the Oil Palm Controversy in
Transnational Perspective. Singapore: Institute of Southeast
Asian Studies, March 2009.
Oil World. 2009. Oil World Annual 2009. ISTA Mielke GmbH.
Langenberg, Hamburg, Germany.
Perencanaan Strategis untuk Menghadapi Abad 21. PT. Gramedia
Pustaka Utama, Jakarta.
Serikat Petani Kelapa Sawit ( SPKS). 2012. Training Praktik Penilaian
Tanaman Kelapa Sawit, Bogor.
SawitWatch. 2008. Losing Ground: the Human Rights Impact of Oil
Palm Expansion in Indonesia. Bogor.
Via Campesina, Industrial Agrofuels Fuel Hunger and Poverty,
Notebook N1.2009. Jakarta.
Vermeulen, S. And Goad, N. 2006. Towards better practice in
smallholder palm oil production. Natural Resource Issues
Series No. 5. International Institute for Environment and
Development. London, UK.
110
White, Ben. 2009. Laba Kuasa di Cat Warna Hijau Jurnal Tanah Air
Walhi. Jakarta p. 236.
World Bank. 2001. Te Quality of Growth. Gramedia Pustaka Utama.
Jakarta.
GOVERNMENT DOCUMENTS
Direktorat Jenderal Perkebunan. 2009. Statistik Perkebunan: Kelapa
Sawit. Directorate General of Plantations, Jakarta.
Direktorat Jenderal Perkebunan. 2010. Road Map Pembangunan
Kelapa Sawit. Directorate General of Plantations, Jakarta.
Direktorat Jenderal Industri Agro dan Kimia. 2009. Roap Map
Pengolahan CPO. Directorate General for Agro and Chemical
Industry, Jakarta.
Kementerian Kehutanan. 2010. Rencana Strategis 2010-2014. Ministry
of Forestry, Jakarta.
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INEQUITABLE TAXATION IN
INDONESIA:
BASELINE MAPPING
OF POLICY AREAS AND
OPTIONS IN AN EFFORT TO
TACKLE THE ISSUE
Ah Mafuchan

ABSTRACT
Income inequality is now on the political agenda due to the widening gap
between the rich and poor. Tere are a number of factors that are causing the
inequitable distribution of wealth. For example, public policies such as taxation,
labor, education, health that are inconsistent with the principles of justice
and equity are also contributing to widening economic and non-economic
disparities. Another causal factor is an unfair market mechanism. Taxes as a
fscal policy can function as an instrument for fair and equitable economic
distribution. However, in practice, taxes are a source of economic inequality.
Tax rates that put the wealthy and super-wealthy at a more advantaged position
are proof of this paradoxical efect.
112
INTRODUCTION
Every time people try to punish the rich, the rich dont simply comply,
they react. Tey have the money, power, and intent to change things. Tey
do not just sit there and voluntarily pay more taxes. Tey search for ways to
minimize their tax burden. Tey hire smart attorneys and accountants, and
persuade politicians to change laws or create legal loopholes. Tey have the
resources to efect change... Te poor and middle class do not have the same
resources. Tey sit there and let the governments needles enter their arm
and allow the blood donation to begin. Today, I am constantly shocked at
the number of people who pay more taxes, or take fewer deductions, simply
because they are afraid of the government. And I do know how frightening
and intimidating a government tax agent can be Robert T Kiyosaki, Rich
Dad, Poor Dad (2010: p. 21)
Income inequality is now a much-discussed subject to the extent that
public attention has shifed its attention away from non-income inequality
issues (social inequality). Te notion that social equality is harder to measure
than money inequality as contended by Noah Smith is probably one of the
reasons for this. Income inequality is in fact much easier to measure and
comprehend. As part of economic inequality, the income gap illustrates a
situation where disparities exist between the percentages of the population
relative to resources, including income received by the population.
Numerous countries across the globe are now experiencing high levels of
economic inequalities. Luebker (2011) regards this drastic rise in economic
disparities as the worst ramifcation of globalization. Luebker was probably
arguing against the Kuznets (1995) curve theory. Kuznets does not consider
economic inequality as a problem but instead sees it as necessary for growth.
Te emergence of the rich sets the economic wheels in motion, creating
more employment opportunities. Te employed population can therefore
earn a livelihood, thus elevating their well-being. Citing Luebker, economic
globalization, however, has debunked Kuznets theory. A globalized industry
that transcends national and geographical boundaries has led to increasingly
expansive industrial activities. Consequently, massive capital accumulation due
to reckless human greed can no longer be efectively measured. Te extractive
industry has made it possible for natural resources to be siphoned of from one
country to another at such frenetic pace that seems to know no borders.
In the United States the highest income earning bracket represents
1% of the population but have control over 40% of national assets (Stiglitz,
2012). Tis has been a cause for concern for President Obama who considers
113
income inequality as the most profound challenge facing the United States. In
Indonesia, Yusuf, Sumner and Rum (2013) made an estimate of the evolution
of income inequality in the country from 1990 to 2012. By applying the Gini
coefcient
1
and decile dispersion ratio,
2
it was evident that Indonesias income
inequality has hit heights unmatched in the countrys history. Indonesias Gini
ratio was 0.33 in 1990 and rose to 0.41 in 2012. Te Center for Economics and
Development Studies (CED) of Padjajaran University (2013) estimated that
in 2012 the wealthiest 20% take in 49% of national income, while the poorest
40% are only lef to enjoy 16% of national income. Meanwhile, the richest 10%
have become wealthier with a twelve-fold income increase compared to the
bottom 10%.
Inequality needs to be measured periodically. Two basic concepts should to
be taken into account in measuring income inequality: (i) private sector income
inequality (earnings before tax and transferred to the public), and (ii) income
inequality in terms of disposable income afer direct tax and public transfer.
Direct tax refers to taxes imposed directly upon the taxpayer and cannot be
transferred to other parties, such as income tax. Tese two approaches are
also known as primary and secondary income distribution (Luebker: 2011).
Meanwhile, Todaro and Smith (2006) used two measurements to analyze
income distribution: (i) size distribution of income that directly calculates the
earnings of each individual or household, and (ii) functional or factor share
distribution of income that measures total national income received by each
factor of production (land, labor and capital).
Based on various references it can be inferred that income inequality
can be attributed to several factors: (i) the unequal distribution or control
of natural resources; (ii) diferential treatment or appreciation between those
who toil to earn a living and others who need not put in as much efort; (iii)
individuals are socially coerced to work or not to work in all lines of work
based on specifc disciplines; (iv) public policies (taxation, labor, education,
health, etc.) that have a bearing on the quantity and quality of the distribution
of existing resources. Apart from these four aspects, inequality in general can
1 Measuring inequality based on the Lorenz curve which makes a comparison
between the distribution of a specifc variable (income or income per capita) and the uniform
distribution of a variable that represents equality. Te curves horizontal axis shows the
cumulative percentage of households from poor to rich, while the vertical axis indicates
cumulative expenditure or income.
2 A simple and basic inequality measurement that presents the ratio of the average
consumption of the richest 10% of the population against the average consumption of the
poorest 10%. Tis approach can be interpreted by expressing the income of the richest 10% of
the population as a multiple of the income of the botttom 10% or those in the poorest decile.
114
be the result of an unbalanced market mechanism and unfair tax policies and
distribution (Kenworthy and McCall, 2008).
From the foregoing explanation, a simple deduction that can be drawn
is that in the event of widening disparities in a population, inequality will
also worsen. To curb disparities, several experts have suggested the need for
income distribution. In relation to this, an instrument that can be used by the
government is redistribution through tax collection and distribution. Carter
and Matthews (2012), two OECD tax experts, have emphasized the role of tax
policies in reducing inequality by improving wealth distribution through more
transfers, either through the delivery of basic services (education and health),
infrastructure development or cash transfers. In addition, progressive taxation
can be a means for the government to redistribute income. Tis approach will
prompt fnancial reforms that should not only be about pursuing growth but
also oriented towards distributive justice. Duncan and Peter (2012) in their
work, Unequal Inequalities: Do Progressive Taxes Reduce Income Inequality?
further elaborated that a progressive tax structure is capable of narrowing
inequalities, primarily by creating a climate with redistributive impacts.
According to Fozzard (2001), collected taxes that have become part of public
funds must be directed towards meeting citizen preferences and for ensuring
justice by reducing poverty and social disparities.
Tax policies and practices on the other hand also bring problems that
need to be addressed. In numerous countries, taxation has become a source
of inequality. Te super-rich are paying fewer taxes compared to the upper-
middle income earners due to low tax rates. As noted above, the rich will
unrelentingly seek ways, either legally or illegally, to minimize their tax burden.
Bahagijo (2014) in Super-Tax for Frances Mega-Rich and Indonesias 2014
Elections (INFID Analysis No.1) brought attention to the meager contribution
of the ultra-rich in paying taxes. Musgrave and Musgrave (1984) added that
theoretically, a persistent issue in the implementation of a tax regime concerns
the distributive justice of tax burdens for diferent income groups.
In various countries, tax contribution to total state revenue is typically
higher compared to state revenue from non-tax sources. In Indonesia, taxes
contribute an average of 72 74% of total state earnings. In 2012, total state
earnings amounted to USD 123 billion of which 74.8% is derived from tax
collections (Ministry of Finance, 2013). Tis average is below the target set
for the fscal year. In the past few years, the tax revenue target has never been
met. In 2013, total tax revenue was 91.31% from the target set by the revised
national budget for 2013, the lowest performance in the past three years. In
preserving Indonesias existence as a nation, the relationship among citizens
and between citizens and the government should be based on a set of values and
115
instruments. One of the principles that can help maintain these relationships is
upholding justice. With justice, citizens shall be equally treated with regard to
their fundamental rights and obligations as citizens of the state.
Furthermore, distributive justice of goods and services (justitia
distributiva) will be more equitable and enjoyed by all. Every citizen shall be
able to exercise their rights based on their roles and contributions. Citizens on
the other hand will also have basic rights that are not based on their roles and
contributions (justitia cummulativa). Justice however is based on transactions
(sunallagamata), both voluntary and involuntary. Distributive justice is ofen
used for measuring government policies with regard to the people.
Te states responsibility towards citizens therefore is perceived to be
greater than the peoples obligations towards the state. Te government must
therefore distribute resources under the peoples control in a fair manner. In
this context, it would indeed be more important to implement the principle
of distributive justice. However, when citizens are expected to fulfll their
responsibilities such as their tax obligations, the principle of commutative
justice becomes more of a priority.
Concerning the issue of tax burden and distribution that leads to inequality,
it is therefore necessary to look into areas where there is tax inequality. How
should inequitable tax burden and distribution be dealt with to ensure tax
justice? Tis paper will attempt to provide answers to both questions. Te scope
of this paper is limited to measuring tax-beneft incidence in terms of: (i) who
will bear tax burdens?; (ii) who will beneft the most from public spending?
INEQUITABLE TAXATION: BASELINE MAPPING
In the presence of distributive and cumulative justice, every individual
will be able to beneft from taxes through social programs or others which
will ultimately reduce inequalities. In addition, distributive justice will also
help lay a more concrete foundation to ensure equality before the law. In
view of this, there are a number of urgent reasons to address taxation and tax
inequality: (i) taxes are a vital and the most sustainable source of development
fnancing and; (ii) taxes can pave the way for upholding distributive justice.
Trough fair and just fscal and monetary policies, the government will be
able to make a diference for the people consistent with the principles of social
justice as enshrined in Indonesias constitution. Tis is because of the transfer
of resources from high-income earners to low-income earners through fscal
(tax) policies. Sources of tax revenue and the transfer of tax resources are the
keys to reducing tax inequality. From the authors research, there are several
areas of inequality in taxation policies:
116
1. SOURCES OF TAX REVENUE
Pursuant to the Income Tax Law, sources of tax revenue in general can
be distinguished into: personal, undivided inheritance as a whole to replace
the rightful heir, statutory bodies and permanent establishments. In simplifed
terms, these sources are categorized only as personal and statutory bodies. Te
ofcial number of taxpayers is presented in Table 1 below:
Table 1: Number of Taxpayers in Indonesia 2009-2013
Source: Directorate General for Taxation, Ministry of Finance, 2014
From the statistics above, it is evident that the number of individual and
corporate taxpayers is far from ideal. With a population of 237 million people
(2010) of which 10-11% are poor, individual taxpayers of only 23 million is
surely far from adequate. If examined further, in comparison to the income tax
contribution of the rich, employees contribute much more. Tis is governed in
Article 26 of the Income Tax Law (dividend, interest, discounts and benefts
related to guarantees, loan repayment, royalty, rent and miscellaneous income
associated with the use of property, and others) which sets a lower percentage
compared to components in Article 21 (salary, wage, honorarium, allowance
and others). Statutory bodies (Articles 25 and 29) in fact signifcantly contribute
to tax revenue (Figure 1 below).
