Incomes and Parasite of Inequality

Kompas/AGUS SUSANTO

Multi-storey building in the business district on Jalan Sudirman, Central Jakarta, Sunday (14/6/2020).

Each light (regardless of its dimness) is still a blessing amid the darkness. That is what is being felt now.

As anxiety filled people’s minds over the COVID-19 pandemic, one of the nation\'s achievements was announced: Indonesia has moved up to become an upper-middle income country. Of course it was not easy to reach that level; it took Indonesia 23 years to get out of the lower-middle-income group.

So, it is worth to give thanks to this performance as a reflection of the country’s hard work, commitment and consistency. Even so, this torch is still dim, not yet very bright because some problems are still looming, so just a little bit of negligence can nudge Indonesia from its newfound position. Moreover, not many countries are able to advance to the top-income group because of the variety of requirements that must be met. This is what causes a number of countries to be trapped in the middle-income category.

Inequality trap

The gross national income (GNI) per capita of upper-middle-income countries is between US$4,046 and $12,535. If Indonesia ever has a per capita income above $12,535, it will be upgraded to a high-income country. At present (using 2019 data), Indonesia\'s per capita income is $4,050, so it is only slightly above the lower limit of the range of the upper-middle-income group.

The problem that is quickly realized is: In early 2020, there was a pandemic and until the end of the year the economy is projected to be sluggish. The implication is that national income will decline, so the per capita income (after being divided by the total population) will also weaken. This threat is real, so next year (when it is announced), the potential drop in per capita income can become a reality. Therefore, the government must strive to minimize the opportunity for a decline.

Also read : The Pandemic and Institutional Investment

Next, it is not easy to obtain convincing income data in a developing countries like Indonesia. Many informal economic activities contribute to the income of individuals but are not recorded in the official statistics. The informal economy is divided into four actors: the household sector, the informal sector, the irregular sector and the criminal sector (Thomas, 1992). The household sector is an economic activity that is usually not traded and this is numerous, similar to the informal sector (but this activity is transacted). The irregular sector is the legal transaction of goods/services, but its procurement or distribution is illegal, such as tax evasion, smuggling and various violations of regulations. The criminal sector is an entirely illegal business act, such as drugs, theft and human trafficking. So, recorded income is actually below the actual value. The challenge is to immediately include informal economic activities in state records.

KOMPAS/TOTOK WIJAYANTO

A store attendant arranges a mannequin on Monday (23/3/2020) at a shopping center in Kuningan, South Jakarta, where most shops have posted notices of temporary closure. The decline in economic activities in Jakarta is expected to prompt migrant workers in the informal sector to return to their places of origin.

Another problem that is commonly understood is the inequality trap. Per capita income shows economic development from time to time. However, the use of this indicator hides the inequality behind it. Over the last five years, the government has been striving to reduce Indonesia’s income inequality with all its capacity. In 2014, income inequality by using the gini ratio reached its peak: 0.41. In 2019, this ratio was reduced to 0.38. That means the government\'s efforts have produced results even though they have not been equal with that of 2004, namely 0.32, according to Statistics Indonesia (BPS).

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Nevertheless, more detailed data shows that inequality is still a parasite to development. Based on 2019 National Socioeconomic Survey (Susenas) data (Finance Ministry, 2020), the ratio of poor people to Indonesia’s population is 9.4 percent, vulnerable income group 20.6 percent, in the direction of the middle class 48.2 percent, the middle class 21.5 percent and high-level income 0.4 percent. So, actually, the welfare status in Indonesia is only celebrated by no more than 21.9 percent of the population at the high level. At this point, Indonesia should not be amazed by the predicate of a middle-income country.

