#1Inequality in Indonesia: Trends, drivers, policies Taufik Indrakesuma & Bambang Suharnoko Sjahrir World Bank Presented at ILO Country Level Consultation Hotel Borobudur, Jakarta 24 February 2015 THE WORLD BANK I BANK DUNIA Sharing Development Solutions for an Emerging Indonesia#2Indonesia has enjoyed strong growth since the Asian Financial Crisis, with a growing middle class... Strong economic growth... ...with a rising middle class Real GDP Growth (%) -5 -10 -15 0 1996 Source: BPS 10 5 1998 2000 2002 2004 2006 2008 2010 2012 Millions of People 50 45 40 35 30 25 20 15 10 5 0 2002 2004 -Population 2006 2008 2010 2012 Source: BPS 1,200 1,000 800 600 400 200 0 Consumption THE WORLD BANK I BANK DUNIA Sharing Development Solutions for an Emerging Indonesia Trillions of Rupiah#3...but vulnerability remains high, with small shocks easily sending households into poverty Many live near poverty... 50 ...and enter poverty easily Percentage of Population 40 40 30 30 20 20 10 10 0 68m Vulnerable 28m Poor 1 in 4 Indonesians in 2010 were poor at least once in the past three years Between 1.0x and 1.5x Poverty Line ■Below Poverty Line Source: Susenas 2013 Source: 2008-10 Susenas Panel, WB staff calculations THE WORLD BANK I BANK DUNIA Sharing Development Solutions for an Emerging Indonesia#4The rate of poverty reduction is slowing and the economic growth is not being shared by all Percentage Point Change in National Poverty Rate Poverty reduction is slowing 2.5 2.0 1.5 1.0 0.5 0.0 -0.5 -1.0 -1.5 Growth is unequal 7 6 5 The rate of poverty reduction has been slowing Percent ♡ 2 ||| 1 0 Growth in National Mean Consumption (2003-2010) Source: BPS 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 1 2 3 4 5 6 7 8 9 10 Household Per Capita Consumption Decile Source: Susenas, World Bank calculations Notes: Annualised real consumption growth (adjusted for spatial and temporal purchasing power) THE WORLD BANK I BANK DUNIA Sharing Development Solutions for an Emerging Indonesia#5Outline ⑪Inequality is rising... 2 and the drivers are .. 3 Lessons learnt from other countries ... 4. for policy discussion in Indonesia. THE WORLD BANK I BANK DUNIA Sharing Development Solutions for an Emerging Indonesia#625 20 20 Source: Notes: Inequality is increasing ... 45 45 40 40 35 55 30 30 1980 Gini Coefficient, 1980-2013 inequality broadly stable, beginning to rise at the end of the period 1981 1984 1987 1990 1992 1993 1994 1995 Susenas Nominal consumption Gini coefficient ...until the AFC, which ! affected the rich more than the poor... ...however, the subsequent economic recovery and sustained period of growth has seen inequality rising again Asian Financial Crisis 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 THE WORLD BANK I BANK DUNIA Sharing Development Solutions for an Emerging Indonesia#7and it is felt by many Indonesians People believe Indonesia is unequal... ■ Almost all Indonesians think that Indonesia is more unequal than they would like - Over 90 percent of survey respondents said that Indonesia was 'unequal' 40 percent said that Indonesia was 'very unequal' ...and that inequality has been increasing They also think that inequality has grown significantly in recent years Almost half of all respondents say that inequality has increased in the last five years . Only 15 percent say that it has fallen On average, people believe that the incomes for the richest 20 percent have grown rapidly • They believe that incomes for the next 20 percent have grown moderately They believe that incomes for the bottom 60 percent have stayed about the same Source: Inequality Perceptions Survey (LSI) THE WORLD BANK I BANK DUNIA Sharing Development Solutions for an Emerging Indonesia#8Inequality is not only increasing in Indonesia, but it is doing so at one of the fastest rates in the region Average Annual Change in Gini, 1990s and 2000s 0.8 0.6 0.4 0.2 0 -0.2 -0.4 China Indonesia Laos India Vietnam Cambodia Philippines Note: Consumption Ginis for all countries except Malaysia, which uses income. The periods for each country are: Indonesia 1990-2011; Malaysia 1992-2009; Lao PDR 1992-2008; China 1990-2008; Vietnam 1992-2008; Thailand 1990- 2009; the Philippines 1991-2009; and Cambodia 1994-2008. Source: Kanbur, Rhee and Zhuang (2014) Inequality in Asia and the Pacific, from PovCalNet; World Bank calculations. THE WORLD BANK I BANK DUNIA Sharing Development Solutions for an Emerging Indonesia Malaysia Thailand#9Moreover, Indonesian inequality is underestimated, with many wealthier households not in the data 250 Household Consumption: Susenas Distribution (2011) Wealthier Households in Susenas (2011) ■ >$10 a day (~Rp.2m/month) Millions of People 200 150 100 50 - Only 5 million people ■ <$1.25 ■ $1.25-2 ■ $2-4 - 2 percent of population. ■>$20 a day (~Rp.4m/month) ― - Only 845,000 people < 0.5 percent of population ■ Missing "High Incomes" does not mean the super-rich! ■ $4-10 ■■$10-20 ■>$20 Source: Susenas and World Bank calculations THE WORLD BANK I BANK DUNIA Sharing Development Solutions for an Emerging Indonesia#10Outline 1 Inequality is rising... 