Study of Policies to Reduce Inequality in Indonesia

Advisor:
Coordinator:
Team Member: Niken Kusumawardhani, Rachma Indah Nurbani, Akhmadi
Completion Year:
2017
Area:
Jawa Tengah, Sulawesi Selatan
Topic:
Economic Policy, Poverty & Inequality

Collaborating Partners

Funding body:
Ford Foundation

 
 

Description & Progress

Description

The government is aware that the issue of rising inequality is an extremely urgent issue to be addressed. Targets for reducing inequality have also been established in the 2015–2019 National Medium-Term Development Plan (RPJMN), namely reducing the Gini index of 0.41 in 2014 to 0.36 in 2019. However, the decline in the Gini index since 2014 until now is not considered significant; the Gini index only slightly decreased from 0.410 in March 2014 to 0.397 in March 2016. On the other hand, the policy options that exist to reduce inequality are still very limited and not supported by evidence that is comprehensive enough. In that regard, The SMERU Research Institute, in collaboration with the Ford Foundation, conducted a study of Policy to Reduce Inequality in Indonesia from April 2016 to June 2017.

The assessment was conducted using a mixed-method approach. Qualitative analysis was done through a series of field activities of extracting information from a wide range of development stakeholders and policymakers in two metropolitan areas (Greater Solo and Greater Makassar). Besides that, quantitative analysis was carried out through a micro-simulation of various alternative policies that affect households, such as Rice for Poor Households (Raskin), Unconditional Cash Transfer Program (BLSM), Conditional Cash Transfer Program (PKH), and Scholarships for Poor Students (BSM). An intensive literature review and expert consultation in Jakarta were conducted before the field visits. By the end of December 2016, the team managed to do the literature review, expert consultation, and field visit to the Greater Solo. The team also prepared, in parallel, the micro-simulation and second field visit to Greater Makassar that was conducted in January 2017. The deliverables of the study which consisted of a paper on micro-simulation and a policy brief from the qualitative study had already been completed in August 2017.

 

Research Findings

The study cases in Greater Solo and Greater Makassar reveal two key findings. First, awareness and understanding of inequality issues at the kabupaten level are limited and partial, as well as varied across kabupaten, particularly in the understanding of various inequality dimensions and measures. Second, because of the limited understanding, the kabupaten governments have no clear inequality measure or indicator to review the program they claim pro-equality.

 

Policy Recommendations 

We recommend that the relevant stakeholders take the following steps:

  1. to publish the official Gini index numbers up to the kabupaten level and
  2. to synchronize the national plan and target on inequality with the sub-national governments’ plans and targets.

The micro-simulation results indicate that the impact of various social protection programs on reducing inequality is varied. Raskin has the smallest impact and BLSM has the biggest one under the scenario of single policy at a time. The second simulation finds how big it is the expansion of the number of beneficiaries and the amount of the transfer to reach the target Gini index. This shows that for the case of PKH, we should expand the beneficiary coverage to 30% bottom population and increase the transfer 15 times higher than existing amount to do so. These findings suggest that we design the program cautiously, in relation to the coverage and amount of transfer, as well as the target Gini index, and to do a valid cost-benefit analysis.