Economic democracy

Looking at the data above, the acquisition of a middle-income status still rests on fragile ground, so the economic democracy agenda should not be hijacked again. Economic democracy stands because of three reasons: equal distribution of assets and access, democratic economic organization and equal economic collaboration. Capital and land assets are at the center of the macro-level gambling on the agenda for economic democracy. Inequality of land ownership based on the 2013 Agriculture Census is 0.68 (BPS, 2014). This is very severe despite a decline from the 2003 Agricultural Census. Over the last five years, the government has aggressively executed policies on agrarian reform and social forestry. This must be maintained and accelerated in the next five years.

Circulation of capital also revolves only at the tip of the richest population. Deposit Insurance Corporation (LPS) data of May shows that 0.03 percent of account holders for deposits above Rp 5 billion (US$346,104) ) control 46.81 percent of total third-party funds (DPK) in banking. On the contrary, 98.21 percent of account holders with funds under Rp 100 million only control 13.74 percent of third-party funds. That means 1.79 percent of account holders control 86.26 percent of DPK! The politics of tax policy is also less sharp in cutting the imbalance of assets and wealth.

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KOMPAS/ PRIYOMBODO

Visitors filled the 2019 Gaikindo Indonesia International Auto Show (GIIAS) automotive exhibition at ICE BSD-City, Tangerang Regency, Banten, Thursday (7/18/2019).

At the meso level, a democratic economic organization is needed to ensure that the decision-making process involves the public and not just the capital owners (Smith, 2005). Workers, representatives of citizens, consumers and others need to be included in the decision-making so that overall policy output represents broader stakeholder aspirations.

So, there is a shift in orientation from shareholders to stakeholders. Beyond that business-building at the corporate level provides space for the involved parties to own, make decisions and be responsible. That is why, the business-building that matches the soul of the constitution is the cooperatives. In developed countries, even like in Europe and the United States, cooperatives are not a symbol of small businesses but large businesses that are owned and managed by the public with sound governance standards that spread blessing for all parties.

Also read : Writing Indonesia in 2045

Finally, at the micro level, the economic democracy agenda that needs to be urged on is an arena of fair play among economic actors. Sound business competition is needed so that every business actor gets an equal pulpit. Nonetheless, business competition is the spirit of preying on competitors (cannibalism) in the "zero sum game" scheme. Efficient economic actors win the competition and crush the actors who are less efficient. Consumers benefit because they get the ideal price (in the short term).

However, when deciphered in more detail, what is more resilient is collaboration, even cooperation, among economic actors. Collaboration gathers talents and resources that are scattered into one big power, thereby producing efficiency and innovation. Cooperation does not merely gather, but it also builds awareness and shared ownership so that it does not produce a paradox between growth and inequality.

Also read : Recession and Economic Sustainability

Economic transformation

If the upstream issue related to economic democracy has been well designed, the next action will be economic transformation. This conversation has been carried out since the 1980s but is slow to execute. Most economic activity still relies on exploration (even exploitation) of natural resources. Indonesia\'s 10-largest export commodities are dominated by raw materials, such as oil and gas, wood, coal, rubber and palm oil. The ratio of exports of manufactured products to total exports is much lower compared to other ASEAN countries, such as Thailand, Malaysia, Vietnam and the Philippines. This low added value economic situation makes it difficult for the state to increase national income, so per capita income cannot be increased.

One of the countries that has succeeded in convincing its economic transformation is South Korea. The country has been in the high-income category for a long time (out of the middle-income trap).

Also read : New Normal of the Economy

Another thing, separation between the agricultural sector (traditional) and industry/services (modern) is increasingly visible. When economic growth moves faster, the growth of the agricultural sector lags behind. Over the past four years, the highest growth in the agricultural sector was only 3.92 percent (2017), even though economic growth was at a level of around 5 percent. The service sector is skyrocketing, but it is not connected to the agricultural sector. The service sector is supported by imported products so it cannot drag progress in the traditional sector.

