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101668-WP-PUBLIC-Box394818b-Executive-Summary-Indonesias-Rising-Divide-English.Pdf Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized INDONESIA'S RISING DIVIDE INDONESIA'S 101668 I II The World Bank The World Bank PRINTED IN Office Jakarta 1818 H Street NW NOVEMBER 2015 Indonesia Stock Exchange Washington, DC 20433, USA Building Tower II/12th Floor T (202) 458-1876 Jl Jend Sudirman Kav 52-53 F (202) 522-1557/1560 Jakarta 12910 W www.worldbank.org P (6221) 5299-3000 F (6221) 5299-3111 W www.worldbank.org/id Indonesia’s Rising Divide The World Bank does not endorsement or acceptance is a product of the staff guarantee the accuracy of of such boundaries. of the World Bank. The the data included in this findings, interpretations, work. The boundaries, For any questions and conclusions expressed colors, denominations, and regarding this report, herein do not necessarily other information shown please contact reflect the views of the on any map in this work do Board of Executive not imply any judgment on Vivi Alatas Directors of the World the part of the World Bank ([email protected]) Bank or the Government concerning the legal status and Matthew Wai-Poi they represent. of any territory or the ([email protected]). A Word From the Country Director Rodrigo A. Chaves Country Director, Indonesia The World Bank Indonesia has undergone a remarkable transformation over the past 15 years. The national poverty rate was halved, from 24 percent in 1999 to 11.3 percent in 2014. Growth averaged at 6 percent annually for a decade up until 2015. Internationally, Indonesia also joined the G-20 as Southeast Asia’s only representative. But the quest for widely shared prosperity is not over. Indonesia is at risk of leaving its poor and vulnerable behind. Poverty reduction has begun to stagnate, with a near zero decline in 2014. Income inequality is rapidly rising and up to one third of it is explained by inequal- ity of opportunities. Healthy and well educated children live side by side with children who suffer from malnutrition, learn little when they are in school, and drop out too early. And there are stark inequalities between regions; for example, 6 percent of children in Jakar- ta do not have access to proper sanitation while, at the same time, 98 percent of children in rural Papua have no access. This kind of inequality dims the prospects of important segments of society for generations. The Government of Indonesia has rightly identified inequality as an obstacle to sustainable development and has set targets to reduce it. In support of this public policy objective, the World Bank embarked on research to better understand why inequality is rising in Indonesia, why it matters, and what can be done about it. This work is the result of partnerships between many government agencies and The World Bank. The study enjoyed the financial support from the Australian Department of Foreign Aairs and Trade. Inequality is complex, impacting many facets of life and involving many actors. We hope that this report will encourage public policy based on evidence and informed by experiences from countries that have successfully reduced inequality. In the country Indonesians deserve and want, extreme poverty is eliminated. In the Indonesia its people dream of, the poor and vulnerable have more opportunities to enjoy ‘shared pros- perity’. This is not an agenda of redistributing an economy of a fixed size. Indonesians need to expand the size of the pie, and keep expanding it and sharing it, to ensure that the welfare of all, and especially the most vulnerable, rises as quickly as possible. The task of slowing – or even reversing – the trend of rising inequality is a large challenge, and one that will take time to achieve. But we believe that by standing together – the government, alongside civil society and the private sector, with the support of development partners – the country will be able to make a dierence for current and future generations who deserve a fair opportunity for a better life. We at the World Bank Group stand ready to continue supporting these objectives. INDONESIA'SRISING D IVIDE INDONESIA'S RISING IV ’ WHY INEQUALITY IS RISING, WHY IT MATTERS AND WHAT CAN BE DONE November 2015, World Bank DIVIDE V Acknowledgements INDONESIA’s RISING DIVIDE WAS PREPARED BY THE WORLD BANK’s POVERTY GLOBAL PRACTICE TEAM IN THE JAKARTA OFFICE. The team, led by Vivi Alatas (Lead Economist, GPVDR), provides technical and policy advice based on sound empirical research and analysis to the Government of Indonesia to support their efforts to reduce poverty, vulnerability and inequality. Financial support for this report was provided by the Australian Department of Foreign Affairs and Trade through the trust fund for the Partnership for Knowledge-based Poverty