117
Figure 1: Total Tax Revenue from Non-Oil and Gas Sources
Given the considerable number of wealthy individuals in Indonesia, the
countrys tax revenue potential from the rich is immense. According to the
Deposit Insurance Institution (DII), which publishes information on the
number of national bank accounts and nominal amount of Tird Party Funds
(TPF) deposited in banks (Table 2 below).
Table 2: TPF by Nominal Segment (DII, September 2013)
In 2013, the NGO, Perkumpulan Prakarsa, Jakarta compiled data from
the Ministry of Finance concerning the contribution of various tax sources
relative to total tax ratio. In 2012, with a tax ratio of 13.3%, the percentage
118
contribution is as follows: (i) income tax at 6.2% with the following breakdown
personal income tax 1.2%, corporate tax 2.3%, others 2.8%; (ii) value-added
tax at 4.1%. From both sources (income tax and VAT), at least 10.3% from
13.3% tax ratio has been accumulated. Tis means that the highest tax burden
is borne by individuals (employees) and the entities where they work for along
with their consumption. Revenue realized from income tax in the 2010 national
budget with regard to Article 12 of the Income Tax Law (employee income tax)
amounted to USD 5 billion (18.6% from total income tax revenue) and Article
25/29 on personal income tax (non-employees) at only USD 367 million
(1.2% of total income tax revenue). Tis is unfair because the contribution
of individual entrepreneurs who should be included in the high net-worth
individual category is insignifcant. We can therefore deduce that the small
number of individual entrepreneurs registered as taxpayers has afected the
amount of tax revenue (Prastowo, 2012).
2. TAX RATE: HIGH FOR MIDDLE-
INCOME, LOW FOR THE RICH
Te principles of taxation are equality, certainty, convenience of payment
and efciency. Te principle of equality in collecting taxes by the state should
be based on the capacity and income of taxpayers (Tjahjono & Husein, 2000).
A fat tax would in fact mean that the government is being discriminatory
to taxpayers. A socially equitable approach in terms of taxation would be to
impose diferent rates for taxpayers. Te higher the income, the higher the
taxes that taxpayer must report and pay. Conversely, low income would mean
fewer taxes to report and pay. Tis constitutes economic justice that ultimately
leads to social justice.
Te prevailing tax rates are also another form of inequitable taxation, in
addition to tax brackets where diferent tax rates apply for diferent income
levels. In Indonesia, the income tax rates (resident taxpayer) applicable to
taxable income are as follows:
Up to USD 5.000, 5% tax rate.
Over USD 5.000 to 25.000, 15% tax rate.
Taxable income over USD 25.000 to 50.000, 25% tax rate.
Taxable income over USD 50.000, 30% tax rate.
Te rates on the taxable income of resident corporate taxpayers and
permanent establishments are as follows:
Up to USD 5.000, 10% tax rate.
Over USD 5.000 to USD 10.000, 15% tax rate.
119
Over USD 10.000, 30% tax rate and pursuant to government
regulations, the highest rate can be lowered to a minimum of 25%.
Non-resident taxpayers for 20% of gross income, or according to the
Tax Agreement applicable for the non-resident taxpayer.
Given the tax rates for individual and corporate taxpayers described
above, it appears that the principle of justice does not entirely apply as they
have created inequality in terms of tax rates and burden borne by taxpayers.
As an illustration, an individual with USD 10 million in wealth will be paying
the same rate of 30% as those with a net worth of IDR billion and so forth.
Tis structure of tax bracket is clearly unfair. Te ultra-rich will ultimately
only pay a fraction of the percentage imposed on middle-income earners. Te
state will therefore not be earning tax revenue as much as it potentially can and
consequently there will be fewer resources to distribute to citizens.
3. TAX INCENTIVE: INEQUITABLE POLICY FROM PLANNING PHASE
Apart from the issue of tax sources and rates, inequitable taxation can also
be observed with regard to tax incentives. Tax incentives are mostly ofered
to entrepreneurs. In giving out these incentives, does the prudent principle
and openness apply? Tax incentive policies ofen lack transparency and as a
consequence awarding such privileges to large-scale businesses can undermine
justice. To reduce inequality with regard to taxation in order to ensure tax justice,
tax incentives should also be available to the low and middle-income earners.
Te governments preferential treatment to major businesses, both
domestic and foreign, is indicated for example in Finance Ministerial
Regulation 130/PMK.011/2011 concerning Corporate Income Tax Exemption
or Reduction Facility (Tax Holiday). Te tax holiday facility for corporate
income tax is introduced under the pretext of encouraging foreign investments
in Indonesia. In reality, incoming investments are mostly for the extractive
industry given Indonesias abundant natural resources. Tis policy will
undoubtedly be counter-productive to eforts in increasing tax revenue from
corporate taxpayers.
4. SUB-NATIONAL TAX RATIOS: WIDELY DIVERGENT
Te diverging trends of tax revenue among regions in Indonesia are of utmost
concern. Sub-national tax ratios (comparison between tax revenue of a given
region and the value of an economys output or Gross Regional Domestic Product/
GRDP among regions) vary widely. Te tax ratio of provincial governments in
2012 in general saw a declining trend compared to 2008. Te South Sulawesi
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provincial government has the highest tax ratio at 10 percent, whereas Central
Sulawesi registered the lowest at 0.67%. A high tax ratio is attributed to low GRDP
and even lower sub-national tax collections (Graph 1 below)
Graph 1: Tax Ratio by Province in Indonesia, 2008 - 2012
Source: National Development Planning Board / Bappenas, December 2013
Tax ratios at the district/city level are even more troubling. Table 3 presents 5
districts or cities with the highest tax ratio, and 5 districts or cities with the lowest.
Table 3: Tax Ratio by District/City
(Top 5 and Bottom 5, 2011)
Source: National Development Planning Board / Bappenas: 2011 compiled
121
Te ratio of locally generated revenue (LGR) relative to total income of
districts/cities of each province in Indonesia is not much diferent than the
tax ratio among provinces. Bappenas (2013) observed a rise in total income
for 2012 when comparing data from 2008 to 2012, with the exception of the
provinces of Aceh, Riau and Riau Islands. Te highest LGR ratio is DKI Jakarta
at 60.98%, and lowest West Papua at 3.33%. Meanwhile, 12 provinces have
recorded LGR-to-total income ratio above the average ratio for districts/cities
in a given province (15.88%) (Graph 2 below).
Graph 2: LGR-to-Total Income Ratio of Districts and Cities by Province
dan Kota Se Provinsi
Source: National Development Planning Board / Bappenas, December 2013
5. INEQUITABLE DISTRIBUTION: A PORTRAIT OF FISCAL SPENDING
Fiscal spending is a means to distribute available resources. Distribution
through fscal policies helps to ensure that the income gap among the
people is not overly wide, and national revenue share can be measured and
sustained. To this end, the spending posture for each fscal year can serve as
an indicator to determine the extent to which fscal spending refects optimal
distribution. In the past several years, the lions share of fscal spending was
for government employment expenditure and routine spending. Government
spending which should be intended for the prosperity of the people, to the
greatest extent possible has instead shifed to the prosperity of bureaucrats
and public ofcials, to the greatest extent possible. Government employment
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expenditure
3
should not exceed spending for development and social welfare.
Tis is to ensure that the national budget does not only beneft bureaucrats,
public ofcials and politicians, but more importantly the public at large.
In the future, the payroll and allowance scheme of civil servants, military and
police personnel and state ofcials should be designed in such a way that does not
squander public funds, nor put a strain on the national budget. Any decision to
increase remuneration or allowances should not only be approved by parliament,
but the public should also have a say in the matter. If the national budget only
allows for narrow fscal space partly due to substantial government employment
expenditure as a consequence of the swelling ranks of civil servants along with
their pay rise, a restructurization policy is therefore crucial and only then will the
management of state fnances refect social justice.
Social justice runs parallel with the concept of creating prosperity for the
people, to the greatest extent possible. National budget policies that embrace the
principle of social justice should therefore take into account adequate and equitable
social spending
4
, capital expenditure
5
, materials expenditure
6
, and subsidies
7
.
3 Government employment expenditure refers to monetary and in-kind payment
determined according to existing legislation to state ofcials, civil servants and employees
on government payroll but have not been conferred civil servant status as compensation for
work undertaken, except work related to capital formation. Tis expenditure component
includes salary, benefts, honorarium, overtime pay, social contribution and other employee-
related expenses (Source: Finance Ministry Regulations/PMK Number 101/PMK.02/2011 on
Spending Classifcation).
4 In the existing fnancial system, items under the social aid category include cash or
in-kind transfers ofered to the public to protect against potential social risks. Tis expenditure
seeks to elevate the well-being of the people, non-continuous and selective in nature. Other
expenditure categorized as social spending includes those that cannot be classifed under the
aforementioned expense items which include non-recurring and uncommon expenditure such
as in response to natural disasters, social disasters and other unexpected expenditures (Source:
Finance Ministry Regulations/PMK Number 101/PMK.02/2011 on Spending Classifcation).
5 Capital expenditure refers to budget expenses allocated for acquiring or increasing
fxed assets and other assets that provide beneft for more than an accounting period
and exceed minimum capitalization of fxed assets or other assets as determined by the
government (Source: Finance Ministry Regulations/PMK Number 101/PMK.02/2011 on
Spending Classifcation).
6 Materials expenditure refer to the purchase of consumable goods and services
to produce goods and services, either marketed or not, and the procurement of goods to
be transferred or sold to the public, and ofcial travel expenses (Source: Finance Ministry
Regulations/PMK Number 101/PMK.02/2011 on Spending Classifcation).
7 Subsidies refer to budget allocated by the government to state-owned enterpirses,
government agencies or other third parties that produce, sell, export or import goods and
services in a view to ensure afordable prices for the people to meet their necessities of life.
Tis component consists of subsidy expenditure in fnancial institutions, fuel subsidy, non-fuel
123
According to the OECD country average, social expenditure is considered adequate
when total allocation accounts for at least 20% of total GDP. In OECD tradition,
social spending covers health expenditure (OECD, 2013). If the OECD benchmark
is considered too high for Indonesia, the percentage of total social spending may
range between 10 and 15% of GDP. In reference to Lindert (2004), social spending
includes: (i) social transfers that cover cash compensation for unemployment,
retirement and health, and (ii) social transfers along with government subsidy for
education. Based on Linderts study (2004), cogent historical and factual evidence
shows that substantial social spending (and high yet proportional taxation) will
help strengthen the economy and bring collective prosperity.
Te fact, however, remains that Indonesias social spending is still dismally
low. Te 2012 revised national budget has only set aside 3.4% (amount +- IDR
48 trillion) of total national budget for health expenditure. As can be seen from
Graph 3 below, even fuel subsidy expenditure, which has incited heated debate
because of the staggering amount, is much lower than the amount earmarked
for government employment expenditure.
Graph 3: Fuel Subsidy Expenditure Compared to Government
Employment Expenditure, 2012 IDR (Rp) Trillion
Source: Finance Ministry of Finance, 2012
price/cost subsidy, non-fuel credit interest subsidy, non-fuel tax subsidy, other non-tax subsidy
and PSO subsidy (Source: Finance Ministry Regulations/PMK Number 101/PMK.02/2011 on
Spending Classifcation).
124
CONCLUSION
Inequitable taxation refers to inequity in tax burden and distribution
which will undermine the fundamental principle of tax justice. In simpler
terms, inequity occurs when the really rich pay less tax than the middle class
or poor, yet the wealthy are benefting more from tax distribution than the less
well-of. Taxation therefore is a source of inequality. To fulfll the principles
of justice, tax policies should be commensurate with the fnancial condition or
income of the taxpayer.
Several experts argue that equitable tax policies and distributive income
through taxation can reduce both economic and social inequalities. Hubbard
(2014), the Dean of Columbia Business School, contends that tax reform is
the best way to narrow income inequality. Moene and Wallerstein (2003)
in Kenworthy and McCall (2008) suggest that inequality can be reduced by
introducing social programs, such as unemployment insurance and health,
making sure that they are accessible in a transparent manner to allow every
person to genuinely beneft from them.
RECOMMENDATIONS
Te following policy options are recommended:
1. Te government needs to increase the number of taxpayers, primarily
among rich individuals and employees, to reach an ideal percentage
between registered taxpayers and prospective taxpayers. Eforts to
increase the number of taxpayers should be directed at both corporate
and individual taxpayers;
2. Te need to broaden the tax base among others by levying taxes on
the informal sector at the upper-mid-scale and on fnancial futures
transactions. Furthermore, the government should not hesitate to
raise tax rates, particularly for the mega-wealthy;
3. Te government can ofer tax incentives through the inclusion of
non-taxable income for female employees with head-of-household
status, elderly workers, people with disabilities and other vulnerable
groups. Te government can also grant a tax exemption for the poor
for the purchase of agricultural production equipment and so forth.