The depth of the intensity of involution in the agricultural sector cannot be stopped, so actors migrate to the cities. Unfortunately, in the last 15 years, the contribution of the industrial sector continued to decline, where in 2019 it was only 19.7 percent (in 2004 it was still 29 percent of GDP). As a result, labor has accumulated in the informal sector, which in 2019 accounted for 57 percent of total workers (BPS, 2019). It is difficult to encourage this group to increase their income due to poor capital and innovation.

Also read : Enforcing New Normal

The issue of economic transformation is certainly also related to investment efficiency. At this point, Indonesia has much work to do. Over the past five years, three main clusters of duties have been worked on to enable investment requirements to be owned by the state, namely infrastructure development, deregulation and enhancement of human capabilities. The hope is that these three legs become a strong starting point to realize investment efficiency. The results are there, but the improvement is slow. Incremental capital output ratio (ICOR) as an indicator of investment efficiency shows a decrease. In 2016, ICOR was 6.69, in 2017 it dropped to 6.64 and 2018 it dropped again to 6.52.

A lower ICOR means more efficiency because it requires less capital to produce the same output. The problem is, ICOR in the neighboring countries is much lower. In 2018, Malaysia’s ICOR was 5.38, India 4.99, Vietnam 4.80 and the Philippines 4.63 (ADB, 2018). This is because large investment values do not produce high incomes.

KOMPAS/P RADITYA MAHENDRA YASA

Farmers plant rice in a rice field in Bulusari village, Sayung district, Demak regency, Central Java, on Monday (4/5/2020). The government will give cash assistance of Rp 600,000 to poor farmers each per month.

Inclusive investment

Investment is the key word and backbone for a significant increase in income. There are many investment problems here, in which these five cases describe most of the problems: (i) investment focuses on exploitation of natural resources, so it destroys the environment and causes delays in industrialization; (ii) investment is only concentrated in certain regions and sectors so it becomes a source of regional and sector imbalance, (iii) investment development from time to time is more capital and technology intensive so it does not create many jobs, (iv) investment often marginalizes local communities so it becomes a source of conflict that disturbs social and political stability, and (v) investment is based on capital control, thereby causing the accumulation of assets and wealth to a handful of economic actors. Later, the government began to realize this, it changed some investment policies to be more inclusive.

Inclusive investment is intended as an effort to eliminate the dilemma behind it, such as inequality, neglect of citizens, environmental destruction and so on. Investments must be environmentally friendly, involving local residents, respecting humanity, have equitable access and assets, long-term orientation and focus on benefits (people, planet, profit/benefit). In the case of Indonesia, inclusive investment is prioritized to resolve a number of key cases, such as regional/sector imbalances, job creation, economic added value, export promotion, environmental recovery, involvement of local communities, strengthening micro, small and medium enterprises (MSMEs), enlarging cooperative/MSME rooms and social investment and economic independence.

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Two instruments that need to be utilized to guide inclusive investment are: (a) established institutions complete rules/regulations (incentives) and strict law enforcement; and (b) investment priorities determine the type of investment, region/sector and target community groups.

The promotion of the environment is the most important element of sustainable development. For decades, economic development has been boosted with the fulcrum of natural resource exploration and exploitation. Various development achievements have been destroyed due to the neglect of the environmental carrying capacity. Floods, droughts, fires and climate change come at a terrible development costs. This happening at the household level, which destabilizes life and removes income, while at the state level, deceives the environmental wealth.

KOMPAS/TOTOK WIJAYANTO

Ahmad Erani Yustika

A similar package with ecology is to encourage women\'s participation, including eliminating wage rate discrimination for the same type of work. In essence, inclusive investment is a necessity that must be fought for so that development does not create social pathology and ecological destruction. The current economic recovery scheme must support the nation\'s strategic agenda. Economic democracy, economic transformation and inclusive investment are the main roots of the economy so any growth in the income trunk will not be wrapped around by the parasite of inequality.

Ahmad Erani Yustika, Professor at the Economic and Business School of Brawijaya University, senior economist of Indef.