Economic growth, poverty and inequality

33 Despite the rapid economic growth and industrialization process, providing sufficient employment opportunities remains a constant challenge. The number of people aged over 15 years, who were legally able to work, increased by an average of around 2 per cent annually from 153.9 million in 2004 to 172.1 million in 2010. Of these, around two thirds participated in the labour market. In general, Indonesia has been quite successful in controlling unemployment. As depicted in Figure 1.8, after reaching the highest unemployment level of 11.24 per cent in November 2005 – due to the spike in oil prices that resulted in the removal of the government subsidy for fuel prices – the unemployment rate declined steadily down to 7.14 per cent in August 2010. A closer look at the composition of the employed, however, presents a worrying picture. Despite the declining contribution of the agricultural sector to GDP, many people continue to work in this sector. In 2010, around 38.3 per cent of the workforce was employed in the agricultural sector, while manufacturing industries only absorbed 12.8 per cent of the workforce, and the rest worked in the service sector. In addition, almost 70 per cent of these people were working in the informal sector. In 2010, only 30 per cent of the workforce were permanent employees and 3 per cent ran their own businesses with the assistance of permanent workers, while 39 per cent were self-employed or ran their own business with the help of non-permanent or unpaid workers, 10 per cent were non-permanent workers, and 17 per cent were unpaid workers including family members. The latest developments are also marked by an increasing proportion of women entering the labour market. These women are mostly working in the informal sector, although the growth rate of women entering the workforce has outpaced men in both the formal and informal sectors Figure 1.9. Another important development is the increasing number of international migrant workers who are mostly motivated by the lack of job opportunities in their home towns. The available data show that most international migrant workers are women and their numbers are continuously increasing Figure 1.10. However, it is estimated that the unregistered numbers are even larger, and this could involve child trafficking. Despite the relatively slow economic growth since the 1997–1998 Asian financial crisis AFC, Indonesia has recently survived the pressure of the 2008–2009 global financial crisis GFC 140 2004 2005 Feb Nov Feb Aug Feb Aug Feb Aug Aug Aug Feb Feb 2005 2006 2006 2007 2007 2008 2008 2009 2009 2010 2010 12 10 8 6 4 2 120 100 80 60 40 20 Figure 1.8: Participation of the population aged over 15 years in the labour market, and unemployment rates, 2004–2010 Source:฀BPS฀–฀Statistics฀Indonesia Number of People million Open unemployment rate Population aged above 15 years: participating in labour market Population aged above 15 years: not entering labour market Open unemployment 34 Figure 1.10: Placement of international migrant workers by sex, 1994–2008 Source:฀Badan฀Nasional฀Penempatan฀dan฀Perlindungan฀Tenaga฀Kerja฀Indonesia฀BNP2TKI฀[National฀Board฀for฀the฀Protection฀ and฀Placement฀of฀Indonesian฀International฀Migrant฀Workers],฀2009 Thousand people 100 200 300 400 500 600 700 800 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 Female Male Total 24 The increase in private expenditure came primarily from money spent during the legislative and presidential elections in 2008 and 2009. Figure 1.11. Indonesia’s economic resilience during the GFC was due to a combination of relatively low international economic integration since the aftermath of the AFC, increased government spending in the form of direct cash transfers to the poor in early 2009, a fiscal stimulus package, and strong increases in private expenditure. 