4. Te author appreciates the governments decision to increase the
limit for non-taxable income as of 1 January 2013 from USD 1.500
(unmarried taxpayer without dependents) to USD 2.400; for married
125
taxpayers without dependents from USD 1.500 to 2.500; and married
taxpayers fling a joint return (without dependents) from USD USD
3.000 to USD 5.000. Te government however has shown lack of
gender and disability sensitivity. Tere should be a non-taxable
income policy as tax incentive for women-headed households,
elderly workers, people with disabilities and other vulnerable groups.
Lowering the non-taxable income limit for unmarried taxpayers
without dependents may also be considered;
5. To ensure that taxation serves the purpose of achieving social justice,
the tax bracket policy should be revised by adding an additional
bracket. For the purpose of reducing inequality, it is recommended
that the government apply a 35-40% rate for those earning over USD
454.000 annually. A tax bracket where the same 30% rate is levied on
individuals with a net worth of USD 9 million and those with USD
45.500 in wealth is unfair;
6. Te government may earmark specifc taxes (sin taxes and on taxes on
the extractive industry), both at the national and sub-national level,
to be allocated for basic services such as education, health and cash
transfers for the poor. Tis is to ensure that an instrument is in place
to guarantee the distribution of resources to those really in need;
7. Urge local governments to build their tax collection capacity especially
since the collection of land and building tax, and underground and
surface water tax are already under their authority;
8. Te need to increase social spending and implement social programs,
both through the targeting and universal approach, to ensure optimal
distribution of resources through fscal policies.
126
REFERENCES
Bahagijo, Sugeng, 2014. Pajak Super Kepada Superkaya Perancis dan Pemilu Indonesia
2014 (Analisa INFID No 1). Jakarta.
Carter, Alan and Stephen Matthews. 2014. How tax can reduce inequality. OECD
http://www.oecdobserver.org/news/fullstory.php/aid/3782/How_tax_can_
reduce_inequality.html -- Accessed on 22 January 2014.
Duncan, Denvil and Klara Sabirianova Peter, Unequal Inequalities: Do Progressive
Taxes Reduce Income Inequality? 2012. Boon Germany: IZA DP No. 6910,
October.
Fozzard, Adrian. 2001. Te Basic Budgeting Problem: Approaches to Resources
Allocation in the Public Sector and Teir Implications for Pro Poor Budgeting.
London: Overseas Development Institute;
Hubbard, Glenn. 2014. Tax reform is the best way to tackle income inequality, http://
www.washingtonpost.com/opinions/tax-reform-is-the-best-way-to-tackle-
income-inequality/2014/01/10/112710ea-68ca-11e3-a0b9-249bbb34602c_
story.html January11, Accessed on 22 January 2014.
Kenworthy, Lane and Leslie McCall. 2008. Inequality, public opinion and
redistribution, Socio-Economic Review (2008) 6, 3568
Kiyosaki, Robert T and Sharon Lechter. 2000. Rich Dad, Poor Dad: What the Rich Teach Teir Kids
About Money Tat the Poor and Middle Class Do Not!, Warner Business Books, USA.
Kuznets, S.1955. Economic growth and income inequality. American Economic Review, 49:
1-28.
Lindert, Peter, 2004. Growing Public: Social Spending and Economic Growth since the
Eighteenth Century, Vol I, Cambridge University Press;
Luebker, Malte. 2011. Te Impact of Taxes and Transfers on Inequality. TRAVAIL
Policy Brief No. 4 ILO (05 August )
Musgrave, Richard Abel & Peggy B Musgrave. 1984. Public Finance in Teory and
Practice. the McGraw-Hill Companies.
Stiglitz, Joseph E., 2012. Te Price of Inequality. W.W. Norton.
Todaro, Michael P. and Stephen C. Smith. 2006. Pembangunan Ekonomi. PT Erlangga, Jakarta
Yusuf, Arief Anshory., Andy Sumner and Irlan Adiyatma Rum. 2013. Te Long-run
Evolution of Inequality In Indonesia, 1990-2012: New Estimates and Four Hypotheses On Drivers.
Working Paper in Economics and Development Studies, No. 201314, September 2013, Center for
Economics and Development Studies, Department of Economics, Padjadjaran University.
GOVERNMENT DOCUMENTS
National Development Planning Board / Bappenas. 2013. Analisis Kesenjangan Antarwilayah.
Jakarta
127
INEQUALITY AND
EDUCATION AND HEALTH
CARE PRIVATIZATION
POLICY IN INDONESIA
Mike Verawati Tangka
ABSTRACT
Conceptually, privatization does not entirely lead to undesirable efects on
condition that its principles and actual implementation are intended for the
best interests and betterment of the people. Te education and health sectors are
vital for building a strong and dignifed nation. Privatization of the education
and health sectors in Indonesia has strayed away from the basic principle of
putting the peoples welfare frst. Public health care is ofeninaccessible to the
poor who should be the primary benefciaries of public services. Human capital
in Indonesia has not developed at a pace that allows the people to withstand
the blows of a crisis due to costly education and low rates of participation in
higher education. Te concept of privatization thought to be a means to boost
performance and establish more facilities for the people has instead widened
inequality. A new paradigm is therefore needed to regain the momentum for
improving education and health services that is in the interest of the people.
128
INTRODUCTION
An educated society leading healthy lives is a key indicator for a country
or region to be called prosperous. Physical and mental health will allow a
person to deal with diferent life situations, while a knowledgeable society
helps build a strong nation of exceptional quality and dignifed in the eyes of
the world. Health and education is undoubtedly the foremost prerequisite for
every country to actualize prosperity. In practice however, countries abide by
diferent concepts for creating well-being. Countries such as Finland, Norway
and Sweden regarded as prosperous nations see education and health care as
national investment, ensuring that people of all layers of society regardless of
wealth and status have access to public services and optimally beneft from
them. In addition, state revenue, in this case taxes, have been consistently used
for fulflling the fundamental rights of the people, especially in the education
and health sector.
One cannot help but harbor a sense of envy towards advanced countries
that guarantee quality education and health care with frst-rate medical
treatment available to every citizen without needing to worry about prohibitive
fees or be fearful of not having the money to seek medical help. For Indonesias
rich minority, sending their children and grandchildren to study overseas is
more than possible, not to mention the ability to pay for health check-ups in
the fnest hospitals in Singapore or the United States. Millions of Indonesias
poor, however, must think more than twice to put their children to school
at the basic level, much less pursue higher education. Public schools may be
easier on the parents pocketbook, some even free of charge. But putting a
child into school still means having to pay for miscellaneous expenses such
as textbooks (that change every school year), uniform (that parents must buy
from certain vendors appointed by the school) and other fees that put a
strain on family fnances. Te underprivileged in Indonesia can only pray that
they stay healthy because even the thought of falling ill is enough to evoke
fear. Medical expenses, discriminatory treatment and bureaucratic red tape
are just some of the barriers that they must confront just because they are poor.
Central Bureau of Statistics (BPS) data (2013) indicates that 28.07 million
people live in poverty. Tis fgure difers by a wide margin with the data from
the National Team for Accelerating Poverty Reduction (TNP2K) data (2013)
which shows a total of 98 million poor people in Indonesia and is predicted to
soar correspondingly with economic infation.
Te foregoing reality brings into relief the adverse consequences arising
from the countrys policy-making on the privatization of the education and
health sector. Te vision enshrined in Indonesias 1945 Constitution to advance
129
the intellectual life of the people and create a just, prosperous and civilized
nation has simply become a process that leads to ever-widening inequality
in society, causing unending suferings and afictions to Indonesias swelling
ranks of the poor. Commercialization as a derivative of the governments
privatization policy has deprived the people from accessing education and
health services. Te desired outcomes of accessable health and education
services have not been directly proportionate to the sharp rise in education
and health care costs as a consequence of the commercialization of hospitals
and schools. Due to the governments inability to control and manage the
private sector, quality health and education are increasingly out of reach of a
large portion of the populatin.
Tis paper will discuss how Indonesias privatization policies in the
education and health sector have not gone hand in hand hand with promoting
the intellectual potential and improving the well-being of the nation. If
privatization is to be an element of government policy, the government must
develop a sound conceptual framework grounded in the sovereignty of the
state with the purpose of fulflling education and health care needs. Policies
that regulate the delivery of quality education and health services should not
simply hand over the responsibility to the private sector through a market-
oriented approach as in now occurring in Indonesia.
A PORTRAIT OF EDUCATION IN INDONESIA
Ever since the government imposed a 20% budget allocation in 2009
for the education sector, eforts have been made to restructure the education
system with a view to hasten improvements and seek workable solutions to
Indonesias myriad of educational problems such as low school enrolment
rates, high drop-out rates, and low illiteracy rates among the productive-age
group. Tese issues are a consequence of a poorly fnanced education sector. In
1992, UNESCO found that at the time when the government of India allocated
89% for the education sector, Indonesia was only willing to commit 62.8% for
education.
1
In 1996, UNESCO made a comparison of the education budget of
various countries and observed that in 1992 developed countries on average
have earmarked 5.3% of their GNP for education, developing countries at
1 Kebijakan Anggaran 20% di Indonesia; http://wrihatnolo.blogspot.com/2009/04/
kebijakan-anggaran-pendidikan-20-persen.html
130
4.2% of GNP, while underdeveloped nations a mere 2.8% of GNP. Te trends
identifed in UNESCOs analysis are supported by World Bank data. In 2003,
the World Bank found that Indonesias education budget was 1.4% of GDP,
Vietnam at 2.8% of GDP and South Korea at 5.3% of GDP (Table 1 below).
Te comparative data of countries worldwide released by UNESCO and World
Bank Indonesia has consistently had the lowest education expenditures.
Table 1. Comparison of the education budget of various countries
Source: Te World Bank, Education in Indonesia: Managing the Transition to Decentralization
(Indonesia Education Sector Review), the World Bank: Washington D.C., 2004, Volume 2, pp. 2-4.
Education remains the focus government attention, particularly as Indonesias
Education for All (EFA) Development Index has fallen over the years. In 2011,
Indonesias ranking slid to 69th place among 127 other countries compared to
65th position in 2010. Developed by UNESCO, Indonesias EFA development
index for 2011 was lower than Brunei Darussalam (34) and four steps below
Malaysia (65).
2
One of the reasons for this dismal performance is Indonesias rising
drop-out rates. At least half a million primary school children and 200,000 lower
secondary students are unable to continue with their education. Education data in
2010 showed that 1.3 million children aged 7-15 are at risk of dropping out from
school. A report published by the Department of National Education stated that
four children quit school every minute (EFA, 2010).
Te education sector is also troubled by other issues such as poor
infrastructure. According to data from the Ministry of National Education
2 Permasalahan Pendidikan di Indonesia; Kacung Maridjan 2012.
131
(2012), primary schools across Indonesia currently are equipped with a total
of 899,016 classrooms of which 293,098 (32.6%) are damaged. As for lower
secondary schools, Indonesia has a total of 298,268 classrooms and 125,320
(42%) of them are in poor condition. Te situation is made worse by the lack
of qualifed teachers. Te quality and competency of educators in Indonesia
in general remains far from expectation. In terms of qualifcation, from
2.92 million new teachers roughly 51% have earned a bachelors degree or
higher, while the rest have lower credentials. Similarly, concerning educator
certifcation, only 2.06 million teachers or 70.5% of educators are certifed,
while the remaining 861,670 have not met certifcation requirements. Tere
is also inequitable distribution of educators. Teacher shortages for schools in
urban, rural and isolated areas are 21%, 37%, and 66% respectively. Indonesia
overall faces a severe lack of teachers, reaching 34%, whereas many regions
experience a surplus of teachers. Furthermore, in 2010-2015 at least 300,000
teachers at all educational levels will be retiring, thus there is an urgent need
to fnd replacements in order to ensure the continuity of learning processes.
3

An inconsistent education curriculum also adds to the long list of problems.
Te curriculum changes almost every year which is not only burdensome to
students but also means rising costs.
Another equally critical factor is the fact that education carries a steep
price tag. To put a child in kindergarten or primary school costs USD 44 to
USD 87, some even charging more than USD 87. Enrollment in lower and
upper secondary schools will cost USD 435 and can be much more expensive
in schools that ofer better quality education. Te rising cost of education
is inextricably linked to a government policy that adopts the school-based
management approach (SBM). In reality, this approach has been translated into
fund-raising drives (Maridjan, 2013). A school committee or education board
which functions as an SBM organ must include representation from the
business community. This is based on the assumption that entrepreneurs
have broader access to funding. As a consequence, once a school committee
has been established any fees imposed by the school are justified as being
in compliance with the school committees decision. A non-transparent
selection process for committee executives and members has allowed
nepotism to thrive. School committees therefore simply function as the
legitimator for policies introduced by the school principal. Likewise,
SBM provides a legitimate excuse for the government to relinquish its
responsibilities in dealing with education issues.