2 and the drivers are .. 3 Lessons learnt from other countries ... 4 for policy discussion in Indonesia. THE WORLD BANK I BANK DUNIA Sharing Development Solutions for an Emerging Indonesia#11Inequality is partly due to differences between districts, education and employment... Consumption Inequality: Contribution of Differences Within and Between Groups 2012 100% 80% 60% 40% 20% 0% Urban-rural Provincial District HOH Gender HOH HOH Sector HOH Formal Proportion in Proportion Education Agriculture Formal I Within-group Inequality Between-group Inequality Source: Susenas, World Bank calculations Notes: Decomposition of Theil L Index (GE(0)) THE WORLD BANK I BANK DUNIA Sharing Development Solutions for an Emerging Indonesia#12...but it is the education and employment gaps which are widening, not geographical ones Change in Theil, 2002-12 0.12 0.10 0.08 0.06 0.04 0.02 0.00 Consumption Inequality: 2002-12 Change in Theil Index by Within and Between Components IIII -0.02 Urban-rural Provincial District HOH Gender HOH HOH Sector Education HOH Formal Proportion Proportion in Agriculture Formal Within-group differences are behind nearly all of the recent increase in inequality... ...although formality and education are also leading to higher inequality Within-group Inequality ■Between-group Inequality Source: Susenas, World Bank calculations Notes: Decomposition of Theil L Index (GE(0)) THE WORLD BANK I BANK DUNIA Sharing Development Solutions for an Emerging Indonesia#13Increases in inequality are partly driven by increase in skill premium Percent Jobs are requiring more education... Employment by Education Level 100 80 60 40 40 20 0 2002 2013 ...meaning workers with more education receive higher wages Percent 120 Worker Wage Household Consumption Premium Premium 100 ■Tertiary 80 ■SMA 60 SMP 40 ■SD or less 20 0 SMP SMA Tertiary 2003 SMP SMA Tertiary 2010 LHS: Source: Sakernas, World Bank calculations. RHS: Worker wage premium represents how much higher wages workers at each level of education receive compared with workers with primary or less education, controlling for experience, gender, work status, location and other factors. Household consumption premium represents the same thing for per capita consumption and head of household's education. Source: Sakernas, Susenas and World Bank calculations. THE WORLD BANK I BANK DUNIA Sharing Development Solutions for an Emerging Indonesia#14Poor workers in Indonesia are only able to access low productivity jobs Indonesia's labour productivity significantly lags neighbours'... ...meaning most existing and new jobs are not productive. 25,000 20,000 15,000 10,000 5,000 Value Added Per Worker (2005 PPP$) 0 71% All Jobs 71% of all workers in low-productivity sectors: agriculture, retail & trade, social and personal services 60% Manufacturing Retail & Trade Agriculture ■Malaysia Thailand Indonesia New Jobs 60% created in low- productivity sectors: retail & trade, social and personal services Source: BPS (aggregate value added), Sakernas (worker #s), CEIC (Malaysia and Thailand) Source: Sakernas (2013), WB staff calculations THE WORLD BANK I BANK DUNIA Sharing Development Solutions for an Emerging Indonesia#15Minimum wage setting has neither protected workers nor rewarded their productivity Minimum wage increases are not correlated with increases in cost of living. Provincial Min. Wage vs CPI Inflation Minimum wage increases are not correlated with productivity Provincial Min. Wage vs Labour Productivity 25 70 70 00 60 Changei nCPI (%) 2007-2013 20 20 30 40 50 50 10 0 0 20 40 60 Change in real minimum wage (%) 2007-2013 Source: Sakernas, World Bank calculations. R² = 0.0809 Changein Value Added Per Worker (%) 2007-2010 20 15 10 10 5 Ф -5 R² = 0.0124 -10 -15 80 100 -20 -10 -5 0 5 10 15 20 25 30 Change in Minimum Wages (%) 2007-2010 Source: Sakernas, World Bank calculations. THE WORLD BANK I BANK DUNIA Sharing Development Solutions for an Emerging Indonesia#16Increases in inequality are being driven by the skill premium and a greater impact of shocks Change in Gini 2003-2010 Decomposed Key Changes Leading to Higher Inequality Residual Structure (shocks and variance) Increasing Returns to Education Percent of Total Change Explained 133 28 12 Changing Returns to Sector of Work Key Changes Leading to Lower Inequality Increased Endowments (e.g. urban migration, higher education, more formal work) Decreasing Urban-Rural Gap Decreasing Provincial Gaps Decreasing Work Type Gaps -28 -23 -16 -8 Source: Susenas, World Bank calculations Notes: Counterfactual simulations of consumption distribution using Juhn-Murphy-Pierce method and an occupational choice model. Key results only shown THE WORLD BANK I BANK DUNIA Sharing Development Solutions for an Emerging Indonesia#17Outline 1 Inequality is rising... 