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Income inequality high, economic inequality higher
Jakarta Post - October 8, 2014
Economic inequality in Indonesia has been on the rise and recently reached a record high of 41 as measured by the Gini index of household consumption expenditure. Gini ranges between 0 and 100 and 0 refers to perfect equality when everyone has a similar level of income and 100 signifies perfect inequality when all income is accumulated in one person.
The issue of rising inequality is also socially and politically important as it may harm societal stability, especially in a large, diverse and young democracy plagued by widespread poverty and vulnerability amid rising expectations.
Rising inequality in Indonesia echoes global concerns about the issue. French economist Thomas Piketty argued that rising inequality was embedded in the capitalist economic system because capital returns had been increasingly higher than overall economic growth since the middle of last century.
Concerns with overall inequality in Indonesia have so far been driven by the evolution of the Gini coefficient of per capita household expenditure, derived from the national socioeconomic survey (Susenas).
Indonesia's Gini index reached a record high of 41 in 2011 and 2012, from the record low of 31 in 2004. This means that overall inequality increased by more than 30 percent during President Susilo Bambang Yudhoyono's presidency. Globally, since 2011, Indonesia could be categorized as a country with low income and high inequality, from being a low income-low inequality country a decade earlier.
Despite current awareness of the already high level of economic inequality, the current official measure of inequality (41 on the Gini index) has been underestimated. The true level of economic inequality in Indonesia is much higher than that. There are two main reasons for this: conceptual and technical.
First is the conceptual level. The current measure is the Gini index of consumption expenditure and we know that consumption is different from income, let alone wealth or assets. Consumption expenditure is only part of income earned in a typical household. It has a smoothing effect through saving and withdrawal. In the longer term, income will be accumulated in the form of wealth or assets that will grow through capital gains or investment returns.
Therefore, by definition, expenditure inequality will be lower than income inequality and income inequality should be less than wealth inequality. Economic inequality can refer to any of these inequalities, whether consumption, income or wealth.
In a study commissioned by the International Labour Organization (ILO), I calculated the Gini index of labor earning based on the national labor force survey (Sakernas) that reached a record high in 2009, at a staggering level of 46.
The Gini index of labor earning was down to 44 in 2012. Labor earning data in the Sakernas is only available for the employment categories of self-employed, regular wage employment and casual employment, which account for around two thirds of total employment. During the past decade, the overall Gini earning figure was higher than that of expenditure, on average by 22 percent.
Labor earning is a better proxy for income, but this measure does not include the income of employers. Therefore, the incomes of wealthy businessmen are not covered by Sakernas earning data. If employers' income is included, the Gini index of earning would be much higher.
Jeffrey Winters of Northwestern University provided a sense of wealth inequality Indonesia. In 2011, although Indonesia's richest 43,000 citizens represented less than one hundredth of 1 percent of the population, their total wealth accounted for 25 percent of the country's gross domestic product (GDP); the average wealth of the 40 richest Indonesians is the highest in the region and their combined wealth is equal to 10.2 percent of the country's GDP.
Second is the technical level. The sampling nature of Susenas has tended to fail in capturing the consumption of very high and very low income groups, as these groups are largely untouchable for different reasons. Those who drive a Lamborghini or wealthy elite figures are very unlikely to be included in Susenas samples.
Therefore, if Indonesia is concerned with the recent rise in the Gini expenditure figure, surpassing the warning level, one can imagine the true magnitude of economic inequality based on income or wealth measures.
To conclude, the level of inequality is high and rising according to official measurements, but the true level of economic inequality is much higher and something must be done about it.
[The writer is senior lecturer in development studies at the University of Western Sydney, Australia.]
Source: http://www.thejakartapost.com/news/2014/10/08/income-inequality-high-economic-inequality-higher.html.
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