3 www.kemendiknas.go.id Wajah Persoalan Pendidikan di Indonesia
132
1. THE ELUSIVENESS OF UNIVERSAL ACCESS TO
HIGHER EDUCATION
Improvement targets for the formal education sector can be achieved
with government commitment and eforts. For example, the Millennium
Development Goals (MDGs) seek to increase net enrolment rates, expand
the proportion of grade 1 students who succeed in fnishing their primary
education, and raise literacy levels to 100% for both males and females aged
15-24 by 2015, but how about access to higher education?
Unfortunately, a 20% increase in the education budget does not guarantee
students who have completed their twelve-year compulsory education in
moving on to a higher level. A Bachelors degree is in fact one of the criteria
for entry-level jobs in many companies, institutions and industries, and
a consideration in determining remuneration. Overall, access to higher
education has improved, particularly during the Reform Era, but in absolute
terms, it remains dismally low. At the national level, tertiary education
enrollment rate is no more than 12% in 2012. Furthermore, improved access
to higher education is mostly enjoyed by those from high-income groups. Tis
is evident in 2012 data which shows that 30% of students entering college come
from 20% of the countrys wealthiest, whereas only 2% represents the poorest
20%. Tis gulf between the enrollment rates of the rich and poor has widened
in the past fve years. Te surge in post-secondary education enrollment rates
in the past fve years is in fact dominated by those from afuent backgrounds.
Within a span of fve years (2007-2012), higher education enrollment rate for
the richest 20% rose almost 5% from 25% to 30%. Meanwhile, in the same
period, for the bottom 20% the participation rate only increased 1.5 percent
4
.
2. LACK OF REALIZATION OF HEALTH RIGHTS AND SERVICES
With regard to health indicators, Indonesia has not fared well if examined from its
maternal mortality rate (MMR) that has worsened from 288 per 100,000 live births in
2010 to 359 per 100,000 live births. It appears that the MDG target of pushing the rate
down to 102 per 100,000 live births by 2015 will be difcult to meet.
Apart from MMR, malnutrition is another serious issue for Indonesia
and which is also the cause of the rise in maternal and infant mortality rates.
Health infrastructure, such as the availability of puskesmas (community health
centers) is equally crucial as Indonesia currently only has a total of 7,550
4 Peningkatan Akses terhadap Pendidikan Tinggi Lebih Banyak Dinikmati
Masyarakat Kaya; http://keberpihakan.org/page/articles/3
133
health care units, in addition to 22,002 sub-health centers and 6,132 mobile
clinics. Although these primary health facilities are available in every sub-
district, access remains inequitable. Facilities are not fully accessible to the
people, both in terms of cost and distance. Meanwhile, the referral system of
hospitals established in nearly all districts/cities is not functioning as expected.
Health facilities that should cater to the needs of the people even those in the
remotest of areas are inadequate. Furthermore, puskesmas is not within easy
reach due to poor infrastructure. Another problem is the acute shortage of
health workers. According to a World Bank study (2008), Indonesia only has
13 physicians for every 100,000 population, which is the lowest ratio in Asia.
Te study also found that nearly 40% of doctors are absent from duty as they
have been following the working hours set by the central government
5
.
With regard to human resources, the main issue concerns the inefciency and
inefectiveness in handling health problems. Despite an increase in health human
resource ratio, it remains far from Indonesias 2010 health target, while ratios between
regions are widely divergent. Given current statistics on health workers who graduated
from related institutions, it would be hard to meet the expected target. In 2003, the
health worker to population ratios are 17.47 general practitioners, 5.2 specialists, 108.53
nurses, and 28.40 midwives per 100,000 population.
Indonesia has set its own good manufacturing practices (GMP) for medicines
and health products that include 220 generic drugs. Consumption of generics and
traditional medicines has seen an upward trend, and 95% of national medicine
demand is domestically supplied. Tis also applies for vaccines and certain health
equipment. Nevertheless, their availability, quality and safety remain far from
optimal and cannot be easily accessible by all. Furthermore, traditional Indonesian
medicine has not been developed to its fullest extent. Safety and quality control
of food and drugs covers supplementary food, traditional medicine, cosmetics,
therapeutic products or medicine as well as narcotics, psychotropic drugs and other
addictive substances including the investigation of criminal ofenses. Indonesia
also faces scarcity for all types of health workers.
3. COMMERCIALIZATION OF HEALTH FACILITIES AND SERVICES
Among health-related cases repeatedly exposed by the media concern the
plight of the poor denied medical attention from doctors and puskesmas workers
simply for not being able to pay for treatment, much less for consultation. Tis
5 See World Bank, 2008 Investing in Indonesias Health: Challenges and
Opportunities for Future Public Spending. World Bank. 2008, p. 4
134
is only one of the realities that refect how health care in Indonesia is a luxury.
Changing the status of public hospitals to state-owned enterprises and private
establishments has only doubled the costs borne by patients. More worryingly
this status change has mostly been implemented at the sub-national level. As
can be seen in Table 2 below the number of privately run hospitals far outstrip
state run hospitals.
Table 2: Hospitals in Indonesia, 2003-2008
Source: Ministry of Health, 2009
Tis is because health providers assume that quality is directly proportional
to commercialization. As a consequence, there has been a recent proliferation
of international standard hospitals that emphasize exclusive services rather
than promoting health and saving the lives of the people at large.
Rising hospital prices in a number of regions across Indonesia are
one of the direct consequences of privatization policies. In Kupang, cost of
privatization of Yohannes General Hospital has skyrocketed to 600%. In nearly
all regions, the status of local public hospitals has been changed to become
general service agencies (BLU, badan layanan umum). Te concept of BLU
is actually a move towards privatization (semi-privatization). Under the BLU
concept, every hospital has the liberty to manage its own afairs, including
fnances. Once they have been designated BLU status, many hospitals have
raised their prices. In Purwokerto, Central Java, costs soared 300%. A similar
situation is found in Denpasar, Bali where the rate for third class inpatient has
risen from USD 1 to USD 3.
6
Furthermore, due to economic liberalization
policies, hospitals are now open to foreign investment that allows 67% foreign
ownership. Tis unlocks the door for the entry of foreign-owned hospitals.
6 Source: http://www.berdikarionline.com/editorial/20111114/kesehatan-rakyat-
dihadapan-pasar.html#ixzz2xvqEayfx
135
EDUCATION AND HEALTH CARE
PRIVATIZATION POLICY
1. PRIVATIZATION IN INDONESIA
Privatization or the sale of national assets to the private sector is
phenomenon that emerged with the wave of reform that swept over Indonesia
following the demise of the New Order regime in 1998. Not only in Indonesia,
virtually every developing country has opted for privatization as the preferred
national economic policy as recommended and dictated by international
agencies. International institutions such as IMF and World Bank are convinced
that handing over the management of public services such as education, clean
water and health to private operators will solve the economic crisis and improve
welfare. Te reality however, is quite the reverse. For Indonesia in particular,
education, health care and clean water have become increasingly inaccessible.
7

IMF and the World Bank are international agents with a signifcant stake in
pushing developing countries to implement privatization policies. For every
signing of a letter of intent (LOI) on fnancial aid for developing countries, the
IMF and World Bank will never fail to include a privatization conditionality
with which the recipient government must comply.
Te privatization policy is part of an efort to align with the neo-liberal
economies of many advanced nations. Te problem lies in the fact that the
social, economic and political conditions of developing and developed
countries are poles apart. In high-income countries, privatization proceeds
smoothly with tight government control over the private sector, whereas in
their less developed counterparts, complying with the conditionality imposed
by international agencies to release government control of public services
create a breeding ground for corruption, collusion and nepotism. Tis is due
to the weak functioning of regulations supportive of a competition-conducive
climate, and unambiguous rules of the privatization game.
As soon as privatization was implemented it became a controversial issue
sparking sharp criticism from diferent elements in society. First, the infated
prices of public goods and services that the people must bear. Second, fewer
employment opportunities. Tird, absence of rules that regulate privatization,
thus it is designed largely for increasing market gains than social services.
7 Excerpted from article Privatisasi, Program Penyejahteraan atau Penyengsaraan?_
pedestrian rhapsody.htm
136
Fourth, poor communities are deprived of access to public goods. Fifh, control
of national assets have been wrested away from the public. Sixth, privatization
results in new forms of corruption in the governance of national assets.
2. EDUCATION PRIVATIZATION POLICY IN INDONESIA
Law 20/2003 on the National Education System sets forth three building
blocks for the privatization of educational institutions, one of which is that
fnancing shall be the shared responsibility of the public and government
(Article 46). Tis justifes the inadequacy of education budget allocated by
the government, although it already exceeds 20% of the national budget. Te
government sees itself as only partially responsible for fnancing and any
shortfall should be borne by the public. Tis is indicated in the following
articles:
Article 9
Te public has the obligation to provide fnancial support for the
implementation of education activities.
Article 11 clauses (1) and (2)
Tese clauses reduces government responsibility from an obligation to
fulfll educational rights to merely guaranteeing the implementation of
education programs.
Article 12 clause 2 (b)
Tis clause makes it obligatory for students to pay their share of educational
costs with the exception of those waived from such obligations pursuant
to prevailing laws and regulations.
Article 53
Educational institutions as legal entities are defned as: (1) formal
education providers and or units established by the government or public
in the form of educational legal entities; (2) legal entities as set out in
clause (1) shall function to provide educational services to students; (3)
educational legal entities as described in clause (1) shall be based on
the non-proft principle and may independently manage fnances for
advancing the educational unit.
Article 54
Tis clause stipulates that (1) public engagement covers the participation
of individuals, groups, households, professional organizations, private
sector and community organizations in managing and controlling the
quality of educational services; (2) the public can participate as source,
implementer and user of educational outcomes.
137
By virtue of these articles, the government, as the principal guarantor, has
shifed its responsibility for the implementation of education from the state to
the people through various mechanisms such as the school-based management
in primary to secondary education , and by allowing for greater autonomy in
higher education . Education privatization is further reinforced through the
following government regulations as derivatives of Law 23/2003:
1. Government Regulation No. 19/2005 on National Education Standards
Parental obligation to provide basic education for their children
(Article 7 clause 2)
Public obligation to provide resource support for the
implementation of education programs (Article 9)
Education fnancing shall be the shared responsibility of the
government, local government and public (Article 46 clause 1)
2. Government Regulation No. 47/2008 on Compulsory Education
Article 3 Clause 2: Citizens aged 15 above shall not be fnanced
by the government if they wish to fnish their nine-year
compulsory education
Article 13 Clauses 1, 3, 4 and 7: Promotes public participation in
terms of fnancing
3. Government Regulation No. 48/2008 on Education Financing
Te aforementioned policies further afrm the trend of handing
over the education system to market mechanissm which confers
schools the autonomy to make their own decisions on education
costs. Moreover, there appears to be a tendency among public
schools, from primary to secondary level, to upgrade their status
to so-called international education standards. As a consequence,
any additional fnancing required for educational investment or
operations in order to meet international standards is imposed
on parents. Tis makes education increasingly inaccessible to the
people, especially the poor. In response to this ever-widening gap in
accessing education, the government has positioned itself as a donor
or facilitator by introducing various forms of assistance such as BOS
(school operations aid), BOP (educational provider aid), block grants
and scholarships.
138
3. TYPES AND CHARACTERISTICS OF EDUCATION
PRIVATIZATION IN INDONESIA
1. Te commercialization of education means handing over the
management function to the private sector with a proft-oriented
approach.
2. Te public is burdened with the responsibility of fnancing education
through the cost-sharing or community cost model.
3. Local governments bear education costs through the implementation
of the regional autonomy policy.
4. HEALTH PRIVATIZATION POLICY IN INDONESIA
In the past two decades, health policies have also shown a strong trend
toward privatization for reasons that are mostly associated with the ongoing
economic crisis which the government has conveniently used as an excuse to
exonerate itself from the failure to adequately provide health fnancing. Tis
trend is obvious in the following government regulations:
1. President Decree No. 38/1991 on Self-Financing Hospitals.
2. Health Ministerial Regulation No. 159B/1998 on Development of
Hospitals with Capital Ownership.
3. 1990 PAKMEI Policy Package on Debureaucratization of
Pharmaceutical Sector.
By partially releasing health service delivery to be managed by independent
units, the government will bear a lighter fnancing load. Tis is indicated in the
trend among hospitals and puskesmas to add the word self-fnancing to their
names. Policies in the last fve years are a strong signal that the government is
formulating a BLU policy.
In todays era of autonomy, privatization appears to be an impressive
concept when the trend at the time it was frst introduced (until now) has
leaned more towards building professionalism, in terms of services and
institutions, which was supported by numerous studies and trainings on
reinventing government (defned as entrepreneurial bureaucracy). Policy
reviews have given the impression that privatization improves health service
delivery. Intervention through training on professionalism for a puskesmas in
Blitar, East Java emphasized that good professional practice is demonstrated
by the swifness and accurateness of standardized services that are consistently
delivered through frm commitments (by entering into written contract) which
will ultimately result in an increase in patient visits. In the case of Blitar, local
139
residents near the puskesmas have even complained about inconveniences
caused by the upsurge in patient visits.
