Indonesia Risks Slower Growth and Weakened Social Cohesion
Indonesia Risks Slower Growth and Weakened Social Cohesion
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JAKARTA - With income inequality at a historic high, the Indonesian government needs to do more to help the poor and close the country's widening wealth gap to ensure long-term economic growth, the World Bank says in a new report.
"In the long term, Indonesia risks slower growth and weakened social cohesion if too many Indonesians are left behind. Their lost potential is Indonesia’s lost potential,” Rodrigo Chaves, World Bank country director for Indonesia, said in a statement today.
The report titled "Indonesia's Rising Divide" shows that inequality in Indonesia has never been this high.
Indonesia's Gini coefficient -a measure of inequality where 0 represents complete equality and 100 represents complete inequality- has increased from 30 in 2000 to the highest recorded level of 41 in 2014.
Countries where wealth is more equally divided grow faster, with recent research indicating that a higher Gini coefficient leads to lower and less stable economic growth, according to the World Bank.
As an example, the report says that when the share of total income held by the richest 20 percent of people increases by 5 percent, economic growth falls by 0.4 percent. At the same time, when the share of total income held by the poorest 20 percent of people increases by 5 percentage points, growth increases by 1.9 percentage points.
On the other hand, high inequality can also lead to conflict. The report found that districts with a higher level of inequality than the average are 1.6 times more likely to experience social problems.
The government, as stated in the report, is targeting to lower Indonesia's Gini coefficient to 36 by 2019.
The report argues that the target can be met if the government takes aim strategically at four main drivers of inequality in the country that affect current and future generations: inequality of opportunity, inequality in the labor market, high wealth concentration and unequal resilience to shocks.
“Government policies can reduce the frequency and severity of shocks, and ensure all households have access to adequate protection when shocks occur. These are long-term but needed investments for Indonesia.,” said Matthew Wai-Poi, World Bank senior poverty economist and lead author of the report.
The Washington, based lender estimated that Indonesia's economy will grow at 4.7 percent this year and 5.3 percent in 2016.
"In the long term, Indonesia risks slower growth and weakened social cohesion if too many Indonesians are left behind. Their lost potential is Indonesia’s lost potential,” Rodrigo Chaves, World Bank country director for Indonesia, said in a statement today.
The report titled "Indonesia's Rising Divide" shows that inequality in Indonesia has never been this high.
Indonesia's Gini coefficient -a measure of inequality where 0 represents complete equality and 100 represents complete inequality- has increased from 30 in 2000 to the highest recorded level of 41 in 2014.
Countries where wealth is more equally divided grow faster, with recent research indicating that a higher Gini coefficient leads to lower and less stable economic growth, according to the World Bank.
As an example, the report says that when the share of total income held by the richest 20 percent of people increases by 5 percent, economic growth falls by 0.4 percent. At the same time, when the share of total income held by the poorest 20 percent of people increases by 5 percentage points, growth increases by 1.9 percentage points.
On the other hand, high inequality can also lead to conflict. The report found that districts with a higher level of inequality than the average are 1.6 times more likely to experience social problems.
The government, as stated in the report, is targeting to lower Indonesia's Gini coefficient to 36 by 2019.
The report argues that the target can be met if the government takes aim strategically at four main drivers of inequality in the country that affect current and future generations: inequality of opportunity, inequality in the labor market, high wealth concentration and unequal resilience to shocks.
“Government policies can reduce the frequency and severity of shocks, and ensure all households have access to adequate protection when shocks occur. These are long-term but needed investments for Indonesia.,” said Matthew Wai-Poi, World Bank senior poverty economist and lead author of the report.
The Washington, based lender estimated that Indonesia's economy will grow at 4.7 percent this year and 5.3 percent in 2016.
(rnz)
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