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One only hopes that Indonesian economic policy makers
were listening carefully to the speech of Christine Lagarde, the managing
director of the International monetary Fund (IMF), at the World Economic
Forum held in Davos in January 2013. Lagarde did not mince her words in the
excellent speech she delivered on why policymakers must start addressing
economic inequality.
“I believe that the economics
profession and the policy community have downplayed inequality for too
long,” she said, adding that “surely we have all learned by now that it is
no longer enough to focus on growth alone. We need all people to share in
rising prosperity.”
Lagarde went on to say that “a more
equal distribution of income allows for greater economic stability, more
sustained growth and healthier societies with stronger bonds of cohesion
and trust.” At the same time, she pointed out that youth and women play
a crucial role in economic growth.
Lagarde’s approach is certainly different from that of Michel Camdessus,
who was IMF director in the days of former president Soeharto, when the
latter was accused of being recalcitrant. Things have changed at the IMF.
One way to measure economic inequality is to use the gini ratio. In 2011,
Indonesia’s gini ratio was 0.41, which means that 1 percent of the
population held 41 percent of Indonesia’s total wealth.
The number looks even worse if the household gini ratio is considered; the
ratio of 0.65 means that 1 percent of Indonesia’s households control 65
percent of the wealth of Indonesia’s households (Kompas, Oct. 30, 2012).
In 2011, an Indonesian NGO calculated that, based on a gini ratio of 0.41,
the wealth of the 40 richest Indonesians is equal to that of 77 million
Indonesians.
The thinking that economic growth without equality leads to instability is
not new. As early as 1910, president Roosevelt was already concerned about
economic inequality when he declared that the US federal government had a
responsibility to promote equality of opportunity and to attack special
privileges and vested interests.
Perhaps the book written last year by Nobel Prize winner Joseph Stiglitz,
entitled The Price of Inequality, spurred on discussion of this crucial
issue, which so many had been avoiding.
In Davos this year, Stiglitz told an elite audience that the richest 1
percent of Americans now hold 25 percent of the country’s wealth and that
this was causing all sorts of social problems, especially among young
people, in the US.
An in-depth and well-researched report by the weekly The Economist last
year focused on economic inequality. Its 25-page coverage on the issue
investigated the widening gap between rich and poor and found that
inequality was one of the most serious social, economic and political
problems that the world was facing.
The Economist quoted the Asian Development Bank, which has argued that if
income distribution in emerging Asia had not worsened over the past 20
years, the region’s rapid growth would have lifted an extra 240 million
people out of extreme poverty.
This is something for all of us Asians to think about!
The Economist stated that the close links between politicians and
plutocrats or government by the wealthy meant that cronyism was established
and that this was the most obvious way in which Asian governments have made
inequality worse.
This was because businessmen who are politicians have insider access to
land and natural resources and to government contracts. The Economist
pointed out that cronyism must be curbed, particularly in emerging markets,
as a freer financial sector with market-driven interest rates will remove a
potent source of income concentration and economic distortion.
Education is a crucial factor in reducing income inequality, as can be seen
in Latin American countries. Government spending on secondary education has
led to an increase in the literate and schooled workforce, which is then
able to work in a modern economy that is very much driven by technological
innovation.
The Indonesian government is still fixated on economic growth. This kind of
thinking is reflected in a 2012 publication by the McKinsey Global
Institute called The Archipelago
Economy: Unleashing Indonesia’s Potential.
The McKinsey Institute has been a consultant to the Indonesian government
and claims that it helped the government “to better fulfill [its] mission to the public” (McKinsey
website). The focus of the report has been economic growth and the ways in
which to ensure further growth to attract investment.
The McKinsey publication states that Indonesia today is the 16th largest
economy in the world. There is a smattering of discussion on inequality in
the publication but not much; instead, the focus is on economic opportunity
and on the fact that Indonesia has a young population, which will be
powering future growth in incomes.
This is true. Indonesia today is also the fourth-most populous country in
the world and 44 percent of its 240 million people are under 24 years of
age.
A tsunami consisting of a large youth bulge is about to arrive in our
employment sector. As Lagarde pointed out in her speech, “Inclusive growth
must also be job-rich growth,” in which a strong dimension is youth
employment.
Indonesia is in the grip of large-scale corruption that is eating into our
economy and can be likened to a cancerous growth.
As for the 20 percent compulsory government spending on education, which
directly affects our youth, how much of this spending really goes into
powering knowledge and skills among our young people and how much of it
becomes operational costs for our bureaucrats?
The Indonesian government can get the McKinseys of this world to give
advice and help plan greater efficiency and effectiveness, but the crucial
test lies in implementation. Let’s stop all the image building, spinning of
statistics and political pitching.
Just get on with it and implement plans properly and effectively, because
this in itself would be a major achievement. ●
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