5. POLICY ANALYSIS
Prior to the implementation of privatization in Indonesia in the 1980s,
there were already several signs apparent, such as the fact that fewer public
service sectors are facilitated directly by the government. Tis is consistent
with the concept of privatization that sees a shif in functions and roles from
the public to private sector (Cowan, 1990, 6)
8
. Tis shif does not necessitate
a competitive environment, and as such public services greatly depend on
market demand. Privatization can also mean a shif away from public service
mechanism to market mechanism which creates competitiveness in the
public service sector. Competition is intended to foster a win-win situation
among market players for the purpose of making available high-quality and
afordable commodities (goods and services). Te people will beneft from
healthy competition as they can avail themselves of more appealing options
and alternatives.
Meanwhile, Savas (1987 : 3) in Privatization the Key to Better Government,
puts forward that privatization is the act of reducing the role of government,
or increasing the role of the private sector, in an activity or in ownership of
assets. On a broader scope, privatization is the key to government limitations
and integrity: limitations in terms of size, scope and power due to other
community institutions; integrity because the peoples needs are fulflled in a
more efcient, efective and equitable manner.
9

Privatization of welfare services should be built on the assumption that in
every aspect of inequality that arises, such as with regard to labor and capital,
actors pursue political powers, not as an end in itself, but for delineating the
boundaries between State and market with proper controls in place to ensure
that the interests of benefciaries, in this case the public, are optimally served
(Korpi, 1987, p. 12)
10
.
8 Privatization may be defned as the transfer of a function, activity, or organization
from the public to the private sector. In this context, Cowan defnes privatization more as
a shif in a function, activity or organization from the public to private sector, but does not
explicitly mention on the need for competition.
9 Collection of lecture notes on public policy administration, Kumpulan materi
Kuliah Administrasi Kebijakan Publik, by Dwiyanto 2010: Blogspot Privatization
Membingkai Teori Privatisasi dalam Tesis; p. 2
10 Lennart J. Lundqvist, Explaining Privatization: Notes Towards a Predictive Teory,
140
Privatization in Indonesia, however, has led to unproductive consequences
at the expense of the poor who are powerless in bracing themselves against
the profound impact of privatization. Peter McPherson (1986) argues that the
concept of privatization is essentially not entirely disagreeable on condition
that; 1) the government bolsters privatization policies with the commitment to
revise economic policies that should side with the people; 2) privatization does
not pander to political interests as it will deviate from the original purpose;
3) a one-size-fts-all model is not applied as a benchmark for privatization
efectiveness as its implementation signifcantly hinges on the situation
in which privatization is imposed; 4) the market mechanism is under tight
control to ensure that the privatization process is not hijacked by selfsh, proft-
driven market interests.
11
Privatization in Indonesia has led to consequences that have given rise to
a host of unending poverty issues as illustrated in the following analysis:
1. Education and Health Care Privatization Policies Contribute to
Povertization
Te privatization of the education and health sectors reveals the inability
of the government and state to improve the well-being of the people which
is signifcantly determined by education and health indicators.
Privatization is not only applied in developing countries such as Indonesia.
Advanced nations have also privatized certain vital sectors critical to
public interests but without adversely afecting the people. In some of these
countries, privatization has even further improved the quality of public
services. Tis not only requires rigorous control from the state and people,
but also the unswerving commitment of government administrators in
genuinely working towards improving public services. Sectors vitals for
the peoples welfare are privatized with the necessary reform measures in
the education and health sectors.
Privatization in Indonesia has resulted in undue control of education and
health sectors by foreign owners or investors in pursuit of profts. Tis
deviates from the original purpose of bringing prosperity to the people
by making available quality education and health care. Excessive investor
autonomy has encroached even into the most critical level, that is, policies
that should have been the privilege of the government to determine the
best interest of the people.
Privatization that was initially intended to deal with economic woes,
has increasingly contributed to the povertization of the people because
Scandinavian Political Studies, Bind 12 (New Series) (1989) 2, Gothenburg University
11 Anggita Cinditya Kusuma, Tinjauan literature dalam pengaruh privatisasi, p. 20,
University of Indonesia, 2011
141
commercial interests have all but eroded the state ideology that essentially
takes responsibility in safeguarding the life, well-being and dignity of the
people. Unchecked privatization also gives rise to lack of transparency
and corruption which only causes misery and anguish for people. Budgets
which should have been utilized to the advantage of the people have been
diverted to other uses.
2. Te Increasing Compartmentalization of Society
Privatization does not instantaneously create inequalities in society,
but the scope of its impact has clearly led to noticeable disparities. Te
focus on the provision of premium public services according to market
demand will automatically drive service rates upwards, further excluding
the disadvantaged and marginalized groups in accessing quality education
and health services.
Te rich get richer while the poor become poorer will ultimately incite
social resentment that can change cultural values and norms. A society
that previously share a sense of mutual empathy and mutual respect,
willing to compromise with each other has changed into an individualistic
and pragmatic society that uses confict to suppress inequality. Society has
forsaken a conciliatory culture that engages on constructive dialogues to
solve problems. In a village in Bulukumba for example, local residents
vented out their anger and frustration for not receiving subsidized rice as
promised by setting the village chief s house ablaze (2013).
Furthermore, unilateral policies imposed by educational institutions
or hospitals pursuant to bylaws, such as on the wearing of head scarves
for students, gender-segregated classrooms, hospitals adopting sharia
principles and maternity clinics for Muslims, appear to increasingly focus
on certain religious identities. Society therefore no longer clings to a
culture of empathy to ensure a peaceful existence.
3. Marginalized Groups are further Excluded Resulting in Widening
Inequalities
Education and health care privatization serves to further marginalize
various groups. Indigenous peoples, persons with disabilities, the elderly,
women and the younger generation have been persistently sidelined
in political and economic decision-making processes that afect their
lives. Tese groups who historically have been discriminated against,
must endure being denied their fundamental rights. Access to political
participation is obstructed. Growing inequalities are not only confned
to the macro level, but have also permeated into the micro level which
may appear insignifcant but if lef to fester and accumulate will have far
reaching implications for the social and economic welfare of the nation.
One of which is the rising maternal mortality rates where Indonesia is
ranked the worst in its ability to lower maternal deaths. Tis is a wake-up
call for the country and nation to rise up to the occasion.
142
Privatization policies that do not serve the best interests of the people will
unquestionably disregard the principles of equality, freedom, inclusivity
and advancing the peoples dignity. Privatization will further reproduce
inequalities as long as it remains preoccupied with proft and wealth
hoarding, and even worse will further ensnare the country into a debt trap
that weighs down the present government and future generations who are
lef with a legacy of unpaid debts.
CONCLUSION AND RECOMMENDATIONS
1. ADVOCATING AGAINST EDUCATION PRIVATIZATION
Earlier sections have shown that the privatization of the education sector
has increased school dropout rates and illiteracy levels among the poor. Tis
is clearly in contradiction with the amended the 1945 Constitution Article 31,
Clause 2 that reads: Every citizen has the right to compulsory basic education
and the government has the obligation to provide fnancing. In clause 4 it is
asserted that the State places priority on allocating at least 20% of the national
and sub-national budget for educational funds in order to meet the needs for
implementing national education programs.
12
Furthermore, policies aimed at privatizing the education sector are in
contradiction with Law 39/1999 on Human Rights and the International
Convention on Economic, Social and Cultural Rights that guarantee every
citizen the right to education. At the international level, privatization policies
are also inconsistent with the purpose of EFA andMDGs that ensure universal
access, without exception, to basic education by 2015. It is therefore crucial
for civil society to make every efort to advocate against the privatization
of Indonesias education sector. Advocacy that helps women, marginal and
minority groups, indigenous communities and groups in difcult situations
such as in confict areas claim their right to education.
Te foregoing situation shows the impact of education privatization on
women and marginal groups, such as child workers and those who marry early,
as they face difculty in accessing education. As a consequence, rising illiteracy
levels among women and children are partly due to the increasing number of
children quitting schools among poor and marginalized communities.
12 Mari Bicara Fakta : Catatan Masyarakat Sipil atas Satu Dekade Pelaksanaan MDGs
di Indonesia ; Goal 2 Pendidikan Dasar untuk Semua dalam Ancaman Privatisasi Hak Dasar
Rakyat 2012, pp. 24-25
143
In this context, it becomes essential to develop education policies that
allow a second chance for those who have dropped out of school or who have
never gone to school. Alternative education curriculum and methodology is
critical as formal education has failed to meet the needs of marginal groups.
Alternative education should be adaptable to their specifc needs. Te advocacy
agenda should be aggressively launched in an efort to uphold the peoples
right to education.
2. ADVOCACY OF LITERACY PROGRAMS
Indonesias illiteracy rates in reality present a more dismal situation
than pictured by the government through its ofcial data. Immediate action
is critical given the upward trend in illiteracy levels exceeding dropout rates
for lower secondary schools and Madrasah Ibtidaiyah (Islamic-based primary
schools) that can reach 200,000 to 300,000 children each year.
1

Te government must undertake concrete actions to deal with this
worrying trend by expanding state budget for literacy programs up to a
minimum 3% of the education budget. Tis is in line with targets set by the
Global Campaign on Education (GCE) and Asian South Pacifc Bureau of
Adult Education (ASPBAE). Functional literacy program funds only account
for less than 1% of total education budget.
Te government should also develop literacy education program models
and publish literacy education materials tailored to the specifc character and
situation of students. Te continuity of learning programs must be guaranteed
and designed according to local context. Existing literacy education programs
are currently developed homogenously through a top-down approach. In
addition, the government is expected to augment facilities and hone the skills
of program facilitators, increase teachers salary and consistently build their
capacity. It would be more advantageous for the government and civil society
organizations to regularly monitor literacy programs in order to hasten quality
improvements. If required, the government can fnancially support civil
society and other groups with proven competency in efectively conducting
literacy programs.
3. POLICY ADVOCACY TO PROMOTE GENDER EQUALITY AND
RIGHTS-BASED EDUCATION
Illiteracy is far more prevalent among women than men. In light of this,
actions should focus on narrowing this gap. An Edwatch census and data
from the Indonesian government reveal higher illiteracy levels among females
144
than males. Census fgures show that 59.5% of women are illiterate, while
government statistical data published by BPS (Central Bureau of Statistics)
reveals that 67.9% of total number of illiterates are women in comparison to
only 32.1% among men.
2

One of the reasons for this disproportionality is the high rate of early marriage
among women. Te prevalence of child marriage warrants due attention as it is a
contributing factor to rising illiteracy and school dropout levels.
In advocating against early marriage, a major challenge concerns Law
1/1974 on Marriage. Under this law, the minimum legal age of consent for
marriage is 16 for females. Tis provides legitimacy for early marriage. Yet
is must be acknowledged that, regardless of the minimum age requirement,
many girls in fact are already lef with no other option but to marry young due
to various reasons. It is therefore of utmost urgency to amend Law. 1/1974,
specifcally concerning the minimum age which should be 18 above for the
purpose of protecting the rights of the child.
Te unwritten rules in certain schools that prohibit married and pregnant
girls from continuing with their education should also be re-assessed as they only
serve to rob these girls of their right to return to school and given a second chance.
4. IN-DEPTH REVIEW OF EDUCATION ISSUES
In tackling Indonesias education problems, specifcally pertaining to the
impact of privatization, there is a need to e review education privatization
policies. Specifc data should be collected on education issues that arise as a
consequence of privatization, such as its impact on the peoples lack of access
to higher education. Another possibility would be to conduct a comparative
study on privatization policies in diferent countries to gain insight into their
successes and failures.
5. ADVOCACY RECOMMENDATIONS FOR THE HEALTH SECTOR
In the health sector the following measures need to be initiated:
a. Paradigm Shif in Health Care
Te health care paradigm must give priority to providing services to all
sectors of society, both the rich and poor. . Te privatization process must
be tightly controlled allowing the people full participation in overseeing
the process. Health issues are essentially a political issue and in dealing with
them, political commitment is necessary. Some do not consider the health
of the population as contributing much to socio-economic development.
