A reassessment of inequality and its role in poverty reduction in Indonesia

Whilst economic growth is essential for the development of a country, the quality of growth - for instance who benefits from it, whether it is equally distributed and whether is helps the poor escape poverty, is also important. Before the onset of the economic crisis in 1997, Indonesia experienced high economic growth. There is however, controversy about whether the whole population benefited equally from this. This study examines the evolution of inequality in Indonesia during the period of 1984 to 2002 taking into account price disparities across regions.

The authors begin with a review of the Indonesian economy during its high growth period from 1984-1996 and the aftershock of the economic crisis in 1997. The following sections discuss different inequality measures and review the literature on inequality studies both generally and specifically in the Indonesian context. Most quantitative studies have found that inequality was lower in Indonesia than its neighbouring countries including Malaysia and the Philippines, and even lower than the average of high income countries. Unlike this paper however, these studies did not take regional price disparities into account. Finally, the authors conduct their own analysis of inequality using data on nominal household expenditure.

Key findings include:

• high economic growth between 1984-1996 was relatively pro-poor, with the exception that the richest decile grew faster than the middle deciles
• in 1999, due to the crisis, the mean per capita expenditure of all deciles fell substantially
• during the crisis all measures indicate a decrease in inequality - this is because people in higher deciles lost more than poorer people
• inequality between urban and rural areas in Indonesia is relatively lower than the inequality between the rich and the poor in each area

The paper also analyses the role of inequality in poverty reduction in Indonesia. The authors conclude that the higher inequality, the less impact growth has on reducing poverty.