2 and the drivers are .. 3 Lessons learnt from other countries ... 4 for policy discussion in Indonesia. THE WORLD BANK I BANK DUNIA Sharing Development Solutions for an Emerging Indonesia#18Brazil has been effective in reducing inequality, albeit from a very unequal starting point Source: Notes: Gini Coefficient, Brazil and Latin America 0.60 0.588 0.583 0.58 0.576 0.566 0.564 0.56 0.559 0.548 0.542 0.54 0.537 Brazil 0.52 Latin America* 0.50 0.48- 0.46 0.44 0.42- 0.40 2001 2002 2003 2004 2005 2006 2007 2008 2009 World Bank (2012): Inequality in Focus Latin America is an average of 17 countries THE WORLD BANK I BANK DUNIA Sharing Development Solutions for an Emerging Indonesia#19This was achieved through macro-economic stability and educational expansion... Macro-economic stability and growth have benefitted the poor - Poor do not have access to financial instruments that protect them from inflation Economic expansion has driven job creation Expansion in primary and secondary expansion has changed the labour force profile - - Brazil's inequality in labour income had been driven by inequality in education Concerted policy effort to expand education for poorer households In 1993, a child of a father with no formal education would complete 4 years of schooling; now students complete 9-11 years, regardless of parents' education As more workers become skilled, they benefit from higher wages At the same time, this means there are less unskilled workers Economic growth also increased demand for unskilled workers, so unskilled wages increased as well →Wage differences between skilled and unskilled have fallen Changes in labour incomes represent 2/3 of inequality reduction THE WORLD BANK I BANK DUNIA Sharing Development Solutions for an Emerging Indonesia#20...as well as pro-poor spending and better social policies More pro-poor incidence of social spending - Nearly half of all government spending is social spending (cash transfers, health and education) Expansion in social assistance spending - - - Increased contributory and non-contributory government transfers account for 30 percent of reduction in Gini from 2001-09 Bolsa Familia (CCT) . Now covers 25 percent of households Single largest contribution to reaching the poor and reducing inequality Beneficio de Prestacao Continuada (non-contributory pensions) Greater benefit levels than CCT, but less contribution to reducing inequality However, generous formal and public sector social security programs have been highly regressive THE WORLD BANK I BANK DUNIA Sharing Development Solutions for an Emerging Indonesia#21Outline 1 Inequality is rising... 2 and the drivers are .. 3 Lessons learnt from other countries ... 4. for policy discussion in Indonesia. THE WORLD BANK I BANK DUNIA Sharing Development Solutions for an Emerging Indonesia#22What can be learnt from the international experience for policy discussion in Indonesia? ■Sound macro and fiscal policies are the foundation of a fair and prosperous society - Macro stability Effective Fiscal spending ■Invest in education and skill development - - Long term: Reform the education system to improve gains in quality Short term: Current provision of training both private and public is low ■ Address productivity - Formula-based Minimum Wage setting that is simple, certain and fair Explicitly tied with inflation, productivity and growth THE WORLD BANK I BANK DUNIA Sharing Development Solutions for an Emerging Indonesia#23Terima Kasih#24EXTRA SLIDES#25Both long-term and short-term solutions must be used in tandem to improve worker skills Gains in the quality of Indonesian education have been low PISA scores, Indonesia 410 400 390 380 370 360 350 2003 2006 2009 2012 Reading Math Science Education improvements don't address short term concerns Even if reforms were immediately made to basic and secondary education, the benefits would only be reaped by the year... 2025 Current provision of training, both private and public, is low Firms that report offering formal training opportunities for their employees Large (100+) Medium (20-99) Small (5-19) Non-exporter Exporters (>10% of sales) Foreign (more than 10%) Domestic Indonesia EAP World 0 20 40 60 80 Share of firms providing formal training Source: World Bank, Enterprise Surveys 2009 Education reforms should focus on quality and skills, not just expansion of access Education reforms must be complemented with reforms in skills training and upgrading A demand-driven skills training system, with employers heavily involved in the development of competency standards