Poverty in Indonesia

However, when the Asian Financial Crisis rocked the financial foundations of Indonesia in the late 1990s it had a devastating impact on poverty alleviation, causing the poverty rate to slip back from 11 percent to 19.9 percent in late 1998, meaning that much of the New Order's good work had been undone.

The following table provides poverty and inequality figures - both relative and absolute - for the population of Indonesia (for an analysis of Indonesia's Gini ratio please scroll to the bottom of this page).

Indonesian Poverty & Inequality Statistics:

	2013	2014	2015	2016	2017	2018
Relative Poverty (% of population)	11.5	11.0	11.2	10.7	10.1	9.8¹
Absolute Poverty (in millions)	28.6	27.7	28.5	27.8	26.6	26.0¹
Gini Coefficient/ Gini Ratio	0.41	0.41	0.41	0.40	0.39	0.39¹

 

	2007	2008	2009	2010	2011	2012
Relative Poverty (% of population)	16.6	15.4	14.2	13.3	12.5	11.7
Absolute Poverty (in millions)	37	35	3.25	31.0	30.0	28.7
Gini Coefficient/ Gini Ratio	0.35	0.35	0.37	0.38	0.41	0.41

^{¹ March 2018
Sources: Statistics Indonesia (BPS) and World Bank}

The table above shows a gradual, yet steady, decline in national poverty in Indonesia. However, the Indonesian government applies rather easy terms and conditions regarding the definition of the poverty line. Hence, it results in a more upbeat picture than it is in reality. In 2016 the Indonesian government defined the poverty line at a monthly per capita income of IDR 354,386 (approx. USD $26.6). This is a very low standard of living, even for Indonesian standards.

If we apply the poverty threshold as is used by the World Bank, which classifies the percentage of the Indonesian population living on less than USD $1.25 a day as poor, then the percentages in the table above will rise by a couple of percentage points. Moreover, according to the World Bank, when taking into account the percentage of the Indonesian population that lives on less than USD $2 a day, the figure would jump even more sharply. This shows that a large proportion of the Indonesian population is in fact near poor. Recent reports in Indonesian media suggest that around a quarter of Indonesians (which translates to around 65 million people) are currently near poor (as they live just above the poverty line).

Although over the past decade Indonesian poverty numbers have shown a steady downward trend, it is assumed that in the future this downward trend will continue at a slower pace. Most of Indonesians that rose out of poverty in recent years were those who had been living just below the poverty line. This means it took less effort to push them out of poverty. It is now the bottom base of Indonesia's poor people who need to be alleviated. This is more complicated and thus should result in slowing rates of poverty reduction.

Food price stability (rice in particular) is a vital matter for Indonesia as the country contains a population that spends a large proportion of their disposable incomes on rice. Therefore, inflationary pressures on the price of rice (for example due to bad harvests) and other food products can have serious consequences for those that are poor or near poor. In fact, it can push a significant number of near poor people into full poverty.

Besides food prices, inflation also tends to peak when the government adjusts administered prices (this is primarily related to energy subsidies for fuel and electricity). For example, when the Susilo Bambang Yudhoyono administration drastically cut fuel subsidies in late-2005 a significant increase in poverty occurred between 2005 and 2006. Rising international oil prices had made the government decide to reduce fuel subsidies in order to relieve the government's budget deficit. This consequently led to a double-digit inflation rate of between 14 and 19 percent year-on-year (y/y) until October 2006. President Joko Widodo also drastically cut fuel subsidies, both in late-2014 and early-2015. However, due to the low crude oil prices at the time this decision had less far-reaching impact on the nation's inflation rate. Still, inflation surged to between 8 - 9 percent (y/y) in 2014 and therefore there also occurred a small increase in Indonesia's poverty rate from 2014 to 2015, both in terms of urban and rural poverty.

Indonesian Poverty and Geographical Distribution

One remarkable characteristic of Indonesian poverty is that there is a major difference in terms of relative and absolute poverty in relation to geographical location. While in absolute terms over half of the total Indonesian poor population lives on the island of Java (located in the more populous western half of Indonesia), in relative terms the provinces of eastern Indonesia show far higher numbers of poverty. The table below shows the top five of Indonesian provinces regarding highest incidences of relative poverty. All these provinces are located outside the more developed western-located islands of Java, Sumatra and Bali.

Indonesian Provinces with Highest Relative Poverty:

Province	Poor People¹
Papua	28.5%
West Papua	25.4%
East Nusa Tenggara	22.2%
Moluccas/Maluku	19.2%
Gorontalo	17.7%

^{¹ as percentage of total population per province in March 2016
Source: Statistics Indonesia (BPS)}

These eastern provinces of Indonesia, where farmers lead a largely subsistence existence, contain very high rates of rural poverty. In these regions, indigenous communities have been living on the margins of development processes and government (or international) programs. Migration to urban areas is often the only way to find employment and - thus - escape poverty.

However, contrary to relative poverty in eastern Indonesia, the table below shows that absolute poverty in Indonesia is mainly clustered on the islands of Java and Sumatra. These two islands are the most populous islands in Indonesia.

Indonesian Provinces with Highest Absolute Poverty:

Province	Poor People  (in millions)
East Java	4.78
Central Java	4.51
West Java	4.49
North Sumatra	1.51
East Nusa Tenggara	1.16

^{per March 2016
Source: Statistics Indonesia (BPS)}

Rural and Urban Poverty in Indonesia

Indonesia has experienced a process of rapid and continued increased urbanization (similar to the trend around the globe). Since the mid-1990s the absolute number of Indonesia's rural population began to decline and today more than half of Indonesia's total population lives in urban environments (in the mid-1990s approximately one-third of Indonesia's population lived in urban societies).