24 Although overall Indonesia was not severely affected by the GFC, manufacturing, Figure 1.9: Workforce in formal and informal sectors in 2009 and average annual growth 2003–2009, by sex Formal 120,000,000 100,000,000 80,000,000 60,000,000 40,000,000 20,000,000 1 2 3 4 5 6 7 8 Informal Women Men Formal Informal Total Annual growth and the trade-hospitality sectors, and to some extent finance, were hit by the crisis Table 1.6. The communities that relied upon automotive, electronics and exportable plantation products such as palm oil and rubber also suffered, with a disproportionately greater impact on the poor Isdijoso, 2009. Although labour markets in general were not significantly affected and unemployment continued to decline see Figure Source:฀Estimated฀from฀the฀National฀Labour฀Force฀Survey฀SAKERNAS,฀2003฀and฀2009 Number of People Number of People 2009 Average annual growth 2003-2009 Women and men 175 121 235 517 412 428 435 295 480 294 381 474 680 697 749 35 1.8, further disaggregated analysis indicates that the crisis brought an increase in the proportion of people working in the informal sector and an increase in the unemployment rate for youth aged 15–25 years, while reducing real wages of employees aged 18–25 years McCulloch and Grover, 2011. The impacts on the affected communities were to some extent eased by the availability of several social protection programmes, particularly in the education and health sectors, that were expanded from the social safety net programmes created as a response to the AFC Hastuti et al., 2010. Indonesian economic progress has been accompanied by a steady decline in income poverty, but many people are still vulnerable to falling into poverty. At the national level, the first MDG target – reducing extreme poverty people living below the international poverty line on less than 1 purchasing power parity per capita per day by half of the 1990 level – was achieved in 2000. The AFC experience, however, provided an important lesson on the potential impact of crises on poverty. As can be seen in Figure 1.12, this particular target had been achieved during 1995–1997, but then the AFC and the subsequent political, social and economic crises reduced the welfare i.e., consumption level of substantial numbers of people so that during 1998–1999 the proportion of people in extreme poverty actually increased to a level higher than the target of 10.3 per cent. Figures 1.11 and 1.12 show the close association between income poverty and various economic shocks. The AFC caused extreme poverty to increase by 9 per cent during 1996–1997. It then increased again by 8.5 per cent in the following year and peaked at 13.4 per cent in 1998. Meanwhile the proportion of people below the national poverty line NPL increased by around 7 percentage points to 49 per cent during 1996–1999. Thereafter, the poverty levels steadily declined until 2005. Unfortunately, the sharp increase of global oil and gas prices in 2005 caused the government to slash fuel subsidies and raise the regulated prices by a weighted average of 29 per cent in February and again by 114 per cent in September of the same year Bazzi, Sumarto and Suryahadi, 2010. This increased the proportion of people in extreme poverty by 1.4 percentage points to 23 per cent during 2005–2006. The proportion of people below the NPL also increased by 2 percentage points to 13 per cent, while the proportion of people living on less than 2 PPP per capita per day increased by 4.4 percentage Agriculture Mining and quarrying Manufacturing Electricity, gas and water Construction Trade, hotels and restaurants Transport and communication Finance, renting and business service Other services Gross Domestic Product GDP excluding oil and gas I 6.44 1.62 4.28 12.34 8.20 6.75 18.12 8.34 5.52