Many policymakers regard the health sector more as a consumptive
145
rather than productive sector that provides quality human resource. With
this mindset, any instability in the economy will automatically mean no
increases to the health budget.
b. Re-assessing, Reforming Health Privatization Policy
Regulations that shif the responsibility to deliver health services to the
private sector should set forth clear boundaries and sanctions mechanism
applicable to the private sector. Boundaries should be based on the
assumption that health institutions are part of government commitment
to provide the best for the people and not for certain groups. Te sanctions
and complaints mechanism should be in place to address discriminatory
service delivery that hampers peoples access to quality health care.
c. Maternal and Infant Mortality Rates Considered as a Public Health Emergency
Indonesias alarming maternal and infant mortality rates should serve
as a strong reminder for the government and the state to evaluate how
the private sector and foreign investors operate their health business in
Indonesia, specifcally with regard to the tendency to pursue profts rather
than fairly and equitably providing services to the people. Steep medical
and hospital fees, including unafordable medicines have lef an increasing
number of patients untreated and unserved. Health programs, such as
jamkesmas (public health insurance for the poor), jamkesda (local health
insurance scheme for the poor) and jampersal (maternity insurance for
the poor) have not been entirely efective due to the prohibitive cost of
health care.
d. Health Workers Who Uphold People-Centered Values
Te role of medical practitioners, dentists, nurses and midwives in
promoting health that emphasizes curative care, and helping people is of
utmost importance. Health care and health promotion eforts should be
managed in a more holistic manner by involving the public collectively
instead of individually. Health professionals should understand the
concept of inclusive health care based on the principle of human rights,
be able to motivate, engage and empower the public, be willing to build
cross-sectoral cooperation and be capable of efciently and efectively
managing the health care system.
e. Efective Use of Tax Revenue for Privatization Slowdown
Learning from advanced countries on how tax revenue is put to use, it is
clear that many of these countries have redistributed taxes for the highest
beneft of the people, thus governments need not go through a rapid large-
146
scale privatization process invital sectors such as education and health.
Similarly, Indonesia should be able to optimize the use of taxes to improve
the quality of its health services and facilities.
REFERENCES
Concept And Teory in Political Economy: Article UKessay.com Privatisation
and Trans-nationalisation of Capital, http://www.ukessays.com/essays/
general-studies/concept-and-theories-in-political-economy.php
Investing in Indonesias Health: Challenges and Opportunities for Future
Public Spending, World Bank. 2008
Privatisasi, Program Penyejahteraan atau Penyengsaraan?, online article
www.Pedestrianrhapsody.wordpress
Anggita Cinditya Mutiara Kesuma, Konsep dan Teori Privatisasi Sebuah
Tinjauan Literatur dalam Penulisan Tesis Pengaruh Privatisasi
terhadap Efektivitas BUMN, FISIP University of Indonesia, 2009
Daron Acemoglu & James A. Robinson, Mengapa Negara Gagal: Awal Mula
Kekuasaan, Kemakmuran, dan Kemiskinan, (Pengantar: Komaruddin
Hidayat) 2012, Penerbit PT Alex Media Komputindo 2014
Jens Erik Torp & Peter Revke Privatization in Developing Countries: Lesson
to Be Learn From Te Mozambican Country, Article: 1998
Kacung Maridjan, Permasalahan Pendidikan di Indonesia; Artikel Kumpulan
Masalah Pendidikan di Indonesia, University of Airlangga Surabaya,
2012
Lennart J. Lundqvist, Explaining Privatization: Notes Toward and Predictive
Teory, Gothenburg University, Scandinavian Political Studies.htm
1989
147
Mari Bicara Fakta: Catatan Masyarakat Sipil atas Satu Dekade Pelaksanaan
MDGs di Indonesia; Goal 2 Pendidikan Dasar untuk Semua dalam
Ancaman Privatisasi Hak Dasar Rakyat 2012, pp. 24-25
Paul Starr, Te Meaning of Privatization, Yale Law and Policy Review 6
(1988): 6-41. Tis article also appears in Alfred Kahn and Sheila
Kamerman, eds., Privatization and the Welfare State (Princeton
University Press, 1989)
Rencana Aksi Keaksaraan Nasional, 2005-2009, 2005. Sensus Sosial Ekonomi
Nasional, BPS, 2003.
(ENDNOTES)
1 Rencana Aksi Keaksaraan Nasional, 2005-2009, 2005.
2 Sensus Sosial Ekonomi Nasional, BPS, 2003.
148
149
MAYOR OF
NEW YORK CITY,
INEQUALITY AND
2014 ELECTIONS
1
Sugeng Bahagijo, et. al.
ABSTRACT
Afer twenty years of being under the grip of the pro-business Republican
administration, the winds of change are now blowing through the city of
New York. A city that once lived up to the creed greed is good is now under
the leadership of a new mayor, Bill de Blasio whose key program is to tackle
inequality.
Concern over the issue of inequality has garnered worldwide attention, a
situation much diferent 5-10 years ago. Not only has it caught the attention
of activists and academicians but also religious leaders such as Pope Francis,
business groups including World Economic Forum and IMF, UNDP and
UNICEF, as well as President Obama.
1 INFID ANALYSIS serves as input for Indonesias policy-makers as well as
presidential and legislative candidates running for public ofce who the people will be voting
for in the 2014 elections.
Materials for preparing this analysis are drawn from the media and other reliable sources.
Conclusions and recommendations can be tested and are open for debate.
Te purpose is to present the aspirations and proposals of Indonesias civil society groups and
citizens who yearn for a viable form of intellectual politics based on programs as well as more
inclusive development for all and the protection of human rights.
Team of authors:
Sugeng Bahagijo, Arief Anshory Yusuf, Hamong Santono, Dwi Ruby Khalifah, Yanuar
Nugroho, Siti Khoirun Nikmah
** Permission granted to quote or cite provided proper credit is given by mentioning the title
of the document and names of authors.
150
Inequality in Indonesia has worsened in the past 10 years. Te countrys
presidential and legislative candidates need to take a stance and devise a plan
to deal with inequality. Economic growth and a free market mechanism in
Indonesia in the last 10 years has failed to narrow inequality, and instead has
aggravated the situation. Te government plays a critical role. It can implement
3 concurrent actions: policy change, institutional reform and accountability.
Despite Indonesias democratic elections in 2004 and 2009, the issue of
inequality has never been discussed and debated by presidential and legislative
hopefuls when in fact its implications are real.
Options available to presidential and legislative candidates in dealing
with inequality are as follows:
Narrowing inequality should be included as a development indicator in
the next fve-year medium-term development plan (RPJM), in addition to
poverty and unemployment reduction: lowering the Gini index from 0.41 to
0.35 within the next fve years;
Improve policies and increase tax revenue by 19%-24% of GDP, particularly
derived from income tax levied on the super-rich at a new tax rate of up to 45%
to ensure greater contribution from the ultra-wealthy;
Reallocate fuel subsidy to provide universal social security, such as
through the national health insurance scheme (JKN) and workers insurance
available to all citizens;
Strengthen the powers and resources of government agencies: Corruption
Eradication Commission (KPK), Directorate General of Taxes, National Land
Agency, Ministry of Manpower, Ministry of Agriculture, Central Bureau of
Statistics (BPS) and Presidential Working Unit for Development Oversight
and Control (UKP4).
INFID ANALYSIS serves as input for Indonesias policy-makers as well as
legislative and presidential candidates running for
New York, New York
Apart from being the location for the United Nations (UN) main
headquarters, New York is dubbed as the city that never sleeps is also regarded
as the fnancial capital of the world. Not surprisingly, Wall Street has become
its foremost icon. Gordon Gekko, a character in the flm Wall Street (1987),
portrayed by actor Michael Douglas is famed for his greed is good ideology.
New York, however, may soon project a diferent image. Since 2014, the
city has been under the leadership of a new mayor. Tis is indeed a profound
political shif, particularly as in the past twenty years, New York has been
managed by pro-business Republican leaders, Rudy Guilani and Michael
151
Bloomberg.
New York henceforth will be led by its new mayor, Democrat Bill de
Blasio, 52. One of his main agendas is to tackle inequality in New York. Being
at the helm of New York is not an easy task to undertake. Some even regard the
position of New York Mayor as the second toughest job afer the U.S. President.
With a population of over eight million, New York and the New York Mayor
has become the U.S. political barometer. President Franklin Delano Roosevelt
known for his New Deal policy was a New York mayor before being elected
U.S. president for four terms.
Bill de Blasi has vowed to deal with the never-ending Dickensian tale
of the rich and poor that has long characterized New York. Changes will be
made to ensure that the people of New York will no longer feel that only 1%
of the population owns the city, but a place where every citizen can work,
live and build families. One of his planned changes is to increase taxes that
will be reallocated for improving the quality of life of the less fortunate. A
higher tax rate will be imposed for the well-heeled, that is, those earning USD
500 thousand to 1 million annually. Collected taxes will be redistributed for
advancing early childhood education (pre-kindergarten).
Why the issue of inequality? Isnt the U.S. a superpower, prosperous and
advanced nation? Data and statistics however tell a diferent story. Te worlds
billionaires and super-rich seem to converge in New York and the U.S., yet a
quarter of the population, the lowest income earners have not seen a rise in
income in the past 25 years. On the other hand, the earnings of the wealthiest
1% have leapt threefold, capturing 20% of national net worth.
Technological advancements and globalization (industrial relocation in
search of cheap labor and location) have contributed to rising inequality. In
1979, General Motors automotive manufacturing facility employed a total of
850 thousand workers. Te flm Capitalism: A Love Story (2009) by Michael
Moore among others depicts how the automotive assembly plant that his father
worked in was relocated. Microsof today employs 100 thousand employees
across the globe, Google has 50 thousand workers, while Facebook has 5
thousand employees (Source: Economic Policy Institute, 2011).
Among developed countries, the U.S. has one of the highest inequality
levels. Te inequality map among rich nations reveals two key trends: (a) high
inequality, and (b) low inequality. Te highest inequality is found in the U.K.,
U.S., Portugal and Singapore, while the lowest is recorded in Sweden, Japan
and Norway (www.equalitytrust.org.uk).
152
Graph 1 below shows the U.S. positioned among other rich countries but
with high inequality index. Te U.S. lies in the upper right quadrant, whereas
prosperous countries clustered in the lower right quadrant are high-income
earners but with low inequality index. Indonesia is placed in the upper lef
quadrant which represents low-income, high-inequality countries.
Graph 1: Log of GDP per capita (2005 PPP US$)
Source: CIA World Fact Book
153
OBAMA AND WORLD ECONOMIC FORUM
Te New York City Mayor is not the only one agonizing over the issue of
inequality. Earlier in December 2013, President Obama declared inequality as a
defning challenge that needs urgent attention: Te top 10 percent no longer
takes in one-third of our income; it now takes half. Whereas in the past, the average
CEO made about 20 to 30 times (comparative) the income of the average worker,
todays CEO now makes 273 times more. And meanwhile, a family from the top
1% has a net worth 288 times higher than the typical family in the U.S. Tis show
of concern does not stop at politicians. A global business group represented by the
World Economic Forum last year mentioned severe income disparity as one of the
major global risks (Global Risk 2013). It is understandable if WEF is troubled over
the converging of two weighty issues: sluggish economy and income inequality
which may instigate social fare-ups. World leaders from all ranks, including the
business community and government, should therefore be made aware of this
worrying trend [Global Risk, 2014]
A group of world experts and leaders established by the UN Secretary
General, the High Level Panel on Post-2015 Development Agenda (HLPEP),
in its report A New Global Partnership: Eradicate Poverty and Transform
Economies through Sustainable Development mentions inequality as a critical
issue. Many parties have even urged to include inequality in the priority list of
the post-2015 development agenda, following the expiry of MDGs by 2015.
Tis concern over the issue of inequality is not only voiced by activists
and the academia, but also religious leaders such as Pope Francis who in the
Evangelii Gaudium document (2013) called for a worldwide response to
inequality. In the 50,000-word document, Pope Francis strongly criticized the
free market mechanism that has instigated economic disparities and its failure
to stimulate a trickle down efect (Washington Post, 11/27/13).
On the other hand, the world is also inundated with news and analysis on the
rise of a new economic block that is expected to replace advanced countries (G7)
known as the BRICS (Brazil, Russia, India, China, South Africa). At the same
time, however, inequality has worsened in nearly all countries with the exception
of Brazil which has managed to signifcantly narrow its economic inequality.
OECD mapped out this phenomenon, including the reasons for the
escalation of income inequality in Argentina, Brazil and Indonesia. Oxfam
and the Brazil-based BRICSAM research institute conducted a mapping of the
inequality situation in BRICSAM countries. In Indonesia, a similar study was
done by Arief Anshory from Padjajaran University (see Annexes 2 and 3).
Kate Pickett and Richard Wilkinsons best seller, Te Spirit Level: Why
154
More Equal Societies Almost Always Do Better, sheds light on the adverse
social consequences of inequality such as diminishing trust towards others,
heightening sense of exclusion and more widespread diseases, and triggering
excessive consumptive behavior.
Eminent economist Joseph Stieglitz, a former World Bank Chief Economist,
in 2012 authored Te Price of Inequality, reiterating that 1% of U.S. highest earners
are in control of 40% of national wealth. Stieglitz also asserts that rising inequality
in the U.S. has stripped the country of its image as the land of hope, putting the
lives and livelihoods of future generations at grave risk.
In many countries, community-based groups are studying the issue
of inequality. In the U.K., Equality Trust prepared a course of action for
the younger generation to contribute in lessening inequality. In Europe,
Luxembourg Income Study developed cross-national databases for policy
reviews and formulation. Another institution, Inequality Watch, studies and
monitors issues related to inequality (www.inequalitywatch.eu).
In the U.S., Robert Reich, Secretary of Labor, produced the flm Inequality
for All to raise public attention on the urgency of the U.S. inequality situation. It is
somewhat similar to the flm produced by Al Gore, but focuses more on inequality.