Reduction. The trust fund is under the strategic oversight of Bambang Widianto, Executive Secretary of the National Team for the Acceleration of Poverty Reduction (Tim Nasional Percepatan Penanggulangan Kemiskinan, or TNP2K) and Rahma Iryanti of the National Development Planning Agency (Badan Perencanaan Pembangunan Nasional, or Bappenas). This report was prepared by a core team led by Matthew Wai-Poi (Senior Economist, GPVDR) based on a series of background papers and presentations. The paper on the Distributional Impact of Fiscal Policy in Indonesia was written by Rythia Afkar (Consultant, GPVDR), Jon Jellema (Consultant, GPVDR) and Matthew Wai-Poi; on the Inequality of Opportunity by Grace Hadiwidjaja (Consultant, GPVDR), Ray Hervandi (Consultant, GPVDR), Matthew Wai-Poi and Laura Wijaya (Consultant, GPVDR); and on the Public Perceptions of Inequality by Taufik Indrakesuma (Consultant, GPVDR) with the guidance of Edgar Janz (Senior Knowledge Management Specialist, GPVDR) and Matthew Wai-Poi. Background presentations were developed on Top Incomes in Indonesia by Michaelino Mervisiano (Consultant, GPVDR), Imam Setiawan (Consultant, GPVDR), Matthew Wai-Poi, Monica Wihardja (Consultant, GPVDR) and Dody Suria Wijaya (Consultant, GPVDR); on Indonesia’s Middle Class by Ririn Purnamasari (Economist, GPVDR), Ikuko Uochi (Consultant, GPVDR) and Matthew Wai-Poi; and on the Inequality of Outcomes by Amri CONTRIBUTORS Ilmma (Research Analyst, GPVDR), Taufik Hidayat SalmanT Zaidi (PracticeHE Manager, GPVDR). Strategic (Consultant, GPVDR) and Matthew Wai-Poi. guidance and key comments were provided by Additional contributions were made by Edgar Janz, Rodrigo Chaves (Country Director, EACIF), Ndiame Mattia Makovec (Consultant, GPVDR), Michaelino Diop (Lead Economist, GMFDR) and Cristobal Mervisiano, Astrid Rengganis Savitri (Consultant, Ridao-Cano (Program Leader, EACIF). GPVDR), and Bagus Arya Wirapati (Research Analyst, GPVDR). The report draws from joint work on fiscal incidence with a team from the Fiscal Policy Office, led by Luky Excellent comments were received from Peer Alfirman (Head of Macroeconomic Policy Center, Reviewers Luis-Felipe Lopez-Calvo (Lead PKEM-BKF) and including Arti Dyah Woroutami Economist, GPVDR), Caterina Laderchi (Senior (Head of Welfare and Labor Sub-division of PKEM- Economist, GPVDR), and Hal Hill (H.W. Arndt BKF) and Ahmad Fikri Aulia (Executive of Welfare Professor of Southeast Asian Economies, Australian and Labor Sub-division of PKEM-BKF). The fiscal National University), as well as from Emma Allen incidence work adopts the Commitment to Equity (ILO), Chantelle Boudreaux (Consultant, GHNDR), approach. Launched in 2008, the Commitment Melissa Chew (Consultant, GHNDR), David to Equity (CEQ) project is an initiative of the Center Gottlieb (Department of Foreign Affairs and Trade, for Inter-American Policy and Research (CIPR) Australian Embassy), Pandu Harimurti (Health and the Department of Economics, Tulane Specialist, GHNDR), Ahya Ihsan (Economist, University, the Center for Global Development GMFDR), Yue Man Lee (Economist, GMFDR), and the Inter-American Dialogue. Developed by Norman Loazya (Lead Economist, DECMG), Neil Nora Lustig and her team at Tulane University, McCulloch (Director, Economic Policy Program, the Commitment to Equity diagnostic tool relies on Oxford Policy Management), Puti Marzoeki a comprehensive fiscal incidence analysis designed (Senior Health Specialist, GHNDR), Iene Muliati to assess how taxation and public expenditures (Social Protection Specialist, GSPDR), Arvind affect income inequality, poverty, and different Nair (Consultant, GMFDR), Truman Packard socioeconomic groups. For more details, see (Lead Economist, GSPDR), Eko Setyo Pambudi www.commitmentoequity.org. (Research Analyst, GHNDR), Samer al-Samarrai (Senior Economist, GEDDR), Ali Winoto Subandoro The report also draws on joint work on top incomes (Health Specialist, GHNDR), Ajay Tandon (Senior in Indonesia, conducted in collaboration with Economist, GHNDR) Violeta Vulovic (Consultant, Luky Alfirman of the Fiscal Policy Office and Bank GMFDR), Mitch Wiener (Senior Social Protection Indonesia. The Bank Indonesia team includes Specialist, GSPDR), Rob Wrobel (Senior Social N.A. Anggini Sari (Deputy Director, Division Head, Development Specialist, GSURR), and Wei Aun Yap Credit Information Regulation, Licensing, and (Consultant, GHNDR), as well as unnamed DFAT Development Division, Reporting Management and staff. The report has benefited greatly Compliance Department), Sani Eka Duta (Assistant from these comments. Director, Credit Information Division, Reporting Management and Compliance Department) and The report was edited by Peter Milne and Edgar Darma Saputra (Reporting Management and Janz, with support from Taufik
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