6.21 6.70

II 4.81 0.37 4.23 11.77 8.31 7.68 16.57 8.66 6.51

6.30 6.72

III 3.25 2.32 4.31 10.41 7.76 7.59 15.64 8.60 6.95

6.25 6.73

IV 5.12 2.43 1.85 9.34 5.88 5.47 16.12 7.42 5.93

5.27 5.70

I 5.91 2.61 1.50 11.25 6.25 0.63 16.78 6.26 6.70

4.53 4.93

II 2.95 3.37 1.53 15.29 6.09 0.02 17.03 5.33 7.19

4.08 4.46

III 3.29 6.20 1.28 14.47 7.73 0.23 16.45 4.90 6.04

4.16 4.51

IV 4.61 5.22 4.16 13.99 8.03 4.17 12.22 3.77 5.69

5.43 5.85

I 3.00 3.12 3.71 8.18 7.05 9.37 11.95 5.28 4.62

5.69 6.20

II 3.08 4.01 4.35 4.66 6.93 9.67 12.94 6.03 5.25

6.19 6.59

III 1.80 2.83 4.08 3.16 6.42 8.78 13.33 6.34 6.44

5.82 6.24

2008 2009 2010 Table 1.6: Quarterly gross domestic product GDP growth by sector, 2008–2010 Source:฀BPS฀–฀Statistics฀Indonesia,฀2008–2010 Notes:฀Preliminary฀igure;฀Very฀preliminary฀igure;฀Very-very฀preliminary฀igure 36 Figure 1.11: Gross domestic product GDP growth, poverty rate and number of poor people in Indonesia, 1980–2009 Note:฀The฀poverty฀rates฀during฀1980–1993฀are฀not฀comparable฀to฀the฀rates฀from฀1996฀onward฀due฀to฀changes฀in฀the฀ ฀ ฀฀method฀of฀calculation฀for฀the฀national฀poverty฀line. Source:฀BPS฀–฀Statistics฀Indonesia฀various฀years -20.0 -10.0 0.0 10.0 20.0 30.0 40.0 50.0 60.0 1980 1981 1984 1987 1990 1993 1996 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 8.7 28.6 42.3 8.1 26.9 40.6 35.0 30.0 27.2 25.9 34.0 49.7 48.0 38.7 37.9 38.4 37.3 36.2 35.1 39.3 35.0 32.5 31.0 37.2 18.4 18.2 17.4 16.7 16.0 17.8 15.4 14.2 13.3 16.6 19.1 4.9 3.6 4.5 4.8 5.0 5.7 5.5 6.1 4.5 6.1 6.3 23.4 0.8 24.4 -13.1 15.1 13.7 17.5 9.0 7.3 7.6 21.6 17.4 7.2 5.3 Number of Poor People million Poverty rate GDP growth Figure 1.12: People living below 1 PPP and 2 PPP per capita per day, 1990–2008 Source:฀BAPPENAS฀and฀BPS฀–฀Statistics฀Indonesia,฀2009 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 70 60 50 40 30 20 10 20.6 17.4 16.2 14.8 11.8 9.8 7.8 8.5 13.4 12 9.9 59.5 58.7 53.5 9.2 7.2 6.6 7.5 6.1 7.5 6.7 5.9 42.6 45.2 49.6 45.2 49 50.1 Below IPL 1 Below IPL 2 37 points to 10 per cent. The GFC, luckily, did not lead to an increase in the poverty rate based on the NPL standard, and the rate steadily declined from 15.42 per cent in 2008 to 14.15 per cent in 2009 and 13.33 per cent in 2010. The poverty gap index P1 and poverty severity index P2, however, indicated that the GFC might be associated with an increase in the value of both indexes to a level similar to 2006 Figure 1.13. This suggests an increase in disparities among the poor, with the poorest of the poor being badly affected by the crisis. Poverty in Indonesia has always been a predominantly rural phenomenon. Despite the growth of the urban population, which now accounts for almost half of the total population, the rural poor still account for more than 60 per cent of the total poor Figure 1.14. The most likely reason for this is that most people in rural areas work in the agricultural sector even though, as discussed previously, the economic share of the agricultural sector has been declining. The relatively low education level of the rural poor limits their opportunities Figure 1.13: Poverty gap and poverty severity indexes, 2002–2010 Source:฀BPS฀–฀Statistics฀Indonesia฀various฀years 0.50 2002 3.01 3.13 2.89 2.94 3.43 2.99 3.37 2.50 2.21 0.79 0.85 0.78 0.81 1.00 0.84 1.00 0.68 0.56 2003 2004 2005 2006 Poverty Gap Index P1 Poverty Severity Index P2 2007 2008 2009 2010 1.00 1.50 2.00 2.50 3.00 3.50 4.00 Figure 1.14: Share of urban and rural poor as a proportion of the national poor, 1976–2010 Source:฀BPS฀–฀Statistics฀Indonesia฀various฀years฀ 1976 1978 1980 1981 1984 1987 1990 1993 1996 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 10 20 30 40 60 50 70 80 90 100 Rural Urban of total poor