With the exception of a few provinces, the rural populations of Indonesia are relatively poorer than the urban ones. Indonesia's rural poverty rate (percentage of the rural population living below the national rural poverty line) dropped to around 20 percent in the mid-1990s but suffered at the hands of the Asian Financial Crisis that ravaged the country between 1997 and 1998, causing the number of poor people in the rural areas to rise again to 26 percent. After 2006, a significant decline in rural poverty in Indonesia emerged (see table below) although in the period 2012-2016 the decline was limited amid Indonesia's 2011-2015 economic slowdown.

Rural Poverty in Indonesia Statistics:

	2006	2007	2008	2009	2010	2011	2012	2013	2014	2015	2016
Rural Poverty¹	21.8	20.4	18.9	17.4	16.6	15.7	14.3	14.4	13.8	14.2	14.1

^{¹ % living below rural poverty line
Source: Statistics Indonesia (BPS)}

The urban poverty rate is the percentage of the urban population living below the national urban poverty line. The table below, that indicates urban poverty in Indonesia, shows a similar pattern as Indonesia's rural poverty rate: a solid decrease since 2006 but a less smooth performance in the period 2012-2015 due to the nation's economic slowdown. This macroeconomic slowdown occurred primarily due to sluggish global economic growth, falling commodity prices, and Bank Indonesia's high interest rate environment in the 2013-2015 period (to combat high inflation, support the rupiah exchange rate and limit the nation's current account deficit).

Urban Poverty in Indonesia Statistics:

	2006	2007	2008	2009	2010	2011	2012	2013	2014	2015	2016
Urban Poverty¹	13.5	12.5	11.6	10.7	9.9	9.2	8.4	8.5	8.2	8.3	7.8

^{¹ % living below urban poverty line
Source: Statistics Indonesia (BPS)}

Widening Inequality in Indonesia?

The Gini ratio (or coefficient), which measures income distribution inequality, is an important indicator to assess the degree of 'righteousness' in a country (although this indicator does have some flaws). A Gini coefficient of 0 indicates perfect equality, while a coefficient of 1 indicates perfect inequality. It is interesting to note that a sharp rise in income distribution inequality occurred in Indonesia in the post-Suharto era. Thus, the period of democracy and decentralization in the post-Suharto era created an environment that allowed for rising inequality in Indonesian society: while in the 1990s Indonesia's Gini ratio stood at an average of 0.30, it rose to an average of 0.39 in the 2000s, and remained stable at 0.41 in the years 2011-2015 before easing slightly to 0.40 in 2016.

It actually is a painful fact that Indonesia's rising inequality emerged while - at the same time - the overall economy expanded from a USD $163.8 billion economy in 1999 to a USD $861.9 billion economy in 2015 (and while Indonesia became a member of the G20 group of major economies in 2008)

A World Bank report that was released in December 2015 claims that only the richest 20 percent of Indonesia's population have enjoyed the fruits of a decade-long economic growth, implying that 80 percent of the population (or 200 million people in absolute terms) are left behind. These are alarming figures. In fact, after China, Indonesia saw the highest rise in income distribution inequality between the 1990s and the 2000s among Asian countries:

Asian Countries with the Highest Average Gini Ratio:

Country	Gini Ratio in  the 1990s	Gini Ratio in  the 2000s	Difference
China	0.34	0.45	+0.11
Indonesia	0.30	0.39	+0.09
Laos	0.32	0.38	+0.06
India	0.34	0.39	+0.05
Vietnam	0.37	0.37	0.00
Cambodia	0.39	0.38	-0.01
Philippines	0.45	0.44	-0.01
Malaysia	0.49	0.47	-0.02
Thailand	0.46	0.41	-0.05

^{Source: World Bank}

In Indonesia the Gini ratio is also closely related to the movement of commodity prices. The rising trend of the nation's Gini ratio in the 2000s came amid the commodities boom, while the Gini ratio stabilized after commodity prices collapsed in 2011. Therefore, rising or falling commodity prices apparently particularly affect the top 20 percent of the Indonesian population. Lower commodity prices weakens this group's incomes and purchasing power.

A high degree of inequality in society is a threat because it not only jeopardizes social cohesion but it also jeopardizes political and economic stability. Moreover, research conducted by the World Bank shows that countries with more equal wealth distribution tend to grow faster and more stably compared to those countries that exhibit a high degree of inequality.

Besides overall nationwide inequality in Indonesia, there also exists a high degree of inequality among the various regions within the country. For example the island of Java, particularly the Greater Jakarta region, contributes about 60 percent to the total Indonesian economy. Direct investment is also highly concentrated on this island causing rising inequality between Java and the outer islands.

What can the government do to combat income distribution inequality in Indonesia? Key strategies would be to increase employment opportunities for Indonesians by encouraging the development of labor-intensive sectors (particularly the agriculture sector and manufacturing industry). To achieve this, it is important to attract direct investment in these labor-intensive industries (implying the government needs to continue its focus on improving Indonesia's investment climate).

Meanwhile, the government needs to focus on the development of new economic growth centers outside the island of Java in order to reduce inequality (structurally) among the various regions. Infrastructure development in the remote regions is one strategy to achieve this (which will cause the so-called multiplier effect). Lastly, education and health should also be improved nationwide as higher education and healthy lifestyles tend to lead to higher incomes.

However, the methodology of the Gini coefficient can be questioned as it divides the population in five baskets, each containing 20 percent of the population: from the 20 percent richest to the 20 percent poorest. Subsequently, it measures the (in)equality between those five baskets. The problem when using this coefficient for Indonesia, however, is that the country is characterized by extreme inequality within each basket, making the outcome of the Gini coefficient less in tune with reality.

Last update: 12 January 2017