Commentary: Indonesia searches for that elusive broad-based growth
Indonesia's middle class are the winners of economic growth under Jokowi, says Asep Suryahadi and Ridho Al Izzati, researchers at the SMERU Research Institute.
JAKARTA: When Joko Widodo (Jokowi) took over the Indonesian presidency in 2014, he faced a stagnating poverty reduction effort and stubbornly high inequality levels.
To address these problems, Jokowi has mainly relied on two social policy initiatives: Expanding the coverage of social assistance programmes and distributing Village Fund (Dana Desa) grants, which are put to purposes decided by villagers themselves.
Despite these schemes, the benefits of economic growth under the Jokowi administration are being reaped by the middle class more than the poorest segments of Indonesia’s population.
SOCIAL ASSISTANCE PROGRAMMES
The social assistance programmes comprise mainly continuations from the previous government. Recipients of the Indonesian Smart Card for Education — some 19.7 million students in 2016 — receive Rp 450,000 (US$32) per year for elementary school, Rp 750,000 for junior high school and Rp 1 million for senior high school.
And under the Indonesian Health Card programme, which reached over 90 million people in 2017, the government pays a premium of Rp 23,000 per person each month.
The government also furthered the Subsidised Rice for the Poor (Rastra) programme, where each household is entitled to buy 10 to 20 kilograms of rice per month at a heavily subsidised price of Rp 1,600 per kilogram (compared to the market price of around Rp 12,000 per kilogram). This programme reached 15.8 million households in 2017.
With the aim of reducing the impact of a fuel price hike at the end of 2014, the Jokowi government implemented an Unconditional Cash Transfer programme to the amount of Rp 1 million (US$72) per household for eight months.
In 2017, this programme covered 15.8 million households. In comparison, the Conditional Cash Transfers programme provides benefits of around Rp 1.9 million per household each year. The Jokowi government substantially expanded the coverage of this programme from 2.8 million households in 2014 to 10 million households in 2018.
Despite these expansions, Indonesia still spends considerably less on social assistance compared to other countries at a similar level of development. Social assistance spending in Indonesia is about 0.7 per cent of GDP, which is less than a half of the average for lower middle income countries (1.5 per cent of GDP).
Meanwhile, the Village Fund came into effect in the 2015 budget year. The use of Village Fund grants is determined by villagers at a forum, which is then formally proposed in an expenditure plan. Most villages have allocated over 70 per cent of their funds for infrastructure development, especially the improvement of village roads.
Only a small amount of money has been allocated for community empowerment programmes, such as livelihood skills training and facilitation.
Under the Village Fund scheme, the government provided a block grant of Rp 280 million to each rural village in 2015, which grew to Rp 800 million as of 2018. Consequently, the Village Fund’s overall budget increased from Rp 20 trillion in 2015 to Rp 60 trillion in 2018.
MIDDLE CLASS BENEFITS MOST UNDER JOKOWI
One might expect Jokowi’s social policy initiatives to contribute to pro-poor economic growth by addressing the problems of stagnating poverty reduction and high inequality.
Yet upon examining the impact of economic growth on the consumption growth of various segments of Indonesia’s population, the middle class reveals itself as the largest beneficiary of Jokowi’s poverty and inequality reduction schemes.
Across the first three years of the Jokowi administration (2014 to 2017) and former president Susilo Bambang Yudhoyono’s administration (2004 to 2014), consumption per capita of all segments of Indonesia’s population continuously increased.
But the trends in growth rates for different segments of the population varied between the two presidents’ tenures.
Under Yudhoyono, consumption growth of the rich was higher than that of other segments of the population, leading to an increase in inequality during those periods. In contrast, in the first three years of Jokowi’s administration, it was the middle class who experienced the highest growth compared to both the poor and the rich, which explains the decrease in inequality in Indonesia in recent years.
Even though inequality has decreased, the poor have been comparatively excluded from economic growth under Jokowi.
Under Yudhoyono, the consumption of the poorest 20 per cent of the population grew at the same rate as economic growth. But during the first three years of Jokowi’s administration, it grew at a rate less than economic growth — indicating that the poor are now less connected to economic growth.
For the middle class (the second and third quintiles of the wealth distribution), their consumption growth was only half of economic growth under Yudhoyono during his second term and has increased to comparable rates of economic growth under Jokowi
THE RICH GETS RICHER
Since 2004, the consumption of the richest 20 per cent of Indonesia’s population has consistently grown at a rate higher than economic growth.
The challenge for the Jokowi administration is to shape Indonesian economic growth to be more inclusive, especially for its poorest population. Despite Jokowi’s social policy initiatives, it is the middle class who are reaping most of the benefits of economic growth.
To connect the poor to economic growth, the government’s social assistance policies need to be complemented by job creation and income generation strategies for the poor.
Asep Suryahadi is Director of the SMERU Research Institute. Ridho Al Izzati is a Junior Researcher at the same institute. This commentary first appeared on East Asia Forum. Read it here.