An interesting initiative is the Wealth for the Common Good under the
Institute for Policy Studies (IPS) that has organized the 1% for an economy
that works for everyone campaign, bringing together a network of members
representing the wealthiest 2% who call upon (through letters, petitions and
dialogues with congress, etc.) other ultra-rich Americans to join in the action
and push for fairer tax policies. Members of this group include Americas
richest man, Warren Bufet (www.inequality.org).
INEQUALITY IN INDONESIA
Indonesian poet WS Rendra captured Indonesias situation in the
following poem:
A heap of corn lying in the room/and a young man who graduated from
high school/Penniless /without the means to become a college student/
only a heap of corn.
He sees himself ambling aimlessly/he sees himself thrown out of a
discotheque/he notices a pair of smart shoes behind the display window/
he spots his rival riding a motorcycle/he looks at some lottery numbers/
He sees himself alone, destitute and a failure
Source: WS Rendra, 2008
155
Both fragments of the poem were written in the 1970s, refecting the
poets distress over the situation at the time. It was the decade when the Malari
1974 and student movement of 1978 took place as university students and
the political opposition made attempts to rectify development policies. Te
foregoing poem is still relevant to many of todays realities; from fancy cars
confscated by the Anti-Corruption Commissioon (KPK) to opulent mansions
advertised on television. Some succeed in pursuing higher education, while
others are outsourced to work in factories or as migrant workers in Malaysia.
Some are jobholders, and many remain jobless, and there are those living in
upscale Pondok Indah or in more modest housing in Pondok Gede.
Te ultra-rich in Indonesia have reached their privileged status by drawing
from the countrys economic resources and commodities, such as oil palm,
coal and other minerals, multimedia and communication technology, and
fnance (see Annex 5). At the other extreme, the rest of Indonesia has not been
able to escape poverty and destitution. Not surprisingly, in line with positive
economic growth in the past 10 years, income inequality has instead worsened
from 0.33 to 0.41 of consumtion gini coefcient.
Inequality-related data compiled by development economists from
Padjajaran University (www.keberpihakan.org) reveals the following: (i) In
2012, Jakartas Gini coefcient (inequality benchmark) registered at 0.42; (ii)
In 2012, the richest 20% enjoy 49% of national income, (increased from 40% in
2002). Meanwhile, the poorest 40% only holds 16% of national income (shrunk
from 20% in 2002). (iii) the wealthiest 10% experiences a twelvefold surge in
income compared to the bottom 10% (increased from 9.6 times in 2007).
Jakarta is not the only city blighted with chronic inequality. Bandung
is similarly aficted with a rapid rise in inequality. With a robust economic
growth (9% annually), Bandung has seen a concomitant increase in inequality.
Tis is evident when economic progress is compared to consumption growth.
If the rise in income as a consequence of economic growth is inequitably
distributed, the average household consumption spending will also tend to
increase at a slower pace. Tis is because the rich and super-rich are inclined
to set aside additional income as savings rather than for consumption. As a
consequence, income will increase at a faster rate than consumption growth.
SUSENAS (National Socio-Economic Survey) data showed growing income
inequality in Bandung from 2007 to 2012, among the highest in Indonesia. In
2007, Bandungs Gini index (standard income inequality benchmark) was 0.37
and rose to 0.47 in 2012. Tis is much higher than the national average of 0.41
(Arief Anshory Yusuf, 2014).
156
Fixing inequality is of utmost urgency given the following realities: (i)
Indonesia has the highest maternal mortality rate in ASEAN, and also among
middle-income countries, yet it has managed to carve a much larger slice
of the economic pie compared to Malaysia, Singapore and Tailand; (ii) the
poor quality of Indonesias human capital in terms of the average educational
attainment of the workforce,
SYMPTOMS OF INEQUALITY IN INDONESIA
Inequality can be seen from three angles. By using the Gini index and
examining the ratio between diferent income levels, and also through the Palma
index (see Annex 1). Inequality can also be measured from the varying levels
of social and economic opportunities available to diferent layers or groups
of society, between men and women (see Annex 2). Inequality in relation to
poverty, even though both difer from each other. Preventing inequality and
poverty requires diferent strategies and programs (see Annex 5).
A multitude of factors are contributing to growing inequality. First, the
negligible role of taxation and fscal policies in improving income levels (labor
market income). Tis is unlike the situation for advanced countries where
their taxation and transfer systems signifcantly afect income (social security,
household benefts, education subsidy, etc.).
Second, the weak role of the government in mediating the interests of
business entities and workers. Tis is can be seen in the following; (a) privileges
and deferment of the minimum wage policy; (b) allowing outsourcing practices
that adversely afect workers; (c) absence of an unemployment beneft scheme; (d)
the government does not put a salary and benefts cap for CEOs and high-ranking
ofcers in the fnance and banking sector, both in private and public companies.
Tird, women in Indonesia are under-represented in national parliament at
only 18%, far below the national target of 30%. In many countries where women
are adequately represented in politics, social spending and public service delivery
has been more than satisfactory. Tis is evident in Scandinavian countries.
Fourth, government has been inefective in setting proper quality
standards and targets for public services, including access to basic services
such as drinking water, health care and education. Public service delivery in
fact determines the accessibility of education for children or youths which in
turn will afect social mobility. On the other hand, the government has not
imposed a ceiling on bureaucratic and political spending in over 400 local
governments.
157
Although the government has taken step to address some of these issues,
the social programs and policies that are in place are mostly residual or
minimalist in nature. Te social security system is regarded more as widefare
instead of welfare as it fails to generate meaningful benefts for the people.
As a consequence, the governments good intentions have been inefective
in reducing inequality. Public funds allocated for the fuel subsidy, fertilizer
and seedling subsidy, rice subsidy (raskin), school operational funds (BOS),
National Community Empowerment Program (PNPM), maternity insurance
for the poor (jampersal) and family welfare program (PKH) are well-intended
but problematic.
INEQUALITY AND THE PRESIDENTIAL ELECTIONS
2014
According to Vikram Nehru (2013) of the Carnegie Endowment, a leading
research institute, Indonesia may move to the ranks of an advanced country
with a per capita income of over 12,600 dollars by 2035. Tis means that in the
next 20 years, Indonesias income will leap fourfold compared to 2013 (USD
3,500). Tis is achievable given Indonesias economic growth at an average of
7.8 percent from 1968 to 1998.
Nehru stated that the new government which is due to be elected
in 2014 will need to prioritize fve agendas, one of which is narrowing
inequality, particularly inequitable opportunities in accessing health care,
education, employment and others. Another priority agenda is strengthening
the manufacturing industry, infrastructure development, environmental
protection and conservation, and quality education.
Te issue of inequality has never been a topic of discussion or debate in
Indonesias two earlier elections in 2004 and 2009. Tere have already been a
number of attempts to bring inequality down in Indonesia. In 2011-2013, the
PDIP parliamentary faction proposed that development success should also
be measured in terms of the extent to which inequality/gini ratio has been
reduced. For the medium-term development plan under President SBY (2009-
2014), inequality was not included as part of the governments indicators of
success. Te president, parliament and political institutions play a decisive
role as decisions on the national budget rest with the president and cabinet
ministers. Te president and Bank Indonesia (BI) are also determining factors
in striking a balance between price stabilization/infation controls and lowering
unemployment/stimulus.
158
Te political cycle is closely associated with the widening or narrowing of
inequality: (a) the extent to which the President places priority on tax policies;
(b) the extent to which the President prioritizes social spending; (c) the extent
to which tax and transfer policies have been reduced inequality. On the other
hand, the President must also remain independent and be bold enough to resist
the vested interests of the super-rich and their signifcant infuence in politics by
not providing compensation, facilities and tax exemptions to the ultra-rich. Te
following framework in diagram 1 below may help address the issue of inequality.
Diagram 1: Te formation of inequality
Source: Author, 2014
Eforts to narrow disparities will be highly benefcial for all citizens in
the following ways: (1) economic growth will become more sustainable to
be enjoyed universally by all layers of society, and not only exclusively by the
upper-class; (2) greater support to the government, democracy, and politics as
citizens can tangibly enjoy the benefts of development.
Lessening inequality will also bring substantial non-material benefts
for fostering community harmony, social cohesion and social stability by
preventing and neutralizing religious radicalism that currently undermines
national unity and sense of mutual-help.
Furthermore, reducing inequality is not mission impossible and neither is
it about cutting-edge technology unreachable to Indonesia such as the advanced
technology for space shuttles. In other words, political will is an absolute necessity
159
along with the astuteness to learn from Indonesias own experiences and that of
other countries to help Indonesia fnd the most viable solution.
Indonesias past development experience under Widjojo Nitisastro in the
1970s can help shape Indonesias course of development today which involves
large-scale interventions in the education and health sector. Te 1970s saw the
emergence of a healthy and educated population. Te national bank, BRI for
example, has consistently worked towards developing micro and medium-scale
enterprises across Indonesia and this wealth of experience can be replicated
to expand the growth of mid-scale businesses in various cities throughout
Indonesia. Industrial policies that support the capacity enhancement of local
and national industries which have been implemented before, can also reduce
Indonesias dependency over imported commodities in an efort to reduce the
balance of payments defcit which has continued for the past 10 years.
Te experiences of other countries such as Brazil need to be taken into
consideration. Under President Luiz Inacio Lula, welfare programs such as
zero hunger, bolsa familia, increasing the minimum wage and universal health
insurance have proven to be efective in reducing inequality.
Tree key lessons can be drawn from the experiences of developed
countries with low inequality such as Sweden and Scandinavian countries: the
governments role, the governments role and the governments role. In other
words, an active and assertive role of the government in correcting market
failures (labor market, information market) is necessary.
Narrowing inequality requires the government to reduce or even eliminate
neoliberal policies that leave the peoples fate at the mercy of market fuctuation and
any lefover gains from economic growth. Tis is because every individual has diferent
talents and capacities, while socio-economic opportunities are unequal. Furthermore,
not all goods and services can be treated as tradable commodities (clean water, health
care, education, clean air, the environment, tolerance and non-discrimination).
Te government and politics (good politics) need to diferentiate
and determine rights and public goods (you get what you need) that must
be defended and protected by using all that is in their power, including the
institutional structure, and commodities and privatization oriented towards
free market mechanism (you get what you pay) see Box 1 below.
THREE SCENARIOS: REDUCING INEQUALITY
Tackling inequality encompasses working on a number of fronts
simulataneously, from fscal and tax policies to public services.
First scenario, the government focuses more on institutional strengthening
160
and the accountability of data and institutions/operations with the purpose of
improving capacity, quality and performance. Te government for example
ensures that bureaucratic reform conforms with the new law (ASN 2013),
guarantees and accelerates the implementation of JKN-BPJS-Health and BPJS-
Manpower, strengthens government watchdog agencies such as KPK, UKP4,
BPK and BPKP, and restructures and consolidates the Directorate General of
Taxation, BPN, BPS and LIPI.
Second scenario, in addition to institutional capacity building, the
government at the same time initiates policy change, including BI policies
(lowering interest rates), fnancial sector regulations, tax policies, minimum
wage and unemployment benefts, reallocation of fuel subsidy and changes to
fertilizer subsidy, wealth development for the people including for land and
housing, government support for expanding cooperatives as well as small and
medium-sized economic sectors.
Tird scenario, the government focuses on three elements simultaneously:
policy change, institutional strengthening and accountability. Under this
scenario, the government needs to make the necessary investments for
intensifying monitoring and data collection eforts that have long been
disregarded. Te government for example can expand and strengthen UKP4 to
immediately remove obstructions and barriers on the ground. Te government
can also strengthen BPN, BPS, Ministry of Manpower, Ministry of Agriculture,
LIPI, universities and other agencies.
What must be done and how? Te following are policy options that
presidential and legislative candidates can take into account in the areas of policy
change, institutional strengthening and accountability/operations (see Annex 4):
First, the governments role and public policies are genuinely oriented toward
promoting equality and redistribution. Te necessary measures include; (i) reduce the
concentration of income and wealth among the top earners inter alia through taxation
and placing a salary and bonus cap on the fnancial sector; (ii) fscal policy, specifcally
taxes, can become an efective government instrument, such as by restructuring the fuel
subsidy; replacing in-kind subsidy with cash subsidy and targeting, and broadening
fnancial access to expand small and medium-scale enterprises.
Second, the government can optimally reduce income inequality in the
labor market among others by; (i) broadening access to better quality public
services, such as education and employment opportunities, and; (ii) increasing
minimum wage to allow households to lead decent lives.
Tird, government policies and measures in expanding wealth (land and
housing) and fnancial access for citizens, including through land reform and
opening up access to land for smallholders and landless farmers, and widening
access to fnancing for citizens and micro-to-medium-scale entrepreneurs.
Fourth, build the capacity of government agencies, directly related to
wealth development and social mobility of the people, such as BPN, BPS,
Ministry of Housing and Ministry of Manpower.
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Table 1: Policy recomendation to reduce inequality
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Annex 1
Tree Inequality Measurements
Source http://www.equalitytrust.org.uk/about-inequality/scale-and-trends
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Annex 2
Studies on Inequality in Indonesia
164
Annex 3
Studies on Inequality in Other Countries
165
Annex 4.
Examples of Policy Recommendation for Reducing Inequality
166
Annex 5
Remuneration Survey (Salary and Benefts) of Indonesians CEOs
Source: Top 100 - Average BOD Remuneration of Public Companies, 2012.
SWA Magazine 2013, pp. 32-35.
Yearly
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Annex 6
List of Research Institutes on Inequality
Source: http://www.equalitytrust.org.uk/resources/links
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Annex 7
Diference Between Inequality and Poverty
Being poor means living under dismal conditions far from a standard
considered decent or comfortable in a society. Poor refers to the inability
or lack of capacity to satisfy basic needs for leading a decent life (income,
food, housing, education and health).
Poverty can be absolute and relative depending on how poverty
is measured. Absolute poverty is the worst condition of deprivation
that remains unchanged over time, whereas relative poverty refers to
changeable measurements. In the U.K., the poverty line is set at less than
60% of the median household income (median income).
Inequality on the other hand will consistently be relative because it
refers to the diference or gap between income levels of the population
and standards of living within a range of economic and non-economic
distribution.
As a consequence, poverty and inequality can rise and fall at the same
time, but can also difer and non-simultaneous in nature. For example
(a) low poverty rate (rich economy, or sizeable economic pie relative
to GDP), but high inequality due to a marked diference between the
highest income and the middle to lower income; (b) poverty reduction
programs may have been efective, but inequality has worsened among
income levels and demographic groups. In other words, it is crucial to
identify and promote government policies and programs that also reduce
poverty and inequality.
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Annex 8
Data and Statistical Needs in Indonesia
170
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Ah Maftuchan is a researcher and trainer specializing on
themes related to social development, primarily social policies,
governance, planning, budgeting and community development.
Maftuchan studied Constitutional Law and Islamic Penal Code at
Sunan Kalijaga Islamic State University (UIN) in Yogyakarta before
earning a masters degree in social development and regional
autonomy from the University of Indonesia. With his academic
credentials, Maftuchan further developed his interest in these
subject areas by actively being involved in public policy advocacy
specifcally directed at legislators and local governments. He also
plays a central role in coordinating various civil society coalitions,
conducting research and writing books and papers. Since his
university years, Maftuchan has been actively involved in a number
of civil society organizations, mainly dedicated to community
development and policy advocacy. Upon fnishing university,
he joined Gesellschaft fr Internationale Zusammenarbeit GIZ
(formerly Gesellschaft fr Technische Zusammenarbeit - GTZ) GmbH
under the good governance program mainly related to population
administration in the province of Aceh from 2007 to 2009.
From February 2009 to date, Maftuchan has worked with
Perkumpulan Prakarsa, a Jakarta-based research and
development institute, as an analyst, researcher, trainer and
project manager. He also actively serves as a commissioner of
the Independent Budget Commission (KAI), a leading group
advocating for pro-poor budget policies and building public
awareness on government budgets. He is also a founder of
Indonesia Tax Justice Forum, a tax research and policy advocacy
group. Since 2010, Maftuchan was included in the governing
board of Nahdlatul Ulama Institute of Human Resource Studies
and Development (LAKPESDAM NU).
Arief Anshory Yusuf is the Director of Center for
Economics and Development Studies (CEDS) under Padjadjaran
University, Bandung. Apart from his position as a senior
economist at the Economy and Environment Program for
Southeast Asia(EEPSEA) and adjunctfellowatAustralian National
University, Australia, Arief also currently serves as the Secretary
General of Indonesian Regional Science Association (IRSA). He
holds an economics degree from Padjadjaran University (1997),
MSc from University College London, U.K. (2002), and PhD
ABOUT
THE
AUTHORS
172
from Australian National University, Australia (2008). The author
of numerous scientifc publications, his research interest covers
natural resource economics and the environment, poverty and
inequality, and economic modeling. Dr. Arief also serves as a
consultant for various international organizations such as World
Bank, ADB, USAid, AusAid, IFAD, CSIRO and IDRC, as well as many
government agencies in Indonesia.
Firdaus, hails from a family of metal traders in the village of
Adiwerna, Tegal in Central Java. He obtained his masters degree
in social science from the University of Indonesia, Depok. His
area of expertise focuses on organizing NGOs and small-to-micro
women enterpreneurs primarily in the economic and social
sectors, in addition to building critical awareness. Since 2002, he
has accumulated a wealth of experience in managing economic
and political development programs for grassroots women,
promoting micro-fnance institutions with a gender perspective,
and facilitating social movements at the grassroots level. Aside
from his dedication to the grassroots community, since 2007 he has
devoted part of his time teaching sociology at a private university
in Jakarta.
Socio-economic research is another area in which he has shown
much interest in. Known to family and friends as Idos, he has
conducted various studies published as books, articles, papers
and modules by diferent journals and media such as Kompas,
Media Indonesia, Pelita, Harian Terbit, Jurnal Analisis Sosial Akatiga
Bandung, Jurnal Perempuan, Jurnal Reformasi Ekonomi (published
by Lspeu, Indonesia), and Social Watch Report 2010. In between
his work as an activist, he also participates in various writing clinics
and journalism training including those organized by the Institute
for Information Studies (ISAI) and TEMPO magazine in 1998. His
dedication to micro, small and medium-scale enterprises as well
as social and economic issues and critical awareness has led him to
win a writing competition on micro-fnance organized by University
of Indonesias Management Institute and Coordinating Ministry for
Peoples Welfare in December 2004 with his winning entry Building
Micro-Finance with a Gender Perspective published by MANAJEMEN
USAHAWAN Indonesia magazine for its NO.01/TH. XXXVI JANUARY
2005 edition.
Idos now serves as ASPPUKs National Deputy Executive Secretary,
and a member of PPSW-PEKKA-ASPPUK Employee Cooperative
Supervisory Board. He also acts as facilitator, resource person
and consultant for various community groups as well as national,
international and government agencies. One of his works includes
a book titled Lembaga Keuangan Perempuan (Konsep, Praktek dan
Dampak), Jakarta: ASPPUK and NZAID, 2007. He can be contacted
at mf_ids@yahoo.com.
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Herjuno Ndaru Kinasih is a social researcher with
specifc attention to economic and development issues. Herjuno
is currently a researcher at the Habibie Center. He was previously
part of Trade Knowledge Network (TKN) Southeast Asia, Institute for
Global Justice (IGJ), Forum Asia and Pacivis University of Indonesia,
and formerly a consultant for ASEAN Secretariat. Herjuno earned
both his masters degree in the science of social welfare ( 2010) and
bachelors degree in international relations majoring in international
political economy from the University of Indonesia (2006). He
has represented Indonesian civil society organizations in several
international conferences related to the G20 Summit and ASEAN.
With INFID, Herjuno is involved in research on fnancial inclusion
in G20 and inequality issues. Herjuno can be contacted at herjuno.
ndaru@hotmail.com.
Irhash Ahmady, born in Bukittinggi on 26 November
1979, is an environmental activist currently acting as Walhi National
Executive Boards Knowledge Management Manager. A seasoned
activist, Irhash has built a reputation for his activism since his
university years in Bandung in 1999 where he was elected the
student body executive for the Department of Literature, while
participating in eforts to organize students, farmers and workers.
He also among others played a part in the peoples advocacy
against the Jatigede Dam and the suppression of labor unions in
2002. Several organizations have become part of his lifes journey.
Since 2004 he has taken the environmental path when he became
involved as an executive for the West Java branch of Walhi. He is
co-author for a book published in two versions titled Java Collapse;
Dari Jalan Raya Pos ke Lumpur Lapindo, Insist 2008. In 2009, he was
appointed member of Walhis National Executive Board and still
serves on the board.
Mike Verawati Tangka, born in Bontang, East
Kalimantan in 1977, currently holds the position of the coordinator
of the Public Policy Reform Working Group at the National Secretariat
of the Indonesian Womens Coalition for Justice and Democracy.
In addition to monitoring policies at the national level, she is also
involved in advocacy work related to the capacity building of
members of parliament and local governments pertaining to
parliamentary work and implementation of constitutional policies
that promote gender justice.
Graduated in psychology from the Department of Social Sciences
of University of Surabaya, she actively monitors and prepares
alternative reports to the UN. Since 2005, she developed the
necessary instruments and reported on the implementation of
CEDAW by the Government of Indonesia, as well as the Convention
Against Torture (CAT), Covenant on Civil and Political Rights (ICCPR),
174
Covenant on Economic, Social and Cultural Rights (ICESCR), civil
society report on achieving the Millennium Development Goals
and Universal Periodic Review (UPR). Several modules on capacity
building have also been prepared, including for Indonesian Womens
Coalition cadre education, public policy advocacy, anti-corruption
education, political skills, political campaign management for
women legislative candidates and voter education for elections.
In the past 10 years, she has conducted studies on diferent issues,
such as public health in East Java (2000), media analysis in relation to
the elections (2004), baseline food security survey in East Indonesia
(2004), and baseline informal workers study in Java (2006). She also
provides facilitation and counsel to the Catholic Youth Campus
Diocese of Jakarta.
Sugeng Bahagijo, currently serves as the Executive
Director of INFID. He formerly worked with KID (Komunitas
Indonesia untuk Demokrasi, Indonesian Community for Democracy),
an institution dedicated to democracy education, and was actively
involved in Perkumpulan Prakarsa as an executive. He was also part
of the Bappenas team of experts assigned to draw up the poverty
eradication strategy document (SNPK). Sugeng has authored several
books including Mimpi Negara Kesejahteraan: Telaah Dinamika
Peran Negara dalam Produksi dan Alokasi Kesejahteraan together
with Darwawan Triwibowo, and named editor of Globalisasi
Menghempas Indonesia. He studied philosophy at UGM and human
rights at HRW. Sugeng was conferred the title of Visiting Fellowby
IDS Sussex University and Visiting Researcher by UCL Louvain la
Neuve- Belgium. Sugeng is also a prodigious contributor of articles
published in national dailies, including, Jakarta Post and Bisnis
Indonesia.
Tursia, is a woman activist who graduated in anthropology
from Udayana University. Her main interest lies in cultural analysis
and changes to society; a passion which she has pursued since her
days at university. She writes profusely, focusing on short stories as
vehicles for social criticism, and poems depicting social issues.
From 2009 to 2013, Tursia joined the Association for Community
Empowerment (ACE) as Program Coordinator on Promoting
Womens Participation in Policy-Making Processes from the Village
to District Level. This program succeeded in encouraging poor
women and marginal groups to take the initiative in conducting
musrenbang (development planning deliberative forum) for
women until the district level.
Tursia is currently actively involved in advocacy work on gender
justice, primarily womens engagement in policy-making processes
and womens position in politics. Apart from womens political
representation, Tursia is also intensely engaged in eforts to
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strengthen womens role in businesses which among others has
provided women with economic options through micro enterprises
and by encouraging grassroots women to be self-reliant. In
collaboration with the womens entrepreneurship network, she has
helped push for laws and regulations that protect small businesses
managed by women.
Yustinus Prastowo, born in Gunung Kidul Yogyakarta,
completed his higher education at STAN Jakarta and later earned
two masters degree, one in philosophy from STF Driyarkara and
the other in public administration and policy from the University
of Indonesia. He previously served at the Directorate General of
Taxation, Ministry of Finance (1997-2011), research associate at
Perkumpulan Prakarsa and senior researcher at the Independent
Budget Commission (KAI). At present, he is the Executive Director
of the Center for Indonesia Taxation Analysis (CITA), Jakarta.
Yustinus is also a lecturer at several private universities in Jakarta,
resource person in numerous tax seminars and training courses,
and a contributor of articles featured in Kompas, Koran Tempo,
Majalah Tempo, Indonesia Tax Review, Majalah Pajak, Majalah
Basis, Jurnal Response Atma Jaya University, and Kemitraan. He has
authored a number of books, inter alia, Manfaat dan Risiko Memiliki
NPWP (Penebar Swadaya, 2009), Panduan Lengkap Pajak (Penebar
Swadaya, 2009) and Buku Pintar Menghitung Pajak (Penebar
Swadaya, 2011), and contributed in the book on Pembangunan
Inklusif (LP3ES and Prakarsa, 2011), and Merajut Kembali Nusantara
(2013). Published research covers code of ethics compliance at
the Directorate General of Taxation (TII, KPK and UNODC; 2012)
and public examination of the Supreme Courts decision on Suwir
Laut and Asian Agri Group (ICW and ILRC: 2014). He also acts as
resource person in training programs organized by Perkumpulan
Prakarsa, Indonesia Corruption Watch, INFID, British Council, State
Intelligence Agency (BIN), Bank Indonesia, U.S. Embassy and others.
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